Macro Unit 2

Question 1

GDP (Gross Domestic Product)

Answer 1

The total dollar value of all final goods and services produced within a country’s borders in a given year.

GDP= C + I + G + Xn

Question 2

What are the four components of GDP (according to the expenditures approach)?

Answer 2

Consumer spending, Investment spending, Government spending, and Net eXports

Question 3

Nominal GDP

Answer 3

is GDP measured in current prices. Does not account for inflation from year to year.

Question 4

Real GDP

Answer 4

GDP is expressed in constant or unchanging dollars. Real GDP is preferred by economists because it adjusts for inflation, making it more accurate.

Question 5

Three things not included in GDP

Answer 5

1. Intermediate goods (goods that go into the production of final goods)
2. non-product transactions (ex. buying stocks/bonds)
3. non-market transactions (Illegal activities the government can’t track)

the purchasing of used goods are also not included in GDP, as the price of that good was counted towards the GDP when the item was new, so counting it again would be double counting and would therefore be inaccurate

Question 6

GDP per capita

Answer 6

per capita=per person

• Used to measure standard of living
• To find GDP per capita, take the GDP of a given country and divide it by that country’s population

Question 7

Business Cycle Graph

Answer 7

The national economy goes up and down like a roller coaster, and generally trends upward. This is represented by an upward squiggly line on the business cycle graph.

points on the graph:
- The high points on the graph are the peaks
- The low points on the graph are troughs
- from peak to trough (downward trend) is a contraction/ recession
- from trough to peak (upward trend) is an expansion

PCTE

Question 8

Recession

Answer 8

When real GDP falls for two straight quarters (six months)

Question 9

Unemployment

Answer 9

workers that are actively looking for a job but are not working

Question 10

Labor force qualifications

Answer 10

Must be:
- above the age of 16
- able, willing, and looking for work
- not institutionalized (jail/hospital)
- not in military
- not in school
- not retired

Question 11

The unemployment rate

Answer 11

The percent of people in the labor force who want a job but aren’t working

Question 12

Three main types of unemployment

Answer 12

Frictional unemployment
Structural unemployment
Cyclical unemployment

Question 13

Frictional Unemployment

Answer 13

People temporarily unemployed or between jobs; they have the right skills, just aren’t working (seasonal unemployment)

Question 14

Structural Unemployment

Answer 14

Changes in the economy make some skills obsolete; these jobs will never come back

Question 15

Cyclical unemployment

Answer 15

Unemployment caused from a recession; as people buy less, businesses earn less and therefore have to fire workers in order to maintain profits

Question 16

Unemployment Rate Equation

Answer 16

Unemployment Rate= # unemployed/# in labor force x 100

Question 17

Natural Rate of unemployment (NRU)

Answer 17

Frictional unemployment plus structural unemployment; unemployment that exists when the economy is healthy and growing (full employment)

Question 18

Four Criticisms of the Unemployment Rate

Answer 18

Discouraged workers
Labor force participation rate
Underemployed workers
Race/Age inequalities

Question 19

Inflation

Answer 19

A rise in the general level of prices; as prices go up, the “purchasing power” of money decreases

Question 20

CPI (Consumer Price Index)

Answer 20

A market basket of products with index numbers assigned to each year that show how prices have changed in relation to a specific base year; Only analyzes prices of consumer goods.

Question 21

CPI Equation

Answer 21

CPI= price of market basket / price of market basket in base year x 100

Question 22

GDP Deflator

Answer 22

An index number that measures ALL prices and is used to convert nominal GDP to real GDP (analyzed the same way as CPI)

Question 23

GDP Deflator Equation

Answer 23

GDP Deflator= Nominal GDP / Real GDP x 100

Question 24

Deflation

Answer 24

Decrease in prices or a negative inflation rate

Question 25

Disinflation

Answer 25

Prices increasing at slower rates

Question 26

Velocity of Money

Answer 26

The number of times a dollar is spent and respent in a year

Question 27

Who is helped and hurt by inflation?

Answer 27

Helped: Borrowers, Businesses (when product price increases faster than the price of resources)

Hurt: Lenders, people with Fixed Incomes, and Savers

Question 28

Three Causes of Inflation

Answer 28

Quantity theory
Demand-pull theory
Cost-push inflation

Question 29

Quantity Theory

Answer 29

The government prints too much money, causing prices to rise and real GDP to fall (also known as hyperinflation)

Question 30

Quantity Theory of Money Equation

Answer 30

M x V = P x Y

M= Money supply P= Price level
V=velocity Y=quantity of output

If (M)oney supply goes up, (P)rice also has to increase in order for the equation to be balanced.

Question 31

Demand-Pull Theory

Answer 31

When demand exceeds the supply causing prices to rise

Question 32

Cost-Push Inflation

Answer 32

Higher production costs increase prices.

Question 33

Problems with the CPI

Answer 33

Substitution Bias (as prices increase for a fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket)

New products (the CPI market basket may not include the newest consumer products)

Product Quality (the CPI ignores both improvements and declines in product quality)