Variables
The components to calculate GDP
What is Consumption+Investment+Government spending+(eXports-iMports)
The equilibrium target numbers
What is 2.5% inflation, 3% GDP growth, and 5% unemployment
What is real interest rates account for inflation while nominal doesn’t.
The definition of NAIRU
What is Non-accelerating Inflation Rate of Unemployment. Aka “natural rate of unemployment”. It helps control inflation and decide policy.
The Marginal Propensity to Consume is 0.7 the Marginal Propensity to Save is...
What is 0.3
1-MPS=MPC
1-(0.7)=0.3
The five macroeconomic goals
What is sustainable economic growth, full employment, price stability, stable trade balance, and a good distribution of income among citizens
The differences between fiscal and monetary policies
Monetary policies have small affects dealing with interest rates and money supply
Fiscal policies have stronger affects dealing with taxes and government spending
The loanable funds market
What is representation of savers vs. spenders/borrowers in the country to determine the needed real interest rate required to influence GDP growth.
Appreciation and depreciation.
What is the increase and decrease in the value of a currency respectively.
In billions of dollars:
C- 12 X-2 pop.: 20 million
I- 7 M- 3
G- 6 GDP Deflator- 13
Calculate nominal GDP, Real GDP, and GDP per capita
NGDP=12+7+6+(2-3)=24
RGDP=(24/13)100=184.62
RGDP per Capita=184.62B/20M= 9231/capita
Variables that could cause a shift in short run aggregate supply
What is
Input costs (raw materials/labor wages)
Government policies (taxes)
Supply shocks (natural disaster/changes in available resources)
The state of an economy where contractionary policy would be needed instead of inflationary
What is an overheated economy instead of a recessionary one
The federal funds rate
What is the interest rates banks charge other banks to borrow when they need to meet their minimum required reserves
Scarcity
A country has an MPC of .8 and the government cuts taxes, due to a recession, by 100B. What is the max effect this move can have on the economy?
What is 400B
MPC/MPS= 0.8/0.2= 4
100B(4)= 400B
Variables that can affect each component of GDP (just one each required)
What is
C: disposable income, consumer confidence, interest rates, and household wealth
I: business confidence, interest rates, and expected future demand
G: economic conditions, political decisions, structural needs
X-M: exchange rates, domestic/foreign income levels, trade policies (tariffs/quotas), production costs, and global demand
The economic policy implanted in an economy that is experiencing 1.5% inflation, 7% unemployment, and 2% GDP growth.
What is an expansionary fiscal/monetary policy, which causes a right shift in aggregated demand increasing price level and decreasing unemployment
If the reserve requirement decreases what happens to the money supply and interest rates?
What is the money supply increasing because the amount of loanable funds increase, lowering interest rates.
Bills: Mature in less than one year, buys US debt when holding large amounts of money so it doesn't lose value
Notes: Matures in 1-10 years same concept but it pays interest every 6 months
Bonds: Long term 10+ years. also pays interest but riskier because inflation could become higher than the interest through the years.
Citizens of a country save 30$ when their new incomes increase from $380 to $470 per week. The government also wants to increase spending by $6 billion dollars. What will be the max change on this country's GDP.
MPS=30/90=1/3
Spending multiplier=1/MPS=1/(1/3)= 3
6B(3)=18B
The different types of unemployment and their meanings
What is
Frictional: voluntarily leaving a job to find a better one. (New college grad finding job)
Seasonal: predictable job loss due to lower labor demand (retail after the holidays)
Structural: long lasting job loss due to changes in economy like technological advances (college graduate working at Walmart)
Cyclical: temporary job loss due to economic downturn when goods and services have low demand (COVID-19 layoffs)
factors that may limit the effectiveness of both a monetary policy and a fiscal policy
What are
Monetary: liquidity trap/current interest rate (if it’s already high, increasing wont do much), time lags (monetary policies take longer), banks must lend, future expectation
Fiscal: consumer behavior (saving instead of spending), Time lags, crowding out (the government borrows to spend which could decrease demand instead of increasing)
The affect on an economy in an AD-AS model if the federal reserve buys bonds in an open market operation and explain.
The aggregate demand curve shifts right (increases), lowering price level and unemployment/output because when the fed buys bonds they are increasing the money supply, lowering interest rates
The formulas for spending multipliers, Tax multipliers, balanced budget multiplier
What is
- (1/(1-MPC))x$ OR (1/MPS)x$
- MPC/MPS
- and (spending multiplier)-1, respectively.
The Fed buys $10 million in bonds from banks and the reserve requirement is 20%. The maximum change in the money supply is..
What is $50 million
Money multiplier=1/reserves=1/.2=5
$10M(5)=$50M