Economics 101: Understanding Gross Domestic Product and Business Cycles, Quizzes of Introduction to Macroeconomics

Download Economics 101: Understanding Gross Domestic Product and Business Cycles and more Quizzes Introduction to Macroeconomics in PDF only on Docsity! TERM 1 Great Depression DEFINITION 1 Unemployment peaked at about 25% Peaks in 1970s called "Great Inflation" TERM 2 Business Cycle DEFINITION 2 periodic EXPANSIONS and CONTRACTIONS in aggregate economic activity TERM 3 Policy Goals DEFINITION 3 1) Economic Growth 2) Full Employment 3) Relatively stable average price level TERM 4 Gross Domestic Output (GDP) DEFINITION 4 Total value of all final goods and services produced for the marketplace during a given period within the nation's borders **Only goods PRODUCED in year (does not include all sold) If made by foreigner still counts in GDP as long as made within nation's borders GDP measured in dollars TERM 5 Expenditure Approach DEFINITION 5 GDP= C + I + G + NX C= Consumption- the purchases of current GDP by HH as final users**excludes new houses I= Private Invesment- Business Purchases of Plant Equipment and Software, New Home Construction, Changes in Inventories G= Government Purchases NX= Net Exports (exports - imports) TERM 6 Factor (Resource) Payments Approach DEFINITION 6 Output is income for individuals in the economy GDP= Sum of firms factor payments =Wages + Salaries + Interest + Rent + Profit = Total HH income TERM 7 Value-Added Approach DEFINITION 7 GDP= Sum of value added by all firms TERM 8 Uses of GDP DEFINITION 8 Per capita GDP is used as a measure of the average standard of living Used to measure growth in economy TERM 9 Problems with GDP DEFINITION 9 Currently calculated, real GDP 1) does not take fully into account the changes in the quality of goods 2) ignores the "underground" economy 3) ignores non-market production 4) ignores the effects of externalizes, such as polliution TERM 10 Employment DEFINITION 10 4 Kinds 1) Frictional- between jobs or entering or reentering labor market in search of a job 2) Seasonal 3) Structural- due to structural changes in the economy that causes a mismatch between worker's skills and employer's requirements 4) Cylical- a result of the economy being in a recession TERM 21 Keynesian Short Run Model DEFINITION 21 Prices and wages are fixed in the short run Equilibrium employment and output may be at levels below full employment TERM 22 Output in the Classical Model DEFINITION 22 Two Inputs = K and L Y = F(L) TERM 23 Production Function DEFINITION 23 function F determined by the current state of technology Concave down due to decreasing marginal product of labor TERM 24 Classical Labor Market DEFINITION 24 Total output is determined by total employment Clearing Labor Market is When Quantity of Labor Supply = Quantity of Labor Demanded TERM 25 Net Taxes (T) DEFINITION 25 Total Taxes - Transfer Payments TERM 26 Output Demand and the Loanable Funds Market DEFINITION 26 C depends upon: Disposable Income & Interest Rate HH Saving = Y - T - C Ip: firms purchase output to increase capital stock, or to replace worn-out capital Total Investment = I = Ip and Change in Inventories Total Govt. Spending = G + Transfer payments TERM 27 Output Demand and the Loanable Funds Market Cont'd DEFINITION 27 Govt. spending financed with taxes or by borrowing G + Transfer payments = Total taxes + loans Loans to Govt = G - t TERM 28 The Supply of Loans DEFINITION 28 An increase in the rate of interest will increase the return from saving and will decrease consumption Therefore will increase HH savings and the Quantity of Supplied Loans TERM 29 Changes in the Loanable Funds Market DEFINITION 29 1) Govt spending Increase in govt. purchases = Increase in Demand for Loans = Increase in Interest Rate = Increase in Savings = Decrease in C = Decrease in Equilibrium Investment 2) Changes in Taxes Increase in taxes = Decrease in govt.. deficit = Decrease in Demand for loans = Decrease in C and S = Decrease in Equilibrium Interest Rate = Increase in Equilibrium Investment TERM 30 Money and Price Level in the Classical Model DEFINITION 30 A change in money supply will simply lead to a CHANGE IN THE PRICE LEVEL 10% increase in money supply leads to 10% increase in price level so 10% increase in money wage TERM 31 Lucas Paper DEFINITION 31 Sustained per capita output growth nonexistent before late 18th century In the 18th century output growth was about 1/3% per year (same as pop. growth) 19th cent. output = 1% per year First 60 yrs of 20th century output growth was about 2.4% per year FROM 1960-2000 World output increased at a 4% annual growth rate World pop. increase at a 1.7% annual growth rate Read GDP per capita increased at a 2.3% annual rate TERM 32 An Economy's Output Will Grow If DEFINITION 32 Increase in L Increase in K Increase in A, an improvement in technology TERM 33 Total Output Depends Upon DEFINITION 33 Employment EPR [Employment/Population] Avg. Hours Worked [Total Hrs/ Employment] Productivity [Total Output/ Total Hours] **Output will grow if there is an increase in any of these TERM 34 Average Standard of Living DEFINITION 34 Per capita output = Y / Pop. = Productivity X Avg. Hrs X EPR IF pop increase bad for standard of living In order for per capita output to increase output must grow faster than population Long run per capita growth depends on productivity growth TERM 35 Effects of Population Growth DEFINITION 35 Increase in Pop. will yield increase in total hours worked but will cause a decrease in productivity due to decreasing returns to scale