Macro Economics Review

UNIT 1 Production Possibility Curve (PPC)

3 Shifters of the PPC

1. Change in resource quantity or quality

2. Change in Technology

3. Change in Trade

UNIT 2 Circular Flow Model

Unemployment

Frictional – temporary unemployment.

Structural – change in labor force that makes some skills obsolete.

Cyclical – unemployment caused by a recession.

Natural Rate of Unemployment (NRU) = frictional + structural

Full Employment Output (Y) = The Real GDP created when there is no cyclical unemployment.

Price Levels

The Inflation Rate- The percent change in prices from year to year.

Price Indices- Index numbers assigned to each year that show how prices have changed relative to a specific base year.

Consumer Price Index (CPI)

Nominal Wage- Wage measured by dollars rather than purchasing power.

Real Wage- Wage adjusted for inflation.

REAL GDP vs NOMINAL GDP

Nominal GDP is GDP measured in current prices. It does not account for inflation from year to year.

Real GDP is GDP expressed in constant, or unchanging, dollars. Real GDP adjusts for inflation.

CPI vs GDP DEFLATOR

The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers.

UNIT 3 Aggregate Demand - Aggregate Supply Model

What can the centrel bank do to increase rates to contract the economy?

• increase interest in reseverves and the discount rate

Supply

Who demands dollars? In general, foreigners demand dollars.

Who supplies dollars? In general, Americans supply dollars.

Discount rate: The interest rate set by the central bank for lending to commercial banks

Interest on Reseveres (IOR): The interest paid by the central bank on reserves held by commercial banks

Federal Funds Rate: The interest rate at which commercial banks lend reserve balances to other commerical banks for overnight loans.

Administered Rate: interest rates set by teh FED rather than determined in a market. Includes the IOR and discount rate