Macroeconomics Chapters 6-9 Test

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Chapter 6
What is a recession
A decline in GDP and unemployment (2Q)
Real GDP
Measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices.
Person can’t get a job and wants a job
What causes shock in the economy
Demand and Supply shocks
Demand Shocks
Unexpected change in demand of a good or service
Supply shock
Unexpected change in supply of a good or service
Resources devoted to increase future output
What do banks and other financial institutions do
Borrow and Lend $
Trade-off current for future consumption
Sticky Prices
– Many prices are sticky in the short run
– Consumers prefer stable prices: BUDGET
– Firms want to avoid price wars
Fixed Prices
Price of a good or a service is not subject to bargaining.
Chapter 7
Gross Domestic Product – Measure of aggregate output
Net Exports
Difference between a country’s total value of exports and total value of imports.
What is the largest component of national income
Compensation of employees
Disposable income
income remaining after deduction of taxes and other mandatory charges
Discretionary income
Available to be used when and how you decide
Real GDP
Value of goods and services produced during a year
– Corrects for price changes
What would happen to GDP if we included intermediate goods
Calculating GDP would be double counting
Intermediate goods
Products purchased for resale
GDP formula
Personal Consumption Expenditures (C) + Gross Private Domestic Investment (Ig) + Government Purchases (G) + Net Exports (Xn)
Chapter 8
Economic Growth
Increase in real GDP or real GDP per capita
Measure improvements in standard of living
What would you use the rule of 70 for
Arithmetic of growth – the # of years required to double real GDP
Effects of industrial revolution and economic growth
– Ongoing increases in living standards
– Time for leisure
– Social change
– Democracy
– Human lifespan doubled
Determinants of Growth
Demand and Efficiency Factor
Demand Factor
Households, businesses, and government must purchase the economy’s expanding output
Efficiency Factor
Use resources in least costly way
Institutional structures of growth and their effects on economic growth
– Strong property rights – People wont invest if they are afraid something will get stolen
– Patents and copyrights
– Efficient financial institutions
– Literacy and widespread education
– Free trade
– Competitive market system
Labor Productivity
Real GDP = Hours of work X Labor Productivity
Average rate of productivity from 1995 – 2012
Critics of economic growth
– Growth is the path to greater material abundance
– Results in higher standards of living
– Increases leisure time
– Allows for the expansion and application of human knowledge
Chapter 9
Business Cycle
Alternating increases and decreases in economic activity over time
Phases of the business cycle
– Peak: Business activity reaches max temperature
– Recession: A period of decline
– Trough: Lowest part of recession
– Expansion: Recovery
When is the US in full employment
Who is included in the labor force
– Involuntary part-time workers
– Discourage workers
Types of unempoyment
– Frictional unemployment: Search/wait (individuals searching for jobs or waiting to take jobs soon)
– Structural unemployment: offshoring jobs (occurs due to changes in structure of demand for labor)
– Cyclical unemployment: Caused by recession
Types of inflation
– Demand-Pull inflation
– Cost-Push inflation
Demand-Pull Inflation
Too much $ chasing too few goods
– Excess spending relative to output
– Central bank issues too much money
Cost-Push inflation
– Due to a rise in per-unit input costs
– Supply shocks: OIL (73-74? 79-80)
What are cost of living adjustments used for (unaffected by inflation)
Union workers will get a raise when the CPI goes up
Okun’s law
Every 1% of cyclical unemployment creates a 2% GDP gap: Actual unemployment rate exceeds the negative rate
What does the GDP gap measure
Actual unemployment rate exceeds the negative rate
Categories: Macroeconomics