Econ 1 - Measures & Indicators Flashcards
GDP (Expenditure Approach) =
Personal Consumption Expenditures + Gross Private Domestic Investment + Gov. Purchases + Net Exports
Net Investment =
Gross Investments - Capital Consumption Allowance (Depreciation)
Net Exports =
Exports - Imports
GDP (Income Approach) =
National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income
National Income (NI) =
Compensation of EE + Rental Income + Interest Income + Proprietor’s Income + Corporate profits
Net Domestic Product (NDP) =
GDP - Depreciation
National Income (NI) =
NDP - Net Foreign Factor Income - Indirect Business Taxes
Personal Income (PI) =
Social Security contributions - corporate income tax - undistributed corporate profits + transfer payments
Disposable Income (DI) =
Personal Income - personal taxes
An industry least likely to be affected by business cycle
Healthcare industry
Aggregate Demand is
a schedule or curve that shows the amount of real GDP or output that buyers collectively desire to buy at every price level
GDP is
The total monetary value of all final goods and services produced within a nation in one year
GDP excludes
- Intermediate goods (purchased for resale or further processing)
- Social security, welfare, veteran payments
- Gifts of $
- Buy/Sale of bonds and other financial assets
- Secondhand Sales
- Household Income
Approaches to GDP (2)
Income Approach or Expenditure Approach
If there is an increase in the resources available within an economy:
economy will be capable of producing more goods and services
FRB monetary policy tools used to control money supply include:
- Selling gov securities
- Changing the reserve ratio
- Raising or lowering the discount rate
Who controls the printing of $?
US Treasury
Indication the economy is in recessionary phase:
Potential national income exceeds actual national income
A strategy used by the FRB to pursue expansionary policy?
Purchase federal securities and lower the discount rate
Who controls the money supply?
Federal Reserve System (FRB)
In the contraction or recessionary phase of the business cycle, what happens to cars, capital goods, and food products?
sales of automobiles and capital goods will decline while sales of food products are likely to be little changed.
Real GDP =
Nominal GDP / GDP Deflator (Price Index)
At peak of business cycle, how should gov. spending, taxes, money supply, and interest rates be changed to dampen the economy and prevent inflation?
Reduce government spending, increase taxes, reduce money supply, and increase interest rates
The primary measure of the level of economic activity in the United States is
GDP
Marginal Propensity to Consume (MPC) =
Change in Consumption / Change in Income
Marginal Propensity to Save (MPS) =
Change in Savings / Change in Income
MPS =
1 - MPC
Types of Unemployment (4)
Frictional, Seasonal, Cyclical, Structural
Frictional Unemployment is
“normal labor turnover” - inevitable and necessary part of labor markets
Seasonal Unemployment is
the regular and recurring patterns in some industries
Cyclical Unemployment is
related to the general level of economic activity and tends to rise during recessions
Structural Unemployment is
changes in tech and international competitiveness change the skills required to perform jobs and/or change the location of jobs
A sale of government securities by the Federal Reserve would do what to bank reserves?
Decrease Bank Reserves (When the Federal Reserve sells a security to a household or firm, it receives the buyer’s check drawn against its own deposits in a commercial bank. The Federal Reserve presents the check to the commercial bank for payment. On payment of the check, the commercial bank’s reserves are reduced.)
Variations between business cycles most likely are attributable to
duration (from peak to peak) and intensity (the peaks and troughs in the cycle)
Unused productive capacity and an unwillingness to risk new investments are characteristics of
the trough within the business cycle
Money Multiplier =
1 / Required reserve ratio
Potential Money Creation =
Excess Reserves x Money Multiplier
In the capital goods sector, when entering the recovery phase, inventory levels are expected to be
low as firms have intentionally sold off inventories as the economic contraction continued to bring inventories to their desired level.
There will be a national election in 15 months. Your planning team believes that the current administration in Washington will actively seek to follow the basic tenets of the political business cycle. Given that fact, as you develop your 2-year forecast, you are more likely to:
increase your sales forecast for the near term and plan to access the debt markets earlier than you had otherwise anticipated
Economists and economic policy makers are interested in the multiplier effect because the multiplier explains why
a small change in investment can have a much larger impact on gross domestic product
Induced investment is
the investment made in an economy in response to changes in level of national income
How does a change in net investment affect the level of income?
A decrease in net investment will cause a more than proportional decrease in the level of income
To address recession, FRB would
Lower the discount rate it charges to banks for loans
Deflation is
a general (sustained) decline in prices for goods and services and in the level of interest rates
Inflation is
a sustained increase in the average level of prices
Tools available to FRB to affect monetary policy
- Buying and Selling U.S. Treasury and federal agency securities.
- Changing the discount rate (interest rate charged to commercial banks and other depository institutions on loans they receive from the Fed.)
- Changing the required reserve amount (funds that a depository institution must hold in reserve against specified deposit liabilities)
Affect on Money Supply if Buy vs. Sell Agency Securities
Buy = Increase money supply (FRM pays out $) Sell = Decrease money supply (others give FRB $)
Affect on Money Supply if Change Discount Rate
Increase % = Decreases money supply (more costly for banks to get $ from FRB)
Decrease % = Increases money supply (easier for banks to obtain $ from FRB)
Affect on Money Supply if Change Require Reserve Requirements
Increase = Decreases money supply (banks have to maintain more $ in their accounts and cannot lend out these funds) Decrease = Increases money supply (banks don't have to hold back as much and can extend more loans to consumers)
“Depression means idleness. And idleness means loss of skills, loss of self-esteem, dysfunctional family relationships, and increased criminal behavior.” This quote describes
non-economic costs of unemployment
To accurate compare 2+ years of GDP, adjust for changes in
price levels
If recession expected, how would the gov. stabilize the aggregate demand level with monetary and fiscal policy?
an expansionary of monetary policy and an expansionary of fiscal policy
Discount rate is
rate that the central bank charges for loans to commercial banks
Federal funds rate is
rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight
Prime rate is
base rate that banks use in pricing short maturity loans to their best, or most creditworthy, customers
Interest rate is
rate that commercial banks charge for loans to the general public
One of the measures economists and economic policy makers use to gauge a nation’s economic growth is to calculate the change in the
real per capita output
Consumer Price Index (CPI) measures
rate of inflation
Variables of National Income
- disposable income
- GDP
- net domestic product
- NOT real per capita GDP
During recessionary phase of business cycle:
there will be a decline in the number of hours worked in an average week for production workers in the manufacturing sector
Phases of Business Cycle (4)
Expansion, peak, contraction/recession, trough
