Aggregate Output, Prices, and Economic Growth

Question 1

What is GDP? What are the ways it can be calculated?

Answer 1

Total market value of the goods and services produced in a country within a certain period of time. Only the market value of final goods are used.

Expenditure Approach: GDP calculated by summing the amounts spent on goods and services.
Income Approach: amounts earned by households and companies during the period.

Question 2

What is the difference between sum-of-value added and value-of-final output methods?

Answer 2

Expenditure methods. FoFo - summing the values of final goods and services. SoVa - Summing the value creating at each stage of production.

Question 3

What is the difference between nominal GDP and real GDP? How do you calculate a GDP deflator?

Answer 3

Nominal GDP is just the regular GDP calculation. Real GDP is the nominal GDP compared to a base year.

GDP deflator= GDP1/GDP0*100

Question 4

What are the components for the Equation for GDP under exp. approach? Income approach?

Answer 4

GDP = C + I + G + (X-M)

C= consumption spending
I= Business investments
G= government purchases
X=exports
M=Imports 

Income approach: national income + capital consumption allowance + statistical discrepancies.

Question 5

How do you calculate national income?

Answer 5

=employee compensation+corporate profits and gov profits+interest income+unincorporated income+rent+indirect business taxes-subsidies

Question 6

How do you calculate personal income? What is personal disposable income?

Answer 6

national income+transfers to households - indirect business taxes - corporate income taxes - undistributed corporate profits.

PDI= personal income - personal taxes

Question 7

What is the fundamental equality for balance of payments?

Answer 7

Savings - business investment = (Government Purchases - taxes) - (exports-imports)

Question 8

What is the fundamental equality for balance of payments?

Answer 8

Savings - business investment = (Government Purchases - taxes) - (exports-imports)

Question 9

What is MPC and MPS?

Answer 9

Marginal propensity to consume and marginal propensity to save. Percentage of the next dollar that are saved or consumed. Must equal 100%.

Question 10

What happens when we raise the real interest rate?

Answer 10

Decease financing costs, and increase investment by business. Higher rates = lower aggregate income. This must be the case to hold the inverse relationship between real interest rate and income. Called the IS curve.

Question 11

What happens when we raise the real interest rate?

Answer 11

Decease financing costs, and increase investment by business. Higher rates = lower aggregate income. This must be the case to hold the inverse relationship between real interest rate and income. Called the IS curve.

Question 12

What is the LM Curve?

Answer 12

Shows combinations of GDP and real interest rate that keep the relationships of money demanded and supplied equal.

Question 13

What is the quantity of money theory?

Answer 13

MV=PY

M= money supply, V=velocity of transactions, P=price level, Y=real GDP

Higher the interest rate, the more interest bearing securities people will hold.

Question 14

What is the aggregate demand curve?

Answer 14

Show the relationship between the quantity of real output demanded and the price level. Increasing the price level will decrease the real money supply.

Question 15

What is the aggregate supply curve?

Answer 15

Shows the amount of output from firms at different price levels.

Question 16

What is the aggregate supply curve? What are the different time frame curves called and represent?

Answer 16

Shows the amount of output from firms at different price levels.

VSRAS = Very short run - can assume wages, inputs and price are fixed so that producer can increase or decrease output without price changes. 
LRAS= Long run - inputs adjust according to price is that it has no effect of aggregate supply. This level of output is called full employment GDP or Potential GDP.

Question 17

What is the aggregate supply curve? What are the different time frame curves called and represent?

Answer 17

Shows the amount of output from firms at different price levels.

VSRAS = Very short run - can assume wages, inputs and price are fixed so that producer can increase or decrease output without price changes. 
LRAS= Long run - inputs adjust according to price is that it has no effect of aggregate supply. This level of output is called full employment GDP or Potential GDP.

Question 18

What are the causes in shifts of the demand curve? What causes movement along?

Answer 18

Shifts: Increase in wealth, business expectations are positive, consumer expectations are positive, high capacity utilization (company using their capacity and investing in capital), expansionary monetary policy (such as lower interest rates). All shift Demand curve right.

Price changes cause movement along demand curve.

Question 19

What are the causes in shifts of the demand curve? What causes movement along?

Answer 19

Shifts: Increase in wealth, business expectations are positive, consumer expectations are positive, high capacity utilization (company using their capacity and investing in capital), expansionary monetary policy (such as lower interest rates), expansionary fiscal policy (ex. lower taxes) All shift Demand curve right.

Price changes cause movement along demand curve.

Question 20

What are the causes in shifts of the demand curve? What causes movement along?

Answer 20

Shifts: Increase in wealth, business expectations are positive, consumer expectations are positive, high capacity utilization (company using their capacity and investing in capital), expansionary monetary policy (such as lower interest rates), expansionary fiscal policy (ex. lower taxes), exchange rates (when decreases value, more exports), global economic growth. All shift Demand curve right.

Price changes cause movement along demand curve.

Question 21

What are the assumptions of the Short Run Aggregate Supply curve? What causes shifts?

Answer 21

Prices of inputs and wages held constant.

Shifts caused by: better productivity, input prices decrease, expected future price increases, decreases in taxes, appreciation of the countries currency to the extent that inputs are purchases from foreign countries.

Question 22

What are the assumptions of the Short Run Aggregate Supply curve? What causes shifts?

Answer 22

Prices of inputs and wages held constant.

Shifts caused by: better productivity, input prices decrease, expected future price increases, decreases in taxes, appreciation of the countries currency to the extent that inputs are purchases from foreign countries.

Question 23

What factor shift the LRAS curve? What is the phase called?

Answer 23

Called Full employment. Shifts when: Increase in the supply and quality of labor, increase in natural resources, increase in the stock of physical capital, increase in technology.

Question 24

What factor shift the LRAS curve? What is the phase called?

Answer 24

Called Full employment. Shifts when: Increase in the supply and quality of labor, increase in natural resources, increase in the stock of physical capital, increase in technology.

Question 25

What is recessionary and inflationary gap?

Answer 25

When quantity of real goods supplied is more than demanded, recessionary, drives prices down. Vice versa for inflationary.

Question 26

What is recessionary and inflationary gap?

Answer 26

When quantity of real goods supplied is more than demanded, recessionary, drives prices down. Vice versa for inflationary. In recessions you will see build up of inventory, lowering of prices. Inflation, low inventories, higher prices. movement along the curve to equal.

Question 27

What is the difference between real GDP and full employment GDP called?

Answer 27

Output gap.

Question 28

What should an investor do if they expect a decrease in aggregate demand?

Answer 28

Increase investment in defensive companies and decrease in cyclical companies.
Increase investment in high grade assets.
Increase long term fixed income to take advantage of interest rate decreases.

Question 29

What is stagflation and how is it caused?

Answer 29

A situation of high unemployment and inflation. Because of a sharp decrease in supply.

Question 30

What are five areas of economic growth?

Answer 30

Labor force: over 16 and available.
Human Capital: education and skill level of the labor force.
Physical Capital stock: high rate of investment, increases productivity.
Technology: increase productivity and potential GDP.
Natural Resources: raw materials necessary to produce economic output.

Question 31

What are five areas of economic growth?

Answer 31

Labor force: over 16 and available.
Human Capital: education and skill level of the labor force.
Physical Capital stock: high rate of investment, increases productivity.
Technology: increase productivity and potential GDP.
Natural Resources: raw materials necessary to produce economic output.

Question 32

How can you estimate potential GDP growth.

Answer 32

Growth in GDP = growth in labor force + growth in productivity.

Question 33

What is sustainable rate of economic growth?

Answer 33

Potential GDP growth.

Question 34

What is sustainable rate of economic growth?

Answer 34

Potential GDP growth.

Question 35

What is the production function? Total factor productivity?

Answer 35

Y= A * f(K/L) y=economic output, l=labor force, k=amount of capital, a=total factor productivity - the multiplier that cannot be explain by increases in the other factors.

Question 36

Explain the basis of the neoclassical or Solow model?

Answer 36

Growth in potential GDP = WL( growth in labor ) + WC ( growth in capital ) + (growth in technology).

Shows what is more important for growth. Must look to technology for long term growth.