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100
What are the 3 goals of monetary policy?
1. maximum employment
2. stable prices (low and predictable inflation)
3. moderate long-term interest rates
100
what is the expenditure approach to GDP
gdp = g + c + i + (x-m)
100
what is the gdp deflator formula, and interpret it 2 different ways
gdp deflator: (nominal / real)*100 more than 1, means inflation is present, rising price levels, is 120% prices have risen by 20% compared to the base year
100
what is the real money supply?
nominal money supply / price level
200
Who is Jerome Powell? How many Fed Banks are there?
Jerome Powell is the Chair of the Fed. There are 12 banks.
200
ad curve increases in the price level lead to...
a reduction in the quantity of real gdp demanded (and vice versa)
200
A house was just built. What happens to GDP? What type of GDP increases?
GDP increases, investment.
200
A house was sold for 6.5 million in 2001. That house is now worth 3 million (rough area ig). An ownership transition just occured, with both sides using a realtor with fees of 3%. What is the GDP?
6.5million*3%
300
A country is experiencing a period of high inflation and low unemployment. According to the short-run Phillips Curve, what would be the expected impact on unemployment if the government implements monetary policy to reduce inflation?
Phillips Curve illustrates the inverse relationship between inflation and unemployment in the short run. Short run impact: lower inflation and higher unemployment.
300
potential real gdp
quantity of real gdp produced at full employment (no cyclical unemployment)
300
what are the types of unemployment?
1. frictional (workers entering workforce for the first time or voluntarily changing jobs)
2. structural unemployment (workers losing jobs due to automation, big issue)
3. cyclical unemployment (related to economy)
300
below full employment equilibrium
a short-run macroeconomic equilibrium in which real gdp is below potential real gdp
400
Why does stagflation challenge the traditional Phillips Model?
Phillips curve is an inverse relationship between inflation and unemployment. So high inflation, low unemployment. Stagflation is high inflation and high unemployment occurring simultaneously.
400
planned real gross private domestic investment influences
- higher real interest rates lead to lower planned real investment
- lower expected future profit from current capital goods projects leads to lower planend real investment
400
what causes the economy to move away from potential real gdp?
- most macroeconomists believe that the primary sources of business cycles are fluctuations in aggregate demand
- this can occur for any reason that generates a shift in the aggregate demand curve
400
income approach to measuring gdp
compensation of employees (largest category), corporate profits, proprietor's income, rental income
500
What are two possible policy responses a government could take to address stagflation? Discuss the trade-offs associated with each policy.
1. Fighting inflation
- The central bank could raise interest rates, reduce the money supply, or the government could cut spending and increase taxes to curb inflation.
- This policy aims to reduce aggregate demand (AD), slowing price increases.
- ✅ Lowers inflation by reducing consumer and business spending.
❌ Worsens unemployment since lower demand leads to slower economic growth and potential job losses.
❌ May deepen the recessionary effects of stagflation, making recovery longer and more painful.
2. Fighting unemployment
- The central bank could lower interest rates, increase the money supply, or the government could increase spending and cut taxes to boost employment.
- This policy shifts AD to the right, aiming to increase output and job creation
- ✅ Reduces unemployment by stimulating business investment and consumer spending.
❌ Worsens inflation, as higher demand can push prices up further, exacerbating the original problem.
❌ Could lead to a wage-price spiral, where higher wages drive even more inflation
500
define term and relationship with population, population of working age, labor force, inactive labor force, employed, and unemployed
500
why would planned real gross private domestic investment be different from actual real gross private domestic investment
firms plan to have a certain level of inventories
- if less goods are sold than expected, inventories increase above planned levels, in this case planned investment will be less than actual investment
- if more goods are sold than expected, inventories decrease below planned levels, in this case planned investment will be more than actual investment
500
Explain 5 aspects of monetary policy, and 5 aspects of fiscal policy.
monetary policy (interest rates, money supply, open market operations, inflation targeting, reserve requirements) fiscal policy (government spending, taxation, budget deficits and surpluses, subsidies and tariffs, public debt management)