Final Exam Study Guide Flashcards
What is Gross Domestic Product (GDP)?
The market value of all final goods and services produced within a country during a specific time period.
What are Final Goods?
goods purchased by the final user
What are Intermediate Goods?
goods used in the production of final goods
What is expansion in the business cycle?
A period when total production and employment increase
What is a recession?
A period when total production and employment decrease.
What is economic growth?
the sustained ability of an economy to produce more goods and services over time
What is an inflation rate?
The percentage increase in the price level from one year to the next.
How do we measure GDP?
Using market values of all goods and services.
- GDP= C+I+G+NX
What is the criteria for a good or services to be counted towards GDP of that year?
- Must be produced within the countries borders
- Must be produced in that year
What does GDP deflator measure?
The price changes over time
What are some short comings of GDP?
- Excludes Household Production
- Excludes underground economy
- Does not account for leisure, environmental quality, or income distribution
- Neglects societal issues
What is the definition of unemployment?
People who are employable, actively seeking a job, but unable to find one
Labor Force
sum of employed and unemployed workers
What is frictional unemployment?
short term unemployment due to the process of matching workers with jobs, includes seasonal unemployment
What is structural unemployment?
unemployment caused by a mismatch between workers skills and job requirements
What is cyclical unemployment?
Unemployment as a results from economic recession
What is the Natural Rate of Unemployment?
Occurs when the economy is at full employment, consisting of only frictional and structural unemployment.
How do we measure unemployment?
Household surveys conducted by the U.S. Census Bureau
What are some problems with measuring unemployment?
- Does not count discouraged workers
- Counts part-time workers seeking full-time jobs as employed
- Includes individuals falsely claiming to seek jobs
What are some positive impacts of government policy on unemployment?
Job Fairs and Retraining Programs that reduce frictional unemployment
What are some negative effects of government policy on unemployment?
- Generous unemployment benefits can discourage job-seeking
- Minimum wage laws may reduce employment opportunities for low-skill workers
How do we measure inflation?
- Using the Consumer Price Index: which measures the average change in prices paid by consumers over time
- Producer Price Index: which measures price changes at the producer level/
What’s the difference between nominal and real interest rates?
Nominals rates are stated interest rates and real rates are adjusted for inflation
What are some of the negative impacts of inflation?
- Impact on Purchasing Power
- Menu Costs (cost associated why changing prices frequently)
- Uncertainty
- Redistribution Effects: unexpected inflation benefits borrowers and harms lenders
What is Aggregate Demand?
Shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
What’s the difference between short run and long run aggregate supply?
- Short Run Aggregate Supply: Relationship in the short run between the price level and the quantity of real GDP supplied by firms
- Long Run Aggregate Supply: Relationship in the long run where GDP is determined by labor, capital, technology, not price level.
What is Macroeconomic Equilibrium?
- Occurs where Aggregate Demand and Short Run Aggregate Supply Intersect
- Long Run Equilibrium occurs when AD and SRAS intersects LRAS
Why is Aggregate Demand Curve is downward sloping?
- Wealth Effect
- Interest Rate Effect
- International Trade Effect
What is the Wealth Effect?
higher price levels reduce the real value of household wealth, leading to decreased consumption
What is the Interest Rate Effect?
Higher price levels increase money demand, raising interest rates, and reducing investment
What is the International Trade Effect?
Higher domestic price levels make exports more expensive and imports cheaper, reducing net exports.
What factors shift aggregate demand?
- Government Policies: Monetary Policy and Fiscal Policy
- Expectations of Households and Firms: Optimism about future income/profit increases consumption and investment
- Foreign Variables: exchange rates and relative GDP growth between countries affect net exports
What is monetary policy?
Federal Reserve actions on money-supply and interest rates
What is fiscal policy?
Changes in federal taxes and government purchases
Why is the SRAS curve upward sloping?
- Profit Effect
- Price Stickiness
What is the Profit Effect?
When the prices of goods and services rise faster than input costs, increasing profits and encouraging production
What is Price Stickiness?
When contracts and menu costs cause slow price and wage adjustments, leading to higher production at increased price levels
What are some factors that shift SRAS?
- Labor and Capital
- Technology Improvements
- Expectations of Future Prices
- Supply Shocks
What is the definition of money?
Any asset generally accepted for goods/services or debt repayment
Why is money important?
- Facilitates trade by reducing inefficiencies of the barter system
- Serves as a medium of exchange, unit of account, store of value, and standard of deferred payment.
What is commodity money?
Things that have intrinsic value (ex. gold, diamonds)
What is fiat money?
Government issued paper money and not backed by physical commodities
What is M1 Money Supply?
- Currency, checking accounts
What is M2 Money Supply?
Includes M1, small time deposits, and non institutional money markets
How do banks create money?
- Banks lend out portion of deposits while keeping a fraction as reserves
How many members does the Federal Reserve Board have? And how many banks are there?
7 members, 12 banks
What is the purpose of the Federal Open Market Committee?
Manages monetary policy, including open market operations
What is the role of the Federal Reserve?
- A lender of last resort to prevent bank runs/panics
- Provides discount loans and sets the discount rate
What tools does the Federal Reserve have to affect monetary policy?
- Open Market Operations
- Discount Rate Adjustments
- Reserve Requirements
How does inflation/deflation affect money supply?
- High inflation occurs when the money supply increases significantly faster than GDP
- Deflation results from a decrease or slower growth in the money supply compares to GDP
What are the goals of monetary policy?
-Price Stability
- Maximum Employment
- Financial Market Stability
- Long-Term Economic Growth
What is the Federal Funds Rate (FFR)?
- The interest rate banks charge each other for overnight loans
- The Fed sets a target FFR to influence short term interest rates and aggregate demand
What system was the Fed running pre-2008?
A Scarce-Reserve Regime
What system does the Fed use now?
Ample Reserves Regime which uses the IORB (Interest on Reserve Balances) as a floor for the FFR. And the ONRRP (Overnight Reverse Repurchase Agreement)
What is the Interest on Reserve Balances (IORB)?
- The rate of interest the Federal Reserve pays to banks on the reserves they hold at the Fed
- This encourages banks to hold reserves and serves as a floor
What is the Overnight Reverse Repurchase Agreement (ON RRP)?
The interest rate the Fed pays to financial institutions on funds they lend to the Fed overnight with the agreement of repurchasing them the next day
What is quantitative easing?
buying long term securities to lower their yields
What is forward guidance?
communicating long term low interest intentions
What are some ways expansionary monetary policy can combat a recession?
- Reduce Interest Rates
- Increase in consumption, investment, and net exports
What are some ways contractionary monetary policy can be used to curb inflation?
- Raise Interest Rates
- Reduce Consumption, Investment, Net Exports
