MacroEconomics Exam #1

Macroeconomics

The study of how the entire society or economy makes decisions

Microeconomics

How firms or household make decisions and interact in the market

What questions do macroeconomists ask about?

Inflation, Economic Growth, Interest Rates, Unemployment, Recessions.

What questions do microeconomists ask about?

Rent control in NYC, Does education effect employment.

Why does an economy’s total income equal its total expenditure?

Because each transaction has a buyer and a seller.

Define GDP

Gross Domestic Product: The total market value of all finished goods and services NEWLY produced in a specific country during a specific period of time.

Consumption

Total spending by house holds on final goods and services (rent)

Investment

Total spending on capital goods that are used to produce more in the future (Machinery, tools, factories, office buildings, inventory, new houses) (NOT STOCKS AND BONDS)

Government Spending

Total government spending on goods and services (Federal, state, local)

Net Exports

Exports(Foreign spending on domestically produced G&S) - Imports (Domestic spending on foreign G&S)

Nominal GDP

Measures value using current prices. This reflects changes in PRICE & QUANTITY.

Real GDP

Measures value using constant prices of the base year. This reflects changes in PRICE.

Why is GDP an imperfect measure of economic well-being or the economy’s standard of living?

Real GDP is a measure of the average persons standard of living

Nominal Intrest Rate

The interest rate as reported without the correction of inflation

Real Interest Rate

The interest rate corrected with the inflation rate

Inflation Rate

The percent change in some measure of the price level from one period to the next.

Cost of living

The amount of money needed to cover basic expenses like house, food, transportation, and healthcare.

Consumer Price index

This measures the average consumers cost of living. Reflects prices of G&S bought by consumers.

GDP Deflator

The ratio of nominal GDP vs. Real GDP. It reflects the price of all G&S produced domestically.

Why is CPI an imperfect measure of the cost of living?

-Substitution Bias (Some prices rise faster than others, and people migrate to cheaper goods)
-Introduction of New Goods( More variety meets more specific needs and the value of some goods increases over time)

-Unmeasured Quality Change(Improvements in the quality increases the price of G&S)

Nominal interest rates tell you…

the rate as reported and how fast the number of dollars in your bank account rises over time (Growth Rate)

Real interest rates tell you…

the rate corrected with inflation and how fast the purchasing power of your bank account rises over time (Growth Rate of Purchasing power)

Employed means?

Paid, self-employed, unpaid in family business, Part/Full time. Also includes temporary absences like vacation, illness, or bad weather.

Unemployment Means?

People not working who have looked for work in the previous 4 weeks.

Labor Force means?

Total number of available workers. (employed and unemployed)

Who is not in the LF?

Discouraged people, full time students, retired people or SAHParents

Define Cyclical unemployment.

The short term fluctuations around the natural rate of unemployment

Frictional Unemployment means..

When workers spend time searching for the jobs that best suit their skills and tastes. This explains short-term unemployment spells.

Structural unemployment means?

Mis match between employee ability and demands of the job. Usually occurs when the wages are set above the equilibrium. This means there are fewer jobs than workers and it explains longer spells of unemployment.