Macro Flashcards by Maura Handte

Aggregate Demand

Aggregate demand is the total amount of expenditures for consumer goods and investment for a period of time. It includes purchases by consumers, businesses, government, and foreign entities.

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What is the slope of a Keynesian aggregate supply curve?

It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.

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What is the slope of a conventional aggregate supply curve?

It is a continuously positive slope, with a steeper slope beginning at the level of full employment; supply increases with price but requires proportionately higher prices at full employment.

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Define “aggregate supply.”

Total output of goods and services at different price levels at the macroeconomic (economy) level.
An aggregate supply curve measures total output of the economy that will occur at different price levels.

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What is the expenditures approach for calculating GDP

this measures GDP using the value of final sales and is derived as the sum of the spending of:
-individuals, businesses, gov entities, and foreign buyers (net exports = exports - imports)
GDP = C + I + G + (X - M)

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what is the income approach for calculating GDP

This measures GDP as the value of income and resource costs and is derived as the sum of:
Wages + Self-employment income + Rent + Interest + Profits + Indirect business taxes + Depreciation + Income of foreigners

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Real GDP

Measures the total output of final goods and services produced for exchange in the domestic market during a period (usually a year) at constant prices.

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GDP deflater

The GDP deflator is a comprehensive measure of price levels used to derive real GDP. It relates the price paid for all new, domestically produced goods and services during a period to prices paid for goods and services in a prior reference (base) period. The specific goods and services included change from year to year based on changes in consumption and investment patterns in the economy.
Real GDP = (Nominal GDP/GDP Deflator) × 100

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Potential GDP

Measures the maximum final output that can occur in the domestic economy at a point in time without creating upward pressure on the general level of prices in the economy. The point of maximum final output will be a point on the production-possibility frontier for the economy.

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Net Domestic Product

Measures GDP less a deduction for “capital consumption” during the period—the equivalent of depreciation. Thus, NDP is GDP less the amount of capital that would be needed to replace capital consumed during the period.

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Gross National Product

Measures the total output of all goods and services produced worldwide using economic resources of U.S. entities. In 1992 GNP was replaced by GDP as the primary measure of the U.S. economy. GNP includes both the cost of replacing capital (the depreciation factor) and the cost of investment in new capital.

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Net National Product

Measures the total output of all goods and services produced worldwide using economic resources of U.S. entities, but unlike GNP, NNP includes only the cost of investment in new capital (i.e., no amount is included for depreciation).

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National Income

Measures the total payments for economic resources included in the production of all goods and services, including payments for wages, rent, interest, and profits, but not indirect business taxes included in the cost of final output (sales taxes, business property taxes, etc.).

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Personal Income

Measures the amount (portion) of national income, before personal income taxes, received by individuals.

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Personal Disposable Income

Measures the amount of income individuals have available for spending, after taxes are deducted from total personal income.

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Nominal GDP

Measures the total output of final goods and services produced in the domestic market for exchange during the period

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Natural rate of unemployment

the percentage of the labor force that is not employed as a result of frictional, structural and seasonal unemployment
(you would have this regardless of the state of the economy)

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Frictional Unemployment

Those in labor force not employed bc they are transitioning between jobs

Structural Unemployment

Those not employed due to

the need for their prior job type being reduced or eliminated
they lack the skills for currently available jobs
ex. Sony bc of MP3s

Seasonal Unemployment

Those out of work bc their jobs regularly and predictably vary by season
ex. bus drivers unemployed in summer

Cyclical Unemployment

Those who are not employed due to a downturn in the business cycle

recession reduced the demand for labor
unemployment number of greatest policy concern

Unemployment rate

percentage of LABOR FORCE not employed

Full employment

only when there is no cyclical unemployment

Peak in the business cycle

a point in the economic cycle that marks the end of rising aggregate output and the beginning of decline in output

Trough

a point in the economic cycle that marks the end of a decline in aggregate output and the beginning of an increase in output

Economic expansion or expansionary period

periods during which aggregate output is increasing (period from trough to peak) normally of longer duration than recessionary periods

Economic contraction or recessionary period

period during which aggregate output is decreasing (period from peak to trough) normally of shorter duration than expansionary periods

Recession

a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production and wholesale-retail sales.

Depression

an economic downturn (negative GDP) that is severe and/or long term. A decline in real GDP exceeding 10%. A decline in real GDP lasting two or more years.

What is the primary cause of business cycles?

While no single theory fully explains the causes and characteristics of business cycles, a major cause is changes in business investment spending (i.e., on plant, equipment, etc.) and consumer spending on durable goods (i.e., on goods used over multiple periods, like major appliances, automobiles, etc.)

declines in consumer and business spending may be caused by such factors as

Tax increases; Declining confidence in the economy; and Rising interest rates and/or more difficult borrowing.

Business Cycles

cumulative fluctuations up and down in aggregate real GDP

Lagging indicators of recession

(1) average duration of unemployment in weeks, (2) the change in the index of labor cost per unit of output, (3) the average prime rate charged by banks, (4) the ratio of manufacturing and trade inventories to sales, (5) commercial and industrial loans outstanding, (6) the ratio of consumer installment credit outstanding to personal income, and (7) the change in the CPI for services. Chronic unemployment is a lagging indicator.

What causes demand-induced (or demand-pull) inflation?

Aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.

What causes supply-induced (or cost-push or supply-push) inflation?

Increases in the cost of inputs to the production process that are passed on to the final buyers in the form of higher prices

Consumer Price Index (CPI)

measures the price of a fixed market basket of goods purchased by a typical urban consumer

Producer Price Index (PPI)

The price of a basket of commodities at the point of the first commercial sale.

The most effective fiscal policy program to help reduce demand-pull inflation would be to

Increase taxes and decrease government spending. The most effective government policy would involve reducing demand that could be done by taxation and reduced government spending.

Which of the following is true about a deflationary economy?

Companies are hesitant to make investments. Deflation results in very low interest rates. They could even turn negative.

Absolute advantage

From an international economic perspective, absolute advantage exists when a country, business, individual or other entity can produce a particular good or service more efficiently (with fewer resources) than another entity. When an entity has an absolute advantage, it uses fewer resources to produce a particular good or service than another entity.

Comparative advantage

exists when one entity has the ability to produce a good or service at a lower opportunity cost than the opportunity cost of the good or service for another entity.

Opportunity Cost

Is the money value of benefits lost from the next best opportunity as the result of choosing another opportunity. If you choose to do one thing, the opportunity cost is the value of the benefit lost by not doing another thing that would have provided the next best benefit.

Entities should trade with other entities for goods and services for which they do/do not have a comparative advantage

DO NOT HAVE