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Econ 102 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

GDP equation

A

Y = C + I + G + NX

NX = X - M

Y (GDP + Output / or Total Income)
C (Consumption)
I (Investment)
G (Government spending)
NX (Net exports)

X (Exports)
M (Imports)

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2
Q

How to measure contribution towards production

A

Total sales - cost of intermediate inputs

Ex : 400 + 600 + 500 = 1500

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3
Q

Wages + Profits = ?

A

Total GDP

Wages: $300 + $500 + $200 = $1000

Profits: $100 +$100 + $300 = $500

$1000 + $500 = $1500

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4
Q

Nominal GDP

A

The GDP only accounts for the changes in the prices and quantities of goods.

P * Q

Ex:
Q1: 80 P1: $30 = $2400
Q2: 90 P2: $36 = $3250

Growth rate:
(3250 - 2400) / 2400 = 35%

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5
Q

Real GDP

A

The GDP that accounts for only the change in production for goods

Pbar = (P1 + P2)/2
Pbar * Q1(80) = 2640
Pbar * Q2(90) = 2970

Growth rate:
(2970 - 2640)/2640 = 12.5%

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6
Q

How to calculate % change in nominal GDP

A

% change in Real GDP + % change in prices

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7
Q

Rule of 70 is the time it takes for GDP to ?

A

Double

70/Annual Growth rate

Ex: 70/1.45 = 40 years

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8
Q

Labor force participation rate

A

The percentage of the working age pop that is either employed or unemployed

(Employed + Unemployed)/Working age population

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9
Q

Unemployment

A

The percentage of workers who currently are not working but are actively looking for a job.

Short term: Under 10 weeks
Long term: Longer than 6 months

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10
Q

Output equation

A

Y = f(LHK)

Y (Output)
L (Labor input)
H (Human capital)
K (Physical capital)

Labor factors:
Size of pop
working age fraction
Share of people who choose to work
How many hours each worker puts in

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11
Q

Unemployment rate

A

Unemployed/Labor Force *100

*Fluctuates but is never 0
*PPL regularly flow into and out of jobs

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12
Q

Inflation rate

A

(Price this year - Price last year)/ price last year

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13
Q

GDP Deflator

A

Nominal GDP/Real GDP

A price index that tracks the prices of all goods and services produced domestically

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14
Q

Real GDP

A

Nominal GDP/Deflator

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15
Q

How to convert in to another time periods currency

A

Today’s currency =
Another times dollars * P level today/P level in another time

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16
Q

Real interest rate

A

The interest rate that accounts only for the change in production

= Nominal interest rate - Inflation rate

Ex:
5-3 = 2%

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17
Q

What is slope in a GDP based graph

A

Change in consumption/Change in income

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18
Q

Marginal Propensity to save = ?

A

change in savings/change in income

MPS = 1 - MPC

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19
Q

Marginal propensity to consume = ?

A

Change in consumption/Change in income

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20
Q

Cost Benefit principle

A

Incentives influence decisions

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21
Q

Opportunity cost principle

A

The true cost of something is the next best alternative you must sacrifice to have it.

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22
Q

Marginal principle

A

Decisions about quantities are best made incrementally

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23
Q

Interdependence principle

A

Your best choice depends on your other choices, the choices others make, developments in other markets, etc….

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24
Q

Circular flow diagram

A

Money market:

  1. Spending on output
  2. Mkt value output
  3. Wages + profit
  4. Income received

Goods market:

  1. Output bought
  2. Inputs provided
  3. Inputs brought
  4. Output sold
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25
Q

GDP

A

The market value of all final goods and services produced within a country in a given year

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26
Q

Three perspectives of GDP

A

Total spending
Total Output
Total Income

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27
Q

Consumption

A

Household spending on final goods and services

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28
Q

Investment

A

Spending on new capital that increases the capitol’s productive capacity

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29
Q

Government spending

A

Gov purchases of goods + services

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30
Q

Net exports

A

Exports - spending on Imports

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31
Q

Exports

A

Produced domestically and purchased abroad

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32
Q

Imports

A

Produced abroad and purchased domestically

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33
Q

Limitations of GDP

A
  1. Prices are not values
  2. Nonmarket activities including household production are excluded
  3. The shadow economy is missing
  4. Environmental degradation isn’t counted
  5. Leisure doesn’t count
  6. GDP ignores distribution
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34
Q

Comparison strategies

A
  1. Evaluate what it means per person
  2. Compare big numbers to the size of the economy
  3. Compare big numbers to their own history
  4. Use the rule of 70 to evaluate long term growth rates
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35
Q

Production function

A

The methods by which inputs are transferred into output, determines the total production that’s possible with a given set of inputs

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36
Q

Labor

A

The sum of all hours worked across the economy

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37
Q

Human capital

A

The accumulated knowledge and skills that make a worker more productive

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38
Q

Physical capital

A

The tools, machines and structures that are inputs in the production process

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39
Q

Capital stock

A

The total quantity of physical capital that can be used in the production of goods and services

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40
Q

Constant returns to scale

A

Increasing all inputs by some proportion will cause output to rise by the same proportion

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41
Q

Replication argument

A

If you want to double the output of your factory, double all outputs

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42
Q

Solow model

A

Used to analyze economic growth

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43
Q

Insight 4

A

The capital stock will grow as long as investment outpaces depreciation

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44
Q

Law of diminishing returns

A

You add more and more workers you will at some point stop producing as much

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45
Q

Catch up growth

A

The rapid growth that occurs when a relatively poor country invests in its physical capital

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46
Q

Rising depreciation

A

If the fraction of machines that fail each year is fixed then more machines will mean more breakdowns —> Total depreciation grows

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47
Q

Tech progress is driven by…

A

The speed at which new ideas are created
How many resources are devoted to generating new ideas

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48
Q

The impact of new ideas

A

Ideas can be freely shared
Ideas do not depreciate with use
Ideas may promote other ideas

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49
Q

Institution

A

Any part of society that keeps the society together and performs a role

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50
Q

Why do institutions matter?

A
  1. Property rights - control over a tangible or intangible resource
  2. Government stability - corruption and political instability discourage investment and corruption
  3. Efficient regulation - Reg and rules are essential to a well-functioning economy, but they can also be inefficient or excessive
  4. Gov. policy encourages innovation - creates incentives through intellectual property laws. And it subsidizes research and development
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51
Q

Working age population

A

Those age 16 or older who are not in the military or institutionalized
*No upper limit for working age population

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52
Q

Labor force

A

The employed plus the unemployed

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53
Q

Equilibrium unemployment rate

A

The long run unemployment rate to which the economy tends to return

*A dynamic labor mkt makes it easier for new people to enter the mkt and find a job quickly

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54
Q

Marginally attached

A

Someone who wants a job and who has looked for a job within the past year, but who isn’t counted as unemployed because they aren’t currently searching for work

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55
Q

Labor Market graph

A

Labor demand is the employers who are seeking to buy labor
*Downward sloping
Labor supply is the workers because they supply labor
*Upward sloping

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56
Q

Unions

A

Organizations representing workers who band together to negotiate jointly

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57
Q

Minimum wages

A

Keeps wages from falling below the set minimum wage

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58
Q

Hysterisis

A

When a period of high employment leads to higher equilibrium unemployment rate

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59
Q

Underemployed

A

Someone who has some work but wants more hours or the job isn’t adequately using their skills

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60
Q

Types of unemployment

A

Frictional- Unemployment due to the time it takes for employers to search for workers and for workers to find jobs

Structural- Unemployment that is due to wages not falling and bringing labor demand and supply into equilibrium

Cyclical-Unemployment is due to a temporary downturn in the economy

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61
Q

Substitution bias

A

The overestimate of the cost of living that occurs because people substitute towards goods whose prices rise by less.

62
Q

Producer price index

A

A price index that tracks the prices of input into the prod process

63
Q

Nominal variable

A

A variable measured in dollars
(whose value may fluctuate over time)

64
Q

Money Illusion

A

The mistaken tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts.

65
Q

Money functions

A

Money is a medium of exchange
Money is a unit of account
Money is a store of value

66
Q

Menu costs

A

The marginal cost of adjusting prices

67
Q

Shoe leather costs

A

The costs incurred trying to avoid holding cash

68
Q

Grade inflation

A

Distorts the signals that grades send

69
Q

Inflation fallacy

A

The mistaken belief that inflation destroys purchasing power

70
Q

Dissaving

A

The amount of money that is spent

71
Q

Consumption smoothing

A

Maintaining a steady or smooth path for your consumptions spending over time

72
Q

Permanent income

A

Your best estimate of your long-term average income

Consumption is driven by permanent income rather than current income

73
Q

Five insights

A
  1. A temp change in income leads to a small change in consumption
  2. A permanent change in income leads to a large change in consumption
  3. An anticipated change in income leads to no change in consumption
  4. Learning about future income changes leads to a change in consumption
  5. It’s hard to forecast changes in consumption
74
Q

Credit constraints

A

Limits on how much you can borrow

75
Q

Hand to mouth consumers

A

Spend their income as they receive it

76
Q

Types of changes in income

A

Temporary
Changes CS by a small amount and HTM by a large amount
Overall changes moderately

Permanent
Changes both CS and HTM by a large amount
Overall changes by a large amount

Anticipated
Changes CS by a large amount
HTM does not change
Overall changes moderately

77
Q

Efficient market hypothesis

A

The theory that at any point in time the stock prices reflect all publicly available information

78
Q

Business investment vs regular Investment

A

Business Investment is anything besides inventory stock
and
Inventory stock is considered a separate investment

79
Q

Current Account

A

Measures how much we import relative to exports

80
Q

Financial Account

A

Measures Financial Outflows relative to financial Inflows

81
Q

A deficit in the current account = ? in the financial account

A

A surplus

82
Q

Okuns rule of thumb

A

for Every 0.5% the Output Gap falls the Unemployment rate rises by 1%

83
Q

PV of future income

A

Yearly income/ (R+D)

84
Q

Capital

A

Assets such as equipment, structures, and intellectual property that used repeatedly to produce output

85
Q

Capital stock

A

The total quantity of capital at a point in time

86
Q

Compounding

A

The accumulation of money over time, as you earn interest on both principal + accrued interest

87
Q

Discounting

A

Converting future values into the equivalent present values

88
Q

Marginal Benefit

A

Next year’s profit

89
Q

Marginal Cost

A

Consider both depreciation + forgone interest

90
Q

User cost of capital

A

The extra cost associated with using one more machine next year

*Rental Cost

91
Q

Market for loanable funds

A

The mkt for the funds used to buy, rent or build capital

*Savers supply funds
*Investors demand funds

92
Q

Budget surplus

A

When Gov revenues exceed spending

93
Q

Budget deficit

A

When Gov spending exceeds revenue

94
Q

Crowding out

A

The decline in private spending and particularly investment that follows from a rise in Gov borrowing

95
Q

Types of investment

A

Inventories, Housing, Business

96
Q

Types of Bond risks

A

Default- Not getting paid

Term- Arises when there’s uncertainty about future interest rates

Liquidity- Arises when your Bond will be hard to sell

97
Q

Treasuries

A

Bonds issued by the Gov

98
Q

Fundamental value

A

The present value of the future profits that a company will earn

99
Q

Relative valuation

A

As assessment of the value of an asset by comparing it to similar assets

100
Q

Random walk

A

When a price follows an unpredictable path

101
Q

Greater fool theory

A

The idea is that people buy an investment because they expect other people to buy it from them at a higher price

102
Q

Globalization

A

The increasing global integration of economies, cultures, political institutions and ideas

103
Q

Financial inflows

A

Investments made by foreigners in the US

104
Q

Financial Outflows

A

Investments by Americans in foreign countries

105
Q

Nominal Exchange rate

A

The price of a country’s currency in terms of another country’s currency

106
Q

Higher price of a dollar

A
  • An appreciation of the dollar
  • A depreciation of the foreign currency
    -Stronger dollar
    -Higher exchange rate
    -Imports are cheaper
    -Exports are more expensive for foreign buyers
107
Q

Lower price of a dollar

A

A depreciation of the dollar
An appreciation of the foreign currency
Weaker dollar
Higher exchange rate
Imports are cheaper
Exports are more expensive for foreign buyers

108
Q

Trade weighted index

A

A summary measure of the value of the US dollar

109
Q

Foreign exchange market

A

The market in which currencies are bought and sold

110
Q

Real exchange rate

A

Allows you to measure the price of domestic goods relative to their foreign competitors

111
Q

Bilateral trade balance

A

How much we buy from a specific country compared to how much they buy from the US

112
Q

Business cycle

A

Short-term fluctuations in economic activity

—> Not cycles because fluctuations are not rhythmic

113
Q

Peak vs Trough

A

Economic high points vs low points

114
Q

unusual expansion

A

rapid bounce back following a recession

115
Q

comovement

A

variables that move up and down together

116
Q

Leading indicator

A

Variables that tend to predict the future path of the economy
EX: Business confidence, consumer confidence, the stock market

117
Q

Lagging indicator

A

Variables that tend to follow the business cycle movement with a bit of delay
Ex: Unemployment

118
Q

Seasonally adjusted

A

Data stripped of predictable seasonal patterns

119
Q

Annualized rates

A

Data converted to the rate that would occur if the same rate had occurred throughout the year

120
Q

Aggregate expenditure

A

The total amount of goods and services that people want to buy across the whole economy

AE = IS
Decrease AE = Increase R

121
Q

A decrease in the real interest rate will cause AE to do what

A

Increase which means that output and the output gap increase as well.

C increases
I increases
G increases
NX increases

122
Q

monetary policy

A

The process of setting interest rates in an effort to influence economic conditions

123
Q

Federal funds rate

A

The inflation rate on a set of overnight loans that are almost certain to be repaid the next day

124
Q

Risk free interest rate

A

The interest rate on a loan that involves no risk

125
Q

Risk premium

A

The extra interest that lenders charge to account for the risk of loaning money

126
Q

shock types

A

Spending- Any change in the spending conditions that change the real i.r at which people can spend
IS curve

Financial- Any change in borrowing conditions that change the real interest rate at which people can borrow
MP curve

Supply-Any change in the supply conditions that change the unexpected inflation in the economy
Phillips curve

127
Q

self fulfilling prophecy

A

Inflation expectations create a self-fulfilling prophecy.

Vicious cycle —> High Inflation
Virtuous cycle —> Low inflation

128
Q

Adaptive expectations

A

Some people might expect recent levels of inflation to continue

129
Q

Anchored expectations

A

Those who might believe that the federal reserve will deliver on its promise to ensure inflation is around 2%

130
Q

Rational expectations

A

Those who use all available information and deep understanding of macroeconomic relationships to come up with the most accurate forecast possible with available data.

130
Q

Rational expectations

A

Those who use all available information and deep understanding of macroeconomic relationships to come up with the most accurate forecast possible with available data.

131
Q

Sticky expectations

A

There is also evidence that people revisit their views about inflation only irregularly, and so they stick with their previous views for long periods of time

132
Q

Demand pull inflation

A

inflation resulting from excess demand

133
Q

Neutral interest rate

A

The real i.r at which GDP = potential GDP

= Federal Funds Rate - Inflation

134
Q

Discount window

A

When banks get loans from the FED to meet their reserve requirements

135
Q

Lender of last resort

A

FEDS role as a lender that banks can turn to when they are in trouble

136
Q

Forward guidance

A

Providing info about the future course of monetary policy in order to influence market expectations of future i.r

137
Q

Quantitative easing

A

Purchasing large amounts of long term gov bonds and other securities

138
Q

Types of Taxes percentages

A

Progressive
- A tax where those with more income tend to pay a higher share of their income in taxes

Regressive
-A tax where those with less income pay a higher share of their income in taxes

Proportional
-Everyone pays the same percentage on their taxes

139
Q

Marginal vs Avg tax rate

A

The marginal tax rate is the tax rate you pay if you earn another dollar.

Whereas the avg tax rate is the total tax divided by the total income earned.

140
Q

Automatic stabilizer

A

Spending and tax programs that adjust as the economy expands and contracts, w/o policy makers taking any deliberate action

141
Q

Mandatory vs Discretionary spending

A

Mandatory spending is spending on programs that does not get determined annually

Discretionary spending is spending that congress appropriates annually

142
Q

Types of taxes

A

Income taxes
Taxes are collected on all income regardless of the source

Payroll taxes
Taxes on earned income

Corporate taxes
Taxes paid by the owners of the corporation

Excise tax
A tax on a specific product

Property tax
A tax on a the value of a property

Sales tax
A tax on purchases that’s typically a percentage of the purchase price of goods and services

143
Q

Fiscal policy

A

the process of using spending and tax policies to influence the economy

Timely
Targeted
Temporary

144
Q

Expansionary vs Contradictory fiscal policy

A

Expansionary
Lower Taxes and raise spending = Higher Output

Contradictory
Raise Taxes and lower spending = Lower output

145
Q

Tax expenditures

A

Special deductions, exemptions, or credits that lower your tax obligations to encourage you to engage in certain activities

146
Q

Government regulations

A

Allows the Gov to require spending while others pay the bill

147
Q

Discretionary fiscal policy

A

Temporarily changes gov. taxes or spending to boost or slow the economy

148
Q

Gross Gov. debt vs Net Gov debt

A

Gross gov Debt
Total accumulation amount of money the gov. owes

Net gov debt
The debt that the gov owes to individuals, businesses and other gov both here and abroad

149
Q

Unfunded liabilities

A

A commitment to incur expenses in the future w/o a plan to pay for those expenses

150
Q

Real federal funds rate

A

Nominal FED Funds rate - Inflation

Neutral I.R + 1/2(Inflation -2%) + OG

Econ 102 (6 decks)

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