Flashcards in Macroeconomics (M42) Deck (81):
This is the price of all (goods and services produced by a domestic economy for a year at current market prices
Nominal Gross Domestic Product (GDP)
This is the price of all goods and services produced by the economy at price level adjusted (constant) prices. Price level adjustment eliminates the effect of inflation on the measure
This is the maximum amount of production that could take place in an economy without putting pressure on the general level of prices
What is the difference between Potential GDP and Real GDP?
When the GDP Gap is positive, what does it indicate?
That there are unemployed resources in the economy - therefore we would expect unemployment
When the GDP Gap is negative, what does it indicate?
That the economy is running above normal capacity and we would expect prices should begin to rise (inflation)
This is GDP minus depreciation
Net Domestic Product (NDP)
This is the price of all goods and services produced by labor and property supplied by the nation's residents
Gross National Product (GNP)
What are the two ways to calculate GDP?
1) Income Approach
2) Expenditure Approach
This approach of calculating GDP adds up all incomes earned in the production of final goods and services, such as wages, interest, rents, dividends, etc.
This approach of calculating GDP adds up all expenditures to purchase final goods and services by house-holds, business, and the government. Specifically it includes personal consumption expenditures, gross private investment in capital goods, & the country's net exports.
This depicts the demand of consumers, businesses, and government as well as foreign purchasers for the goods and services of the economy at different price levels
Aggregate Demand Curve
As price levels increase (inflation increases) nominal interest rates increase causing a decrease in interest sensitive spending, such as houses, automobiles, and appliances
Interest Rate Effect
When price levels increase, the market value of certain financial assets decreases causing individuals to have less wealth and therefore they reduce their consumption
When domestic price levels increase relative to foreign currencies, foreign products become less expensive causing an increase in imported goods and a decrease in exported goods. This decreases the aggregate demand for domestic products
International Purchasing Power Effect
This happens when consumers, businesses, or governments are willing to spend more or less, or when there is an increase or decrease in the demand for domestic products abroad
Aggregate Demand Curve Shifts
Marginal Propensity to Consume + Marginal Propensity to Save = ...
[ 1 / MPS ] *
Change in Spending =
Increase in Equilibrium GDP
This is a fluctuation in aggregate economic output that lasts for several years
This is a period of negative GDP growth - at least 2 consecutive quarters of negative GDP growth
A deep and long-lasting recession is referred to as...
In periods of high technology growth, firms tend to invest more because new products and innovations tend to be more profitable. This is known as what factor affecting investment spending...
the rate of technology growth
Lower real interest rates reduce the cost of investment, known as what factor affecting investment spending...
The real interest rate (nominal rate minus the inflation premium)
If there are already enough capital goods in the economy to meet aggregate demand there is little incentive to invest, known as what factor affecting investment spending...
The stock of capital goods
This is the most volatile portion of GDP
As the purchase price or operating cost of plant and equipment decreases, firms will invest more, known as what factor affecting investment spending...
The acquisition and operating cost of capital goods
Government policy can be used to stimulate investment spending, which is known as what factor affecting investment spending...
Actions by the government
Unemployment can be because of what? (3)
1) Frictional Causes
2) Structural Causes
3) Cyclical Causes
This occurs because individuals are forced or voluntarily change jobs - perhaps while looking for a job or when they are new entrants into the workforce
This occurs due to changes in demand for products or services, or technological advances causing not as many individuals with a particular skill to be needed
Structural unemployment is reduced by retraining programs
This is caused by the condition in which real GDP is less than potential GDP. Therefore, such unemployment increases during recessions and decreases during expansions
This is the rate of increase in the price level of goods and services, usually measured on an annual basis.
______ is a very high, unusually increasing level of inflation
This is a term used to describe a decrease in the price levels
Why is deflation so damaging?
Businesses do not want to borrow money and pay it back with money that has more purchasing power.
Businesses do not want to invest in plant and equipment given that the cost of plant and equipment is declining
This measures the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period
Consumer Price Index (CPI)
This measures the prices of finished goods and materials at the wholesale level
Producer Price Index (PPI)
This measures the prices for net exports, investment, government expenditures, and consumer spending. It is the most comprehensive measure of price level
What is M1
M1 includes only currency and demand deposits
What is M2
M2 is equal to M1 plus savings accounts and small-time deposits
How do you define a small-time deposit?
Less than $100,000
What is M3?
M3 is equal to M2 plus other larger time deposits
In regulating the economy, what does the Federal Reserve focus on? (M1, M2, or M3?)
What is the most common instrument of monetary policy?
When a bank has a reserve deficiency, it may borrow funds from a Federal Reserve Bank. By setting ____ for such borrowing, the Federal Reserve can influence interest rates in the economy
This instrument of monetary policy involves the purchase or sale of government securities using the Federal Reserve Bank Deposits
Which of the following is a tool of monetary policy that a nation’s central bank could use to stabilize the economy during an inflationary period?
a) Selling government securities
b) Lowering bank reserve requirements
c) Lowering bank discount rates
d) Encouraging higher tax rates
A is correct
a) Reduces the money in the market - money is being put back into the government
b) Again this increases the money supply, causing more inflation. Additionally this approach is rarely used
c) This increases lending, which increases inflation
d) This is fiscal policy, not monetary policy
This includes government actions, such as taxes, subsidies, and government spending, designed to achieve economic goals
This is levied by a government based on two principles
1) ability to pay
2) derived benefit
The US Income Tax Rate, in general, is _____
The US Property Tax Rate, in general, is ______
The US Sales Tax Rate, in general, is _______
What is the most significant wage tax in the US?
Social Security Tax
This economic theory holds that market equilibrium will eventually result in full employment over the long run without government intervention - this does not support the use of fiscal policy to stimulate the economy
Classical Economic Theory
This economic theory holds that the economy does not necessarily move towards full employment on its own. It focuses on the use of fiscal policy to stimulate the economy
This economic theory holds that the fiscal policy is too crude a tool for control of the economy. It focuses on the use of monetary policy to control economic growth
This economic theory holds that bolstering an economy's ability to supply more goods is the most effective way to stimulate growth
This economic theory combines Keynesian and monetarist theories. It focuses on using a combination of fiscal and monetary policy to stimulate the economy and control inflation
When there is reciprocal (a vs. b) absolute advantage between two countries, specialization will make it possible to produce more of each product
Absolute advantage is defined as the ability of one nation to produce a product at a relatively lower opportunity cost than another nation
This is comparative advantage
Absolute advantage without comparative advantage does not result in gains from international trade
The gains from international trade depend on specialization with comparative advantage
This is a restriction on the amount of a good that may be imported during a period
This is a tax on an imported product
This is a total ban on the importation of specific goods
This limits the quantity of goods that can be exported to appease importing countries and keep them from imposing stiffer import restrictions
Voluntary Export Restraint
What are 4 factors that influence foreign exchange rates?
2) Interest Rates
3) Balance of Payments (flow of goods between the residents of two countries)
4) Government Intervention
This is the exchange rate of the currency for immediate delivery
This is the exchange rate for currency for future delivery
What is the difference between a foreign currency transaction and a foreign currency translation?
Foreign Currency Translation - reverting over the financial statements
Foreign Currency Transaction - one piece of the financial statements (a/p, a/r) in which the money exchanging hands is not USD
This is the risk due to exposure that a multinational company has because its financial statements must be converted to its functional currency
This risk relates to the possibility of gains and losses resulting from income transactions occurring during the year
What are the different kinds of ways to hedge foreign currency risk?
4) Currency Swaps
5) Money Market Hedge
This allows, but does not require, the holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified period of time or at a specified date
These are negotiated contracts to purchase and sell a specific *quantity* of a financial instrument, foreign currency, or commodity at a price specified at origination of the contract, with delivery and payment at a specified future date
If the US dollar declines in value relative to the currencies of many of its trading partners, the likely result is that:
a) Foreign currencies will depreciate against the dollar
b) The US balance of payments deficit will become worse
c) US exports will tend to increase
d) US imports will tend to increase
a) Foreign Currencies will appreciate against the dollar, not depreciate
b) Because the US Exports tend to increase, the deficit will not become worse but it will become better
c) Because the US Dollar declines in value relative to other countries, our goods will be cheaper to other countries
d) US imports will tend to decrease, not increase, because the US Dollar is weaker and importing becomes more expensive
These are forward-based standardized contracts to take delivery of a *specified* financial instrument, foreign currency, or commodity at a specified future date or during a specified period generally at the then-market price
A slightly more specific/standardized Forward Contract
This is a forward-based contract in which two parties agree to exchange an obligation to pay cash flows in one currency for an obligation to pay in another currency
This is a way of eliminating transaction risk by borrowing foreign currency when an agreement is executed. This strategy immediately converts the foreign currency to USD. Then, when the foreign currency is collected from the sale, the loan can be repaid - resulting in no foreign exchange loss or gain over the loan period
Money Market Hedge