Test 2 Study Guide Flashcards by Brianna Garcia

Define GDP:

The total market value of all final goods and services produced annually within a country’s borders

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What is : Is the sum of the products of the prices (p) of all goods and quantities (Q) of those goods produced:

Gross Domestic Product
GDP= z(PQ)

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What are the components that make up GDP and what are their relative contributions to the overall total?

Household = Consumption
Business = Investment
Government = Gov Purchases
Foreign = Net Exports

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The sum of spending on durablegoods, nondurable goods, and services

Consumption

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The sum of all purchases of fixed investment (business purchases of capitalgoods, such as machineryand factories, andpurchases of new residential housing) andchanges in businessinventories (changes in the stock of unsold goods)

Investment

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Federal, state, and localgovernment purchases of goods and services, andgross investment

government purchases

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Exports - imports

Net Exports

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Total FOREIGN spending on domestic (U.S.) goods

Exports

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Total domestic (U.S) spending on FOREIGN GOODS

imports

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What is the Business Cycle

Recurrent swings (up and down) in the REAL GDP

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Recurrent swings (up and down) in the REAL GDP

Business Cycle

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4 phases of the BUSINESS CYCLE

PEAK
CONTRACTION
TROUGH
RECOVERY
EXPANSION

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REAL GDP

The value of the entire output producedannually within a country’s borders, adjusted forprice changes
CALCULATE = BASE YEAR PRICES

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ECONOMY: 2 MAJOR ACTIVITIES

BUYING SIDE= aggregate demand
Selling side = aggregate supply

FRAMEWORK: AD-AS

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WHAT IS AD

AGGREGATE DEMAND

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WHAT IS SRAS

SHORT-RUN AGGREGATE SUPPLY

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WHAT IS LRAS

LONG RUN AGGREGATE SUPPLY

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The quantity demanded of all goodsand services (Real GDP) at different price levels,ceterisparibus

AGGREGATE DEMAND

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A curve that shows thequantity demanded of all goods and services (Real GDP) atdifferent price levels,ceteris paribus

AGGREGATE DEMAND CURVE

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HOW DOES AGGREGATE DEMAND CURVE SLOPE DOWNWARD?

REAL balance effect
-Interest rate effect
International trade effect

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The change in thepurchasing power of dollar-denominated assets thatresults from a change in the price level.

real balance effect

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The changes in household andbusiness buying as the interest rate changes (in turn, areflection of a change in the demand for or supply ofcredit brought on by price level changes).

interest rate effect

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The change in foreignsector spending as the price level changes.

International trade effect

AD CURVE SHIFT : CONSUMPTION AND INVESTMENT

CON.
- wealth
- expectations about future prices and income
-interest rate
- income taxes

investment:
- interest rate
- business taxes
expectations about future sales

The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus

short-run aggregate supply

factors that cause SRAS to shift

wage rates prices of non-labor inputs productivity supply shocks

factors sras shift RIGHT

wages DECREASE price non-labor inputs DECREASE product INCREASE

A curve that represents the output the economy produces when wages and prices have adjusted to their final equilibrium levels. vertical line on graph

long run aggregate supply

the labor market and their possibilities

recessionary gap inflationary gap long-run equilibrium

labor market possibility: The unemployment rate is greater than the natural unemployment rate and a surplus exists in the labor market.

recessionary gap

labor market possibility: The unemployment rate is less than the natural unemployment rate and a shortage exists in the labor market.

inflationary gap

labor market possibility: The unemployment rate is equal to the natural unemployment rate and equilibrium exists in the labor market.

long-run equilibrium

what are the 3 functions of money

store of value medium of exchange unit of account (liquid)

factors: store of value medium of exhange unit of account (is liquid) what are these

functions of money

what is currency and checkable accounts - commercial banks savings and loans deposits - credit unions and mutual savings bank

What are some of the largest items in the Federal Government’s current budget?

medicare social security defense spending interest on debt

budgets for what: medicare social security defense spending interest on debt

governments largest budget

money definition: An interest-earning account, at a commercial bank or thrift institution, that requires a minimum balance and offers limited check-writing privileges

money- market deposit account

money definition: An interest-earning account, at a commercial bank or thrift institution, from which funds can be withdrawn at anytime without a penalty payment

savings deposit

money defintion: An interest-earning deposit with a specified maturity date

time deposit

units of money : Jake has $1,537 in his checking account.

store of value

units of money : Jake writes a check for $1,299.

medium of exchange

units of money: Jake can easily determine that the price of the computer is more than the price of the vacation.

unit of account

Which of the following most accurately describes indirect finance?

Lenders and borrowers interact through a financial intermediary.

Which of the following most accurately describes direct finance?

The lenders and borrowers come together in a market setting.

balance sheet: assets

reserves securities loans

balance sheet: liabilites

checkable deposts bank capital todal

Why is real GDP a more accurate measure of an economy's production than GDP?

Real GDP is not influenced by price changes, but GDP is.

The horizontal axis of a diagram of the AD and AS curves measures which of the following?

An economy's aggregate output

The vertical axis of a diagram of the AD and AS curves measures which of the following?

An economy's price level

Which of the following are reasons the aggregate demand curve is downward sloping? Check all that apply.

A lower price level leads to a lower interest rate. A higher price level decreases consumption through the substitution effect. A higher price level makes domestically produced goods more expensive than foreign goods.

Tax rate rises = tax revenue rises, reach maximum point THEN fall with further increase in tax rates

Laffer Curve

recessionary gap: unemployment

Real GDP < natural real unemployment rate > natural unemployment

inflationary gap : unemployment

real GDP > natural real unemploymeny < natural

The decrease in private expenditures that occurs as a consequence of increased government spending or the need to finance a budget deficit.

crowding out

A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.

federal reserve banking