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Macroeconomics and Money, Banking, and Financial Markets Section of the Economics Comprehensive Exams

Terms in this set (66)

Gross Domestic Product (GDP): all of the FINAL GOODS and SERVICES that one produced within a country's borders measured at a current market price, during a certain calendar year

Measures the economy's annual output of goods and services.

Y(GDP)= Total expenditures=C+I+G+NX (Consumption, Investing, Gov't Purchases, and Net Exports - Imports)

Consumption ex:
Sinutab buys a carrot
Rogaine pays tuition in UD's Graduate
Program in Auto Upholstery Repair

Zocor buys 3 Mercedes CL 500's to
use in his high end taxi service
Risperdal builds a factory to
manufacture bird feed

Government spending
The US government buys a new jet
from Lockheed Martin Inc.

Percocette, Dr. Doyle's French
girlfriend, pays her bill at the Hotel
Zaza in Dallas (From her own income)

Cialis buys a BMW M6 (made in

When GDP declines (2 consecutive periods): A Recession occurs

The "Broken Window Fallacy" refers to: assuming that increases in GDP that result from clean up expenditures following a natural disaster result in increases in aggregate economic well-being. * Clean up costs don't make us better off; Tailor example: instead of having his window smashed, he could have used the money from repairing the window to buy a tv or something, thereby spurring the economy.


*The market is in equilibrium in a closed economy (Y=C+I+G), then it must also be true that S=I

(short answer) Use the saving/investment framework to show what will happen to the real interest rate and the level of investment spending, if the government changes any of the fiscal policy variables in a way that will reduce the government budget deficit.

A reduction in government budget deficit will decrease the real interest rate and increase savings & investment (graph)

What determines the full employment, potential level of GDP in the long run?
Y=AF(K,L) A=Technology/K=Capital/L=labor

Y is determined by the state of production technology and the consent of K&L employed in the production process

GDP Deflator (Filter): Converts Nominal into Real GDP



Per capita
Use the open economy saving-investment framework to show how a large decrease in taxes will affect net exports and the balance on capital and financial account (KFA)? T↓ → Disposable income ↑ → C↑ → S↓→NX<0 NX<0 = we import more than export
-Balance of Trade = NX+KFA
-NX will decrease = NX<0
-KFA will increase=KFA>0

What does the change in the capital and financial account that you describe above, suggest about the volume of international borrowing or lending that the US is engaged in? The US to be able to import more will have to borrow for abroad. So, thus, the US will become a debtor nation (instead of a creditor nation) and borrow money from abroad in order to sustain its increase in consumption (due to the decrease in taxes) because now due to the rise in consumption. I>S so they need to borrow and be a debtor nation.

Suppose that government spending on the wars in Afghanistan and Iraq increases significantly. Use the open economy Savings-Investment framework to show how this will affect the level of Net Exports.
NX=Y- C - I - G => G increases =NX to

If government spending increased, then national savings would decrease, lending to a decrease in NX

Will the change in the current account balance you describe above result in more or less borrowing from abroad?
More bc there is less net exports
Many people are concerned about reducing the size of federal government budget deficit.

Give an example of change in one of the major fiscal policy variables that would lead to a reduction in the government budget deficit.

Decrease Government spending or increase Taxes

The level of GDP in the US seems to be stuck at a level that is considerably below full employment level of GDP. Use the closed economy IS-LM model to show what the effects would be on GDP and Real interest rates of the change in the fiscal policy variable that you describe above, and whether it would move the economy toward or further away from the full employment level of GDP. In other words, would this be a good time to try to balance the federal government?

Decrease in G = decrease in consumption. IS shifts to IS'. Y down and r down

Therefore the economy moves further away from full employment -> it is not a good time to balance the federal budget