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CFA Level 1 > 2.3 Aggregate Output, Prices, and Economic Growth > Flashcards

2.3 Aggregate Output, Prices, and Economic Growth Flashcards

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1
Q

Macroeconomics

A

the study of aggregate activities of households, companies, and markets

It focuses on investment, consumption, general price changes, and level of interest rates

The investment potential of firms and industries is affected by the country’s economy in which they operate

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2
Q

Aggregate output

A

the value of all goods and services produced in an economy over a specified period of time

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3
Q

Aggregate income

A

the value of all payments earned by suppliers in an economy for the production of goods and services

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4
Q

Over a given period, an economy’s aggregate output and aggregate income must be?

A

equal

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5
Q

There are four forms of payments (income).

A
  1. Compensation for labor, including wages and benefits
  2. Rent for use of property
  3. Interest for use of loaned funds
  4. Profits paid to owners for providing capital and taking on financial risk
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6
Q

Aggregate expenditure

A

the total amount of money spent on the goods and services produced in an economy during a period

the total amount of money spent on the goods and services produced in an economy during a period

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7
Q

Gross domestic product (GDP)

A

From an output perspective, GDP is the market value of all final goods and services produced within an economy during a given time period

From an income perspective, GDP is the aggregate income earned by all households, companies, and governments within an economy during a given time period

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8
Q

Developed countries use a standardized methodology to measure GDP. In order to ensure consistency over time and across countries, three broad criteria are used:

A
  1. All goods and services must be produced during the measurement period. Government transfer payments and capital gains are excluded.
  2. Include only goods and services with an objective value based on market prices.
  3. Exclude intermediate goods that will be resold or used in the production of other goods.
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9
Q

Real GDP

A

measures the total value of goods and services if the prices were unchanged

It removes the effects of inflation from nominal GDP

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10
Q

The GDP deflator

A

measures the aggregate price change

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11
Q

The Components of GDP

A

C: Consumer spending

I: Gross private domestic investment, including fixed assets and inventory

G: Government spending

X: Exports

M: Imports

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12
Q

A fiscal deficit

A

is recorded if the government spends more than it collects in taxes

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13
Q

how to finance a fiscal deficit

A

governments must borrow from the financial sector

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14
Q

A country’s exchange of goods and services with the rest of the world is measured in terms of what?

A

net exports

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15
Q

trade deficit

A

country imports more than it exports

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16
Q

Gross domestic income (GDI) calculation

A

net domestic income +
Consumption of fixed capital (CFC)
+
Statistical disrepancy

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17
Q

Personal household income (PHI)

A

compensation of employees
+
net mixed income from unincorporated business
+
net property income

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18
Q

Household disposable income (HDI)

A

PHI less taxes paid (net of transfers received). It measures how much households have to spend on goods or save

compensation of employees
+
net mixed income from unincorporated business
+
net property income
-
current transfers paid (personal taxes)
+
current transfers received (unemployment compensation)

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19
Q

Household net saving

A

HDI less household final consumption expenditures, plus net changes in pension entitlements

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20
Q

The marginal propensity to consume (MPC)

A

represents the proportion of an additional unit of disposable income that will be spent

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21
Q

The marginal propensity to save (MPS)

A

is the proportion f an additional unit of disposable income that will be saved

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22
Q

Aggregate demand (AD)

A

the quantity of goods and services that households, businesses, government, and foreign customers want to buy at a given price

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23
Q

The aggregate demand curve

A

looks like the demand curve from microeconomics, but the explanation is different because income is not fixed
represents the combinations of aggregate income and price level at which the following conditions are met:

  1. Aggregate expenditure equals aggregate income.
  2. The available real money supply is willingly held by households and businesses.
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24
Q

the downward slope of the aggregate demand curve results from which three effects?

A

the wealth effect

the interest rate effect

the real exchange rate effect

25
Q

The wealth effect

A

based on the concept of purchasing power of nominal wealth

Nominal wealth does not change: one euro is always worth one euro

Real wealth, which is the value of money in terms of goods and services, fluctuates with the prices of goods and services

26
Q

the interest rate effect

A

When the price level increases, the demand for money increases, which raises the interest rate

The higher interest rate leads to lower investment and consumption expenditures.

Conversely, when the price level decreases, the demand for money decreases, which reduces the interest rate

The lower interest rate leads to higher investment and consumption expenditures

27
Q

The aggregate supply curve (AS curve)

A

represents the domestic output companies will supply at various price levels

In the very short run, the output will increase without price changes, resulting in a horizontal supply curve (shown by VSRAS in the diagram below).

Over slightly longer periods of time, the short-run aggregate supply (SRAS) curve is positively sloped.

In the long run, wages, prices, and expectations can change, but not physical capital. This period is usually a few years to a decade and results in a vertical supply curve

28
Q

The long-run equilibrium level of supply output

A

the full employment level of output

29
Q

Shifts in Aggregate Demand

what dies a shift to the right indicate?

A

an increase in aggregate demand

30
Q

Shifts in Aggregate Demand

key factors

A
  1. Household Wealth
  2. Consumer and Business Expectations
  3. Capacity Utilization
  4. Fiscal Policy
  5. monetary policy
  6. exchange rate
  7. Growth in the Global Economy
31
Q

Household Wealth impact on Aggregate Demand

A

Household wealth includes financial and real assets

Households save for future consumption

Households tend to save less when the value of their wealth is greater

An increase in wealth will increase consumer spending and thus shift AD to the right

32
Q

Consumer and Business Expectations impact on Aggregate Demand

A

When consumers and businesses are confident about future income, they tend to spend more, which shifts AD to the right

33
Q

Capacity Utilization impact on Aggregate Demand

A

Companies will increase investment spending if they are operating near capacity. This will move the AD curve to the right

34
Q

Fiscal Policy impact on Aggregate Demand

A

Fiscal policy is the use of taxes and government spending to affect aggregate expenditures

An increase in government spending will shift the AD curve to the right

Decreasing the tax rate will also shift the AD curve to the right

35
Q

Monetary Policy impact on Aggregate Demand

A

An increase in the money supply shifts the AD curve to the right

36
Q

Exchange Rate impact on Aggregate Demand

A

If the domestic currency decreases in value relative to a foreign currency, the exports should increase and imports decrease.

his will cause the AD curve to shift to the right.

37
Q

Growth in the Global Economy impact on Aggregate Demand

A

Faster growth in foreign markets will increase the demand for goods

Some of these goods will be provided by exporting domestic goods

This increase in exports will shift the AD curve to the right.

38
Q

Factors that change the cost of production or profit margins will cause the short-run aggregate supply curve to shift.

These factors include:

A
  1. nominal wages
  2. input prices

3, expectations about future prices

  1. Business Taxes and Subsidies
  2. Exchange Rate
39
Q

nominal wages impact on the short-run aggregate supply

A

Wages are often a large portion of a company’s costs. An increase in wages will shift the SRAS curve to the left

It is better to focus on unit labor cost, which takes into account productivity

40
Q

Input Prices impact on the short-run aggregate supply

A

Higher raw material input prices will shift the SRAS curve to the left

41
Q

expectations about future prices impact on the short-run aggregate supply

A

If a company expects the price of its products to rise in the future, it will likely increase production, provided the cost of carrying inventory is not excessive

This will shift the SRAS to the right

42
Q

Business Taxes and Subsidies impact on the short-run aggregate supply

A

Higher business taxes will shift SRAS to the left

Higher business subsidies will shift SRAS to the right.

43
Q

Exchange Rate impact on the short-run aggregate supply

A

If the domestic currency decreases in value relative to a foreign currency, the cost of importing raw materials will increase

This will shift SRAS to the left.

44
Q

The long-run aggregate supply curve position is determined by what?

A

the potential GDP of the economy

that is the amount that can be produced at full employment

45
Q

Increases in the following factors could shift the Long-Run Aggregate Supply (LRAS) curve to the right:

A
  1. Supply of Labor
  2. Supply of Natural Resources
  3. Supply of Physical Capital
  4. Supply of Human Capital

–> This is the quality of the labor force. It can be improved through training and education.

  1. Labor Productivity and Technology

–> Productivity measures the efficiency of labor. Advances in technology can improve this efficiency.

46
Q

Equilibrium occurs where AD and AS intersect. There are four types of macroeconomic equilibrium:

A

Long-run full employment

Short-run recessionary gap

Short-run inflationary gap

Short-run stagflation

47
Q

Long-Run Equilibrium (Full-Employment)

A

Long-run equilibrium occurs if the AD curve intersects the LRAS and SRAS at the same point

The economy is at potential real GDP with both labor and capital fully employed

48
Q

Recessionary Gap

A

Recessions can occur if aggregate demand falls, shifting the short-run equilibrium to the left

the recessionary gap is the difference between the quantity supplied before the gap, and at the point of the gap

48
Q

Stagflation

A

a case of high inflation and high unemployment

It is caused by declines in aggregate supply, which could be triggered by sudden rises in raw material costs

48
Q

Inflationary gaps

A

occur if expansion drives the economy past its production capacity

48
Q

A leftward shift in the aggregate demand curve is most likely consistent with:

A
lower taxes.

B
higher imports.

C
higher bank reserves.

A

B
higher imports.

49
Q

Economic growth

A

the annual percentage change in real GDP or the annual change in real per capita GDP

Small changes in the per capita growth rate can drastically change the standard of living over time

49
Q

According to the neoclassical or Solow growth model, productive capacity increases for which two reasons:

A
  1. accumulation of production inputs (capital, labor, raw materials)
  2. new technology that makes the inputs more productive
49
Q

The neoclassical or Solow growth model

A

often used to determine the underlying sources of growth

50
Q

diminishing marginal productivity

A

each additional individual input will add less to the output

economies cannot experience sustainable growth simply by adding more inputs

In other words, a strategy of simply increasing the capital input (capital deepening) can only go so far

51
Q

Sources of Economic Growth

A
  1. Labor supply

–> This includes the number of people available for work and the average hours worked.

  1. Human Capital

–> This measures the quality of labor. Education and training can increase quality.

  1. Physical Capital

–> Physical capital includes buildings, machinery, and equipment. Countries that invest a lot tend to have high growth rates.

  1. Technology

–> Technology is the most important factor affecting economic growth. Technology is used to transfer inputs into outputs. Its impact on growth is measured by total factor productivity.

  1. Natural Resources

Natural resources include renewable sources (e.g., trees) and non-renewable resources (e.g., oil and coal).

52
Q

The level of labor productivity depends on what?

A

the accumulated human and physical capital, which is greater in developed countries

53
Q
A
54
Q
A

CFA Level 1 (105 decks)

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