Exam #1

Study Guide – Macroeconomics (Slides 1–3)

1-The Emergence of Capitalism

Economics – The study of how humans interact with each other and their environment in producing livelihoods, and how this changes over time.
Macroeconomics – The study of the structure, behavior, and performance of the economy as a whole.
Capitalism – An economic system organized around private property, markets, and firms, where production is for profit and labor is typically wage-based.
Private Property – The right to own, use, and transfer assets (land, machinery, etc.). Owners can exclude others from use.
Market – An institution connecting buyers and sellers through exchange of goods and services.
Firms – Organizations where production occurs, directed by owners/managers, selling goods/services for profit.
Invisible Hand (Adam Smith) – The idea that individuals pursuing self-interest can unintentionally promote the overall good of society.
Specialization (Division of Labor) – Focusing on specific tasks increases efficiency via learning by doing, differences in abilities, and economies of scale.
Exponential vs. Linear Growth –
- Linear: increases by a constant amount each period.
- Exponential: increases by a constant percentage rate each period.
Inequality & Environmental Costs – Capitalism can foster innovation but also creates inequality and ecological problems.

3-National Income Accounting & …

Gross Domestic Product (GDP) – The total value of all final goods and services produced in a country in a given period.
Final Goods – Goods consumed by end users, not used as inputs to avoid double-counting.
GDP Components (Expenditure Approach) –
- C = Consumption (household spending)
- I = Investment (spending on capital goods, e.g. machinery)
- G = Government Spending
- X – M = Net Exports (exports minus imports)
Nominal GDP – GDP measured at current prices.
Real GDP – GDP adjusted for inflation, better for comparisons across time and countries.
GDP Deflator – A price index used to measure inflation across all goods and services.
Inflation Rate – Percentage change in the GDP deflator (or general price index).
GDP Limitations – Does not capture leisure, unpaid labor, environmental quality, inequality, or defensive expenditures.
Circular Flow Model – Illustrates how income, output, and spending circulate between households and firms.
Equilibrium Condition – For stability, leakages (savings, taxes, imports) must equal injections (investment, government spending, exports).
Business Cycle – Fluctuations in economic activity: expansion → peak → contraction → trough.

4-AD AS model and Exam I

Aggregate Demand (AD) – Total spending on domestic goods and services: AD = C + I + G + (X – M). Slopes downward.
Aggregate Supply (AS) – Total quantity of output (real GDP) firms will produce at different price levels.
- SRAS – Short-Run Aggregate Supply (upward sloping).
- LRAS – Long-Run Aggregate Supply (vertical at potential GDP).
Shifts in AD – Caused by changes in consumer confidence, business confidence, fiscal policy, monetary policy, exports.
Inflation – A general rise in the average price level of goods/services.
- Demand-Pull Inflation – Caused by AD shifting right (excess demand).
- Cost-Push Inflation – Caused by rising production costs or supply shocks.
Deflation – General decline in prices.
Disinflation – Reduction in the inflation rate.
Stagflation – Inflation combined with stagnant or negative growth.
Redistributive Effects of Inflation –
- Price Effect – Different groups face different “personal” inflation based on what they buy.
- Income Effect – If wages/incomes don’t rise as fast as inflation, purchasing power falls.
- Wealth Effect – Holders of cash or fixed-interest assets lose value during inflation, while borrowers benefit.