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SECTION 1:Measuring the Economy: GDP, Prices, and Inflation1.1.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 usedor sold later) by a businessor 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 quantityof goods and services produced in the economy. (Constant $ GDP) Real GDP= current year quantity x base year value Nominal GDP: The value of final goods and services evaluated at current yearprices. 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*