ap macroeconomics chapters 24-27

what are sticky prices? what about flexible?

they cause EQ quantity to shift due to inflexible prices. this will have a notable impact on employment levels

flexile pricing allows the same EQ quantity to be produced at different prices. this reduces the effects of a shock.

what is modern economic growth?

per capita GDP rises (basically, living standards are steadily rising)

are demand shocks more likely to be sticky? why or why not?

they are more likely to be sticky because in the short run, the government responds to the shock by adjusting employment and output

true or false: sticky pricing is forever

no. prices will become more flexible as time goes on.

what is national income accounting?

measures economy’s overall performance. we use this to assess health of economy, long run growth, and formulate policies

what are intermediate goods?

goods purchased during production and NOT for the final sale. this is not counted in GDP because only final sales are counted

what are non-production transfers?

financial transactions and second-hand sales. include public transfer, private transfer, and stock market transactions

what is the expenditures approach?

consumption + investment (NOT stocks) + government expenditures + net exports (exports minus imports)

C + I + G + (X - M)

sort the following into C, I, G, net export, or not counted towards GDP:

1. college tuition

2. social security payments

3. Microsoft stock purchased from microsoft

4. plant ticket to London on British airways

5. a new factory

6. sale of a previously occupied house

7. computer made in the US and sold in Canada

1. consumption

2. not in GDP (public transfer)

3. not in GDP (stocks)

4. consumption

5. investment

6. not in GDP (not new product)

7. export

list the shortcomings of GDP

• improved product quality

• leisure time

• underground market

• non-market activities

• pollution and the environment

• composition and distribution of goods

what’s the rule of 70?

70 divided by the annual growth percent equals the years to double real GDP

if nominal GDP rises by 13% and inflation rises by 3%, how long will it take for real GDP to double?

13 - 3 = 10% real growth

70/10 = 7 years to double

what is per capita GDP?

capita per person. this can tell us about the living standard for the average person. you can have high GDP, but a low per capita GDP

what are some institutional structures that promote growth?

• efficient financial institutions

• patent and copyright laws

• property rights

• free trade

• competitive market system

• literacy and education

on the supply side, what are the determinants of growth?

• increase in quality and quantity of resources

• increase in quality and quantity of human resources

• increase in capital goods

• improved technology

what are the determinants of growth for demand and efficiency?

• demand: you need people (households, businesses, governments) to actually demand the stuff

• efficiency: achieve economic efficiency and full employment

why might the US have such a larger supply of laborers compared to other nations? (this isn’t about population)

longer work week and emphasis on work culture

what is growth accounting and what does it entail?

growth accounting is assessing the importance of supply-side elements with respect to real GDP.

it talks about increases in work hours and increases in labor productivity. productivity increases are usually more significant.

what are the causes of the business cycle?

• financial instability

• political events

• irregular innovation (like trends)

• monetary factors (like gov’t printing more money)

• productivity changes

are non-durable or durable goods more impacted by the business cycle?

durable, since people will stop buying them if the economy is contracting. but, people still need non-durable goods—like food—so those won’t be as impacted

what groups aren’t included in the unemployment pool?

• those who are 16 or younger

• institutionalized people

• those who aren’t actively looking for work

what are some criticisms of unemployment data?

unemployment is understated because 1) part-time employees are counted as full-time, and 2) discouraged workers are not counted

what are the three types of unemployment?

• cyclical: follows the trends of the economy (business cycle). could be a decline in total spending

• frictional: unemployment when someone is stuck between jobs (left a firm, hired by another)

• structural: jobs go away due to changes in consumer tastes. some skills may become obsolete

what is NRU?

natural rate of unemployment. this only counts those in frictional and structural unemployment—NOT cyclical.

this is the rate where economists deem “normal” and no gov’t intervention is needed

what is the GDP gap?

actual GDP - potential GDP. on a PPC graph, a point would lie within the curve

what is Okun’s law?

for every 1% rise in unemployment (decrease in employment), there is a 2% decrease in real GDP

what is inflation?

a rise in prices with reduced purchasing power

what are types of inflation?

• demand-pull inflation: spending > producing

• cost-push inflation: per-unit production costs increase. this is usually associated with supply shocks.

can real GDP stay the same in cost-push inflation?

yes—nominal GDP and inflation must rise at the exact same rate for that to happen

what is core inflation?

inflation without volatile food and energy prices. policymakers, however, can choose whether or not to include those prices

unanticipated inflation v.s. anticipated inflation

• unanticipated: can cause real income and wealth redistribution

• anticipated: helps us avoid redistribution

percent change in income is the percent change in nominal income minus percent change price level.

when nominal income rises differently from price level, redistribution of RGDP occurs

name the groups who are hurt by inflation

creditors, savers, fixed-income receivers

name the groups who are helped by inflation

flexible-income receivers and debtors

real interest rate formula

RIR = NIR - inflation premium

inflation premium is the interest charged according to anticipated inflation