Macroeconomics Midterm

Gross Domestic Product (GDP)- the total $ value of all goods and services produced in a given year.

Nominal GDP is the total dollar value of all final goods and services produce in a year, in the current year’s dollars.

Real GDP is adjusted for changes in prices, measuring GDP in the prices of a base year.

The difference is important because we need Real GDP in order to compare how much was produced from one year to another, without the distortion of inflation.

-Doesn’t include discouraged workers

-Doesn’t include people who work part time but they want to work full time (under employed)

Inflation is the measure of the percent change in the general price level.  The price level is measured by the Consumer Price Index (CPI), which measures the current prices of a “basket” of about 400 ‘typical’ consumer goods and services as a percentage of the cost of that same ‘basket’ in some base year.

The Consumer Price Index (CPI) measures the current prices of a “basket” of about 400 ‘typical’ consumer goods and services as a percentage of the cost of that same ‘basket’ in some base year. It tells us the percent by which the prices of typical consumer items have increased or decreased over that time period.

Proportional- all people pay the same percent of income

Ex) income tax in conmen wealth of Massachusetts and other states.

Regressive Taxes-higher income people pay a lower percent of their income than lower income people

Ex) state/city sales taxes, especially goods that everyone buys

Investment (I):  business spending  on additions to plants, equipment, inventories, and newly constructed housing.

Government expenditures (G): purchases of goods and services by the government.

Imports (M): Foreign-produced goods and services consumed by Americans.  (leakage)

Exports (X): U.S. produced goods and services consumed by foreigners.  (injection)

Unlike Consumption, which is determined by income and thus determined within the model, Investment is determined outside the model.  Investment might be decided by expected profits, interest costs, or business confidence…all outside the model.

Discretionary Fiscal Policy – deliberate policy actions by the government.

Examples:  tax cuts and increases, spending increases and decreases.  Happen by acts of congress…lag time is significant.

Result:  Have little preventative significance, can affect a long-term down or up of economy.

Automatic Stabilizers (fiscal)- expenditures that automatically increase or taxes that automatically decrease when economic conditions worsen.

Examples:  income taxes, unemployment benefits, food stamps, etc.  Happen as economy changes.

The government is lending money to the banks in order to keep the banks from collapsing

Banks ‘Create’ Money: they can loan out more money than they actually have, creating checking accounts and creating money.

Money Multiplier:  an increase in reserves by a dollar leads to an increase in total deposits (the money supply) by a multiple of the original increase.

Open Market Operations

Buying and selling bonds in the capital market.

Changing the Discount Rate

The rate at which the Fed lends reserves to its member banks.

Changing the Reserve Requirement

The amount of reserves the FED requires banks to hold in reserve.