GDP & Inflation
What does GDP stand for and what does it measure?
(Gross Domestic Product; total market value of all final goods and services produced within a country in a given time.)
Define frictional unemployment.
(Temporary unemployment when switching jobs.)
Who conducts fiscal policy?
(The government—Congress and the President.)
What is a current account deficit?
Imports > exports; more money leaving the country than entering.
What is M1?
(Cash + checking deposits + traveler’s checks.)
What is the difference between nominal and real GDP?
(Real GDP adjusts for inflation, nominal does not.)
What is the natural rate of unemployment?
(Frictional + structural; the unemployment rate at full employment.)
What is expansionary fiscal policy?
(Increase government spending and/or decrease taxes to stimulate economy.)
Define exchange rate.
The value of one currency in terms of another.
What is the money multiplier formula?
1 / reserve requirement ratio
What is the GDP deflator and how is it calculated?
(GDP Deflator = (Nominal GDP / Real GDP) × 100)
What’s the difference between demand-pull and cost-push inflation?
(Demand-pull: too much demand. Cost-push: rising input costs.)
What is the role of the Federal Reserve?
Control money supply and interest rates via monetary policy.
If the U.S. dollar appreciates, what happens to U.S. net exports?
They decrease; U.S. goods become more expensive abroad.
If the reserve requirement is 10%, what’s the maximum money creation from a $1,000 deposit?
(10,000 = 1,000 × 1/0.10)
If nominal GDP increases but real GDP stays the same, what happened to prices?
(Prices increased; inflation occurred.)
What does the Phillips Curve show?
(Inverse relationship between inflation and unemployment in the short run.)
What are the 3 tools of monetary policy?
Open market operations, reserve requirement, discount rate
Name one factor that can shift the demand for a currency.
Interest rates, income levels, tastes, inflation expectations.
What is the opportunity cost of holding money?
(Interest you could earn elsewhere.)
Using the expenditure approach, list all components of GDP.
(C + I + G + (X - M): Consumption, Investment, Government Spending, Net Exports)
Name one reason the long-run Phillips Curve is vertical.
(In the long run, there is no tradeoff between inflation and unemployment.)
If the Fed wants to reduce inflation, what should it do?
Sell bonds, increase reserve requirements, or raise the discount rate.
Explain how a tariff impacts domestic and foreign producers.
Helps domestic producers by raising foreign prices, hurts foreign exporters.
Describe the transmission mechanism from monetary policy to real GDP.
Monetary policy → interest rates → investment → AD → real GDP.