Exam 1 Review Flashcards
nominal GDP
measures the current dollar value of final goods and services produced in a given time period within a country’s borders
real GDP
measures the value of final goods and services measured at constant prices
unemployment rate
the percentage of the labor force that does not have a job
a firm’s value added
equal to the value of its output minus the value of the intermediate good it purchases
consumer price index
traces the price of a fixed market basket of goods over time.
GDP Deflator
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
stock
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
flow
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
depreciation
measures the reduction in value of the economy’s stock of plants, equipment, and residential structures as they wear out
labor force participation rate
measures the percentage of the economy’s adult, non institutional population that is in the labor force
disposable personal income
amount of income consumers have available to spend or save after paying taxes and receiving government transfer payments
imputed value
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
nominal GNP
nominal income earned domestically by both domestic citizens and foreigners
according to the __________, GDP is equal to the sum of _______________
- national incoem accounts identity
- consumption, investment, government spendings, net exports
core inflation
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
during periods of inflation, Nominal GDP rises at a __________ rate than real GDP
rises at a faster rate
if in 2011, General Motors experienced a large increase in it’s inventories of unsold cars…what can we say about total income?
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
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?
$30,000
the value added of a particular company is equal to:
its sales minus its cost of intermediate goods
suppose you purchase a new home for 250,000. In the national income accounts, consumption expenditures equals?
it will rise by the imputed rent on the house, which is equal to what the market rent would be if it were rented
on occasion, the GDP deflator can rise while real GDP falls. When this phenomenon occurs, Nominal GDP:
can rise, fall, or remain constant
the largest component of GDP in the US is typically what?
consumption
if OPEC were to collapse and the price of imported oils were to fall dramatically, then”
the GDP deflator would probably fall at a faster rate than the CPI
value added
the value of output minus the value of intermediate goods used to produce that output
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
consumption (define and how much of GDP does it account for?)
value of all goods and services bought by households
71.1% of GDP
investment (define and how much is it of GDP)
spending on capital, a physical asset used in future production (13.4% of GDP)
components of Investment
- business fixed investment: spending on plant and equipment
- residential fixed investment: spending by consumers and landlords on housing units
- inventory investment: the change in the value of all firms inventories
investment vs. capital
investment is SPENDING on NEW capital
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
net exports
total exports minus total imports
-account for -3.4% of GDP
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
Changes in nominal GDP can be due to:
- changes in prices
2. changes in quantitites of output produced
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
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%
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%
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
how does the BLS construct the CPI?
- survey consumers to determine composition of the typical consumer’s basket of goods
- eveyr month, collect data on prices of all items in the basket; compute cost of basket
- CPI in any months is equal to:
100 x (cost of basket in that month/cost of basket in base period)
why the CPI may overstate inflation (3 reasons)
- subsitution bias
- introduction of new goods
- unmeasured changes in quality
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
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
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
In 1995, how much did the Senate panel estimate that the CPI overstates inflation?
1.1% per year
CPI vs GDP deflator: prices of capital goods
- included in GDP (if produced domestically)
2. excluded from CPI
CPI vs. GDP deflator: prices of imported consumer goods
- included in CPI
2. excluded from GDP deflator
CPI vs. GDP deflator: the basket of goods
CPI: fixed
GDP deflator: changes every year
the establishment survey
the BLS obtains a second measure of employment by surveing businesses, asking how many workkers are on their payrolls
GDP measures both ….
total income and total expenditure on the economy’s output of goods and services
money
stokc of assets that can be readily used to make transactions
3 functions of money
- medium of exchange: we use it to buy stuff
- store of value: transfers purchasing power from present to future
- unit of account: the common unit by which everyone measures prices and values
2 types of money
- fiat money: has no intrinsic value
2. commodity money: has intrinsic value
money supply
the quantity of money available in the economy
monetary policy
control over the money supply
who is monetary policy conducted by?
a country’s central bank, in the US, this is the Federal Reserve
open market operations
- the purchase and sale of government bonds
- what the Fed uses to control the money supply
what is included in M1?
Currency, demand deposits, travels checks, other checkable deposits
what is included in M2?
m1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts
what is the equation of money supply?
M = C + D
money supply equals currency plus demand (checking account) deposits
reserves
the portion of deposits that banks have not lent
a bank’s liabilities include what? a bank’s assets include what?
a banks liabilities include deposits and assets include reserves and outstanding loans
100% reserve banking
a system in which banks hold all deposits as reserves
fractional-reserve banking
a system in which banks hold a fraction of their deposits as reserves
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
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)
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
bank capital
the resources a bank’s owners have put into the bank
leverage
the use of borrowed money to supplement existing funds for purposes of investment
leverage ratio = assets / capital
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
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
money multiplier
the increase in the money supply resulting from a one-dollar increase in the monetary base
instruments of monetary policy
- open market operations
- the discount rate
- reserve requirements
- interest on reserves
how does the Fed use open market operations?
to increase monetary base, the Fed could buy government bonds, paying with NEW dollars
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
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
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
quantitative easing
the Fed bought long-term govt bonds instead of T-bills to reduce long-term rates
the money supply depends on what 3 things?
- monetary base
- currency deposit ratio
- reserve ratio
double coincidence
the unlikely occurence of two people each having a good that the other wants
open market operations
the purchase and sale of government bonds
balance sheet
a bank’s statement of it’s assets and liabiliteis
reserves
the deposits that banks receive but do not lend out
financial intermediation
process of transferring funds from savers to borrowers
bank capital
the financial resources bank owners use to start a bank
leverage
the process by which banks use borrowed money to create and acquire assets that greatly exceed the amount of bank capital
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
monetary base
sum of the currency and bank reserves (aka high powered money)
the money supply formula
(monetary base x money multiplier) / the CD ratio + reserve deposit ratio)
excess reserves
when the reserve deposit ration exceeds the reserve requirement
the money supply increases when the Federal reserve ______________
when the Federal Reserves buys Treasury bonds from the public
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
- banks assets will increase by $500
- banks liabilities will increase by $500
- money supply will not change
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
a bank’s capital or owner equity is calculated as:
assets minus liabilities
a bank’s capital requirement is calculated as the minimum acceptable ratio of its:
bank capital to assets
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
if the monetary base is $60 billion and the money multiplier is 3, then the money supply equals
$180 million
an increase in the currency deposit ratio leads to a
decrease in the money supply
discount rate
interest rate charged by the Fed to banks that borrow reserves from the fed
how often do the Feds meet?
every six weeks
whats the basic formula for money supply?
M = currency + demand deposits
banks assets
amount of money it holds as reserves
bank’s liabilities
the amount of money it owes it’s depositers
if a bank holds 100% of it’s deposits in reserves, how is the money supply effected?
it is simply not effected
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
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
capital requirement
amount of capital banks are responsible for holding to be able to pay off their depositers
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
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
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
money supply complex equation
M = (cr + 1 / cr + rr) x B
OR essentially, the money multiplier X the monetary base (M = m x B)
money multiplier
-factor of proportionality
cr + 1 ) / ( cr + rr
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
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
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
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
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
