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Gleim BEC > Study Unit 3 > Flashcards

Study Unit 3 Flashcards

1
Q

GDP

US GDP

A

principle measure of national economic perf

US GDP=total mkt value of all final goods/servc produced w/in U.S. by domestic or foreign sources during a specified pd

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2
Q

Expenditures approach

A 
sum of all expenditures in the economiy
GDP= C+I+G+NX
C-consumer spending
i- Investment spending
G-Govt spending
NX-Net exports
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3
Q

Consumer Spending

A

largest component, most important determinant is personal incomes
changes in incomes don’t affect GDP $for$
for every adtl $ consumers receive in income, some spent, other put in savings

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4
Q

Investment Spending

A

Business investments- create jobs and income (PPE purch); all construction (rent/lease); inventory changes
business invest most volatile b/c reflect optimism about future demand and affected by wide and sudden variations
invest demand is inversely related to real interest rate in mkt. determine to invest or deposit, compare real rate and expected rate; lower interest rate means invest more

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5
Q

Government Spending

A

total outlays for goods and svcs consumed by govt in providing public svcs and long lived public infrastructure (schools, bridges)
-transfer pmts (SS) not included b/c will be spent on final goods

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6
Q

Net Exports

A

attempt to capture $ spent on US-made goods and exclusdes American spending on goods and svcs made abroad
NX=Exports (X)- Imports (M)
can be positive or negative

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7
Q

National Income

A 
National income- all income generated by US owned, no matter location (largest component is employee compensation)
Salaries/wages
Rents
Interest
Proprietor/ptnrshp income
Corp profits
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8
Q

NDP

A

measures income generated in US regardless of owner
additions to NI
-indirect business taxes (sales, excise)
-net foreign factor income- excess of income generated in US from foreign owned resources over income from other countries from US owned
NDP = GDP- capital consumption allowance (depreciation)

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9
Q

GDP

A

Add to NDP the allowance for amnt of capital stock consumed/lost in process of income generation

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10
Q

Personal and Disposable income

A

PI- all income rec’d by indiv; total of NI minus taxes SS, income tax, etc.
DI- income of indiv after taxes; composed of consumption/interest pmt and savings

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11
Q

Limitations of GDP

A

only includes finished goods, doesn’t include intermediate goods (dbl counting)
increases in GDP don’t consider environmental factors (noise, congestion, pollution)
benefit of economic activity from disasters included; not included is loss
underground econ in 3rd world not included
value of leisure time not included

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12
Q

Nominal vs Real GDP

A

Nominal- basic GDP calc w/ adding total mkt value of all final goods/svcs in current $ (not good to compare diff yrs of output since price level fluctuates)

Real-facilitate yr to yr comparison, adjust nominal for changes in general price level to report in constant $
Real GDP= Nominal/Price index (in hundredths)
if real GDP rises faster than pop country has rising std of living

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13
Q

Business Cycle

A

tendency toward instability w/in overall growth of capitalistic economies
peak- @/near full employment; @/near max output for current level of resources/tech
recession- GDP falls, unemployment rises; if severe prices fall and is a depression
trough- econ activity reaches lowest ebb
recovery- output and employment rise, price level rises

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14
Q

Causes of recessions/troughs

A

consumer confidence declines (pessimistic about future, spend less); unsold inventory builds, businesses decrease production and fire ppl

miscalculation in fiscal or monetary policy by govt

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15
Q

Leading Economic indicators

changes suggest future change in real GDP in same direction

A
  • avg workweek for mfg
  • new orders for consumer goods and nondefense capital goods
  • bldg permits for houses
  • stock prices
  • money supply
  • spread between ST and LT interest rates
  • consumer expectations
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16
Q

Leading Economic indicators

changes suggest future change in real GDP in opposite direction

A 
initial claims for unemployment insurance (more ppl not working = slow business activity)
vendor perf (vendors have slack time and carry high level of inventory)
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17
Q

Aggregate demand

A

schedule reflecting all goods/svcs consumers willing/able to buy at diff price levels
curve reflects relationship between price level and real GDP
downward sloping; no distinction between ST and LT

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18
Q

Aggregate supply

A

schedule reflecting all goods/svcs able to produce at various price levels
ST-changes in price level makes firs adjust output to earn excess profits; unused capacity available (workers work for hourly wage) represented by leftmost portion of curve; curve rise as inputs added
LT-vertical line, full employment, change in price=change in wages, no change in real profits

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19
Q

factors shift aggregate supply curve

A

change in productivity, measured by worker productivity (total real GDP produced during year divided by total # hours worked). more produce in an hour=more productive

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20
Q

Productivity

A

amnt of capital- more invested in plant & machinery, higher productivity (more automation)
state of tech- more advanced, more productive (shift AS curve right); adtl income from tech shifts AD curve right)
workforce competence-more educated/trained, higher
productivity

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21
Q

Growth

A

increase in price level depends on degree that AD increases wrt AS; change in price level (inflation) causes worry when economy expands
demand doesn’t change, right shift of AS results in lowering of price level (deflation)

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22
Q

Factors in economic growth

A

supply- increased productivity, increase in quantity/quality of natural resources
demand-increase in total spending
efficiency- efficient allocation of resources

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23
Q

Demand side policies

A

actors in free market aren’t only parties to determine AD

  • govt can stimulate/suppress
  • stimulative- encourage economy
24
Q

Supply side

A

policies implemented to increase country’s stock of investment capital; use cap to increase capacity which stimulates AS

25
Q

Inflation

A

sustained increase in the general level of prices
reported rate of inflation is avg of increase across all
prices in the economy
rate of inflation=(current yr price index- prior yr price index)/prior yr price index
price index- measure of price of mkt basket of goods/svcs in 1 yr compared w/ price in a base year

26
Q

money’s purchasing power

A

how many goods/svcs able to acquire in exchange for` it

27
Q

CPI

A

CPI=cost of market basket in current year/cost of mkt basket in base yr
monthly computation by Bureau of Labor Statistics
can lower business’ buying pwr, challenge in maintaining margins
compare amnts in constant $, both deflated using PI, difference divided by prior pd’s amnt

measures change in general price eve by pricing items in a typical urban household shopping list; uses 87 urban areas in US from 23k retail/svcs; rent data from 50k landlords/tenants

28
Q

Constant dollar calculation
this year=$1080; CPI=115
last year=$950; CPI=107

A

difference nominal dollars=1080-950=130
constant dollars this year billing=1080/1.15=939.130
constant dollars last year billing=950/1.07=887.85
difference in constant dollars=51.28
nominal billings increases 13.7%
after inflation adjustment increased 5.8% (51.28/887.850)

29
Q

Nominal vs real income

A

nominal- $ rec’d as wages, interest, rent, profits
real- purchasing power of income rec’d; relates directly to std of living; shrinks when nominal income doesn’t keep pace w/ inflation

30
Q

Effects of inflation on financial reporting

A

inventory (LIFO)

  • rapid rising prices, increases COGS, decreases op income, decrease tax liaab
  • if use FIFO, COGS=older less costly inventory, boosts op income

depreciation (asset recorded at cost)
-rising prices, amnts reported as depreciation expense are lower than would be if in terms of replacement cost; op income higher in current pd, but replacing assets as retired is more $$$

31
Q

Demand-pull inflation

A

demand outpacing the supply of goods
economy can’t keep up with demand, price of existing goods are bid up
when economy approaches full employment and demand continues to increase
“too many $ chasing too few goods”

32
Q

Cost push inflation

A

increased per-unit production costs that pass on to consumers via higher prices
increases in RM costs are cause b/c occur as form of supply shock

33
Q

Deflation

A

sustained fall in general price level, caused by opposite situations from inflation
fall in demand w/o supply contraction is left shift of AD curve; firms liquidate inventory even if lose $
-price and output fall
increase in output w/o increase in demand is right shift of AS curve
-price falls as output increases

34
Q

Unemployment

A

unemployment rate= (# unemployed/size of labor force)*100

exclude those under 16, in jail, homemakers, FT student, retirees, discouraged workers (unemployed, able to work, not actively seeking work)

include those who are willing and able to work and seeking employment

distorted by false claim to seek work, cash basis workers

35
Q

Frictional unemployment

A

caused by normal working of labor mkt
include those moving, ceasing work to pursue education/training, between jobs

acknowledges “normal” amnt of unemployment exists at any given time

36
Q

Structural unemployment

A

composition of workforce doesn’t match need; result of changes in consumer demand/tech
-computer changes skills and eliminated jobs

available jobs aren’t in location where unemployed workers live

37
Q

Cyclical unemployment

A

related to level of economy’s output; occurs in recessions (deficient-demand unemployment)
-consumer spending slow, firms decrease production and fire workers

38
Q

“Full” Employment

A

natural rate of unemp has frictional and structural unemply combined
econ at full employment when all unemployed fall into these 2 categories; rate varies over time as demographic and institutional changes occur in economy

39
Q

Effects of unemployment

A

lost value to the economy
goods not produced, svcs not provides never regained
-loss is GDP gap

social costs

  • loss of skill
  • personal/family stress
  • violence/crime
  • social upheaval
40
Q

Phillips curve

A

theoretical relationship bet inflation and employment
based on historical and inverse relationship bet rate of unemp and rate of inflation
applicable in ST only
LT, inflationary policies won’t decrease unemp

41
Q

Fiscal policy

A

govt as major player in marketplace, takes in revenues (taxes) and makes purchases (budget)

discretionary- spending under ctrl of indiv w/in govt (weapons contracts)
nondiscretionay- enacted in law; outlays (SS) must be made regardless of funding source bc Congress made them legal reqs; no indiv or group can choose to withhold or increase

42
Q

Tools of fiscal policy

A 
tax policy
govt spending (hwy maintenance, military buildup)
transfer pmts (welfare, food stamps, unemp comp)
43
Q

Multiplier effect

A

each dollar spent by consumer becomes another consumer’s income, etc.
increased consumption for every adtl dollar consumers receive in income is called the marginal propensity to consume (MPC); remainder that was not spent put into spending
$ ricochets, has cumulative effect greater than single amnt
Multiplier= 1/(1-MPC)
i.e. increase in expenditure of x boosts GDP by the multiplier times x

44
Q

Keynesian theory

A

expansionary fiscal policy during recession (stimulate AD) and contractionary during boom

45
Q

expansionary policies

A

cut taxes, more $ for consumers
govt increase spending, increase demand for goods/svcs from private sector
transfer pmt increased, more $ for consumers

46
Q

Inflationary gap

A

amnt by which economy’s aggregate expenditures @ full employment GDP exceed those necessary to achieve full employment GDP
if exist govt istitutes contractionary policies

47
Q

contractionary policies

A

increase taxes, less disposable income
cut govt spending, decrease demand for goods/svcs from private sector
transfer pmt decreased

48
Q

3 uses of money

A

medium exchange- $ is common language for valuation, if no $ would barter which is inefficient
unit of account- basis for bookkeeping, ease of comparison
store of value- value unit of $ determined by quanity of goods/svc it can be exchanged for; barter inefficient b/c if perishable could be worthless

49
Q

real vs nominal interest rate

A

real= nominal rate- rate of inflation lender expects over loan life
nominal=stated rate of loan (real interest rate + expected inflation)

50
Q

M1 vs M2

A

M1-only most liquid forms of $

M2-includes M1 and less liquid $

51
Q

Fractional reserve banking

A

prohibits banks from lending out a $ rec’d on deposit
required reserve ratio is of each dollar deposited bank is req’d to either keep on on hand in vault or deposit with the Red Reserve Bank in its district
bare minimum is the req’d reserves
amnt customer deposits > req’d reserves is excess reserves; banks make loans from excess reserves

52
Q

required reserves

A

provide fed w/ another tool for controlling money supply
amnt of $ banks can create is approximated using monetary multiplier
MM=1/req reserve ratio

53
Q

Fed’s 3 tools of monetary policy

A

open market operations (most valuable)
req’d reserve ratio
d/c rate

54
Q

Open market operations

A

treasury securities traded on open mkt, fed can purchase from or sell to commercial banks
-purchase to loosen $ supply (Fed fund rates fall)
-sell to tighten $ supply (Fed fund rates rise)
Fed funds rate- rate banks charge for overnight loans
-banks w/ excess reserves can lend on ST basis to banks in risk of being below req’d reserve ratio
-

55
Q

Required reserve ratio

A

requiring banks to retain funds affects profits
lowers reserve to loosen $ supply
-banks retain less $, can lend more
raises reserve to tighten $ supply

56
Q

Discount rate

A

reflects changes Fed wishes to make
decrease $ supply, fed increases rate (less banks borrow)
increase $ supply, Fed decreases rate

Gleim BEC (14 decks)

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