Macro Flashcards: GDP, Prices, Unemployment, and Fiscal Policy

A comprehensive set of practice flashcards covering the three-sector circular flow, GDP concepts, price indices (CPI/deflator), inflation, unemployment, business cycles, and Keynesian/fiscal policy basics.

In the Three-Sector Circular Flow Model, which sector supplies wages, rents, and interest in the factor market?

Firms.

In the Three-Sector Circular Flow Model, what do households supply and demand in the factors of production market?

Households supply labour, land, and capital and demand income.

In the circular flow, what does the government do in relation to transfers, taxes, and government expenditure?

The government supplies transfers, demands taxes from households and firms, and provides government expenditure in the goods and services market.

What does GDP stand for and what does 'Gross' mean in GDP?

Gross Domestic Product; Gross means depreciation is not subtracted.

What does 'Domestic' imply in GDP?

Activity within a single economy, regardless of ownership.

What does 'Product' refer to in GDP?

The value of final goods and services, avoiding double counting.

What does a nominal GDP measure imply?

GDP measured per period at current (nominal) prices.

Give examples of activities excluded from GDP (non-GDP).

Second-hand purchases, financial assets (stocks/bonds), non-market activity (home production), and government transfers and interest.

What is the National Income Account?

A country’s recorded details of its GDP.

What is the intuition behind the three approaches to GDP (output, income, expenditure)?

Output sold at market price equals consumption; market price value becomes income to producers; produced but not sold becomes a form of expenditure (inventory).

What does Y stand for in national income accounting?

Aggregate income, or GDP, which equals firm revenue.

What is the Income Approach to GDP formula?

Y = wL + rK (wage income plus returns to capital).

What is the Aggregate Expenditure (National Income Accounting Identity) for GDP in an open economy?

Y = C + I + G + (X − M) (net exports).

What is the difference between durable and non-durable goods?

Durables are long-lived; non-durables are short-lived.

What are the main investment types included in GDP?

Business Fixed Investment (Capital), Changes in Inventories, Residential Investment.

List key caveats of GDP as a measure.

Leaves out non-market activity, ignores values beyond market price, and does not measure overall well-being.

What is Real GDP?

Quantities produced valued at base-year prices; measures physical volume of production.

What is the Traditional/Fixed approach to real GDP?

Real GDP = nominal quantity × base-year prices; the Real GDP index = (Real GDP / base-year nominal GDP) × 100.

What is the Modern/Chain-weighted approach to real GDP index?

A chain-weighted index that links across periods using current and previous prices/quantities to compute real growth, then recovers real GDP by multiplying by base-year nominal GDP.

What is the ‘cheat’ method to get the real GDP index for t from previous periods?

Multiply the previous indices together to bootstrap the current index.

What is Nominal GDP formula?

Nominal GDP (PYt) = GDP deflator (Pt) × real GDP (Yt).

What is the growth relation for Nominal GDP?

Growth(PYt) = Growth(Pt) + Growth(Yt).

What does the GDP Deflator represent?

A price index of all goods and services; a broad measure of inflation, similar to CPI.

What is the Consumer Price Index (CPI)?

A measure of the cost of purchasing a fixed basket of G&S relative to a base year; prices are measured in currency per unit.

How is the CPI measured?

Using a basket of goods with quantities; compute period expenditures using current prices; compare to base-period expenditures.

How is the CPI indexed?

Index = (Pt / P0) × 100.

What is inflation (and deflation)?

Inflation is a rise in the price level; deflation is a fall in the price level; inflation reduces purchasing power over time.

What is the rate of inflation formula?

π = (Pt − P{t−1}) / P_{t−1}.

How is annual inflation related to quarterly inflation?

Annual rate can be computed from quarterly data as (Pt − P{t−4}) / P_{t−4}; moving averages smooth volatility.

What are substitution bias and quality bias in inflation measurement?

Substitution bias occurs when consumers substitute away from expensive goods; quality bias occurs when improvements in quality aren’t fully captured.

What are the costs of indexing nominal income to inflation?

Inflation expectations may rise; firms internalize higher expected costs, affecting pricing and wages.

What are the costs when inflation outpaces nominal income?

Real income falls; wealth redistribution; bracket creep; menu costs; noise in the price system.

What is the difference between Nominal and Real Interest Rates?

Nominal rates are paid in currency; Real rates are adjusted for inflation (expected real are t+x, realized are t or t-x).

What is the Participation Rate?

The proportion of the population that is in the labor force.

What is the Unemployment Rate?

The fraction of the labor force that is unemployed.

What is Underemployment?

Part-time workers getting more hours and full-time workers getting less hours than minimum of 35.

What is Underutilisation?

The sum of Underemployment and Unemployment.

How do you calculate the change in the number of unemployed workers?

Unemployment rate × employed population minus employment rate × unemployed population.

What is Steady-state Unemployment?

A situation where the flows into and out of unemployment are equal.

What are the long-term trends in unemployment?

Frictional and Structural unemployment.

What is Full Employment?

A situation where the labor market operates at capacity and cyclical unemployment is zero.

What is the Natural Rate of Unemployment?

The non-observable rate of unemployment at which the economy operates at potential output; varies with demographic and structural change.

What are Trend, Business Cycle, and Seasonal Cycles?

Trend—long-run changes, representing potential output; Business Cycle—short-run fluctuations over several years, usually representing actual output; Seasonal—regular, yearly patterns, representing actual output.

What does Seasonally Adjusted Data mean?

Data adjusted to remove seasonal effects to reveal cyclical or trend movements.

What are Peak and Trough in the business cycle?

Peak is the high point before a downturn; trough is the low point before an upturn.

How is a Recession often defined?

Two consecutive quarters of negative real GDP growth (rule of thumb).

What is Potential/Natural Output?

Output achievable when resources are used at a normal rate, reflecting the economy’s productive capacity.

What is the Output Gap?

The difference between Actual and Potential output; positive if actual > potential, negative if potential > actual.

What is Okun’s Law?

Cyclical unemployment is negatively related to the output gap—unemployment rises when output is below potential.

What is Classical (Say’s Law) versus Keynesian business cycle theory?

Classical: Say’s Law — supply creates its own demand; cycles driven by aggregate supply; demand-side policies weak or counterproductive. Keynesian: demand drives cycles; fiscal policy can stabilise demand.

What are Animal Spirits?

Unpredictable mood/factors of consumers or investors that influence demand.

What is Exogenous vs Autonomous in macro models?

Exogenous: determined outside the model; Autonomous: not influenced by income/output.

What is the Simple Closed-Economy Keynesian model of Aggregate Expenditure?

Planned expenditure equals planned consumption + planned investment + planned government purchases; investments and government are exogenous in a simple economy.

What is Planned Consumption?

Autonomous consumption plus MPC × (disposable income).

What is the Government Budget Constraint?

The use of funds should equal the source of funds (balance of budget).

What are Net Taxes?

Taxes minus transfers.

What is the Government Deficit?

Change in government debt equals the primary deficit plus interest payments on debt.

What is Net Government Debt (Net Wealth)?

Assets minus liabilities; differs from gross government debt.

What is the Intertemporal Budget Constraint?

Borrowing is constrained by the value of future primary surpluses.

What are Automatic Stabilisers?

Automatic fiscal mechanisms that provide support but move government into deficits (e.g., unemployment benefits, tax receipts).

What is Discretionary Spending?

One-time transfers or spending projects impacting deficits

What is Government Borrowing (B)?

Bonds issued by the government to finance deficits.