Econ Exam 2

  1. Gross Domestic Product (GDP)
    measures total income of everyone in the economy AND total expenditure on the economy's output of goods and services produced within the country (only final goods!)
  2. What does the Circular-Flow Diagram depict?
    illustrates GDP as spending, revenue, factor payments, and income
  3. Preliminaries for Circular-Flow Diagram:
    • Factors of Production
    • Factor Payments
  4. Factor Payments:
    • payments to the factors of production
    • (e.g., wages, rent)
  5. What the Circular-Flow Diagram Omits:
    • Government
    • Financial system
    • Foreign sectors
  6. Market Value:
    the price of something in currency
  7. Final good:
    intended for the end user
  8. Intermediate good:
    used as components to make other goods
  9. Does GDP include produced goods of the past?
  10. GDP includes _____ goods and ______ services.
    tangible; intangible
  11. Is there a time limit for a GDP?
    each GDP is only for a given period of time
  12. Components of GDP (Y):
    • Consumption (C)
    • Investment (I)Government Purchases (G)
    • Net Exports (NX)
  13. GDP Component: Consumption
    total spending by households and G&S
  14. GDP Component: Investment
    is total spending on goods that will be used in the future to produce more goods. 
  15. GDP Component: Governmnet Purchases
    is all spending on the g&s purchased by govt at the federal, state, and local levels
  16. GDP Component: NX
    • export - import
    • exports are foreign spending
    • imports are portions of C, G, and I that are spent on things produced abroad
  17. Nominal GDP:
    not corrected for inflation, values output using current prices
  18. Real GDP:
    corrected for inflation, values output using base year prices
  19. What does the GDP Deflator measure?
    overall level of prices; uses currently produced goods and services
  20. GDP deflator formula
    100 x (nominal GDP / real GDP)
  21. What is the main indicator of the average person's standard of living?
    Real GDP per capita
  22. GDP doesn't care about:
    • quality of environment
    • leisure time
    • non-market activity (like child care)
    • an equitable distribution of income
  23. Why care about GDP?
    • large GDP = better school, environment, etc.
    • indicates quality of life
  24. Consumer Price Index:
    measures the typical consumer’s cost of living and is the basis of cost of living adjustments; uses a fixed basket!
  25. 5 steps to finding CPI:
    • 1) determine what's in the "basket"
    • 2) find prices of things in the basket
    • 3) compute the basket's cost
    • 4) chose a base year and compute index
    • 5) compute inflation rate
  26. CPI in any year fomula
    100 x (cost of basket in current year / cost of basket in base year)
  27. Inflation rate formula
    [(CPI this year - CPI last year) / CPI last year] x 100
  28. Substitution bias:
    consumers substitute towards goods tha become cheaper
  29. How does substitution bias, introduction of new goods, and unmeasured quality change effect CPI?
    CPI misses these things because it uses only fixed goods/is hard to measure and overstates the increase in the cost of living
  30. Effect of the Introduction of new goods:
    increases variety, dollar becomes more valuable
  31. Effect of Unmeasured quality change:
    improvements in quality of goods in the basket increase the value of each dollar
  32. Imported consumer goods are ______ in/from CPI and _______ in/from GDP deflator.
    included; excluded
  33. Capital goods are ______ in/from CPI and _______ in/from GDP inflator (if produced domestically).
    excluded; included
  34. Formula to compare dollar figures in different times:
    amount in today's dollars = amount in year T dollars x (price level today / price level in year T)
  35. Indexation:
    A dollar amount is indexed for inflation  if it is automatically corrected for inflation  by law or in a contract.
  36. Nominal interest rate:
    the rate of growth in the dollar value of a  deposit or debt; not corrected for inflation
  37. Real interest rate:
    the rate of growth in the purchasing power of a deposit or debt; corrected for inflation
  38. Real interest rate formula
    Real interest rate = nominal interest rate - inflation rate
  39. Financial system:
    the group of institutions that helps match the saving of one person with the investment of another.
  40. Financial markets:
    institutions through which savers can directly provide funds to borrowers. 
  41. Bond:
    certificate of indebtedness
  42. Stock:
    a claim to partial ownership in a firm
  43. Financial intermediaries:
    institutions through which savers can indirectly provide funds to borrowers.
  44. Mutual funds:
    institutions that sell shares to the public and use the proceeds to buy stocks and bonds
  45. Private saving:
    and formula
    • the portion of households’ income that is not used for consumption or paying taxes
    • Y - T - C
  46. Public saving:
    and formula
    • Tax revenue less government spending
    • T - G
  47. National saving:
    and formula (is also Investment fomula)
    • the portion of national income that is not used for consumption or government purchases
    • Y - C - G
  48. What is a saving?
    investment in a closed economy
  49. Budget surplus:
    and formula
    • an excess of tax revenue over govt spending
    • T - G
  50. Budget deficit:
    and formula
    • a shortfall of tax revenue from govt spending
    • G - T
  51. The supply of loanable funds comes from saving:
    • households with extra income
    • positive public saving
  52. The demand for loanable funds comes from investment:
    • firms borrow funds to pay for equipment
    • households borrow funds to buy new houses
  53. Crowding out:
    government borrows to finance its deficit, leaving less funds available for investment
  54. Employed:
    paid employees, self-employed, and unpaid workers in a family business
  55. Unemployed:
    people not working who have looked for work during previous 4 weeks (MUST BE LOOKING FOR A JOB)
  56. Everyone else that is not employed or unemployed is considered to be not ______.
    in the labor force
  57. Labor force:
    total number of workers including the employed and unemployed
  58. Unemployment rate:
    and formula
    • % of labor force that is unemployed
    • (# of unemployed / labor force) x 100
  59. Labor force participation rate:
    and formula
    • % of the adult population that is in the labor force
    • (labor force / adult population) x 100
  60. BLS
    Beareau of Labor Statistics
  61. Discouraged workers:
    want to work, but have given up on finding job; classified as "not in labor force"
  62. What is the flaw in the Unemployment Rate?
    It doesn't always show improvement or worsening because it depends on how many people are actually applying for unemployment
  63. Natural rate of unemployment:
    the normal rate of unemployment around which the actual unemployment rate fluctuates
  64. Cyclical unemployment:
    the deviation of unemployment from its  natural rate; associated with the business cycle
  65. Frictional unemployment:
    occurs when workers spend time searching for the jobs that best suit their skills and tastes; usually doesn't last long
  66. Structural unemployment:
    occurs when there are fewer jobs than workers; usually lasts a long time
  67. Job search:
    is the process of matching workers with appropriate jobs
  68. Sectoral shifts:
    are changes in the composition of demand across industries or regions of the country; this puts people out of work and they need to look for new jobs that fit their skills
  69. Unemployment insurance:
    a govt program that partially protects workers’ incomes when they become unemployed; increases frictional unemployment and this ends when the person gets a job
  70. Union:
    a worker association that bargains with employers over wages, benefits, and working conditions; exert market power
  71. Efficiency wages:
    Firms voluntarily pay above-equilibrium wages to boost worker productivity
  72. Four reasons to use efficiency wages – 
    • 1) worker health
    • 2) worker turnover
    • 3) worker quality
    • 4) worker effort
  73. Money:
    the set of assets that people regularly use to buy g&s from other people
  74. Medium of exhange:
    an item buyers give to sellers when they want to purchase g&s
  75. unit of account:
    the yardstick people use to post prices and record debts 
  76. Store of value:
    an item people can use to transfer purchasing power from the present to the future
  77. Commodity money:
    takes the form of a commodity with intrinsic value
  78. Fiat money:
    money without intrinsic value, used as money because of govt decree
  79. barter:
    exchange of one good or service for another
  80. double coincidence of wants:
    the unlikely occurrence that two people each have a good the other wants
  81. money supply:
    the quantity of money available in the economy
  82. currency:
    the paper bills and coins in the hands of the (non-bank) public
  83. demand deposits:
    balances in bank accounts that depositors can access on demand by writing a check
  84. central bank:
    an institution that oversees the banking system and regulates the money supply
  85. monetary policy:
    the setting of the money supply by policymakers in the central bank
  86. Federal Reserve:
    the central bank of the U.S. 
  87. How many board of governors are there and where are they located?
    7 and in Washington, D.C.
  88. How many regional Fed banks are there?
  89. Who does the Federal Open Market Committee?
    board of governors and presidents of some of the regional banks
  90. fractional reserve banking system:
    banks keep a fraction of deposits as reserves and use the rest to make loans
  91. reserve requirements:
    regulations on the minimum amount of reserves that banks must hold against deposits
  92. reserve ratio (R) –
    • = fraction of deposits that banks hold as reserves
    • OR
    • = total reserves as a percentage of total deposits
  93. T-account:
    a simplified accounting statement that shows a bank's assets and liabilities
  94. Does a fractional reserve banking system create wealth?
    NO, only money
  95. Money multiplier:
    the amount of money the banking system generates with each dollar of reserves
  96. Bank capital:
    the resources a bank obtains by issuing equity to its owners
  97. leverage:
    the use of borrowed funds to supplement existing funds for investment purposes
  98. Leverage ratio:
    the ratio of assets to bank capital
  99. Capital requirement:
    a govt regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts.
  100. credit crunch:
    when banks don't a lot of capital and start lending less
  101. Open-Market operations:
    the purchase and sale of U.S. government bonds by the Fed.
  102. discount rate:
    the interest rate on loans the Fed makes to the banks
  103. reserve requirements:
    regulations on the minimum amount of reserves banks must hold against deposits
  104. run on banks:
    when people suspect their bank is in trouble and they run to the bank to withdraw all their money
  105. federal funds rate:
    interest rate on the loans that a bank with excessive reserves gives to the bank with very little reserves
Card Set
Econ Exam 2