Econ exam 3 - Principals of Economics PDF

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Principals of Economics 2305 Exam 3 Review Texas Tech University...

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Econ exam concepts: Chapter 21 - GDP: the market value of all final goods and services produced within a country at a given time - Market value: goods and services are valued at their market prices/values - Final good: an item bought by its final user during a specified time period - Intermediate good: item produced by one firm, bought by another firm, and used as a component of a final good - The GDP only changes within the country it was produced in - The time period is normally a year or a quarter of the year - Entrepreneurship is the only FOP that receives profit from households and firms - GDP= C+I+G+(X-M) or consumption expenditure+ investment+ Government expenditure+ net exports - Government expenditure: local, state, and federal government expenditure on goods and services, but does not include transfer payments - Domestic GDP: within a country - Gross GDP: before deducting the depreciation of capital, opposite of gross is net - Two approaches to measuring GDP: expenditure approach and income approach - Expenditure approach: measures GDP as the sum of consumption expenditure on goods and services and net exports (C+I+G+(X-M)) - Aggregate income equals aggregate expenditure - Consumption expenditure is the largest component of measuring GDP Chapter 22 - People in the labor force: consist of both employed and unemployed, must be at least 16 years old - To be unemployed you must: o Be without work but have made efforts to find a job in the previous 4 weeks o Be waiting to be called back to a job you were previously laid off from o Be waiting to start a job in the next 30 days  We don’t consider military officers employed o Labor force participation rate: (labor force/working age population) x 100 - Types of unemployment: o Frictional: arises from normal labor, unemployment associated with the changing of jobs in a changing economy o Structural: created by changes in technology and foreign competition, skill mismatch, unhealthy o Cyclical: higher than normal unemployment at a business cycle trough and lower than normal at a business cycle peak (ex. A worker who is laid off because the economy is in a recession and then rehired when expansion begins; when cyclical unemployment is zero, the unemployment rate equals the natural unemployment rate - Potential GDP: quantity of real GDP produced at full employment - Inflation: persistently increasing price level

o If the inflation rate is negative, the price level in an economy is falling - Deflation: persistently decreasing price level - Consumer price index: measures average of the prices paid by the urban consumers for a “fixed” basket of consumer goods and services o the CPI= 100 for the reference base period - inflation rate: ((CPI year t – CPI year t-1)/CPI year t-1)x100 chapter 25 - money: any commodity/token is generally acceptable as a means of payment o three functions: medium of exchange, unit of account, and store of value - barter: exchange of goods and services directly; must have a double coincidence of wants - money in the US consists of: currency, deposits at a bank and other depository institution - currency: notes and coins held by individuals and businesses - deposits are money because owners can use them to make payments - official measures of money o M1: currency and travelers checks and checking deposits (all of which are means of payment) o M2: M1 plus time deposits, saving deposits, money market mutual funds, and other deposits - Liquidity: property of being instantly convertible into a means of payment with little loss or value - Deposits are money but checks and credit cards are not - Depository institution: firm that takes deposits from households and firms and makes loans to other households and firms o Commercial banks, thrift institutions, and money market mutual funds - Commercial banks: private firm that is licensed by the comptroller of the currency or by a state agency to receive deposits and make loans; goal is to maximize wealth of its owners and does this by making the interest rate that it lends exceed the interest rate that it pays on deposits - Cash assets: notes and coins in its vault or its deposit at the federal reserve - Securities: US government bills and commercial bills and longer-term US government bonds and other bonds such as mortgage backed securities - Loans: commitments of fixed amounts of money for agreed-upon periods of time - FED: central bank, regulates a nations depository institutions and controls the quantity of money; goals: keep inflation in check, maintain full employment, moderate business cycle, contribute to long-term growth; pays close attention to the federal funds rate o Board of governors: seven members appointed by president and approved by senate o Federal open market committee: main policy making group - open market operations: selling treasury securities; buying treasury securities= increase in money supply; selling treasury securities= decrease in money supply; the FED’s purchase of government securities could increase loans made by banks

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last resort loans: the FED stands ready to lend reserves to depository institutions that are short of reserves - required reserve ratio: the FED sets this; minimum percent of deposits that a depository institution must hold as reserves - banks create deposits by making loans o quantity of deposits that banks can create is limited by the monetary base, desired reserves, and desired currency holding - monetary policy is conducted only by the federal reserve - when the FED lowers the federal funds rate, it can lead to an increase in lending by banks - the relationship between the quantity of real money demanded and the nominal interest rate is negative and is the demand for money chapter 27 - aggregate supply: relationship between quantity of real GDP supplied and the price level - long-run aggregate supply: we assume labor supply is fixed, always vertical at potential GDP; relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP o as the price level rises, the long-run aggregate supply curve stays the same - short-run aggregate supply: labor supply changes according to wage-rate; relationship between the quantity of real GDP supplied and the price level when the money wage rate, prices of other resources, and potential GDP remain constant o the quantity of real GDP supplied increases if the price level increases o a rise in the price level with no change in the money wage rate induces firms to increase production - when potential GDP increases, both the LAS and SAS curves shift rightward - potential GDP changes for three reasons: o increase in the full-employment quantity of labor o increase in the quantity of capital o an advance in technology (industrial revolution) - changes in aggregate supply: changes in potential GDP, changes in money wage rate...