Week 1 Macro recap

What is the difference between nominal GDP/GSP and real GDP/GSP?

Nominal GDP/GSP is measured at current prices, so it reflects both price changes and output changes. Real GDP/GSP removes price effects, so it better reflects changes in the volume of production.

Why is real GDP/GSP generally better than nominal GDP/GSP for assessing long-run economic growth?

Real GDP/GSP controls for inflation, so it shows whether the economy is producing more goods and services rather than simply recording higher prices.

When can real GDP per capita be more useful than real GDP for judging national performance?

Real GDP per capita adjusts output for population size, making it more useful when comparing average economic living standards over time or across countries.

How is the implicit GDP/GSP price deflator calculated?

Implicit price deflator = (Nominal GDP or GSP / Real GDP or GSP) x 100. It measures the average price level of domestically produced output relative to the base period.

What are the three approaches to calculating GDP?

GDP can be calculated using the production approach, income approach, or expenditure approach. The expenditure approach is commonly written as C + I + G + NX.

Why is GDP an imperfect measure of wellbeing?

GDP excludes some valuable activity, such as unpaid household work and non-market production, and does not directly measure inequality, environmental damage, leisure, health or overall quality of life.

What causes cyclical unemployment?

Cyclical unemployment is caused by downturns in the business cycle, when weak aggregate demand reduces production and firms need fewer workers.

What is frictional unemployment?

Frictional unemployment occurs when people are temporarily between jobs, searching for work, or moving into better-matched employment.

What is structural unemployment?

Structural unemployment occurs when workers’ skills, location or industries no longer match the jobs available in the economy.

How is the CPI basket of goods used to measure inflation?

A representative basket of consumer goods and services is priced over time. CPI inflation measures the percentage change in the cost of that basket between periods.

What is the difference between demand-pull and cost-push inflation?

Demand-pull inflation occurs when aggregate demand grows faster than the economy’s capacity to supply output. Cost-push inflation occurs when rising production costs, such as wages, energy or imported inputs, push prices upward.

How do lower interest rates affect aggregate demand?

Lower interest rates usually increase aggregate demand by making borrowing cheaper, encouraging consumption and investment spending, and often reducing saving incentives.

Why does the short-run aggregate supply curve slope upward?

SRAS slopes upward because some wages and input prices adjust slowly, so a higher price level can temporarily make production more profitable and encourage firms to supply more output.

Why is the long-run aggregate supply curve vertical?

LRAS is vertical because, in the long run, output depends on productive capacity—resources, technology and institutions—rather than the overall price level.

What role does the Reserve Bank of Australia have in monetary policy?

The RBA influences interest rates and financial conditions to help manage inflation, output and employment. One tool is open market operations, where the central bank buys or sells securities to influence liquidity and interest rates.

What is expansionary fiscal policy?

Expansionary fiscal policy involves increasing government spending, reducing taxes, or both, with the aim of increasing aggregate demand, output and employment.