Transfer Payments – Payments by the government to households for which the government doesn’t receive goods/services in return (ex. Social Security). This is NOT included in the GDP . Which of the following would be considered money in the U.S.? Corporate stock (no) U.S. Savings bond (no) Capital owned by Boeing (no) Investment by Ford in a factory (no) Funds in a checking account (yes) U.S. currency/cash (yes) When measured by production, GDP for a nation’s economy is the market value of all final goods and services produced domestically in that year. Same dollar value for purchases Same dollar value for income In per capita, it roughly measures well-being China: $9,800 (Which was equivalent to the U.S. in 1935) Haiti: $1,300 (Which was equivalent to the U.S. in 1800) Real Vs. Nominal GDP Both use same Q (amounts produced); P (prices) are different Real GDP – Calculated by designating a particular year as a base year and using those prices, but using the quantities of the current year Nominal GDP – Calculated by using the price and quantity of current year Real is not influenced by inflation, but nominal is. In a recession, Real GDP is more likely to fall than nominal GDP Real GDP if most often used to track an economy Real GDP Real GDP = (Current GDP – Base GDP)/(Base GDP) The Great Recession (Real GDP declined by 4.2%) was the worst downfall since the Great Depression in the 1930s (Real GDP declined by 33%) To help, the Federal Government increased expenditures (G and transfers increased); Cut taxes (to cushion falls in C and I); These are known as “fiscal policies” (changes in the federal budget) To help, the Federal Reserve cut interest rates (to stimulate C and I, which are part of the “monetary policy”); and aided the financial system Bureau of Economic Analysis (BEA) – Is in the Department of Commerce and compiles data needed to calculate the GDP o Part C: Fiscal & Monetary Policy Monetary Policy Conducted by the U.S. Federal Reserve (U.S. “central bank”) Chartered by Congress Most key positions are appointed by the President and confirmed by the Senate
Chair: Janet Yellen; Also head of the “Federal Open Market Committee” (FOMC) Congressional mandate to the Fed: “Promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” FOMC Speech by Janet Yellen: Underutilization of land diminishing Impact of oil price declining How does the Fed influence the economy/conduct monetary policy? Influence interest rates Change money supply (M1 or M2) Federal Fund Rate – what banks charge each other for overnight loans Set by Federal Reserve Banks profit by borrowing at lower rates than what they lend at When the federal fund rate is changed, consumption and investment change When the federal fund rate increases, there is slower growth. When the Federal Fund Rate decreases, there is slower growth.
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