Chapter 10 - Agg output, price econ growth

Question 1

Expenditure Approach to Calculate GDP

Answer 1

Sum the amounts spent on goods and services produced during the period.

Question 2

Income approach to Calculate GDP

Answer 2

Sum the amounts earned by households and companies during period (wage income, interest income, business profits)

Question 3

Value of final output method ( expenditure approach)

Answer 3

Sum values of all final goods and services produced

Question 4

Sum of value added method of calculating GDP

Answer 4

Sum the additions to value created at each stage of production and distribution.

Question 5

Nominal GDP

Answer 5

expenditure approach - total value of all goods and services produced by an economy, valued at current market prices. Inflation increases nominal GDP, even if physical good output stays the same.

Question 6

Real GDP

Answer 6

Measures the output of the economy using prices from a base year. Current year output.

Question 7

GDP deflator

Answer 7

Converts nominal GDP into real GDP. Nominal GDP in year t /value of year t output at base year prices * 100

Question 8

GDP deflator

Answer 8

Nominal GDP/Real GDP * 100

Question 9

GDP =

Answer 9

C + I + G + (X-M) . Consumption spend, business investment, gov purchases, exports, imports.

Question 10

GDI

Answer 10

National income + capital consumption allowance (depreciation on productivity goods) + statistical discrepancy ( adjusts for Income GDP and expenditure GDP since there’s different data).

Question 11

National Income

Answer 11

Sum of income received by all factors of production. National income = compensation of employees +corp and gov profit before taxes + interest income + business owners’ incomes + rent + (indirect business taxes - subsidies).

Question 12

Personal income

Answer 12

Pretax income earned by households, includes gov transfer payments

Question 13

household disposable income

Answer 13

perosnal income after taxes

Question 14

GDP =, Total Income =

Answer 14

C+S+T (consumption spenindg, household/business savings/net taxes)

Question 15

Equality of Total income = total expenditures

Answer 15

C+I+G+ (X-M)=C+S+T

Question 16

G-T

Answer 16

Fiscal balance

Question 17

X-M

Answer 17

Trade Balance

Question 18

AD curve

Answer 18

illustrates inverse relationship between price level and level of real output. Two conditions: goods market is in equilibirium and money market is in equibilrium.

Question 19

Three effects that explain why AD curve slopes downward. W.I.R.

Answer 19

WIR 1. Wealth effect. ^ price, people feel poorer and buy less. 2. Interest rate effect. Affects demand for money. Price increase, people need more money to buy, only high interest rates cause people to invest vs spend. 3. Real exchange Rate effect. Domestic price ^ relative to foreign price, real price increases for foreigners so demand for exports goes down.

Question 20

SRAS Curve

Answer 20

Relationhip between price levela nd quantity of real GDP supplied. Upward sloping bc some input prices change as production is increased/decreased. Output prices will increase (profits), but input prices stay the same in short run.

Question 21

LRAS

Answer 21

All input prices are flexible, so the curve is perfectly inelastic (verticle). LRAS represents potential GDP, full employment of all the things.

Question 22

VSRAS

Answer 22

Firms adjust output without changing price by changing labor hours and intensity of use of plant/equipment in response to changes in demand.

Question 23

Things that Increase Agg Demand

Answer 23

Increase in consumers wealth, business expectations being positive, consumer expectations of higher future income, high capacity utilization, expansionary monetary policy, expansionary fiscal policy,

Question 24

Exchange rates will increase agg demand when

Answer 24

decrease in relative value of country’s currency increases exports and decreases imports

Question 25

Global economic growth

Answer 25

GDP growth in foreign economies increases quantity of imports and foreign demand

Question 26

Cause SRAS curve to shift to the right

Answer 26

Labor productivity increases, input prices decrease, exp[ectations of future output prices to increase, taxes and gov subsidies increase, exchange rates make my currency go up, my foreign production inputs get cheaper.

Question 27

Factors that shift the LRAS curve

Answer 27

Increase in the supply and quality of labor increasing potential output, increase in supply of natural resources increases potential REAL GDP, increase in the stock of physical capital, technology

Question 28

Movements long vs shift

Answer 28

Reflect the impact of a change in the price level on quantity demanded and supply

Question 29

Recessionary Gap

Answer 29

Real GDP is less than full employment

Question 30

Inflationary GAp

Answer 30

Difference between GDP1 and full employment GDP (increase in avg demand curve caused upward pressure on price)

Question 31

Stagflation

Answer 31

Declining economic output and higher prices

Question 32

Increase in AD
Decrease in AD
Increase in AS
Decrease in AS

Answer 32

Real GDP, Unemployment, Price level
1. Increase, decrease, increase
2. Decrease,increase, decrease
3. Increase, decrease, decrease
4. Decrease, increase, increase

Question 33

Sources of economic growth

Answer 33

Labor supply - over 16 working or available, human capital - skilled and educated peeps, physical capital stock - high rate of I increases this, technology, natural resources.

Question 34

Potential GDP

Answer 34

Growth in labor force * growth in labor productivity

Question 35

Production Function

Answer 35

Relationship of output to the size of the labor force, capital stock, productivity

Y = A x f(L,K)
Agg Econ output = total factor productivity * f( size of labor force, amount of capital available)

Question 36

Total factor productivity - A

Answer 36

Quantifies amount of output growth not explained by increases in the size of labor force and capital

Question 37

Diminishing marginal capital

Answer 37

Long term growth cannot be sustained by capital deepening investment

Question 38

Solow Model

Answer 38

Growth in potential GDP = growth in tech + WL (growth in labor) + Wc (growth in capital)

WL - labors % share of national income
Wc - capitals % share of national income