Exam 2 Study Guide, Review of Exam 1, and outline of notes
Exam 2 Study Guide, Review of Exam 1, and outline of notes ECON 104
Popular in Introductory Macroeconomic Analysis and Policy, Goffe
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This 12 page Study Guide was uploaded by Ethan Ezratty on Tuesday February 2, 2016. The Study Guide belongs to ECON 104 at Pennsylvania State University taught by Goffe in Winter2015. Since its upload, it has received 142 views.
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Date Created: 02/02/16
Econ 104 Study Guide EXAM 2 2/4/16 10:46 AM **EXAM ONE REVIEW** Business Cycle: alternating periods or expansion / recession Expansion: total production / employment RISE Recession: total production / employment LOWERS Economic Growth: economies ability to produce -quantities of goods and services -measures rate of economic growth + reasons for that growth Inflation rate : % RISE in average level of production from year to year GDP: measures total production -market value of all FINAL goods and services during period of (1) year -**measured using market values, not quantities*** INTERMEDIATE GOODS: good/service that is an input to another good or service -Ex: Ford buying tires from good year -*Does NOT include value of used goods -Firms sell goods and services in 3 groups: 1) Domestic households 2) Foreign Firms + households 3) Government Real vs. Nominal GDP: Nominal- calculated by summing the value of current goods/services Real: calculated by using a base year, then comparing it to other years -** Quantity of the current good (x) price of good in the base year -(New Q x Base P) -Estimates can be distorted as base year moves further away -Real GDP holds prices constant -Economy is almost always measures with real GDP -GDP deflator= (Nominal GDP/Real GDP) x 100 -Factors of production for firms: -Labor, Capitol, Natural resources, Entrepreneurship, income 1. Wages- to households for labor services 2. Interest- use of capital 3. Rent- natural resources (Ex: land) 4. Profit- income that remains -** Social Security is NOT included in GDP - Bank, bonds, stocks make up the financial system - Countries need a well-employed financial system fir economic growth Components of GDP: Consumption: -Expenditures on services (medical care, haircuts) -Expenditures on nondurable goods (Food, gas) -Expenditures on durable goods (cars, furniture) 2) Investment: -Business fixed: -Spending of firms to produce new goods -Residential: -spending on new housing -Changes in business inventories 3) Government Purchases -Spending by federal, local, state government on new goods/services -*****Government spending on transfer payments is not included in GDP*** 4) Net Exports: (Exports-imports) -Exports=produces in US -Imports=produced in foreign countries -Subtract imports from total expenditures because we would be including spending that doesn’t result in production of new goods **GDP= C+I+G+NX -Consumer spending on services > than sum of spending on durable / nondurable goods -Business fixed investment = largest company of investment -Purchases by state and local government > than purchases by Federal -**Consumption is largest part of GDP -When BEA calculates GDP, it does not include production in home + underground economy -DIY products not included -In 1980- we worked 60+ hours/week (high GDP) -Now less than 40 (lower GDP) -Pollution and Crime don’t affect GDP -GDP measures the size of the pie, not how its divided up Interest Rates: rate at which we borrow and lend money -Money paid back to lender for loaning money -S+D by leaders / borrowers -Monetary policy is part of S +D Monetary Policy -Conducted by the US Federal Reserve -Established Congress, positions appointed by President, confirmed by Senate -The FED is independent of the federal government. -Fed’s “dual mandate” from congress -“Promote goals of maximum employment, stable prices, + moderate long-term interest rates Stable Prices -maintain 2% inflation -Changes in interest rates and M1 + M2 -***Fed chair- Janet Yellen (FOMC) -Key Fed Tool: federal funds interest rate -what banks charge eachother for overnight loans -FOMC sets rate at .25% -How the fed affects us: -the FOMC RAISES federal funds - rate -> higher cost for banks -> loans rates for firms-> more expensive for consumers to buy goods w/ credit -> slower growth (% change in GDP) -**If unemployment rises, Fed will decrease interest rates -** If federal funds rate falls, GDP will rise and consumption and investmnent of GDP will change Fiscal Policy: -changes in federal expenditures + taxes -these 2 are changed independently -Controlled by President and Congress EXAM 2 MATERIAL Econ 104 Section 1: Measuring the Economy (1/21/16) A. What is GDP? B. Real GDP C. Monetary & Fiscal Policy D. GDP Deflator • Definition • inflation • since 1970 • deflation & disinflation E. Consumer Price Index (CPI) • Worksheet • Definition • Since 1970 • Core rate of inflation • GDP deflator vs. CPI Questions for the semester: Why are some countries poor/ why do some coutnries Question: How many are money in the U.S? -Corporate Stock -U.S. Savings bond -capitol owned by Boeing -investment by Ford in a factory -Funds in a checking account - U.S. currency (cash) Interest Rates -ex: student loans (Stafford) -2016: 4.29% & 2007: 7.0% -avg debt (Penn State Loan ): 35,000 monthly repayments over 10 years -@4.29% - $359 -@7.0% - $406 ( 5,562 more in total) -Def: Rate at which we borrow and lend -Where do they come from? -SUpply and Demand lenders + borrowers MONETARY POLICT part of this S&D -ex: interest rate on stafford loan = (10 year treasury note”) + 1.81% Monetary Policy ( 1/26/16) -conducted bu the U.S. Federal reserve (“Fed”), the U.S. central bank -established by Congress + most key positions appointed by the senate. - yet the Fed is LARGELY IND of Fed Gov. -Fed “dual mandate” from congress: “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates” - Fed Chair: Janet Yellen - also heads the “ Federal Open Market Committee” ( FOMC) - key fed tool- Fed funds interest rates * what banks charge each other for overnight loans -EX: how the Fed affects us the FOMC (part of Fed)federal funds rate goes 3%-4% -> higher costs for banks -> loan rates for consumers & firms go up -> more expensive for firms and consumers to buy goods with credit - > slower growth (i.e. % change real GDP) -few jobs created, harder time din din g job, fewer new firms Clicker question: The unemployment rate suddenly rises. What do you think the Fed would do with the federal funds rate? -increase it -lower it -keep the same -not sure Question: If the federal funds rate falls, all else equal. GDP will likely rise and 2 components of the GDP will change. GDP = C+1+G+NX Fiscal Policy -Change in federal expenditrues & taxes -these 2 are changed independently -controlled by the Prez and Congress -Government budget deficit= federal expenditures- federal taxes - The difference is borrowed by the U.S. Treasury per year by selling U.S. Treasury bonds to the investigating public • A type of “Security” -Federal debt: total mount of bonds sold by the Federal Government. (accumulated deficits): $13.1 tril or 74% of GDP -interest payments: $223 bil. (1.3% of GDP) -Fed sets the federal funds rate to achieve its dual mandate • - monetary policy -Federal Government (President & Congress) set federal expenditures & taxes (fiscal policy) borrowing (deficit) pays for any expidentyre -Question: Is the fed responsible for the federal debt? • No END OF Part C: Fiscal Policy & Monetary Policy (Quick Intro) (2/2/16) -Question: TO aid those unemployed during a recesiion (or period of slow growth, like today), what cant the government do? • With monetary (Interest rates and the money supply and fiscal policy (government expenditures and taxes)- they influence C,I … -Question: Which of the following is not one of the big questions of our course? • A. why some countries don’t grow • B. why inflation occurs • C. will your generation have higher income then your parents • D. what might be done for the unemployed • E. why countries are poor Part D- GDP Deflator -Questions: 1. How do we measure inflation? 2. Why did it happen? -Uses nominal & real GDP to measure the “price level” (average price of all goods and service in an economy) -GDP Deflator Formula= (Nominal GDP/Real GDP) x 100 • ex: in 2009? 100 (base year) • now: 110= ($18.0 tril/16.4 tril) x 100 -Key: GDP deflator measures price relative to their value in 2009, when it was 100 • ex: GDP deflator= 200 -> prices 2x (double) -The GDP Deflator is a “price index” GDP Deflator and Inflation -inflation= % price index -Question: From these data, the inflation rate over the last year was…? A. <0% B. 0% to 1% C. 1% to 2% D. >2% Work: (2015 III- 2014 III/2014 III) x 100 • (110-109/109) x 100 = .9% Question :Here is the GDP deflator. The highest inflation was in the…? A. 1970s B. 1980s C. 1990s D.2000s Question: Which most accurately deflects the U.S. economy since 1970: Production _______ rises and prices ______ rise A. usually, always B. always, usually C. always, always D. usually, usually -Definition of Deflation: Deflation is a fall in prices while disinflation is less inflation -Question: In these data (deflator), the U.S. _____ had deflation and ______ had disinflation A. has, has B. has, has not C. has not, has D. has not, has not End of Part D: GDP deflator -Question: How do we measure inflation for the entire economy? -Answer: GDP Deflator= (nominal GDP/real GDP) x 100 -It is a price index that measures the “price level” (versus its base year) -Inflation is the % change Part E: The Consumer Price Index (CPI) -Question: For the sake of this question, say hat your parents now earn $100,000 and that in 2045 you’ll earn $200,000. Is this enough to say that in a material sense that you’ll be better off? -No -The Consumer Price Index (CPI) -The CPI can be used to remove inflation from nominal prices & wages Definition: Nominal (money) price or wage- how many dollars it takes to buy something or hire someone Definiton: Real price or wage- nominal value with inflation explicitly removed – ex: real and nominal GDP 2/4/16 10:46 AM 2/4/16 10:46 AM
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