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What is GDP? What productive activities are not included in GDP? what is the difference between GDP and GNP? how do you use expenditures method to calculate GDP?

GDP is the measure of the market value of final goods and services produced for the market within a nation's geographic borders during a period of time.

excludes back market transactions (bartering), non market transaction (homemakers), do not properly account for quality improvements (eye correction surgery) or increased leisure and other factors that improve quality of life (exercise), count harmful and dangerous output the same as useful output (war)

GDP includes only production within a nations border while GNP included production anywhere in the world as long as it is created by domestically owned resources

demand=personal consumption expenditures+gross private domestic investments+governmnet spending+net exports

US Nominal= 17 trillion
per capita= $55,000


Right now germany has a surplus and italy has a trade deficit. Both countries use the euro as currency. What is Italy giving up by using the euro instead of their own currency?

They are giving us their ability to control the monetary policy but in return getting purchasing power and currency that holds it value


how is unemployment rate calculated

unemployed, available,&actively seeking work/labor force x 100%


what is the current unemployment rate



What is the current labor force participation rate



4 type of unemployment

1. Frictional: job are constantly being created and destroyed (changing maternity leave policy)
2. structural: mismatch between job skills and job opportunity (tech advancements, film developers)
3. Seasonal: predictable periodic change in the supply and demand for labor (construction)
4. cyclical: insufficient demand (recession layoffs)


what is the natural rate of unemployment

unemployment rate that allows a nation to sustain its current level of inflation


how does the department of labor measure unemployment



Define inflation/deflations/ disinflation/hyperinflation

I: sustained increase in average price level
D: sustained decrease in average price level
Dis: decrease in the rate of inflation
H: extreme inflation



Consumer price index: weighted average change in price for a market basket of goods
Producer Price Index: measure price changes at the wholesale level and excludes imports


Current level of inflation



what is globalization

increasing international economic interdependence


Business Cycles

recurring, irregular, and unsystematic movemnet in real economic activity around a long term trend


4 functions of money

1. medium of exchange
2. store of value
3. establish prices
4. establish interest rates


Problem with barter economy

multiply of trading ratios, indivisibility problems, time wasted due to the need for mutual coincidence of wants and surpluses, no standardization to store wealth


Who was Adam Smith? Define and give Example of invisible hand

Father of Economics

Self regulating nature of the market place in determining how resources are allocated based on individuals acting in their own self interest.

EX: Fan guys and apple computers


Who was John Maynard Keynes? When was he writing? Explain his interest rate theory in detail



indirect link between money supply changes and fluctuations in spending. Fluctuations in money supply are important mainly if they change real and nominal interest rates


Who is Milton Friedman? Contrast Keynesian theory of money with the monetarist perspective.

Economist who challenged Keynes theory

Mid 1900s

direct link between money supply changes and fluctuation in spending. Focus on central bank releases showing changes in they money supply and money aggregates


What does the quantity theory of money imply about increases in the money supply?

hypothesis that changes in prices correspond to changes in monetary supply. Increase in money supply means increase of inflation


How much current money is in circulation

thousand billion


what are M1, M2, M3

1: money-currency in circulation
2: near money-savings deposits, money market mutual funds
3: near near money-short term repurchase agreements


what is monetary base? Different than money supply?

currency in circulation plus the reserves of financial intermediaries plus reserves at central bank

Bank reserves are not counted in money supply (not available for spending and provide cover for money that is available for spending and is counted in money supply


difference between bank and credit union

bank is for profit while credit union is not for profit and cycles profits back to lower interest rates


What is a central bank

entity responsible for overseeing the monetary system for a nation.


basic functions of central bank

regulation and monetary policy


3 types of risk for central bank

liquidity: how easily you can transfer money into cash'
market: changing interest rates and exchange rates
credit: borrower may default


what is a treasury bond

low interest and low risk government borrowing from citizens


give example of money creation process

bank a gets a $100 deposit. they retain their RRR and reinvest the remaining in bank B. Bank b receives $90 deposit form A retains $9 reinvest $81 ... etc


simple money multiplier

why weaker?

Excess reserves

1/require reserves


reserves of cash more than the required amount


difference between fiscal and monetary policy

fiscal is the responsibility of the government (discretionary and non discretionary use of government spending and taxes to achieve macrocell goals) monetary is the responsibility of the central bank