ECO 202 Study Guide - Midterm Guide: United States Treasury Security, Savings Account, Federal Funds Rate

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16 Oct 2017
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Exam 2 study guide
IMPORTANT EQUATIONS
GDP deflator= nominal GDP/ real GDP x 100
GDP= Net Taxes + gross interest + government purchases + C
GNP= GDP- output from foreigners in the US + output of Americans and US
firms abroad
Chapter 7
National debt is at $20 trillion
Average nominal interest rate=1%
Real interest rate is about -1%
Budget= -$.5 trillion
China is the largest lender to the US
How firms decide on investment projects:
Rate of return compared to the interest rate
Will the project lead to more profits than the amount of money they can
make off the interest rates of the money
Invest if R of R is greater than or equal to interest
Nominal interest rate: dollars of interest per year for every $100 put in the bank
Real interest rate: measures how much you earn or gain by saving money
Loanable funds theory
Firms borrow for investment
As the real interest rate increases firms borrow and invest less
smaller interest rates lead to more borrowing
IF DEMAND(LF) SHIFTS TO THE RIGHT PROFITS GO UP
Supply loanable funds come from savings(household and business)
Savings increase as real interest rates increase
Chapter 8
M1= coins/currency in circulation + checking account balances + travelers’ check
M2= small time deposits + savings account balances + money market mutual
funds
rrr= required reserves ratio: about 3%
Legal requirement by the Fes for an amount the bank must keep in
reserve
err= excess reserve ratio
Percent amount of excess reserves that a bank keeps in case of an
emergency
cr= currency ratio
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