Final Exam - Summary.docx - Econ 104 Final Exam Section 1...

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Econ 104 – Final ExamSection 1What is GDP?in that
capital(K) – manufactured goods owned by firms to produce other goods and services.
Interest RatesRate at which we borrow and lend using other’s funds and paying for itWhere do interest rates come from?Supply & demand by lenders & borrowersMonetary policyis changes in interest rates & “money supply” by a country’s “central bank” (part of thegovernment)- U.S. cent. bank: Federal Reserve (“Fed”) -> Bank for banksFed’s “dual mandate” from Congress:“promote effectively the goals ofmaximum employment, stable prices*and moderate long-term interestrates”*Stable prices – Fed takes as 2% inflation.- Key Fed tool –federal fundsinterest rate• what banks charge each other for overnight loans – now at 1.25%Fiscal Policy- changes in federal expenditures & taxes• these 2 are changedindependently*- controlled by the President & CongressGovernment budgetdeficit= federal expenditures – federal taxesFunds for thedeficitcome from the U.S. Treasury borrowing frominvestorsby selling them bondsFederaldebt: total amount of bonds sold or the accumulateddeficitsfederal debt:$14.6 trillion (77% of GDP)Interest payments on the federal debt: $269 billion (1.4% of GDP)borrowing (deficit) pays for any expenditures not covered by taxesfederaldebt= accumulateddeficitsGDP DeflatorUses nominal & real GDP to measure the “price level” (average price of all goods and services in an economy)def:GDP deflator = (nominal GDP/real GDP) • 100The GDP deflator is a “price index.inflation = %Δ price index%Δ GDP deflator = inflation%Δ real GDP = economic growth%Δ "="("final - initial" /"initial" ) • 100high prices ≠ high inflation.Deflationis a fall in prices whiledisinflationis less inflationThe CPI can be used to remove inflation from nominal prices & wages

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