GDP
total dollar value of all final goods and services produced in a country during a single year
GDP=
C+ I + G + (EXPORTS-IMPORTS)
C=CUSTOMER SPENDING
I=INVESTMENTS- BUSINESS CAPITAL- INVENTORY
X=EXPORTED GOODS
M=IMPORTED GOODS
REAL GDP
the value of final goods and services of a given year expressed in base-year prices.
NOMINAL GDP
The GDP measured in terms of the price level at the time of measurement (unadjusted for inflation).
NOMINAL GDP= PY
P= PRICE INDEX FOR ALL FINAL GOODS & SERVICES
Y=REAL GDP
EQUATION OF EXCHANGE:
MV=PY
CPI
(consumer price index) a measure of the overall cost of the goods and services(BASKET) bought by a typical consumer.
"Cost Of Living" index
CPI=Cost of BasketCURRENT/Cost of BasketBASEYR X100
real rate of interest
the nominal rate of interest minus the anticipated rate of inflation.
federal reserve
The central bank of the US; sets the nation's monetary policy
STIMULATING "LOOSE" MONETARY POLICY
The Fed increases the banks reserves in order to make money more available (& cheaper) to borrow, so borrowing and spending & hence real GDP will rise.
(use when below potential)
tight" MONETARY POLICY
the Fed decreases bank excess reserves , making money less available(& more expensive) to borrow, so borrowing & spending & hence GDP will fall.
use above potential)
potential GDP
is the level of real GDP that the economy would produce if it were at full employment
FOMC
The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.
INFLATION EQUATION
a general and progressive increase in prices
, Inflation rate= CPI new year- CPI old year/ CPI old year
AGGREGATE DEMAND
sum of all personal consumption expenditures, business expenditures, and government expenditures in a particular time period; total quantity of goods and services all citizens, businesses, government will want at any one time, total demand for goods and s
PHILIPS CURVE
a curve showing the relationship between the inflation rate and the unemployment rate
OPEN MARKET OPERATIONS
buying and selling of United States securities by the Fed to affect the money supply
FISCAL POLICY
Government policy that attempts to manage the economy by controlling taxing and spending.
FISCAL POLICY "RAISE
STIMULATING FISCAL POLICY: taxes are reduced , or government purchases are INCREASED, or government transfer payments are INCREASED.
if taxes are cut, consumers have more money to spend.
If transfer payments increase, have more to spend.
FISCAL POLICY "LOWER
CONTRACTIONARY FISCAL POLICY OR FISCAL RESTRAINT cause aggregate demand to fall.
occurs when taxes are RAISED, or government purchases are DECREASED or gov transfer payments are DECREASED.
"COUNTERCYCLICAL"stabilizing fiscal policy
GOVERNMENT TRANSFER PAYMENTS
Payments to persons that are not made in return for currently supplied goods and services.WELFARE, SOCIAL SECURITY
AUTOMATIC STABILIZERS
government spending and taxes that automatically increase or decrease along with the business cycle.
ex: When actual real GDP fall below potential real GDP, the amount of tax revenue collected falls, transfers to the poor rise.
DISCRETIONARY FISCAL POLICY
Changes in taxes or spending that are the result of deliberate changes in government policy.
Requires new legislation.
ways to increase; reduce taxes, raise amount the gov spends to purchase goods & services
STRUCTURAL BUDGET BALANCE
The balance on the federal government budget that would occur if tax receipts were at full-employment levels.
ACTUAL BUDGET BALANCE
Depends on whether the economy is a potential.
actual=structural
recession
An economic slowdown of the economy which results in rising unemployment, increased business failures, declining economic growth and higher personal bankruptcies.
federal debt
best described as % of GDP
four cost of inflation
Tax costs-inflation is a tax-
Shoe-Leather Costs-arise from increase in velocity circulation
Confusion Costs-make decisions based on comparing marginal cost & marginal benefit.
Uncertainty Cost- high inflation rate brings uncertainty about the long-term i
hyperinflation
when rate of inflation exceeds 50% a day.
occurs when gov expenditure exceeds what the gov can collect in taxes
velocity of circulation
average number of times in a year that each dollar of money gets used buying goods & services.
V= PY / M
P=PRICE LEVEL
Y=VALUE OF FINAL GOODS&SERVICES IS NOMINAL GDP, WHICH IS, REAL GDP
M= QUANTITY OF MONEY
EQUATION OF EXCHANGE
MV=PY
THE QUANTITY THEORY PREDICTION
P=MV / Y
ON THE LEFT PRICE LEVEL, ON THE RIGHT ALL THE THINGS THAT INFLUENCE THE PRICE LEVEL.
TO TURN EQUATION TO THEORY, WE USE TWO FACTS:
1)AT FULL EMPLOYMENT REAL GDP=POTENTIAL, WHICH IS DETERMINED BY REAL FACTORS & NOT BY THE QUANTITY OF MONEY.
2) VEL
RATE OF EXCHANGE
MONEY GROWTH + VELOCITY GROWTH = INFLATION RATE + REAL GDP GROWTH
WHICH MEANS
INFLATION RATE = MONEY GROWTH + VELOCITY GROWTH - REAL GDP GROWTH
REQUIRED RESERVE RATIO
The minimum fraction of deposits banks are required by law to keep as reserves
M1
narrowest measure of the money supply that includes all coins and paper bills in circulation, traveler's checks, checking account balances, and balances in credit unions
M2
All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.
STRUCTURE OF FEDERAL RESERVE
1. board of governors: appointed by president and approved by senate. includes chairman
2. federal reserve banks: 12 in 12 districts, each with a reserve president. implements policy
3. federal open market committee: responsible for policy includes board
MONEY MULTIPLIER
the amount of money the banking system generates with each dollar of reserves
M=(1+C)/(R+C)X MB
NOMINAL INTEREST RATE
REAL INTEREST RATE+ INFLATION RATE
VALUE OF MONEY
#NAME?
DEPRECIATION
a decrease in price or value
STATISTICAL DISCREPANCY
the discrepancy between the expenditure approach and the income approach estimates of GDP calculated as the income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.
GNP
The sum total of all goods and services produced anywhere in the world in a given time period.
Board of Governors(7)
The Seven-member group that supervises and controls the money and banking system of the US; the Board of Governors of the Federal Reserve System.
Open Market Committee
oversees the buying and selling of government securities by the Federal Reserve System
commercial banking assets
bank reserves
bank loans to customers
securities
Commercial bank reserves
coins & currency held by the bank plus the balance on its reserve account at the federal reserve.
required Reserve Ratio
the minimum fraction of deposits banks are required by law to keep as reserves
Buy securities
if the fed wants to use open market policies to increase bank reserves it should BUY
iflation
is a tax!