Macro Ch. 2 Test What is the Rule of 70? If given numbers, can you figure out the answer?

What is the Rule of 70? If given numbers, can you figure out the answer?

Formula: 70/growth rate → Tells you how many years till your GDP will double.

Growth rate = 3% → 70/3 = 23.33 years for our GDP to double

Describe inflation and what are 2 main types of inflation?

The rate of the increase of prices over a given period of time

2 main types: Demand-pull(Driven by consumer demand) + Cost-push(Driven by supply cost)

What is the business cycle and what are the phases?

A type of fluctuation found in the aggregate economic activity of a nation

Phases: expansion, peak, recession, trough

What are the characteristics of each of the different business cycle phases?

Peak, recession, trough, expansion

How do you calculate unemployment?

((Unemployed / labor force) x 100)

What are the 3 types of unemployment we talked about? Can you give examples of each one?

Frictional: When your between jobs

Structural: Changes over time force you out of job (Skills not needed anymore)

Cyclical: Unemployment that is caused by a decline in total spending

What is GDP?

Gross domestic product- measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time

What is the components of the expenditure model for GDP?

GDP = Consumption + private investment + Government Spending + net exports

What is included in each part of the expenditure model for GDP?---------------?

C(Consumption) + I(Private Investment) + G(Gov. Spending) + NX(Net Exports)

In general what is included and not included in GDP. Can you give examples?

New FINAL goods are included, and NOT included examples are used goods and transfer payments (Social Security)

How do we show economic growth on the Production Possibilities Curve?

Rightward shift out

What is inflation and how do you calculate it?

The rate of the increase of prices over a given period of time

Formula: ((Price in year 2 - Price in year 1)/ Price in year 1) * 100

What is the CPI?

Consumer price index: measures a basket of goods that do not change year to year to see how the same basket price changes. The measure of consumer inflation.

Formula: Basket in current year/Base year basket * 100

What is Okun's Law?

The 2 to 1 ratio between unemployment and GDP growth/shrink

Example: Natural rate is 5% and the current unemployment rate is 6% → GDP will decrease by 2%

Describe what a GDP Gap is.

The difference between actual and potential GDP

Equation: GDP gap= Actual GDP - Potential GDP

What is our natural rate of unemployment? What type of unemployment occurs when we are ABOVE the natural rate compared to when we are at or below our natural rate?

Frictional + Structural

When you are above natural, it is cyclical.

What relationship do unemployment and inflation have?

They have an Inverse Relationship → as one goes up the other goes down

What do we mean when we refer to "investment"?

Any medium for generating future income. It is an investment in human capital like going to school or investing in the firm like amazon buying new trucks.

Can you calculate GDP growth as a percent from one year to the next?

Yes, here's the formula:

GDP growth rate = [(GDP in current year - GDP in previous year) / GDP in previous year] x 100%

Nominal vs. Real GDP

Nominal GDP: Is the total value of all goods and services produced in a given time period (Price of the dollar without inflation)

Real GDP: Is nominal GDP adjusted for inflation (Price of dollar when you put inflation in it)

What are "Sticky Prices" and how do they affect the business cycle?

Prices that are slow to adjust to changes in the business cycle and thus GDP

How can the unemployment rate be understated?

It doesn't consider everyone who doesn't have a job and discouraged and part time workers are counted as full time

What are ways we have become more productive over the last 100 years?

Technology

Durable vs. Nondurable goods and how consumption is affected when we are in a recession?

Durable goods last, nondurable goods are short life span
In a recession, durable goods consumption hurt more than nondurable goods

What is the deal with real income when you have increases in nominal income and inflation both rising at different levels?

Your purchasing power will be affected. real= nominal-inflation. If you have increases in inflation and Nominal wage your real income will either:

Increase if wage growth > inflation

Decrease if inflation > wage growth

What are demand and supply shocks and can you give examples?

Shocks are when something happens that isn't expected like COVID 19

A demand shock is a sudden and unexpected change in consumer demand for a good or service. This could be caused by changes in consumer tastes, changes in income, or changes in the availability of credit

A supply shock, on the other hand, is a sudden and unexpected change in the supply of a good or service. This could be caused by changes in production costs, changes in technology, or changes in the availability of raw materials

Under what type of prices (sticky or flexible) would a firm hold inventory if there was a demand shock?

Sticky

What is the leader/follower theory?

The leader-follower relationship is the social interaction that occurs between leaders and followers as they. Follower countries will grow at a faster rate than leader countries because they already paved the way for growth. It is like an older sibling taking a class before a younger sibling so that it is easier for the younger sibling.

What is a price index?

A price index measures the average cost for a basket of goods or services over time, relative to a base period

BONUS: How Is economic growth best defined or shown? What stat tells up the best way to see economic growth?

GDP per capita is the best way to show

BONUS: During the Great Recession who was hit the hardest by unemployment?

Generally females

BONUS: If GDP in year one was 150 billion and 175 in year two, what was the growth rate?

(175-150)/150 * 100

How do unemployment rates for males differ from females?

Females on average are higher than males

If the MPC is .9 for the US and consumption increases by 5 billion how much GDP or AD increase.

MPC= .9 then MPS= .1
The money multiplier is 1/.1 = 10
Consumption is 5B and MM is 10 then AD shifts right 50 billion.

How is GDP understated

Black market and quality changes in product and services

How do you avoid double counting when measuring GDP

Focus on market value of final goods only
Ignore intermediate goods
Count only new items, nothing used or bought once already
Measure value added at each stage of production

Two primary concerns of macroeconomic are changes in output and

long run growth

Why are strong property rights essential for economic growth?

encourage investment, promoting innovation, facilitating efficient resource allocation, and supporting a competitive business environment

What is real gdp and what is nominal gdp

Real GDP is nominal-inflation
Real GDP takes inflation out so that you can compare it over time.
Nominal GDP is found by current $ x current output
Real GDP is found by base year $ x current year output

How has Free trade helped economies grow?

Free trade allows for more efficient allocation of resources and specialization based on comparative advantage.
It enables countries to access larger markets, benefit from economies of scale, and gain exposure to new technologies and ideas.