Macroeconomic Measurement, Growth, and Policy: Key Concepts for Students

What is the formula for GDP measured by the expenditure approach?

GDP = C + I + G + (X − M)

Why are imports subtracted when calculating GDP?

Imports are included in consumption, investment, or government spending but are not produced domestically.

What does Real GDP compare?

Real GDP compares output using base-year prices to measure changes in quantities rather than prices.

What is the preferred measure of economic growth?

Real GDP per capita growth, as it adjusts for inflation and population growth.

What are the four types of unemployment?

Frictional, Structural, Seasonal, and Cyclical unemployment.

Which type of unemployment is most relevant for macroeconomic policymakers?

Cyclical unemployment, as it reflects insufficient aggregate demand.

How is the unemployment rate calculated?

Unemployment rate = U / (E + U), where U is the number of unemployed and E is the number of employed.

What does inflation measure?

The positive growth rate of a price index.

What is the CPI and what does it measure?

The Consumer Price Index (CPI) measures prices of goods and services consumed by households.

What is the PPI and what does it measure?

The Producer Price Index (PPI) measures prices of intermediate goods used in production.

What are some other measures of economic well-being?

Income inequality, life expectancy, and years of schooling.

What is a drawback of using income inequality as a measure?

It does not capture average income or total economic output.

What is a drawback of using life expectancy as a measure?

It is influenced by non-economic factors such as culture and genetics.

What is a drawback of using years of schooling as a measure?

It measures quantity of education but not quality.

What are the three key facts about economic growth?

1. GDP per capita varies across countries. 2. All countries used to be poor. 3. Some countries experienced growth miracles while others faced growth disasters.

What are the immediate causes of economic growth?

Increases in physical capital, human capital, and technology.

What is the ultimate cause of economic growth?

Institutions that create incentives for investment and innovation.

Why do secure property rights encourage investment?

Investors expect to keep the returns on their investments.

What is temporary catch-up growth?

Growth through capital accumulation in countries with low initial capital levels.

What is long-run cutting-edge growth?

Continuous technological improvement in countries at the frontier.

What happens when the investment rate increases?

The economy moves to a higher steady-state level of output, but long-run growth remains unchanged.

What is the steady state in economic growth?

It occurs when investment equals depreciation (I = D), and capital and output are constant unless technology improves.

What drives R&D in the economics of ideas?

Profit incentives.

What are the characteristics of ideas in economics?

Ideas are non-rival and create spillovers.

What are the effects of government intervention on innovation?

Government intervention through patents and subsidies can increase innovation.

What is the relationship between market size and R&D?

Larger markets encourage more R&D.

What are the characteristics of recessions?

Periods of negative growth and rising unemployment.

What was a major cause of the Great Depression?

A stock market crash, collapse in confidence, deflation, banking failures, and inadequate policy responses.

What does liquidity refer to in the context of money?

How easily an asset can be used for transactions.

What is the price of money in the money market?

The interest rate.

What causes shifts in the money supply?

Federal Reserve actions such as open market operations, changes in interest on reserves, or quantitative easing.

What happens to interest rates when the money supply increases?

Interest rates lower, stimulating borrowing, investment, and consumption.

What effect does a decrease in the money supply have on interest rates?

Interest rates rise, reducing spending.

What causes shifts in money demand?

Changes in transaction needs, uncertainty, or payment technologies.

What is the savings market also known as?

The loanable funds market.

What determines the equilibrium interest rate in the savings market?

The interaction of savings (supply) and borrowing (demand).

What factors shift the supply of savings to the right?

Higher income, an aging population, or greater uncertainty.

What can cause the demand for savings to shift to the right?

Increased business optimism or government deficits.

What is the risk-free interest rate typically anchored by?

U.S. Treasury bonds.

What does the Quantity Theory of Money (QTM) express?

MV = PQ, or in growth rates, ΔM + ΔV = ΔP + ΔQ.

What does the QTM imply about money in the long run?

Money is neutral, and sustained inflation is caused by sustained money growth.

Why is the Aggregate Demand (AD) curve downward sloping?

Higher spending growth must translate into either higher inflation or higher real output growth.

What shifts the Aggregate Demand curve to the right?

Expansionary monetary or fiscal policy, rising confidence, or tax cuts.

What is the Short-Run Aggregate Supply (SRAS) curve's characteristic?

It is upward sloping due to sticky prices and wages.

What causes shifts in the SRAS curve?

Changes in input prices, supply disruptions, or productivity.

What is the Long-Run Aggregate Supply (LRAS) curve's characteristic?

It is vertical, determined by real factors like technology, capital, and labor.

What can create trade-offs between inflation and output in the long run?

Real shocks to LRAS.

How can fiscal policy raise output during recessions?

By employing idle resources.

What is the spending multiplier range?

From 0 (full crowding out) to greater than 1 when unemployed resources are used.

What are the four tools the Federal Reserve uses to manage monetary policy?

Interest on reserves, open market operations, lender of last resort actions, and expectation management.

What happens when the Fed raises interest on reserves?

It discourages lending and contracts aggregate demand.

What is the relationship between bond prices and interest rates?

Bond prices are inversely related to interest rates.

What role do banks play in the economy?

They act as financial intermediaries and create money through lending.

Why does monetary policy affect output only in the short run?

Because money is neutral in the long run and faces trade-offs when responding to real shocks.