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MacroEcon > Final Exam Study Guide > Flashcards

Final Exam Study Guide Flashcards

1
Q

What is Gross Domestic Product (GDP)?

A

The market value of all final goods and services produced within a country during a specific time period.

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2
Q

What are Final Goods?

A

goods purchased by the final user

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3
Q

What are Intermediate Goods?

A

goods used in the production of final goods

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4
Q

What is expansion in the business cycle?

A

A period when total production and employment increase

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5
Q

What is a recession?

A

A period when total production and employment decrease.

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6
Q

What is economic growth?

A

the sustained ability of an economy to produce more goods and services over time

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7
Q

What is an inflation rate?

A

The percentage increase in the price level from one year to the next.

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8
Q

How do we measure GDP?

A

Using market values of all goods and services.
- GDP= C+I+G+NX

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9
Q

What is the criteria for a good or services to be counted towards GDP of that year?

A
  • Must be produced within the countries borders
  • Must be produced in that year
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10
Q

What does GDP deflator measure?

A

The price changes over time

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11
Q

What are some short comings of GDP?

A
  • Excludes Household Production
  • Excludes underground economy
  • Does not account for leisure, environmental quality, or income distribution
  • Neglects societal issues
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12
Q

What is the definition of unemployment?

A

People who are employable, actively seeking a job, but unable to find one

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13
Q

Labor Force

A

sum of employed and unemployed workers

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14
Q

What is frictional unemployment?

A

short term unemployment due to the process of matching workers with jobs, includes seasonal unemployment

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15
Q

What is structural unemployment?

A

unemployment caused by a mismatch between workers skills and job requirements

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16
Q

What is cyclical unemployment?

A

Unemployment as a results from economic recession

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17
Q

What is the Natural Rate of Unemployment?

A

Occurs when the economy is at full employment, consisting of only frictional and structural unemployment.

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18
Q

How do we measure unemployment?

A

Household surveys conducted by the U.S. Census Bureau

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19
Q

What are some problems with measuring unemployment?

A
  • Does not count discouraged workers
  • Counts part-time workers seeking full-time jobs as employed
  • Includes individuals falsely claiming to seek jobs
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20
Q

What are some positive impacts of government policy on unemployment?

A

Job Fairs and Retraining Programs that reduce frictional unemployment

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21
Q

What are some negative effects of government policy on unemployment?

A
  • Generous unemployment benefits can discourage job-seeking
  • Minimum wage laws may reduce employment opportunities for low-skill workers
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22
Q

How do we measure inflation?

A
  • 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/
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23
Q

What’s the difference between nominal and real interest rates?

A

Nominals rates are stated interest rates and real rates are adjusted for inflation

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24
Q

What are some of the negative impacts of inflation?

A
  • Impact on Purchasing Power
  • Menu Costs (cost associated why changing prices frequently)
  • Uncertainty
  • Redistribution Effects: unexpected inflation benefits borrowers and harms lenders
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25
Q

What is Aggregate Demand?

A

Shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

26
Q

What’s the difference between short run and long run aggregate supply?

A
  • 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.
27
Q

What is Macroeconomic Equilibrium?

A
  • Occurs where Aggregate Demand and Short Run Aggregate Supply Intersect
  • Long Run Equilibrium occurs when AD and SRAS intersects LRAS
28
Q

Why is Aggregate Demand Curve is downward sloping?

A
  • Wealth Effect
  • Interest Rate Effect
  • International Trade Effect
29
Q

What is the Wealth Effect?

A

higher price levels reduce the real value of household wealth, leading to decreased consumption

30
Q

What is the Interest Rate Effect?

A

Higher price levels increase money demand, raising interest rates, and reducing investment

31
Q

What is the International Trade Effect?

A

Higher domestic price levels make exports more expensive and imports cheaper, reducing net exports.

32
Q

What factors shift aggregate demand?

A
  • 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
33
Q

What is monetary policy?

A

Federal Reserve actions on money-supply and interest rates

34
Q

What is fiscal policy?

A

Changes in federal taxes and government purchases

35
Q

Why is the SRAS curve upward sloping?

A
  • Profit Effect
  • Price Stickiness
36
Q

What is the Profit Effect?

A

When the prices of goods and services rise faster than input costs, increasing profits and encouraging production

37
Q

What is Price Stickiness?

A

When contracts and menu costs cause slow price and wage adjustments, leading to higher production at increased price levels

38
Q

What are some factors that shift SRAS?

A
  • Labor and Capital
  • Technology Improvements
  • Expectations of Future Prices
  • Supply Shocks
39
Q

What is the definition of money?

A

Any asset generally accepted for goods/services or debt repayment

40
Q

Why is money important?

A
  • 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.
41
Q

What is commodity money?

A

Things that have intrinsic value (ex. gold, diamonds)

42
Q

What is fiat money?

A

Government issued paper money and not backed by physical commodities

43
Q

What is M1 Money Supply?

A
  • Currency, checking accounts
44
Q

What is M2 Money Supply?

A

Includes M1, small time deposits, and non institutional money markets

45
Q

How do banks create money?

A
  • Banks lend out portion of deposits while keeping a fraction as reserves
46
Q

How many members does the Federal Reserve Board have? And how many banks are there?

A

7 members, 12 banks

47
Q

What is the purpose of the Federal Open Market Committee?

A

Manages monetary policy, including open market operations

48
Q

What is the role of the Federal Reserve?

A
  • A lender of last resort to prevent bank runs/panics
  • Provides discount loans and sets the discount rate
49
Q

What tools does the Federal Reserve have to affect monetary policy?

A
  • Open Market Operations
  • Discount Rate Adjustments
  • Reserve Requirements
50
Q

How does inflation/deflation affect money supply?

A
  • 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
51
Q

What are the goals of monetary policy?

A

-Price Stability
- Maximum Employment
- Financial Market Stability
- Long-Term Economic Growth

52
Q

What is the Federal Funds Rate (FFR)?

A
  • 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
53
Q

What system was the Fed running pre-2008?

A

A Scarce-Reserve Regime

54
Q

What system does the Fed use now?

A

Ample Reserves Regime which uses the IORB (Interest on Reserve Balances) as a floor for the FFR. And the ONRRP (Overnight Reverse Repurchase Agreement)

55
Q

What is the Interest on Reserve Balances (IORB)?

A
  • 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
56
Q

What is the Overnight Reverse Repurchase Agreement (ON RRP)?

A

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

57
Q

What is quantitative easing?

A

buying long term securities to lower their yields

58
Q

What is forward guidance?

A

communicating long term low interest intentions

59
Q

What are some ways expansionary monetary policy can combat a recession?

A
  • Reduce Interest Rates
  • Increase in consumption, investment, and net exports
60
Q

What are some ways contractionary monetary policy can be used to curb inflation?

A
  • Raise Interest Rates
  • Reduce Consumption, Investment, Net Exports

MacroEcon (6 decks)

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