BEC 5.2

Question 1

How is GDP calculated under the expenditure approach?(GICE)

Answer 1

Summing total expenditures in the domestic economy.
Calculated as:
(G)overnment purchases of goods and services
+ Gross private domestic (i)nvestments
+ Personal (c)onsumption expenditures
+ Net (e)xports (exports minus imports)

Question 2

How is GDP calculated under the income approach?(I PIRATED)

Answer 2

Summing the value of resource costs and incomes generated during the measurement period
Calculated as:
(I)ncome of proprietors
\+(P)rofits of corporations
\+(I)nterest (net)
\+(R)ental income
\+(A)djustments for net foreign income
\+(T)axes (indirect business taxes)
\+(E)mployee compensation (wages)
\+(D)epreciation (capital consumption allowance)

Question 3

What are the causes of demand-pull inflation and cost-push inflation?

Answer 3

Demand-pull inflation: caused by increases in aggregate demand.

Thus, demand-pull inflation could be caused by factors such as increases in government spending, decreases in taxes, increases in wealth, increases in consumer confidence, and increases in money supply.

Cost-push inflation is caused by reduction in short-run aggregate supply.

Thus, cost-push inflation could be caused by factors such as increase in oil prices and an increase in nominal wages

Question 4

What is the difference between nominal GDP and real GDP?

Answer 4

Nominal GDP - measures value of all final goods and services produced within borders of a nation in terms of current dollars (i.e., prices prevailing at the time of production)

Real GDP - measures value of all final goods and services produced within the borders of a nation in terms of constance prices (i.e., the value of goods and services adjusted for changes in the price level)

Real GDP = (Nominal GDP/GDP Deflator) x 100
where GDP deflator is the price index used to adjust nominal GDP for changes in the overall prices of goods and services

Question 5

Define gross domestic product (GDP)

Answer 5

Total market value of all final goods and services produced within the borders of a nation in a particular period.

GDP includes the output of foreign-owned factories in the U.S., but excludes the output of U.S. - owned factories operating abroad

Question 6

Explain the relationship between interest rates and the money supply

Answer 6

Changes in the money supply directly affect interest rates through the money market.

Increase in money supply shifts money supply curve to the right and causes interest rates to fall.

Decrease in money supply shifts the money supply curve to the left and causes interest rates to rise.

Thus, an increase in the money supply leads to a decline in interest rates and a decline in the money supply leads to an increase in interest rates

Question 7

List the 3 ways the Federal Reserve could increase the money supply

Answer 7

1. Open market operations: Purchase government securities on the open market
2. Changes in the discount rate: Lower the discount rate
3. Changes in the required reserve ratio: Lower the required reserve ratio

Question 8

What is the likely impact of a decrease in the money supply on the interest rates, real GDP, and the overall price level?

Answer 8

Decrease in money supply leads to an increase in interest rates.

As interest rates rise, cost of capital increases, leading to a decline in investment spending and a shift left in the aggregate demand curve.

As aggregate demand curve shifts left, real GDP and the overall price level fall.

Thus, a decrease in the money supply leads to:

1. Increase in interest rates
2. Decrease in real GDP
3. Decrease in overall price level