Exam 1 Review Flashcards
1
Q
nominal GDP
A
measures the current dollar value of final goods and services produced in a given time period within a country’s borders
2
Q
real GDP
A
measures the value of final goods and services measured at constant prices
3
Q
unemployment rate
A
the percentage of the labor force that does not have a job
4
Q
a firm’s value added
A
equal to the value of its output minus the value of the intermediate good it purchases
5
Q
consumer price index
A
traces the price of a fixed market basket of goods over time.
6
Q
GDP Deflator
A
compares the price of current mix out output in GDP with what the current mix of output would have cost in a particular base year
nominal/real = deflator
7
Q
stock
A
quantity measured at a point in time
ex: US capital stock was $x on January XXXX
ex: person’s wealth, number of people with college degrees, the government debt
8
Q
flow
A
quantity measured per unit time
US investment was xxx during 2013
a person’s annual saving, number of new college grads this year, government budget deficit
9
Q
depreciation
A
measures the reduction in value of the economy’s stock of plants, equipment, and residential structures as they wear out
10
Q
labor force participation rate
A
measures the percentage of the economy’s adult, non institutional population that is in the labor force
11
Q
disposable personal income
A
amount of income consumers have available to spend or save after paying taxes and receiving government transfer payments
12
Q
imputed value
A
since homeowners do not pay rent, when the national income accounts estimate consumption, they use an imputed value of what the rent on their house would be
13
Q
nominal GNP
A
nominal income earned domestically by both domestic citizens and foreigners
14
Q
according to the __________, GDP is equal to the sum of _______________
A
- national incoem accounts identity
- consumption, investment, government spendings, net exports
15
Q
core inflation
A
measures the increase in price of a consumer market basket that excludes food and energy prices.
-considered a better measure of ongoing inflation trends than CPI
16
Q
during periods of inflation, Nominal GDP rises at a __________ rate than real GDP
A
rises at a faster rate
17
Q
if in 2011, General Motors experienced a large increase in it’s inventories of unsold cars…what can we say about total income?
A
total income was still equal to the total expenditure on goods and services because increases in inventories were counted both as part of expenditure and as part of income
18
Q
Suppose US Steel sells steel to Chrysler for 10,000 and then this steel is used in a Voyager van that is sold to a new car dealer for 25,000. The car dealer than sells the van for 30,000. GDP has risen by how much?
A
$30,000
19
Q
the value added of a particular company is equal to:
A
its sales minus its cost of intermediate goods
20
Q
suppose you purchase a new home for 250,000. In the national income accounts, consumption expenditures equals?
A
it will rise by the imputed rent on the house, which is equal to what the market rent would be if it were rented
21
Q
on occasion, the GDP deflator can rise while real GDP falls. When this phenomenon occurs, Nominal GDP:
A
can rise, fall, or remain constant
22
Q
the largest component of GDP in the US is typically what?
A
consumption
23
Q
if OPEC were to collapse and the price of imported oils were to fall dramatically, then”
A
the GDP deflator would probably fall at a faster rate than the CPI
24
Q
value added
A
the value of output minus the value of intermediate goods used to produce that output
25
components of "consumption"
- durable goods: last a long time (cars, home appliances)
- nondurable goods: last a short time (food, clothing)
- services: intangible items purchased by consumers
26
consumption (define and how much of GDP does it account for?)
value of all goods and services bought by households
71.1% of GDP
27
investment (define and how much is it of GDP)
spending on capital, a physical asset used in future production (13.4% of GDP)
28
components of Investment
1. business fixed investment: spending on plant and equipment
2. residential fixed investment: spending by consumers and landlords on housing units
3. inventory investment: the change in the value of all firms inventories
29
investment vs. capital
investment is SPENDING on NEW capital
30
government spending (define and what percent of GDP is it?)
includes all government spending on goods and services
- excludes transfer payments
- makes up 18.9% of total GDP
31
net exports
total exports minus total imports
| -account for -3.4% of GDP
32
if a firm produces $10 million worth of final goods and only sells $9 million worth of them, does expenditure still equal output?
yes, unsold ooutput goes into inventory, and is counted as inventory investment...whether or not the inventory buildup was intentional
-in effect, we are assuming that firms purchase their unsold output
33
Changes in nominal GDP can be due to:
1. changes in prices
| 2. changes in quantitites of output produced
34
changes in real GDP can only be due to changes in what?
changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices
35
for any variables X and Y, percentage change in (X x Y) = ?
percentage change in X + percentage change in Y
if hourly wage rises 5% and you work 7% more hours, then your wage income rises approximately 12%
36
percnetage change in (x/y) = ?
percentage change in X - percentage change in Y
ex: if NGDP rises 9% and RGDP rises 4%, then inflation rate is approximately 5%
37
CPI
a measure of the overall level of prices
- calculated and published by Bureau of Labor Statistics
- tracks changes in typical household's cost of living
38
how does the BLS construct the CPI?
1. survey consumers to determine composition of the typical consumer's basket of goods
2. eveyr month, collect data on prices of all items in the basket; compute cost of basket
3. CPI in any months is equal to:
100 x (cost of basket in that month/cost of basket in base period)
39
why the CPI may overstate inflation (3 reasons)
1. subsitution bias
2. introduction of new goods
3. unmeasured changes in quality
40
substitution bias in regards to CPI overstating inflation
the CPI uses fixed weights, so it cannot reflect consumers ability to substitute toward goods whose relative prices have fallen
41
introduction of new goods and how this causes CPI to overstate inflation
the introduction of new goods makes consumers better off and, in effect, icnreases the real value of the dollar. but it does not reduce the CPI, because the CPI uses fixed weights
42
unmeasured changes in quality and how that causes CPI to overstate inflation
quality improvements increase the value of the dollar but are often not fully measured
43
In 1995, how much did the Senate panel estimate that the CPI overstates inflation?
1.1% per year
44
CPI vs GDP deflator: prices of capital goods
1. included in GDP (if produced domestically)
| 2. excluded from CPI
45
CPI vs. GDP deflator: prices of imported consumer goods
1. included in CPI
| 2. excluded from GDP deflator
46
CPI vs. GDP deflator: the basket of goods
CPI: fixed
| GDP deflator: changes every year
47
the establishment survey
the BLS obtains a second measure of employment by surveing businesses, asking how many workkers are on their payrolls
48
GDP measures both ....
total income and total expenditure on the economy's output of goods and services
49
money
stokc of assets that can be readily used to make transactions
50
3 functions of money
1. medium of exchange: we use it to buy stuff
2. store of value: transfers purchasing power from present to future
3. unit of account: the common unit by which everyone measures prices and values
51
2 types of money
1. fiat money: has no intrinsic value
| 2. commodity money: has intrinsic value
52
money supply
the quantity of money available in the economy
53
monetary policy
control over the money supply
54
who is monetary policy conducted by?
a country's central bank, in the US, this is the Federal Reserve
55
open market operations
- the purchase and sale of government bonds
| - what the Fed uses to control the money supply
56
what is included in M1?
Currency, demand deposits, travels checks, other checkable deposits
57
what is included in M2?
m1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts
58
what is the equation of money supply?
M = C + D
money supply equals currency plus demand (checking account) deposits
59
reserves
the portion of deposits that banks have not lent
60
a bank's liabilities include what? a bank's assets include what?
a banks liabilities include deposits and assets include reserves and outstanding loans
61
100% reserve banking
a system in which banks hold all deposits as reserves
62
fractional-reserve banking
a system in which banks hold a fraction of their deposits as reserves
63
if a bank is a 100% reserve bank and it receives a cash deposit of $1000, how much is in the assets and liabilities?
assets: reserves of $1000
liabilities: deposits of $1000
64
if a bank holds 20% of deposits in reserve, and makes loans with the rest, what happens when it receives $1000 deposit? assets, liabilities?
assets: reserves of 200, loans of 800
liabilities: deposits of 1000
money supply now equals 1800 (1000 deposits, 800 in loanable funds)
65
a fractional-reserve banking system creates _________, but it doesn't create ___________
a fractional banking system creates money, but it doesn't create wealth:
bank loans give borrowers some new money and an equal amount of new debt
66
bank capital
the resources a bank's owners have put into the bank
67
leverage
the use of borrowed money to supplement existing funds for purposes of investment
leverage ratio = assets / capital
68
capital requirement
- minimum amount of capital mandated by regulators
- intended to ensure banks will be able to pay off depositors
- higher for banks that hold more risky assets
69
a model fo the money supply: they exogenous variables
monetary base: B = C + R
reserve deposit ration: rr = R/D
-depends on regulations and bank policies
currency-deposit ratio: cr = C/D
-depends on household's preferences
70
money multiplier
the increase in the money supply resulting from a one-dollar increase in the monetary base
71
instruments of monetary policy
1. open market operations
2. the discount rate
3. reserve requirements
4. interest on reserves
72
how does the Fed use open market operations?
to increase monetary base, the Fed could buy government bonds, paying with NEW dollars
73
how does the Fed control monetary policy with the discount rate?
the discount rate is the interest rate the Fed charges on loans to banks
-to increase the base, the Fed could lower the discount rate, encouraging banks to borrow more reserves
74
how does the Fed effect monetary policy with reserve requirements?
Fed regulations that impose a minimum reserve-deposit ratio
| -to reduce the reserve deposit ration, the Fed could reduce reserve requirements
75
how does the Fed effect monetary policy with interest on reserves?
the Fed pays interest on the bank reserves deposited with the Fed
-to reduce the reserve-deposit ratio, the Fed could pay a lower interest rate on reserves
76
quantitative easing
the Fed bought long-term govt bonds instead of T-bills to reduce long-term rates
77
the money supply depends on what 3 things?
1. monetary base
2. currency deposit ratio
3. reserve ratio
78
double coincidence
the unlikely occurence of two people each having a good that the other wants
79
open market operations
the purchase and sale of government bonds
80
balance sheet
a bank's statement of it's assets and liabiliteis
81
reserves
the deposits that banks receive but do not lend out
82
financial intermediation
process of transferring funds from savers to borrowers
83
bank capital
the financial resources bank owners use to start a bank
84
leverage
the process by which banks use borrowed money to create and acquire assets that greatly exceed the amount of bank capital
85
capital requirement
amount that bank regulators establish in order to ensure that banks have enough capital to pay their debtors if their assets lose some of their value
86
monetary base
sum of the currency and bank reserves (aka high powered money)
87
the money supply formula
(monetary base x money multiplier) / the CD ratio + reserve deposit ratio)
88
excess reserves
when the reserve deposit ration exceeds the reserve requirement
89
the money supply increases when the Federal reserve ______________
when the Federal Reserves buys Treasury bonds from the public
90
in a 100% reserve banking system, if someone deposits $500 of currency in a bank, what are the banks:
1. liabilities
2 . assets
3. total money supply
1. banks assets will increase by $500
2. banks liabilities will increase by $500
3. money supply will not change
91
in a fractional reserve banking system in which there is no currency and the reserve deposit ratio is 25%, a $500 new deposit will eventually increase the money supply by:
$2000
(500/.25) = 100
92
a bank's capital or owner equity is calculated as:
assets minus liabilities
93
a bank's capital requirement is calculated as the minimum acceptable ratio of its:
bank capital to assets
94
in a fractional reserve banking system, if the reserve deposit ratio is 30% and the currency deposit ratio is 40%, then the money multiplier equals
idk, read the book
95
if the monetary base is $60 billion and the money multiplier is 3, then the money supply equals
$180 million
96
an increase in the currency deposit ratio leads to a
decrease in the money supply
97
discount rate
interest rate charged by the Fed to banks that borrow reserves from the fed
98
how often do the Feds meet?
every six weeks
99
whats the basic formula for money supply?
M = currency + demand deposits
100
banks assets
amount of money it holds as reserves
101
bank's liabilities
the amount of money it owes it's depositers
102
if a bank holds 100% of it's deposits in reserves, how is the money supply effected?
it is simply not effected
103
formula for figuring out money created by a fractional reserve banking system
ex: figure out the amount of money created for a $1000 deposit
total money supply = {1 + (1-rr) + (1-rr)^2 + (1-rr)^3 + ... } x $x
$5000 created
OR (1000 / .2) = 5000
104
leverage ratio
ratio of the bank's total assets to bank capital
ex: if we had a ratio of $1000:$50, this means that for eery dollar of capital that the bank owners have contributed, the bank has $20 of assets, and thus, $19 of deposits and debts
105
capital requirement
amount of capital banks are responsible for holding to be able to pay off their depositers
106
currency-deposit ratio (cr)
the amount of currency (C) people hold as a fraction of their holdings of demand deposits D. It reflects teh preferences of households about the form of money they wish to hold
107
reserve deposit ratio (rr)
fraction of deposits that banks hold in reserve. It is determiend by the business policies of banks and the laws regulating banks
108
monetary base
(B) is the total number of dollars held by the public as currency C and by the banks as reserves R. It is directly controlled by the Feds
109
money supply complex equation
M = (cr + 1 / cr + rr) x B
OR essentially, the money multiplier X the monetary base (M = m x B)
110
money multiplier
-factor of proportionality
| cr + 1 ) / ( cr + rr
111
money supply is ____________ to the monetary base
Thus, an increase in the monetary base does what to the money supply?
The money supply is proportional to the monetary base. Thus, an increase in the monetary base increases the money supply by the same percentage
112
the ______ the reserve-deposit ratio, the _____ loans banks make, and the _____ money banks create from every dollar of reserves
Thus, a ____________ in the reserve deposit ratio raises the money multiplier and the money supply
the lower the reserve deposit ratio, the more loans banks make, and the more money banks create from every dollar of reserves.
thus a decrease in the reserve deposit ratio raises the money multiplier and the money supply
113
the ___________ the currency-deposit ratio, the ________ dollars of the monetary base the the public holds as currency, the _________ base dollars banks hold as reserves, and _______ money banks can create
thus, a decrease in the currency deposit ratio ________ the money multiplier and the money supply
the lower the currency-deposit ratio, the fewer dollars of the monetary base the the public holds as currency, the more base dollars banks hold as reserves, and more money banks can create
RAISES
114
a deduction in the discount rate does what to the money supply?
it raises the monetary supply, because more banks borrow at the Fed's discount window
115
an increase in the reserve requirements tend to do what to the reserve deposit ratio and thus do what to the money supply?
an increase in reserve requirements tends to raise the reserve deposit ratio and thus lower the money multiplier and the money supply
