Final Exam Flashcards
Labor Force Participation Rate
The percentage of a society’s adult population that either are employed or are unemployed and actively seeking employment.
Consumption
Spending by households on goods and services.
Exeption: The purchase of new housing is not considered a form of consumption. (Purchasing new housing is considered an investment.)
Investment
The purchase of goods that will be used in the future to produce more goods and services.
Investment is the sum of the purchases of inventories, structures (e.g. household purchases of new housing), and capital equipment.
Components of GDP
- Consumption
- Investment
- Government Spending
- Net Exports
Every dollar of expenditure included in the GDP calculation must fall into one of these four components.
Government Spending
Spending on goods and services by local governments, state governments, and federal governments.
Transfer payments are not included in government spending calculations.
Transfer Payments
Payments not made in exchange for a currently produced good or service.
Transfer payments alter household income, but do not reflect an economy’s production.
Examples of Transfer Payments
- Social Security Benefits
- Unemployment Insurance
Net Exports
Foreign spending on domestically produced goods (i.e. exports) minus domestic spending on foreign-produced goods (i.e. imports)
Flaws of GDP Calculations
- Does not consider leisure time/activities.
- Does not consider the quality of the environment.
- Does not consider the distribution of income.
- Does not account for economic activity that takes place outside of markets.
What does real GDP show?
How an economy’s overall production of goods and services changes over time.
Real GDP measures the total value of all goods and services produced in an economy after adjusting for inflation.
Nominal GDP
A measure of the value of all goods and services produced in an economy at current prices.
Real GDP
A measure of the value of all goods and services produced in an economy at constant prices.
Real GDP measures the quantity of output produced by an economy without considering changes in prices.
4 Types of Unemployment
- Cyclical Unemployment
- Structural Unemployment
- Frictional Unemployment
- Seasonal Unemployment
Cyclical Unemployment
Unemployment caused by shifts in the business cycle that impact the demand for labor.
Cyclical unemployment causes unemployment to change in the short-term.
Structural Unemployment
Unemployment caused by individuals lacking skills that are valued by the labor market.
Structural unemployment causes unemployment to change in the long-term.
Frictional Unemployment
Unemployment that occurs as workers move between (or search for new) jobs.
Frictional unemployment causes unemployment to change in the long-term.
Seasonal Unemployment
Unemployment that occurs when people working in seasonal jobs become jobless due to the demand for labor decreasing.
Unemployment Rate Formula
U = [(Unemployed Individuals) / (Labor Force)] x 100
The labor force is the total number of employed and unemployed persons.
Labor Force
The total number of employed and unemployed persons.
LF = (Employed Persons) + (Unemployed Persons)
The labor force does NOT include individuals who are not actively seeking employment.
Labor Force Participation Rate Formula
LFPR = [(Labor Force) / (Adult Population)] x 100
Gross Domestic Product (GDP)
The final value of all goods and services produced within a country in a given period of time.
What economic activities does the GDP calculation exclude?
- Production of illegal goods and services
- Informal production of goods and services
- Sale of used (or previously produced) goods and services
- Unreported cash transactions
Gross National Product (GNP)
The final value of all goods and services produced by the citizens (or firms) of a country.
C
Consumption
I
Investment
G
Government Spending
NX
Net Exports
- M = Imports
- X = Exports
Inflation
The rate of change of prices in an economy.
C0
Autonomous Consumption
Autonomous Consumption: Wealth-based consumption
Dual Mandate of Federal Reserve
- Stabilize Prices
- Maximize Employment
Exogenous Variables in the IS-LM Model
- G (Government Spending)
- NX (Net Exports)
- C0 (Autonomous Consumption)
- m (Marginal Propensity to Consume)
- T (Tax Rate)
- I0 (Autonomous Investment)
Endogenous Variables in the IS-LM Model
- Y (Real GDP)
- r (Real Interest Rate)
- C (Consumption)
- I (Investment)
Tools of the Federal Reserve to Increase the Real Money Supply
- Buying Bonds from the Government
- Decreasing the Discount Rate
- Decreasing the Required Reserve Ratio
- Quantitative Easing
- Decreasing the Interest Rate on Reserves
What body conducts monetary policy?
The Federal Reserve Bank
Monetary policy involves changes to the money supply.
What body conducts fiscal policy?
Government
Fiscal policy involves changes to government spending or taxation.
Consumption Equation
C = C0 + m(Y – T)
What factors will cause the IS curve to shift?
- Change in C0 (e.g. Increase in Wealth)
- Change in T (e.g. Decrease in Tax Rate)
- Change in I0 (e.g. Increase in Interest Rate)
- Change in G (e.g. Increase in Infrastructure Spending)
- Change in X (e.g. Decrease in Tourism)
- Change in M (e.g. Increase in Foreign Good Prices)
How will an increase in wealth impact the IS curve?
The IS curve will shift right, as consumers’ spending on non-disposable goods/services (i.e. autonomous consumption) will increase.
How does an increase in spending impact the real interest rate?
The real interest rate increases.
- An increase in spending leads to an increase in real money demand, which results in an increase in real interest rates.
- An increase in spending leads to an increase in aggregate demand, which shifts the price level up; this subsequently decreases the puchasing power of money, which decreases the real money supply and increases the real interest rate.
j
Interest Rate Sensitivity
Interest Rate Sensitivity (j): The investment-related responsiveness (of firms and households) to changes in the real interest rate.
How does a change in price level impact the AS-AD graph?
The result is movement along the AD curve.
A change in the price level results in the movement from one IS-LM solution/intersection to another IS-LM solution/intersection.
z
Exogenous parameter that measures the responsiveness of firms’ output to changes in the price level.
Physical Capital
K
Human Capital
H
Labor
L
N
Natural Resource
A
Technology
YN
Long-Run GDP
“Natural GDP”
Pe
Expected Price Level
What is contractionary monetary policy designed to combat?
Inflation
Inflation rates are too high.
What is expansionary monetary policy designed to combat?
Recession/Depression
Discount Ratio
The interest rate the Federal Reserves charges private banks for taking out loans from the FR.
Efficiency Wages
A strategy utilized by firms to retain skilled workers (and increase productivity and develop worker loyalty) by paying higher wages.
Efficiency wages is a cause of structural unemployment.
