Exam 2 Chapt (7-10 ) Macro Antonia UTA

What is unemployment?

People who are able and willing to work but cannot find a job.

What is the labor force?

Employed + Unemployed people.

What is the unemployment rate formula?

Unemployment Rate = (Unemployed / Labor Force) × 100

What is the participation rate formula?

Participation Rate = (Labor Force / Working-age Population) × 100

What is the difference between stock and flow?

Stock = measured at a point in time; Flow = measured over time.

What are the three types of unemployment?

Frictional, Structural, Cyclical.

What is frictional unemployment?

Temporary unemployment while searching for a job.

What is structural unemployment?

Long-term unemployment due to skill mismatch.

What is cyclical unemployment?

Caused by recessions and low demand.

What is a market basket?

A bundle of goods/services used to measure price levels.

How do you calculate price index?

Price Index = (Cost of Basket (current year) / Cost of Basket (base year)) × 100

How do you calculate inflation?

Inflation Rate = (New Index - Old Index) / Old Index × 100

What is inflation?

Prices increase.

What is deflation?

Prices decrease.

How do you calculate real interest rate?

Real Interest Rate = Nominal Rate - Expected Inflation.

What is the difference between product and factor markets?

Product markets sell goods/services to households; factor markets involve households selling resources to firms.

What is the key idea of the circular flow?

Spending = Income, and goods flow one way while money flows the other.

What is GDP?

The total market value of all final goods and services produced within a country's borders in a given time period.

What is a final good?

A good ready for its final use and not used to produce another good.

What is value added?

Value of output minus cost of intermediate goods.

What is the GDP expenditure formula?

GDP = C + I + G + (X - M)

What is included in consumption?

Household spending on goods and services.

What is included in investment?

Business spending on capital goods and inventory changes.

What is included in government spending?

Government purchases of goods and services (NOT transfer payments).

What is net exports?

Exports minus imports (X − M).

What is the income approach to GDP?

Adding wages, rent, interest, and profit.

What is depreciation?

The value of worn-out or used-up capital.

How do you calculate Net Domestic Product?

NDP = GDP - Depreciation.

What is nominal GDP?

GDP measured using current prices.

What is real GDP?

GDP adjusted for inflation using constant prices.

What is economic growth? Why must it be REAL and PER CAPITA?

Economic growth is the increase in real GDP per capita over time. It must be real to remove inflation and per capita to measure living standards per person.

Why do small differences in growth rates matter?

Because of compounding—even small increases (like 2% vs 3%) lead to huge differences in income over time.

What is labor productivity and why is it important?

Labor productivity is output per worker (real GDP ÷ workers). It is the main driver of long-run economic growth.

What factors increase labor productivity?

Human capital, Physical capital, Technology, Experience/training.

What is human capital and how does it affect growth?

Human capital is the skills, knowledge, and education of workers. It increases productivity and raises wages.

What role does saving and investment play in economic growth?

Saving provides funds for investment, which increases capital, leading to higher productivity.

What is new growth theory?

It states that economic growth is driven by ideas, innovation, and knowledge.

What are property rights and why are they critical for growth?

Property rights are legal protections of ownership that encourage investment.

What is economic development and how is it different from growth?

Economic development refers to improvements in living standards, while growth focuses on GDP.

What are the key factors that lead to economic development?

Education, Strong property rights, Innovation, Economic freedom.

What drives economic growth?

Productivity, supported by human capital, capital, technology, investment, and property rights.

What is Long-Run Aggregate Supply (LRAS)? What does it represent?

LRAS is a vertical curve showing the level of real GDP produced when the economy is at full employment.

Why is LRAS vertical instead of sloped?

In the long run, prices, wages, and costs adjust, so firms produce at full capacity regardless of price level.

What factors shift LRAS and why?

LRAS shifts with technology improvements, more labor, more capital, better education, or loss of resources.

What is Aggregate Demand (AD)? What does it include?

AD is total planned spending in the economy: AD = C + I + G + (X - M).

Why does the AD curve slope downward?

Wealth effect, Interest rate effect, Open economy effect.

What causes AD to shift?

Changes in government spending, consumer confidence, investment, money supply, or taxes.

What is long-run equilibrium (LRE)?

The point where AD intersects LRAS, determining real GDP and price level.

What happens when LRAS shifts right but AD stays the same?

Economic growth with secular deflation: GDP increases, Price decreases.

What is secular deflation and why does it occur?

A persistent decrease in prices caused by economic growth when LRAS increases but AD does not.

What is demand-side inflation?

When AD shifts right while LRAS stays the same, causing prices to increase.

What is supply-side inflation?

When LRAS shifts left, causing GDP to decrease and prices to increase.

How can both economic growth and inflation occur at the same time?

If LRAS shifts right but AD shifts right even more, GDP increases and prices increase.

What determines whether price increases or decreases when both AD and LRAS shift right?

It depends on which shifts more: AD > LRAS → price increases; LRAS > AD → price decreases.

What is the general cause of inflation in this model?

Inflation occurs when AD increases, OR LRAS decreases, OR AD increases faster than LRAS.

How do you solve any AD-LRAS graph question step-by-step?

1. Identify which curve shifts (AD or LRAS). 2. Identify direction (right = increase, left = decrease). 3. Determine effects on price and GDP.