SECTION 1:
Measuring the Economy: GDP, Prices, and Inflation
1.1.
Be able to calculate real and nominal GDP and explain what they measure. This
includes related terms like capital, intermediate goods, and investment.
Investment:
The purchase of capital goods or addition to inventories (goods to be used
or sold later)
by a business
or purchase of a new house or apartment
Ex) United airlines buys a new Boeing 787, me buying a new house, AIrlines buy jet
fuel, putting money in the bank for spring break, a factory
Intermediate goods:
Is used up or transformed into the production process
Ex) flour ---> bread wood ---> house
Final Good:
A final good is purchased by the final user. ex) Bread, house, car
Capital:
Manufactured goods , owned by a business to produce other goods and
services. It also lasts for many years and can be used many times.
Ex) hammer owned by carpenter, manufacturing plant
Real GDP:
The value of final goods and services evaluated at the
base year
. It
represents changes in the
quantity
of goods and services produced in the economy.
(
Constan
t $ GDP)
Real GDP= current year quantity x base year value
Nominal GDP:
The value of final goods and services evaluated at
current year
prices.
Measures the value produced that year. (
Current
$ GDP)
Nominal GDP= Current year quantity x current value
1.2 Be able to explain (i) what fiscal and monetary policy are, (ii) how they influence the
economy, and (iii) how they are currently being used in the U.S. This includes numbers
for federal expenditures, taxes, debt, and deficit as well as the history, goals, and
structure of the Federal Reserve (Fed). (Ch. 14.4 (to 1st paragraph of "Open Market
Operations'), Ch. 15.1, notes, and
Lecture Replacement Videos
)
Fiscal Policy:
How Fiscal Policy influences the economy:
Monetary Policy:
Changes in interest rates and “money supply” by a country’s central
bank (FED) (part of the government) (established by congress)
Federal Reserve:
The U.S central bank
**FED is largely independent from the govt**
FED’s dual mandate:
promote the goals of maximum employments, stable prices and
moderate long term interest rates. (Stable prices: 2% inflation)
Federal Funds interest rates:
what banks charge each other for overnight loans (2.25%-
2.50%)
If the federal funds rate increases the economy would grow more slowly. (higher costs
for banks, more expensive for firms and customers, small increase in demand, slower
growth, fewer jobs)
Federal Open Market Committee: A part of the FED; raises and lowers interest rates
-Unemployment suddenly rises----> lower the Federal Funds Rate
Fiscal Policy:
Change in federal expenditures and taxes (government purchase of a
new good, transfer payments, interest payments) *Not responsible for federal debt*
Government budget deficit= federal expenditures - federal taxes
-Funds for the deficit comes from the U.S Treasury selling them bonds ($100 + interest)
Federal debt: Total amount of bonds outstanding ($16.4 trillion)
Open-Market Operations:
The FED buys and sells bonds with the investing public
(FED buys bonds in an open market operation and bank reserves grow) *FED controls
the resreves*
