Eco231 example 1

Natural vnemp.

(Ch.6) unemproyment, CPI. Inflation

Unemployment formula:

(unemployment/ labor force)× 100

frictional unemplorment - people between Jobs in the labor force.

Structural unemployment - when workers have skills that don't

demand for goods and services to fall, which causes workers To be layed Of and Labor falling.

CP1 and Inflation

consumer Price index - measures changes in the prices uf

goods and services (shows inflation)

CPI formvia: Current value uf marker basket

× 100.

base year valve of market basket

Inflation formvia:

(Year 2 CPI) - (year 1 CPI) × 100

year 1 cPl

(Ch.7) Nominal and reai GDP

GDP: C+I+G* (x - M) = Aggregate expendature meathod

C: consumption - durables, nonduables, services

I: Investment-fixed investment and Inventory

G: Government Purenases

X: exPorts

M: Imports

GDP: wages + rent + Interest + Profit = National income method

Nominal GDP: total valve of goods+ services at current prices real GDP: total valve of goods+ services adiusted for inflation

(Ch.8) Aggregate Supply

Aggregate supply curve- shows the total output: of goods and services that an economy is able to produce at different price levels.

• increases as it moves right, decreases as it moves left.

• Short-run aggregate Supply (SPAS) Snifts When recource prices, Government policy, and productivity changes.

• Long run aggregate Supply (RAS) Shows now much a country can produce when everything is running at

can only produce limited quantity regaraleis of price level.

Price lever

LRAS

SRAS

RGDP

exampies (SRAS)

• Increase in nominal wages wovid increase Price, decrease SRAS

• Increase in physical capital would increase SeAs with recources

• Persistant power outages would decrease SEAS WIth recources

• decreased corperate tax would increase SRAS with recources

• expected inflation would decrease SRAS will decrease witn recources (because recource prices would increase)

examples (LRAS)

• Increase nominal wages wouid not change LRAS because even though workers are payed more, there is still limited workers

• more physical capital would increase LRAS With recources

(Ch8) Aggregate demand (AD)

aggregate demand curve- shows total amount of goods and services that People are willing to buy in the economy at different prices.

Price level

AD

RGDP

the AD Curve Is downwards sloping because Price level changes now wealtny people feel, changing their willingnes to borrow. spend, and byy, which all contribute to demand in the economy.

Examples:

• unexpected stock market boom Increases AD because consumer spending Increases

• Widespread fear of recession decreases AD as spending decreases

• Increase in aovernment transfer payments Increase AD as
  People would spend the money the gout. Transter (more spending)

• V.S. $ appretiates, AD decreases because foreigners spending also decreases

• decrease In real interest rates, AD increases as Investment
  Increases.

• an increase in income would decrease AD as spending decreases when people nave less disposable income.

(Cn.a) The self regulating economy

Economic growth - increase in the valve of goods and services produced by the economy over time.

- Economic growtn only nappens under the right conditions, and is not Inevitable.

conditions:

- Rule of Law

- Protections of Private Property rights Protected by (ule of law)

-Incentives that Promote productivity

Economic self adJustment - The term for the economy fixing itself over time, without government intervention.

• auring a recession (low demand, nigh unemployment), wages will eventvally fall (and prices), making It cheaper for businesses to produce more which neips recover the economy. (SRAS Shifts rigt)

• during melation (highprices, Too much demand), Wages and costs rise, reducing demand and slowing the economy back down. (SRAS Shifts lef+)

The economy returns to Its natural output level, whereau recources are fully used, and the unemployment rate is at its natural rate (not too nign or too low).