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

Econ 104 – Final Exam
Section 1
What is GDP?
in that

Interest Rates
Rate at which we borrow and lend using other’s funds and paying for it
Where do interest rates come from?
Supply & demand by lenders & borrowers
Monetary policy is changes in interest rates & “money supply” by a country’s “central bank” (part of the
government)
- U.S. cent. bank: Federal Reserve (“ Fed ”) -> Bank for banks
Fed’s “ dual mandate ” from Congress:
“promote effectively the goals of maximum employment, stable prices* and moderate long-term interest
rates”
*Stable prices – Fed takes as 2% inflation.
- Key Fed tool – federal funds interest rate
• what banks charge each other for overnight loans – now at 1.25%
Fiscal Policy
- changes in federal expenditures & taxes
• these 2 are changed independently*
- controlled by the President & Congress
Government budget deficit = federal expenditures – federal taxes
Funds for the deficit come from the U.S. Treasury borrowing from investors by selling them bonds
Federal debt : total amount of bonds sold or the accumulated deficits
federal 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 taxes
federal debt = accumulated deficits
GDP Deflator
Uses 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) • 100
The GDP deflator is a “ price index. ”
inflation = %Δ price index
%Δ GDP deflator = inflation
%Δ real GDP = economic growth
%Δ "="
("final - initial" /"initial" ) • 100
high prices ≠ high inflation.
Deflation is a fall in prices while disinflation is less inflation
The CPI can be used to remove inflation from nominal prices & wages