Unit 3 Macroeconomics Study Guide

Define Gross Domestic Product (GDP):

Total value of goods and services produced within a nation’s borders in a given year

What are the four major components of the Gross Domestic Product (GDP)?

Consumption, Investment, Government Spending, Net Exports (exports minus imports)

What is the difference between nominal GDP and real GDP?

Real GDP accounts for inflation and nominal GDP doesn’t

Define inflation:

Sustained increase in price levels for goods and services

What is used to measure inflation?

Consumer Price Index (CPI)

Define deflation:

Sustained decrease in prices of goods and services

Define frictional unemployment:

Unemployment when you are actively looking for a job for the first time or transitioning between jobs

If the government instituted additional training programs for adults, what type of unemployment could that eliminate?

Structural

What are some examples of seasonal unemployment?

Landscapers, amusement parks, stores during the holiday season, agriculture

What is the natural rate of unemployment?

4-6%

What type of unemployment occurs during an economic downturn outside of the natural rate of unemployment?

Cyclical unemployment which can happen during a contraction/recession

During which phase of the business cycle would unemployment be at its height?

Trough

What is the highest point at the end of an economic expansion and the start of a contraction of the business cycle?

Peak

Which phase of the business cycle experiences a growing economy and falling unemployment rates?

Expansion

What is the effect of a recession on the GDP?

GDP decreases

Explain the design of the Federal Reserve System.

12 regional reserve banks across the US and the Federal Open Market Committee

What does the Federal Reserve do?

The institution that is responsible for monetary policy in the US

Why does the Federal Reserve require banks to keep a percentage of their funds as a reserve?

To supply cash withdrawals

When would the Federal Reserve buy government securities or lower its discount rate?

During a recession

What is an example of a contractionary monetary policy?

Selling government bonds

Example of expansionary fiscal policy?

Increased government spending or cutting taxes

If the government wants to expand the economy what type of fiscal policy should they use?

Increase government spending or cut taxes

If the government wants to stop high inflation what type of fiscal policy should they use?

Increase taxes or cut government spending

What is a budget deficit?

When government expenditures (spending) exceeds revenues (money made)