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Transcript
Macro Issues Gross Domestic Product Nominal v. Real Consumer Price Index Unemployment Inflation Fiscal Policy Tools Monetary Policy Tools Gross Domestic Product Gross Domestic Product is the measure of the final goods and services that are bought and sold in an economy in a given period It is measured through adding together consumption, investment, government purchases, and net exports C+I+G+X is the formula Consumption The spending by consumers on final goods and services Investment The spending by business on machinery and changes in inventory Government Purchases All purchases made by government, excluding transfer payments Net Exports The difference between imports and exports Review Questions "The market value of all final goods and services produced within a nation in a given year." This best describes: A)Net domestic product B)Gross domestic product C)National income D)Personal income GDP: A)includes the value of both market and non-market transactions B)corrects for improved product quality over time C)corrects for improved productivity that results in increased leisure time D)does not include transactions conducted "off-the-books" Review Questions The "G" term in C + Ig + G + Xn includes all of the following except: A)state government purchases of new computers B)Social Security checks received by retirees C)salaries received by members of the military D)local government expenditures for new school construction In calculating GDP: A)both exports and imports are added B)neither exports nor imports are added C)exports are added and imports are subtracted D)imports are added and exports are subtracted Consumer Price Index The Consumer Price Index is what we use to measure the cost of living in the United States It is a measure of 300 goods and services that is referred to as a “market basket” This is how we measure the difference between nominal and real costs This is also how we measure inflation Cost of living allowances are tied to CPI Nominal vs. Real Numbers Nominal are the actual dollar values computed during the given time period Real numbers are computed based on a “base year’s” dollars The reason we do this is to get a better indication of the costs of products and services and the cost of living Review Questions Real GDP is found by: A)adding depreciation to nominal GDP B)adjusting nominal GDP by the CPI C)adding up the dollar value of all transactions in the economy in a given year D)excluding exports and imports from nominal GDP Business Cycle Expansion Positive and expanding GDP Peak The highest growth of GDP in a cycle Contraction Positive but declining GDP Recession Negative and shrinking GDP Trough The bottom of a GDP cycle Recovery Negative but increasing GDP Types of Unemployment Frictional The natural unemployment that comes from individuals between jobs Structural The type of unemployment that stems from changes in the structure of industry Cyclical The unemployment that stems from the changes in the business cycle Seasonal The type of unemployment that comes from changes in the season Inflation A general rise in the level of prices Demand-Pull Consumer demand for a product “pulls” up the price Cost-Push Wage-Push Supply Shock Stagflation Unemployment and Inflation together How do we combat this? Review Questions Inflation: A)reduces both the purchasing power of the dollar and one's real income B)reduces the purchasing power of the dollar and increases one's real income C)reduces the purchasing power of the dollar but may have no impact on one's real income D)increases the purchasing power of the dollar and reduces one's real income The war in Iraq sent oil prices spiraling upwards, resulting in an increase in the overall price level. This is an example of which type of inflation? A)Cost-pull B)Cost-push C)Demand-pull D)Demand-push Does inflation hurt everyone? Inflation Hurts: Inflation Helps: Savers Those on fixed incomes Debtors Fiscal Policy Control of the money supply through government policies Contractionary Fiscal Policy (Tight Money) Increase Taxes Decrease Spending Expansionary Fiscal Policy (Easy Money) Decrease Taxes Increases Spending Review Question An expansionary fiscal policy would call for a: A)deficit during a period of demand-pull inflation B)surplus during a period of demand-pull inflation C)deficit during a recession D)surplus during a recession Monetary Policy Control of the money supply through the Federal Reserve Bank Open Market Operation Buying and Selling of government securities Reserve Requirement The amount of deposits that banks are required to keep on hand Discount Rate The interest rate at which the Fed loans money to member banks Federal Funds Rate The interest rate at which the Fed requires banks to charge EACH OTHER for loans Review Questions The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the: A)Securities and Exchange Commission B)U.S. Treasury Board C)Federal Open Market Committee D)12 Federal Reserve Bank president Other things equal, a dramatic decrease in the money supply would: A)increase the price level B)reduce the purchasing power of each dollar C)increase the purchasing power of each dollar D)have an ambiguous impact on the purchasing power of each dollar Banks and Creation of Money There are three types of money identified by the Federal Reserve: M1 Most liquid Currency and checkable deposits M2 M1 + Near-money savings, small time deposits, Money Market Mutual Funds M3 M2 + Large time deposits Money Creation Banks create money through loans You make a deposit The bank has a reserve requirement The rest they can lend By lending the rest, they have created “new money” that is in the economy. Not only is the money still in your account, but now it is loaned out to someone else as well Review Questions Money is created when: A)loans are repaid B)the net worth of the banking system is increased C)banks acquire physical capital D)banks make additional loans In which of the following scenarios is money created? A)Johnson deposits her $2,000 weekly pay check at Morton Bank B)Morton Bank adds to its total reserves held at the Federal Reserve Bank C)Johnson takes out a loan from Morton Bank to purchase a new car D)Johnson repays her car loan