Economic Concepts Flashcards
What is Aggregate Output
Aggregate output is the sum total of Total Consumption, plus planned Investment plus Government Spending.
What is Gross Domestic Product
It is the sum total of all goods and services produced in the country. Nominal GDP is the market value of goods and services produced in an economy which is not adjusted for inflation. Whereas, real GDP is nominal GDP that is adjusted for inflation to reflect changes in real output.
GDP is the sum of:
C … All private and public consumption (consumer spending) in a nation’s economy. Household consumption accounts for 68 percent of total GDP with 23% for the purchase of goods and 45% for services.
Government outlays (consumption and investments) constitute 18% of total GDP.
G … Governments purchase goods and services used in public administration.
I … Private investments- domestic investment includes capital expenditures and increases in inventory. This category was recently changed to include research and development for businesses, and long-lived intellectual property and works of art such as films, music and books. Businesses purchase investment goods and private investments make up 16% of total GDP.
X … Net exports- exports minus imports within a specific territory. When imports exceed exports, the net amount is subtracted from total GDP value. The formula for computing GDP is written as:
C + I + G + X = GDP. C stands for consumer spending, I is for investment, G represents government spending, and X equals net exports.
What is budget deficit and who can do it?
When Govt spending is more than Taxes collected, the govt borrows. this is called Deficit. Only the Federal government (not state) can create a deficit.
What is monetizing debt
If government expenditures exceed the revenue collected, then the government runs a budget deficit. The US Treasury borrows by issuing bonds that are bought by banks and investors. Banks pay for bonds by crediting the checking account of the Treasury, which increases the money supply. This process is known as monetizing the debt.
What are Monetary Policies
Monetary policy controls the supply of money and influences bank lending and interest rates. It can be used to slow down inflation or to stimulate the economy.
Transaction Money (also called M1)
Transaction money is the value of all currency held outside of bank vaults, and the value of all demand deposits, traveler’s checks, and other checkable deposits. This is the money that can be directly used for transactions.
What do the Feds do to reduce money supply and slow down the economy
Sell US Treasury Security
Raise the discount rate
What is Exchange rate direct quoting vs. indirect quoting
An exchange rate can be quoted directly or indirectly. With a direct quotation, the price of one unit of foreign currency is quoted in terms of the domestic currency. The price of an indirect quote is expressed as the value of one local currency converted to the foreign currency.
An exchange rate also has a base currency and a counter currency. In a direct quotation, the foreign currency is the base currency and the domestic currency is the counter currency. The opposite is true with an indirect quotation, since the domestic currency is the base currency and the foreign currency is the counter currency.
Examples:
$1.00 U.S. = $1.25 Canadian dollar. The base currency is the US dollar and the counter currency is the Canadian dollar. In Canada, the exchange rate is a direct quotation of the Canadian dollar just like all of their goods and services are expressed as Canadian dollars. Consequently, the price of one U.S. dollar in Canadian dollars is a direct quotation for a Canadian resident.
One Canadian dollar = $0.75 U.S dollar. The base currency is the Canadian dollar and the counter currency is the U.S. dollar. This is an example of an indirect quotation of the Canadian dollar in Canada.
What is Required Reserve Ratio
The reserve requirement is the amount of total deposits that the Fed requires its members to keep with the Federal Reserve at the end of the business day. Decreases in the required reserve ratio allow banks to be able to make more loans, which in turn increases the money supply.
How does the Fed tighten monetary policy
Tight monetary polices refer to the Fed decreasing the money supply in an effort to restrain the economy to slow down inflation (rise in general price of goods and services). The Fed sells securities, buyers withdraw funds from their banks which lowers bank reserves, which reduces the amount of money banks have to lend, which curtails borrowing and demand, and drives up interest rates.
How does the Fed Ease monetary policy
Easy monetary policies refer to the Fed’s attempt to stimulate the economy by expanding the money supply. The Fed buys securities, sellers deposit the proceeds of the sale in their banks which increases bank reserves and money available for lending at lower interest rates, which stimulates demand, consumer spending and business investments.
What is frictional unemployment rate
Even if the economy is running at or near full capacity, the unemployment rate will never be zero. This is known as “frictional” unemployment because people are always moving in and out of jobs.
What is National Income Account
National income accounts (NIAs) are used by virtually all nations to measure national income and economic activity. It is a bookkeeping system used by governments which measures revenue earned by domestic corporations, wages paid to workers, and expenditures for products and taxes by its citizens and corporations. This bookkeeping data is used to calculate GDP, GNP (gross national product) and GNI (gross national income).
What is Consumer Price Index
Price indexes are used to measure overall price levels. The price index that pertains to all goods and services in the economy is the GDP price index. A study of the changes in the price over a period can reveal inflation trends.
The Bureau of Labor Statistics does not use fixed weights to construct the GDP price index. Most other price indexes are constructed using fixed weights. The most popular fixed-weight price index is the Consumer Price Index (CPI). The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households.
What is the Yield Curve
Another economic important indicator is the yield curve. A yield curve gives an indication of the market’s expectation of the future direction of interest rates. It is a graph that shows the yields-to-maturity (on the vertical axis) for Treasury securities of various maturities (on the horizontal axis) as of a particular date. This graph provides an estimate of the current term structure of interest rates and will change daily as yields-to-maturity change. The slope of the curve indicates the relationship between short term and long term interest rates.
There are three typical shapes to the yield curve:
Upward-sloping
Flat
Downward-sloping
