ECON201 Final Exam Study Guide Chapter 10 GDP 1 5 Questions GDP market value of all final goods services produced within a country in a given period of time Y C I G NX o Consumption excludes new housing o o Net exports exports imports Investment equipment inventory includes new housing Nominal GDP uses current prices to place a value on the economy s production of goods and services Real GDP uses constant base year prices to place a value on the economy s production of goods and services Chapter 11 Inflation 1 5 Questions consumer price index CPI measure of overall cost of goods services bought by a typical consumer substitution bias prices do not change proportionally each year so consumers buy less expensive items real interest rate nominal inflation rate inflation rate CPI vs GDP Deflator o GDP deflator reflects prices of all goods services produced domestically o CPI reflects the prices of all goods services bought by consumers o CPI compares the price of a fixed basket of goods services to the price of the basket in the base year o GDP deflator compares the price of currently produced goods services to the price of the same goods and services in the base year Chapter 12 Production Growth 1 5 Questions productivity physical capital human capital natural resources technical knowledge diminishing returns benefit from an extra unit of an input declines as the quantity of the input increases foreign direct investment capital investment that is owned and operated by a foreign entity foreign portfolio investment investment that is financed with foreign money but operated by domestic residents inward oriented policies attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world outward oriented policies integrate poor countries into the world economy Chapter 13 Saving Investment 1 5 Questions private saving Y T C public saving T G national saving Y C G market for Loanable funds market in which those who want to save supply funds and those who want to borrow to invest demand funds supply saving x axis LF y axis interest rate tax incentives for saving supply shifts right investment tax credit demand shifts right o o crowding out decrease in investment that results from government borrowing Chapter 15 Unemployment 1 5 Questions Chapters 16 17 Monetary Policy 10 15 Questions 3 Functions of Money medium of exchange what you use to buy goods services unit of account how to measure prices and debts store of value measuring purchasing power from present to future 2 Kinds of Money Bank Reserves commodity item with intrinsic value gold coins cigarettes in POW camps fiat money without intrinsic value used as money b c of gov t decree fractional reserve banking system banks keep a fraction of deposits as reserves to make loans reserve ratio R total reserves as a of total deposits reserves deposits Fed s 3 Tools of Monetary Control 1 Open Market Operations OMOs purchase and sale of gov t bonds by the Fed 2 Reserve Requirements RR affect how much money banks can create by making loans 3 Discount Rate interest rate on loans the Fed makes to banks Federal Funds Rate federal funds rate interest on loans that banks with excess reserves make to banks with insufficient reserves Real vs Nominal o Wage nominal variables measured in monetary units dollars real variables measured in physical units output quantity relative price price of one good divided by another measured in units real variable o W nominal wage price of labor 15 hour o o P price level price of goods services 5 cupcake Real wage price of labor divided by price of output W P 15 hour 5 cupcake 3 cupcakes hour Velocity of Money PxY nominal GDP price level x real GDP M money supply V velocity V PxY M MxV PxY Seigniorage revenue raised from printing money causes inflation Chapters 18 19 Open Economy 10 15 Questions Loanable Funds supply saving demand I NCO Exchange Rates nominal exchange rate e price of US currency in terms of foreign currency real exchange rate epsilon price of US good in terms of foreign goods Big Mac example NX is the demand for dollars foreigners need dollars to buy US exports NCO is supply of dollars US residents sell dollars to obtain foreign currency for foreign assets Chapters 20 21 AD AS Policy 10 15 Questions 3 Key Facts about Economic Fluctuations Fact 1 Economic Fluctuations are Irregular and Unpredictable Fact 2 Most Macroeconomic Quantities Fluctuate Together Fact 3 As Output Falls Unemployment Rises Aggregate demand curve shows the Q of goods services that people want at each price level wealth effect consumers are wealthier stimulates demand for consumption of goods iterest rate effect interest rates fall stimulates demand for investment goods exchange rate effect currency depreciates stimulates demand for NX Aggregate supply curve shows the Q of goods services that firms produce sell at each price level Theory of liquidity preference interest rate adjusts to bring money supply and money demand into balance marginal propensity to consume MPC the fraction of extra income that a household consumes rather than saves
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