GDP
What is the GDP formula?
GDP = C + I + G + (X-M)
What is the formula for calculating unemployment?
# of unemployed/ total people in the labor force
labor force = unemployed + employed
What is inflation?
Increase in prices over time.
What is fiscal policy?
Fiscal policy is policy regarding government spending and taxation.
What is monetary policy?
Monetary policy is the set of policies a central bank can use to influence an economy-- namely, interest rates and the reserve requirement.
Which country's GDP does sales from an American company in a storefront in Toronto, Canada factor into?
Canada-- GDP covers the geographical area of a country.
What are the four types of unemployment?
Cyclical, frictional, structural, seasonal
What is the CPI? How does it tell us what the rate of inflation is?
The Consumer Price Index measures the cost of a broad 'market basket' of goods and how the cost of those goods changes over time. The change over time of the CPI tells us the rate of inflation.
Who is in charge of fiscal policy?
Congress and the President
What is the central bank of the US?
The Federal Reserve
Explain how imports affect GDP.
A worker leaves their job to search for a higher-paying position, while another worker loses their job due to automation. What two types of unemployment are occurring here?
Frictional and structural
Inflation is higher than expected. Explain how this affects borrowers and lenders.
Lenders lose out. While the amount they are owed does not change, that amount of money is now worth less than when it was lent. Borrowers win because they are paying back and amount of money that is less valuable than when they borrowed it.
Explain the difference between expansionary and contractionary fiscal policy.
Expansionary fiscal policy increases government spending and/or cuts taxes to pump more money into the economy to address low growth and high unemployment. Contractionary fiscal policy decreases government spending and/or increases taxes to pull money out of the economy to address high inflation and cool down growth.
Explain both contractionary and expansionary monetary policy. How would each be done? What would each respond to?
Contractionary monetary policy is meant to slow an economy down during periods of high growth and inflation. It is done by raising interest rates and/or the reserve requirement. Expansionary monetary policy is intended to spur growth in an economy with high unemployment and low growth. It is done by decreasing the interest rate and/or reserve requirement.
How is GDP not a complete measure of the health of an economy?
GDP measures total economic output-- it does not measure the standard of living for citizens or the distribution of wealth in a country.
Explain why some level of unemployment is considered “natural” in an economy.
It's healthy and normal for an economy to have people leaving jobs for new ones, graduating school, and so on. It's also expected at every stage of the business cycle that some businesses are closing and people are losing jobs.
Explain the difference between demand-pull inflation and cost-push inflation.
Demand-pull inflation is caused by increased demands for goods raising the price for them. Cost-push inflation results from increasing cost of inputs decreasing supply for goods and therefore increasing price.
The government increases spending during a period of high inflation. Evaluate whether this is an appropriate policy response.
It is not an appropriate policy response. Increasing spending will pump money into the economy and speed up growth/worsen inflation.
If the economy is experiencing high inflation, describe the steps the central bank would take
The central bank would use contractionary monetary policy, namely increasing interest rates, to tame high inflation.
What is the difference between real and nominal GDP? Why is this difference important?
Real GDP is nominal GDP with inflation removed/factored out. This is important because it shows us how much an economy has actually grown or shrunk independent from changes in prices.
How does people giving up the job search because they are discouraged affect the rate of unemployment? In this case, is the unemployment rate accurate?
People give up and stop looking for a job-- this makes the unemployment rate look artifically low.
Wages increase by 4% in a year, while inflation is 6%. What does this mean for workers?
Their purchasing power has decreased. While they are making more money, the cost of goods has increased greater than their salary. It is now harder for them financially because their money does not go as far as it used to.
The government increases spending to finance a war. It also passes significant tax cuts. Explain what type of fiscal policy is happening here and what effect it will likely have on the economy.
The government is engaging in expansionary fiscal policy. By increasing government spending and increasing consumer spending through decreasing taxes, the government will spur growth in the economy.
The economy is in a recession with low consumer spending and high unemployment. What would the central bank do?
The central bank would use expansionary monetary policy (lowering interest rates) to spur borrowing and pump money into the economy. Ultimately, this new movement would hopefully cause economic growth and help address unemployment.