Macroeconomics Problem Set 2

study of the economy as a whole

Promote economic growth, limit unemployment, limit inflation

dollar value of all final goods and services produced in one country per year

statistics on production, income, investments, and savings

%change in GDP=((year 2- year 1)/year 1)*100

GDP divided by the population; identifies the amount an individual produces

economic system, property rights, capital, human capital, and natural resources

Intermediate goods, financial transactions, used goods, and non-market/illegal activities

Expenditures and Income Approach

add up all money spent on final goods in a year

add up all income as a result of selling goods and services in a year

Consumer spending, investments, government spending, and net exports

GDP=C+I+G+Xn

labor income, rental income, interest income, and profit

the rising general level of prices; reduces purchasing power of money

GDP measured in current prices

GDP adjusted to inflation

people who are looking for a job but are currently out of work

Unemployment Rate=(#unemployed/#in the labor force)*100

age 16 and older, able and willing to work, not institutionalized, not in military, not in school full time, retired

temporary unemployment in between jobs either because the worker was fired or quit

type of frictional unemployment caused by time of year and nature of job (ex:snowplow workers)

change in the labor force making some skills obsolete (ex:VCR repairman)

type of structural unemployment where workers are replaced by machinery

unemployment caused by recession; demand for goods and services falls leading to decrease demand for labor, leading to the firing of workers

amount of unemployment that exists when the economy is healthy and growing; adds frictional and structural unemployment

real GDP created when there is no cyclical unemployment

unemployment rates do not take into account discouraged workers, underemployed workers, and race/age inequalities

decrease in general prices

prices increase at slower rates

lenders, people with fixed incomes, and savers

Borrowers, businesses where price of a product increases faster than the price of resources

wage measured by dollars rather than purchasing power

wage adjusted for inflation

percent change in prices from year to year

index numbers assigned to each year that show how prices have changed relative to a specific base year

CPI=(price of market basket/ price of market basket in base year)*100

does not measure substitution bias, new products, or product quality

GDP Deflator=(nominal GDP/real GDP)*100

government prints too much money, demand-pull inflation, and cost-push inflation

the average number of times a dollar is spent and re-spent in a year

money supply*velocity=price level*quantity of output

demand pulls prices up; economy with excessive spending but the same amount of goods

higher production cost results in increased prices

percentage increase in purchasing power that a borrower pays (adjusted to inflation)

Real Interest Rate= nominal interest rate- expected inflation

percentage increase in money that the borrower pays not adjusted to inflation

Nominal Interest Rate= real interest rate+expected inflation