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Econ 104, Goffe, PSU compete solution
3.8 (6 reviews) GDP - >>>the market value of all FINAL goods and services produced in a country during a period of time. GDP equation - >>>GDP(Y)=C (consumption) + I (investments) +G (gov purchases) +NX (net exports) Consumption - >>>expenditures made by households (excluding the purchase of a new house) Investment - >>>Final goods and services purchased by business firms (equipment for production and new buildings), changes in inventories (which is thee difference between production and sales), and residential construction purchased by households. Government Purchase - >>>Spending by the federal, state, and local governments Net Exports - >>>Exports-imports Real GDP - >>>Value of economic output adjusted for inflation or deflation Nominal GDP - >>>GDP evaluated at current market prices which doesn't account for inflation/deflation intermediate goods - >>>a good that is transformed in the production process EX: flour gets turned into bread, therefore it is an intermediate good
final goods - >>>finished products purchased by the final user U.S. GDP 2016 (2nd quarter) - >>>$18.4 Trillion GDP per capita - >>>Measure of average income per person in a country per year U.S. GDP per capita 2016 - >>>$55, Money $$$$$$$$$ - >>>An asset that does each of the following: 1.) Medium exchange used for purchases 2.) A store of value 3.) Unit of accounting 4.) Standard of deferred payment M1 - >>>Cash and checkable deposits M2 - >>>M1+ Savings Accounts Interest Rate - >>>rate at which money is borrowed and lended FED's Dual Mandate - >>>To promote effectively the goals of 1)maximum employment, 2)stable prices, and moderate long-term interest rates Monetary Policy - >>>Changes in the interest rates,M1, and M2 to achieve dual mandate goals Fiscal Policy - >>>Changes in federal taxes and expenditures. Controlled by President and Congress
EX: College grad being unemployed for a few months after graduation Structural Unemployment - >>>Unemployment due to your skills now being obsolete. EX: machine or robot now doing the task you used to do by hand Cyclical Unemployment - >>>Unemployment due to the ups and downs of the Business Cycle Business Cycle - >>>A cycle or series of cycles of economic expansion and contraction CPI - >>>Consumer Price index, measure of the average prices of a basket of consumer goods such as transportation, food, and medical care Price Level - >>>Measures the average prices of goods Inflation Rate - >>>Percent change in the price level from one year to the next PPI - >>>Producer Price Index is an average of prices received by producers of goods and services at all stages of production Nominal Interest Rate - >>>The stated interest rate on a loan Real Interest Rate - >>>Nominal Interest Rate minus the inflation rate Unemployment Rate Equation - >>>(# of Employed/ Labor Force) x
Labor Force Participation Rate Equation - >>>(Labor Force/ Working Age Population) x Menu Costs - >>>The cost of changing prices on products and printing new catalogs GDP Deflator Equation - >>>(Nominal GDP/ Real GDP) x CPI equation - >>>(Expenditures in the current year/ expenditures in the base year) x Efficiency Wage - >>>A higher than market wage that a firm pays to increase worker productivity Which Price Index measures the largest number of goods/services? - >>>GDP Deflator Core Rate of Inflation - >>>shows long-run trends in the price level Why do economists use the core rate of inflation? - >>>To remove transitory and volatile factors. Why? Because food and energy prices fluctuate too much, and therefore skew the CPI to make it look better or worse than it actually is What harm comes from unanticipated inflation? - >>>1.) Unanticipated inflation can reduce real wages 2.) Unanticipated inflation can reduce real interest rates What harm comes from anticipated inflation? - >>>1.) Menu costs 2.) Value of money declines
Technology - >>>Technology increases production without an increase in the amount of Capital (K) or Labor (L) Types of Technology - >>>1.) Better Capital (K) Ex: Boeing improving their over-head bins 2.) Better Organized Production Ex: UPS trucks only turning right on their routes 3.) More Human Capital (K) Ex: What's between the ears --> Knowledge How does Technology help? - >>>With the addition of technology businesses will benefit because they produce more without having to pay more workers, and they don't have an increase in Capital (K). With the addition of technology the per-worker production function curve will shift up. Per worker production function - >>> Aggregate Production Function - >>>Inputs: Output: K (Capital) Real GDP L (Labor) --> Technology--> Intermediate Goods Entreprenuership Parts of I (Investment) - >>>1.) New Capital (K) 2.) Additions to Inventory 3.) New Homes & Apartments Labor Productivity Equation (Y/L) - >>>(Y/L) = A (K/L) ^.
*A= TFP (Total Factor Productivity) Total Factor Productivity - >>>Portion of output not explained by the amount of inputs used in production Long Run Growth rate of the U.S. - >>>roughly 2% What causes real incomes to rise? - >>>Workers becoming more productive Correlation between human health and economic growth - >>>Human health improves as the economy grows In the U.S. which is smaller Real GDP per person, or Labor Productivity (Y/L)? - >>>Real GDP per person. Real GDP per person is roughly $55,800 while Y/L is prod per worker and roughly $111,000. Y/L would be larger because it grows as each worker produces more, while GDP grows as each worker earns more. What happened to the U.S.'s per-worker production function from 1961-2015? - >>>Moved right along the curve, and the entire curve shifted up. Are natural resources a part of the per-worker production function? - >>>Nope Market definition - >>>People and firms freely buying and selling Institution definition - >>>a company or organization that deals with the distribution of money, goods, and services in an economy.
Natural Rate of Unemployment - >>>Natty rate of unemployment is the rate of unemployment when 1.) cyclical unemployment is 0% (2.) The unemployment rate is from roughly 5-5.5 % and (3.) The economy is at "Full employment" What happens to potential GDP from year to year? How about during recessions? - >>>Potential GDP GROWS from year to year, and in recessions it is MORE THAN real GDP. Define Okun's Law - >>>Connection between Real GDP (Y) and the unemployment rate (u). *Formula: %Change Y= 3-2 Delta(u) What rate of economic growth keeps the unemployment rate constant? - >>>3% growth Recession definition - >>>A recession is a significant decline in economic activity spread across the economy lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Numbers from the Great Recession (2007-2009) - >>>Real GDP: -4.2% Unemployment Rate: + 4.5% Length: 18 months Depression definition - >>>A depression is a sever recession Great Depression facts - >>>1929-1933 (peak)
Unemployment Rate roughly 20-25% Real GDP went down 27% Causes of a Recession - >>>1.) Monetary Policy (to reduce inflation) 2.) Oil Shock 3.) Fiscal Policy 4.) Financial Policy *Monetary policy and oil shocks are the two most common causes More recession causes - >>>1.) Rapid growth and Real GDP> Potential GDP 2.) More inflation than expected (More than FED's goal) 3.) FED slows economy with higher interest rates Aggregate Demand - >>>The total demand for final goods or services in an economy at a given time Aggregate demand equation - >>>AD= C + I + G + NX Relationship between consumption and GDP - >>>Consumption is 67% of GDP Current rate of unemployment - >>>Roughly 5.1% What percentage of unemployed people have been unemployed for more than 27 weeks? - >>>Roughly 30%. Higher than average.
Curve shifts: G increases and Taxes increase - >>>AD could shift left or right. Depends on which increase is greater. Curve shifts: U.S. $ depreciates in value compared to rest of world - >>>AD shifts right Curve shifts: Oil Prices Fall - >>>P decreases Y Increases Curve shifts: Taxes fall - >>>P and Y both increase Curve shifts: $ loses value - >>>P and Y both Increase Price level rises when not in equilibrium - >>>Causes Spending to decrease, but production to increase. Security definition - >>>Financial asset that can be bought and sold EX: stocks and bonds Bond (...James Bond) definition - >>>A type of security that is sold by large businesses or governments How do bonds work? - >>>Consumer borrows from a willing investor The borrower promises fixed nominal payments to the investors for a set period of time.
Are bonds an asset for the buyer or seller - >>>The buyer Interest Rate equation for T Bills - >>>Int Rate= (Face Value - PRICE t-bill) / PRICE t-bill Treasury Bills (T-Bill) - >>>A short-term debt obligation sold by the U.S. government with a maturity of less than one year Balance Sheet of a typical Bank - >>>Assets: Liabilities and Net Worth: Loans: Checking Deposits: Reserves: Net Worth : Reserves Definition - >>>A bank's deposits at the FED Required Reserves - >>>Banks must set aside a fraction of their customer's deposits at the FED. This is called a required reserve ratio, or RR. How do you find assets? - >>>Assets = Liabilities - Net Worth Which aspects of the bank balance sheet are actual money? - >>>Only the Checking Deposits Deposits equation - >>>deposits = (1/RR) x Reserves What happens to bond prices and interest rates when the FED buys bonds? - >>>When the FED buys bonds, there are less bonds available for purchase, so their prices go up. Also, Interest rates then go down because of their inverse relationship with bond prices
