May Econ Test

Nominal GDP

Total value of all final goods and services produced in a country during a year using current prices. It does not adjust for inflation.

Real GDP

Total value of all final goods and services produced in a country during a year, adjusted for inflation.

What makes GDP an imperfect measure?

Does not include quality of life, undercounted work, volunteer work, etc.

Why is a high GDP per Capita important for long-term growth?

Higher GDP per person, more spending, more investments, higher overall incomes.

BC: Expansion

Economy grows, GDP rises, more spending and employment.

BC: Peak

Highest point. Economy operating at max output.

BC: Contration (Recession)

GDP falls, less spending, high UE.

BC: Trough

Lowest point of cycle.

BC: Recovery

Slow increase of spending and employment.

Structural Unemployment

Occurs when workers’ skills no longer match available jobs.

Cyclical Unemployment

Caused by recessions or economic downturns.

Seasonal Unemployment

Occurs because some jobs only exist during certain seasons.

Frictional Unemployment

Short-term unemployment while people search for jobs.

Technological Unemployment

Occurs when machines or technology replace workers.

Why is the UE Rate deceiving?

Does not account for the underemployed and discouraged workers.

What is a high UE Rate?

Anything above 4-5%

What Is Full Employment?

95% employed.

What Problem Does the US Government Care About Most?

High unemployment and inflation.

Ways to Lower Unemployment

lower interest, tax cuts, more government spending, etc.

Cost-Push Inflation - Supply-shock inflation

Cost-push inflation happens when the cost of production rises, causing businesses to raise prices.

Cost-Push Inflation Graph

Prices rise, GDP falls.

Impact of Cost-Push Inflation

Creates stagflation.

Demand-Pull Inflation

Demand-pull inflation happens when total demand grows faster than supply.

Demand-Pull Inflation Graph

Price rises, GDP rises.

Impact of Demand-Pull Inflation

UE decreases, more workers needed, slight GDP increase.

How the Federal Reserve and Congress Control Inflation

Federal Reserve (Monetary Policy) sells gov bonds, raises interest rates, reduce spending and borrowing. Congress and the President (Fiscal Policy) reduce government spending and increase tax.

Who Is Hurt by Inflation?

People on Fixed Incomes like retirees, or people who loaned money to someone.

Who Benefits from Inflation?

Asset owners and debtors.