exam #2 Flashcards
MSU econ 202
Gross Domestic Product
the market value of all FINAL goods and services produced within a country over a time period
“the market value”
how much people pay for a good
“of all”
everything produced and sold legally
“final”
will not be sold again (end user)
intermediate good
good used in the production of final good
T or F
the sale of used goods does not count as part of GDP
TRUE
“within a country”
goods imported does not count as GDP (ex: USA only)
which of the following counts as GDP?A. Lions paid for playing a game in London
B. spend hours teaching your son to read
C. Hire my grandma to baby-sit my kids
D. sell flowers to a flower market
C
what is the equation for GDP?
GDP = C + I + G + NX
c: consumption/purchases
I: gross investment - goods are accumulated but not consumed
g: government purchases
nx: exports (ex - Im)
gross investment
goods that are accumulated but not consumed during that time
inventory
goods that were produced but not sold
what is nominal GDP
does not account for price change
given in current prices, without adjustment for inflation.
how does real GDP effect prices?
holds prices constant
what is the equation for per capita GDP?
GDP / population
two ways economic growth can happen
population and productivity increase
productivity occurs when there is improvement in:
physical, human, natural resources, technological knowledge
what is the growth rate equation
GDP2 - GDP1 / GDP1
what is the equation for productivity
output / time worked
the labor forces does not include people who:
- under 16
- in prison
- out of work for less than a week
- sought out jobs for 4 weeks
frictional unemployment
people searching/waiting for jobs
structural unemployment
skills workers offer do not match the skills needed by firms in the economy
cyclical unemployment
unemployment from flutucations in the business cycle
Lara was fired from her job but has a job interview next week.
A. discouraged worker
B. frictionally unemployed
C. structurally unemployed
D. cyclically unemployed worker
B
what is the equation for unemployment rate
unemployed / labor force x100
expressed as a %
inflation
increase in prices
to calculate inflation, use CPI first
what is Consumer price index (CPI)
an indicator that measures the average prices of goods + services purchased
calculating CPI
hint: not an equation
- identify goods and services
- collect prices of the goods over time
- calculate market value
CPI equation
prices of basket as a Tt time / prices of basket in base time x 100
calculating inflation using CPI
II t = CPI1 - CPI t -1 / CPI t -1
t- current year
t -1 = previous year
aggregate expenditures equation
C + I + G + NX = GDP
what does “short run” mean?
prices are fixed/take time to adjust
what is disposable income
income - taxes
what does marginal mean
the use of the next dollar
what is propensity?
inclination or tendency to do something
Marginal propensity to consume (MPC)
fraction of each additional dollar of income that is spent on consumption
MPC = change in C / change in Y
y - income c - consumption
Marginal propensity to save (MPS)
fraction of each additional dollar of income that is saved
MPS = change in savings / change in income
s - savings y - income
equilibrium
- net savings and net borrowing to be zero
- consumption = equilibrium
expenditures multiplier
how much output will increase for any initial change in income
tax multiplier
how much output will eventually change for an initial change in taxes
what is tax multiplier related to?
directly related to marginal propensity bc as income decreases some consumption and savings will be lost
MulitplierT
-MPC / 1 - MPC
market demand
the quantity of one good that consumers want to buy at various prices
quantity of a product =
real GDP
price of a product =
price level (CPI)
determinants of aggregate supply
productivity, resource prices, social institution’s
what is long run aggregate supply (LRAS)
potential of the economy at full employment
is LRAS vertical or horizontal
vertical
what happens during a recession?
unemployment increases and GDP decreases
T or F
inflation and unemployment are inversely related
TRUE
what’s money?
medium of exchange
unit of action
easily compare the value of two goods
store of value
spend money after you earn it
(gold being used as money)
liquidity
turning asset into cash
m1
very easy to spend (cash, checks)
m2
takes more time to access
the federal reserve
the central bank of the US
what does the fed do
- manage money supply
- regulate banks
reserves
money at a bank has on hand (as opposed to money it has loaned out)
assets
what you have
liabilities
what you owe
money multiplier
the amount of money the bank generates with each dollar
money multiplier calculation
1 / reserve ratio
equity
assets - liabilities
leverage
borrowing money to finance business operations
leverage ratio
assets : owners equity
A / E
