Term
| What is nominal GDP? how differ from real GDP? How differ from nominal GNP? |
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Definition
| GDP is the sum of all FINAL goods & services produced for exchange within domestic borders within a year. Real GDP adjusts for inflation. GNP measures the total output of all final goods and services produced worldwide using economic resources of U.S. activities (i.e., output of US producers including what they make in foreign countries). GNP includes both the cost of replacing capital (the depreciation factor) and the cost of investment in new capital. |
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Term
| Who is in the labor force and why is this important to know? |
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Definition
| . The (civilian) labor force consists of those at least 16 years old who are working (excluding those on active military duty) or who are seeking work; all others are not considered part of the labor force (including those who previously were seeking employment but have become discouraged and are no longer looking for work). Impt b/c labor force is basis for calculating unemployment stats (so that discouraged & thus not seeking are NOT incl in stats) |
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Term
| Distinguish between frictional, structural, cyclical, & seasonal unemployment. |
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Definition
| Frictional unemployment is from people who change jobs b/c of personal reasons. There is ALWAYS frictional unemployment. Structural unemployment is when there is a potential for full employment but your workforce isn't well trained enough to fill available jobs, OR b/c the type of jobs they are trained for have been eliminated. Cyclical unemployment is unemployment that results b/c of the business cycle (eg recessions). Seasonal unemployment occurs in certain industries by season and is predictable. |
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Term
| What is "full employment"? Is everyone in the labor force working then? |
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Definition
| Full employment is when there is no cyclical unemployment. There is still frictional, structural, and seasonal unemployment. |
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Term
| Who is not in the labor force? |
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Definition
| People who are under 16, who are retired, who are in the military, who are institutionalized, or who are not seeking work. |
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Term
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Definition
| the maximum final output that can occur without creating upward pressure on the general level of prices. Assumes full utilization of resources. The difference b/t real & potential GDP is a measure of inefficiency in the economy. |
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Term
| How is personal disposable income measured? |
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Definition
| Personal income minus personal income taxes |
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Term
| A good produced in 2008 that was in finished goods inventory on December 31, 2008, and was sold in January 2009 would be included in whole or in part in the GDP of which year(s)? |
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Definition
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Term
| What is the difference between GNP & NNP? |
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Definition
| GNP includes depreciation, NNP (net national product) does not. |
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Term
| What is a "positive GDP gap"? |
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Definition
| When potential GDP > real GDP. indicates inefficiencies in economy. |
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Term
| What is the aggregate demand curve? Components? |
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Definition
| Total spending of consumers, businesses, gov'ts and net exports, as a function of prices |
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Term
| what is the average and the marginal propensity to consume and to save? How is each calculated? What is the relationship between APC & APS, and between MPC & MPS? |
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Definition
| Average propensity = % of income spent or saved, Marginal = $ CHANGE in consumption as a function of $ CHANGE in income. APC + APS = 1, MPC + MPS = 1. |
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Term
| What does business spending consist of? |
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Definition
1. Residential construction
2. Nonresidential construction
3. Business durable equipment
4. Business inventory |
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Term
| What are the main factors influencing consumer spending? the main factor affecting business spending? |
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Definition
| Consumer spending is a functino of personal income and personal income taxes. Business spending's biggest influence is the interest rate. |
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Term
| What is the difference between fiscal policy and monetary policy? |
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Definition
| Gov't fiscal policy is govt decisions about taxes and spending. Gov't monetary policy is the Fed's decisions about the money supply, which influences interest rates and the liquidity of credit. |
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Term
| How does the government control the aggregate demand curve with fiscal policy? with monetary policy? |
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Definition
| Fiscal: change the tax rate, change government spending, change transfer payments. Monetary: Fed can change the discount rate or can buy back/sell bonds to banks in exchange for cash. |
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Term
| Discount rate vs prime rate |
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Definition
| discount rate = rate fed loans to banks, prime = rate banks loan to best customers, CHECK |
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Term
| Classical vs conventional vs keynesian supply curve |
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Definition
| Classical is vertical (no relation aggregate supply & price), conventional is upward sloping, steeper as you go b/c as approach full employment prices incr; Keynesian is horizontal until full employemnt is reached then slopes upwards, reflecting that output is not associated with price level until full employment is reached, at which point increased output is associated with higher price levels. |
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Term
| three things that shift the aggregate supply curve |
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Definition
| resouce availability, resource cost, technological advances |
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Term
| What does the aggregate supply curve measure? graph axes? |
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Definition
| total output of the economy at different price levels; x is price levels, y is total output |
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Term
| How do you predict the effects of changes in aggregate supply &/or demand on price & Qs? |
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Definition
| Have to memorize the 3 types of aggregage supply curves and draw it out--more efficient than trying to memorize each one! |
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Term
| How is demand affected in our country when another country's currency b/c more valuable relative to ours? |
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Definition
| If their currency is more valuable, they can buy more of our stuff and we can buy less of theirs, so aggregate demand will go up here. |
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Term
| If we increase our exports, does this affect our demand curve or our supply curve? How? |
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Definition
| affects our DEMAND curve by increasing it--more people want our stuff!!! ** |
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Term
| What is charted in a business cycle graph? |
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Definition
| changes in GDP (Y axis) over time (X axis) |
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Term
| What are the two major causes of business cycles? And causes of these? |
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Definition
| Changes in business investment and consumber durable goods purchases. These are affected by 1. taxes, 2. consumer confidence; 3. interest rates. |
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Term
| Examples of leading indicators for business cycles? |
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Definition
| consumer expectations, inital claims for unemployment, weekly mf hours, stock prices, building permits, new orders for consumer goods, real money supply |
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Term
| Examples of lagging indicators for business cycle changes? |
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Definition
| chainges in wages, ratio of inventories to sales, duration of unemployment, commercial loans outstanding, rate of consumer installment loans to income |
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Term
| Definition of a business cycle? |
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Definition
| Cumulative fluctuations in aggregate real GDP which last at least two years. |
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Term
| What are the two basic caueses of inflation? |
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Definition
| Demand pull (demand exceeds the productive capacity of the economy) and cost or supply push (= increases in costs of inputs go up, pusing supply curve INWARD and forcing prices up and quantity demanded down). Occurs if raw materials prices, labor prices, or taxes go up. |
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Term
| Consequences of inflation? |
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Definition
| lower output, higher unemployment, interest rates up, borrowing harder, loss of real income & weatlth, uncertainty of economic measures |
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Term
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Definition
| most comprehensive measure of inflation b/c incl govt spending and net exports as well as consumer & business spending; = (nominal GDP/real GDP) * 100 |
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Term
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Definition
| Different measures of the money supply. M1 = currency, coins & checking acct deposits; M2 = M1 + indiv savings accts & CDs, M3 = M2 + instituttional accts & jumbo CDs |
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Term
| What are the three tools the Fed uses to control the money supply? |
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Definition
| 1. Discount rate of lending to other banks; 2. "open market policy" = buying & selling treasury bills to banks (buying increases the money in banks); 3. reserve requirement changes (% of loans out that banks have to hold in reserve) |
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Term
| Effect of increasing the money supply? |
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Definition
| More money available ==> interest rates drop, ==> bus & indiv more likely to borrow and to spend, which in turn increases sales & employment |
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Term
| Why do nations engage in trade? |
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Definition
| to develop new markets, to obtain commodities not available domestically, to obtain goods at lower prices than sold domestically |
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Term
| The concept of comparative advantage is based on _____ |
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Definition
| Differences in relative opportunity costs. This enables one nation or person to have an absolute advantage in everything and yet both parties gain in trade. |
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Term
| What is the US balance of payments? |
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Definition
| A summary accounting of US transaxns with other nations for a calendar year |
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Term
| What are the 3 components of the US balance of payments |
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Definition
| Current account (= trade & grants), capital acount (= loans & investments), Official reserve account = sum of current and capital accounts |
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Term
| Consequence when the US balance of payments has a deficit? |
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Definition
| Here spending and outflows exceed earnings and inflows, so US has more spent and invested abroad than they have. Means our demand for their currency increases and exchange rates tend to rise. |
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Term
A company manufactures goods in Esland for sale to consumers in Woostland. Currently, the economy of Esland is booming and imports are rising rapidly.
Woostland is experiencing an economic recession, and its imports are declining.
How will the Esland currency, $E, react with respect to the Woostland currency, $W? |
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Definition
The $E will decline with respect to the $W.
In a flexible or floating foreign currency exchange rate system, the equilibrium rate of exchange between currencies is determined by market supply of and demand for each currency. Because Esland's import of goods is rising rapidly, Esland's demand for foreign currencies, including Woostland currency, will increase.
Conversely, because Woostland's imports are declining, there is a decreasing |
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Term
| When you import more goods from another country, you demand ____ (more, less) of their currrency? |
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Definition
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Term
| In the long-run, the imposition of an import quota on a commodity is likely to provide the greatest direct benefit to: |
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Definition
| domestic suppliers (as it was intended...NOT a backfiring |
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Term
| What is the multiplier effect? |
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Definition
| The effect whereby a small change in investment can have a greatly multiplied effect on GDP because of multiple exchanges |
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Term
| What is the difference between absolute and comparative advantage? |
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Definition
| The absolute advantage is one in terms of actual costs (or earnings), but comparative advantage is discussed in terms of opportunity costs. Having the ability to earn a higher salary means that your opportunity costs of not doing that task are higher too. |
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Term
| Briefly what happens when you do a foreign currency hedge? |
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Definition
| You sell the goods to a foreign entity for later payment and at the same time you issue a foward foreign currency hedge to exchange foreign and domestic currencies at the payment date at today's rate. (E.g today 100 rubles is worth $110, but in 60 days it may be worth only $105, so you do a contract to sell a bank 100 rubles for $110 in 60 days). |
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Term
| What are the two major types of foreign currency hedging instruments? |
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Definition
| Foreign Currency Forward Exchange CONTRACTS and Foreign Currency OPTION contracts. The foward contract is a firm commitment, the option contract is not. |
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Term
| What is the difference between a direct and an indirect exchange rate? |
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Definition
| Direct is one FC unit = x # of dollars, indirect is $1 = x # of FC units |
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Term
| Foreign currency hedging: If you are going to pay in dollars then you ___ (buy/sell) the foreign currency; if you are going to pay in the foreign currency, then you ____ the foreign currency. |
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Definition
| pay in dollars so buy?? the foreign currency, pay in foreign currency need the foreign currency so sell?? the foreign currency. UNSURE< get straightned our!!! |
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Term
| When the dollar becomes stronger (or a foreign currency becomes weaker) compared to the dollar, is this an advantage or a disadvantage to the foreign economy. |
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Definition
| Stronger dollar means that it now takes more FC units to buy $1. Eg say used to be $1 for 2 rubles, now $1 for 3 rubles. If you're buying foreign goods, and you want to buy something that cost 10 rubles, it used to cost you $5, now it costs you $3.34, so you'll buy more foreign goods = advantage |
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Term
Assume a U.S. company purchases shares of a French company for 1,000,000 Euros on March 1, 2003 when the exchange rate was 1 Euro = $1.10. The investment is classified as available-for-sale by the U.S. Company. After holding the shares for eight months, it sold the entire investment in the foreign market for 1,200,000 Euros when the exchange rate was 1 Euro = $1.23.
What amount of stock value (investment) gain or loss and what amount of exchange rate gain or loss would the U.S. company recognize? |
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Definition
| Mar 1, 1 mill Euros costs them 1.1 mill cash. Nov 1, get back 1.476 mill in cash (1200 Euro x 1.23 rate). Diff is 376K gain. How is this split? take 200 Euro gain and multiply by OLD amt = 220 for the gain in shares, then take .13 cent increase in exchange rate and multiply it by the current number of shares = 156K gain |
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Term
| What is transfer pricing and why is it important? |
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Definition
| Transfer pricing occurs whenyou have a domestic company with foreign affiliates. The affiliate can buy a good and transfer it to the domestic company which can then sell it. Since the US and the foreign country have different tax rates, these transactions can be manipulated to influence profits by where you set the transfer price. |
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Term
| When net exports are negative, what does this mean? |
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Definition
| We are buying more foreign goods than we are selling to foreign countries |
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Term
| What are the primary factors affecting foreign exchange rates? |
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Definition
| interest rates, inflation, political stability |
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Term
| Relationship multiplier, MPC, MPS? What if the multiplier is 5? what will MPC and MPS be? |
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Definition
| Multiplier of 5 ==> MPC of 1/5 = .2, MPS = .8. |
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