Macroeconomics: GDP, Inflation, Unemployment, Growth, and Financial Systems

Comprehensive flashcards covering key macroeconomic concepts, mathematical identities, measurement metrics, financial markets, and monetary theory from the resource guide.

How are capital goods treated when measuring Gross Domestic Product (GDP)?

Capital goods are included in GDP in the year they are produced, even though they are long-lived goods used to produce other goods and services.

Who was commissioned by the U.S. Department of Commerce in 1932 to develop a system for measuring national output?

Simon Kuznets, who later received the Nobel Prize in Economic Science in 1971 in part for his contributions.

What are three primary limitations of conventional GDP measurement?

1) Difficulty distinguishing final from intermediate goods (e.g., defense spending); 2) Exclusion of non-market production (e.g., unpaid household work and the underground economy); 3) Failure to subtract bads or resource depletion (e.g., natural disasters, pollution, and crime).

What equation represents Gross Domestic Product (GDP) using the expenditure approach?

$GDP = C + I + G + NX$, where $C$ is consumption, $I$ is investment, $G$ is government purchases, and $NX$ is net exports.

Why is buying shares of stock or bonds not counted as investment in economic measurements?

Purchasing stocks or bonds merely transfers ownership of existing assets; in economics, investment is reserved strictly for purchasing new physical capital goods, like buildings or machinery.

How is Real GDP constructed to isolate changes in production from changes in prices?

Real GDP values annual production using prices from a single fixed base year.

What formula calculates the Consumer Price Index (CPI) for year $t$?

$$CPI_t = 100 \times \frac{\text{Cost of bundle in year } t}{\text{Cost of bundle in base year}}$$

By how much did the 1996 Boskin Commission conclude that the CPI overstated annual inflation?

The Boskin Commission concluded that the CPI overstated the rate of price inflation by $1.3\text{ percent}$ per year.

What three factors cause the upward bias in the Consumer Price Index (CPI)?

1) Substitution bias; 2) Unmeasured quality change; 3) Introduction of new goods and services.

What is the formula for the GDP deflator?

$$\text{GDP Deflator} = 100 \times \frac{\text{Nominal GDP}}{\text{Real GDP}}$$

How do the CPI and GDP deflator differ regarding imported goods and price weighting?

The CPI includes foreign imported goods in its market basket and uses fixed weights, whereas the GDP deflator includes only domestically produced goods and automatically updates weights based on current production.

What formula defines the unemployment rate?

$$\text{Unemployment Rate} = 100 \times \frac{\text{Unemployed}}{\text{Labor Force}}$$

What three categories does the Bureau of Labor Statistics use to classify working-age adults?

Employed, Unemployed, and Out of the labor force.

Which two forms of unemployment make up the Natural Rate of Unemployment (NRU)?

Frictional unemployment and structural unemployment.

What equation decomposes Real GDP per capita into labor productivity and worker ratio?

$\frac{\text{GDP}}{\text{POP}} = \frac{\text{GDP}}{N} \times \frac{N}{\text{POP}}$, where $\text{POP}$ is population and $N$ is the size of the employed workforce.

What five major factors determine average labor productivity in an economy?

Physical capital, human capital, natural resources, technological knowledge, and the political and legal environment.

What is the relationship between market interest rates and the price of previously issued bonds?

They have an inverse relationship; when prevailing market interest rates rise, the market price of existing bonds decreases.

What identity expresses national savings ($S$) in a closed economy?

$S = Y - C - G = (Y - C - T) + (T - G) = I$, where $(Y - C - T)$ is private saving, $(T - G)$ is public/government saving, and $I$ is investment.

What is the Fisher Equation?

$$\text{Real Interest Rate} = \text{Nominal Interest Rate} - \text{Inflation Rate}$$

What term describes the reduction in private investment caused by government budget deficits raising real interest rates?

Crowding out.

What are the three core functions of money?

Medium of exchange, unit of account, and store of value.

Which components belong to M1 vs M2 monetary aggregates?

M1 consists of currency, savings deposits, demand (checking) deposits, and other checkable deposits. M2 contains all of M1 plus small denomination time deposits and retail money funds.

How is the money multiplier calculated in a simple fractional reserve system with reserve ratio $R$?

$$\text{Money Multiplier} = \frac{1}{R}$$

What is the quantity equation of money?

$V \times M = P \times Y$, where $V$ is money velocity, $M$ is the money supply, $P$ is the price level, and $Y$ is Real GDP.

What does the long-run neutrality of money state?

In the long run, changes in the money supply affect only nominal variables (such as prices and nominal GDP) without altering real economic variables (such as real output or real wages).