CHAPTER 6
What are the two sources of growth for an economy?
Technology and New resources.
What is the definition of Gross Domestic Product?
Is the total market value of all final goods and services produced in an economy in a one-year period.
What is the difference between equilibrium output and potential output?
Equilibrium where you are, potential is what is possible.
What is Say's Law?
Supply creates its own demand or AS = AD
Define "money" and give one of its three functions.
Money is a highly liquid financial asset that’s generally accepted in exchange for other goods, is used as a reference in valuing other goods, and can be stored as wealth
Short term framework was favored by whom and is known as what kind of economics?
Keynes, Keynesian economics and/or DEMAND SIDE economics
What is the formula for calculating GDP?
Y = C + I + G + Nx
What is the definition of "monetary policy" and "fiscal policy"?
Monetary Policy a policy of influencing the economy through changes in the money supply and interest rates Fiscal Policy the deliberate change in either government spending or taxes (or more generally the deficit) to stimulate or slow down the economy).
Name some of the costs of "growth?"
Pollution, Resource exhaustion, Destruction of habitat
What constitutes M1? What constitutes M2?
M1 consists of currency in the hands of the public plus checking accounts
M2 is made up of M1 plus savings and money market accounts, small-denomination time deposits (CDs), and retail money funds
Long term framework was favored by whom and is known as what kind of economics?
Adam Smith, Reagan, supply side economics -
What is the difference between GDP and Net GDP?
Net GDP is adjusted for depreciation
What are the reasons the Short run AD curve is downward sloping?
Interest Rate Effect the effect that a lower price level has on investment expenditures through the effect that a change in the price level has on interest rates. International Effect as the price level falls (assuming the exchange rate does not change), net exports will rise Money Wealth Effect a fall in the price level will make the holders of money richer, so they buy more Mulitpler Effect the amplification of initial changes in expenditures
Name 3 of the 5 sources of "growth."
Growth compatible institutions
Investment and accumulated capital
Available resources
technology
Entrepreneurship
What are the three motives people have for "holding" money?
The transactions motive is the need to hold money for spending
The precautionary motive is holding money for unexpected expenses and impulse buying
The speculative motive is holding cash to avoid holding financial assets whose prices are falling
What are the two types of unemployment and which is problematic?
Cyclical and structural – structural is problematic Types of cyclical include frictional, and seasonal
What are the CPI and PPI indexes?
Consumer Price Index Producer Price Index
What are 3 of the "shift" factors for Aggregate Demand?
Increased Income
Exchange Rates
Distribution of Income
Future Expectations
Monetary and Fiscal Policy Changes
Multiplier Effect
What is the difference between human and social capital?
Human capital are skills that workers gain from experience, education, and on-the-job training
Social capital is the habitual way of doing things that guides people in how they approach production
What is the money multiplier (how does it work?) Extra 100 points for the formula.
Banks create money buy lending out their deposits and the formula is 1/r where r is reserve ratio
What is the average annual growth rate of the US economy?
3%
What are 3 examples of something NOT included in GDP?
Work of homemakers
Private sale of assets
Sales of stocks and bonds
Government transfer payments
Consider a nation where the inflation rate is currently running at 7%, and unemployment is at 3.8%. Draw a Short Term Aggregate Demand Model (AD, AS, LAS) depicting this economy.
Depict an inflationary gap.
What is the difference between classic and new growth theories?
The Classical growth model is a theory of growth that focuses on the role of capital in the growth process
New growth theory is a theory that emphasizes the role of technology in the growth process
What is the definition of a "central bank" and what institution serves that purpose for US?
central bank, whose liabilities serve as cash in a country. The Federal Reserve