Macroeconomics Exam 2

Chapters 9,12,13

Nominal GDP

Value of goods/services at the current price

Real GDP

Reflects changes in price level, inflated price

Price Index

(price of specific year / price of base year) * 100

Real GDP formula

(Nominal GDP / Index) * 100

Human development Index

Measures a countries overall well-being

Economic Growth

Measured by % change in real GDP

Economic Growth formula

(new - old / (old)) * 100

The Business Cycle

Measured from peak to peak

The Business Cycle Phases

Peak, recession, through, expansion

How long do Recessions last ?

<1 year

How long do Expansions last ?

~5 years

Labor force

Employed + Unemployed

Full Employment

Nearly everyone who wants a job has one

Unemployment Rate

% of people in the civilian labor force who are without jobs and are actively seeking one

Unemployment Rate Formula

(# of unemployed/ Labor force) * 100

Labor Participation Rate

People who are working, looking for work, and able to work

Participation Rate Formula

(Labor force/ # able to work) * 100

Criticisms of the unemployment rate

Many believe it should be higher due to the number of discouraged workers, underestimated

Frictional Unemployment

Transition of searching for a new job or waiting to take on a job

Structural Unemployment

Occurs due to the skills of workers no longer in demand

Cyclical Unemployment

Caused by a recession phase where workers are laid off

GDP Gap

Actual GDP - Potential GDP

Okuns Law

(change in unemployment rate) * -2.0

Inflation

Increase in the average price level of goods/services

Deflation

decrease in the average price levels ( negative)

Disinflation

Reduction in rate of inflation, prices still increase but at a slower rate

Hyperinflation

Prices rise rapidly

Demand-pull Inflation

Increase demand of goods but the economy can’t keep up

Cost-push Inflation

Increase in costs of production which increases the prices for consumers

Average Rate of Inflation

(Current CPI - Old CPI / Old CPI) * 100

Real Interest Rate

Adjusted for Inflation

Nominal Interest Rate

Not adjusted for Inflation

The Classical School of Economic Thought

Believe in minimal government intervention, think the economy will fix itself

Keynesian Short-Run Model

Advocated for government intervention to stimulate demand and get the economy stable, observed that consumption is the biggest & most stable component

Sticky wages/prices

Wages and prices adjust slowly in response to economic conditions

Marginal Propensity to Consume ( MPC)

What proportion will we spend

Marginal Propensity to Save ( MPS)

What proportion will we save

MPC Formula

(Change in consumption / Change in income)

MPS Formula

(Change in saving / Change in income)

MPC + MPS =

1

The Multiplier Effect

If we get money & spend it this increases economic activity

The Multiplier Formula

(1 / 1-MPC) OR ( 1 / MPS)

Aggregate Demand

Total spending of consumers, slopes downward because as prices inc people tend to buy less

Change in GDP Formula

Multiplier * Initial change in spending

Aggregate Supply

Total supply in the economy, slopes downward because as prices increase businesses are willing to produce more

GDP

Measure of total output (goods/services)

Import

Bringing goods into our country from another country

Export

Sending goods to another country

Foreign Purchase Effect

When a country’s prices change, it affects how much other countries want to buy its stuff (Export) and how much it wants to buy from other countries (Import)