Aggregate Output, Prices, and Economic Growth

Question 1

What is GDP?

Answer 1

1. Gross domestic product.
2. The market value of all final goods and services produced within a country during a certain time period.

Question 2

How is GDP calculated using the expenditure approach?

Answer 2

The total amount spent on goods and services produced in the country during a time period.

Question 3

How is GDP calculated using the income approach?

Answer 3

The total income earned by households and businesses in the country during a time period.

Question 4

What are the two approaches that the expenditure approach to measuring GDP can use?

Answer 4

1. The sum-of-value-added method or
2. The value-of-final-output method.

Question 5

How is the sum-of-value-added used to measure GDP?

Answer 5

1. Used with the expenditure approach
2. GDP is calculated by summing the additions to value created at each stage of production and distribution.

Question 6

How is the value-of-final-output method used to calculate GDP?

Answer 6

1. Used with the expenditure approach
2. GDP is calculated by summing the values of all final goods and services produced during the period.

Question 7

What is nominal GDP a measure of?

Answer 7

Nominal GDP values goods and services at their current prices.

Question 8

What is real GDP a measurement of?

Answer 8

Real GDP measures current year output using prices from a base year.

Question 9

What is the GDP deflator?

Answer 9

A price index that can be used to convert nominal GDP into real GDP by removing the effects of changes in prices.

Question 10

What are the four components of GDP?

Answer 10

1. Consumption spending,
2. business investment,
3. government spending, and
4. net exports.

Question 11

What is the GDP equation?

Answer 11

GDP = C + I + G + (X − M).

Question 12

What is National Income?

Answer 12

The income received by all factors of production used in the creation of final output.

Question 13

What is Personal Income?

Answer 13

The pretax income received by households.

Question 14

What is Personal Disposable Income?

Answer 14

Personal income after taxes.

Question 15

A fiscal deficit must be financed by some combination of which two things?

Answer 15

1. A trade deficit or
2. An excess of private saving over private investment.
3. (G − T) = (S − I) − (X − M).

Question 16

What does the IS curve illustrate?

Answer 16

• Investment Saving
• The negative relationship between the real interest rate and levels of aggregate income that are equal to planned expenditures at each real interest rate.

Question 17

What does the LM curve illustrate?

Answer 17

• “Liquidity preference—Money supply”
• For a given level of the real money supply, a positive relationship between the real interest rate and levels of aggregate income at which demand and supply of real money balances are equal.

Question 18

What does the short-run aggregate supply curve illustrate?

Answer 18

• Shows the positive relationship between real GDP supplied and the price level, when other factors are held constant.
• Holding some input costs such as wages fixed in the short run, the curve slopes upward because higher output prices result in greater output (real wages fall).

Question 19

What does the long-run agregate supply curve illustrate?

Answer 19

• Long-run aggregate supply represents potential GDP, the full employment level of economic output.
• Because all input prices are assumed to be flexible in the long run, the long-run aggregate supply curve is perfectly inelastic (vertical).

Question 20

What causes movement along the aggregate demand or aggregate supply curves?

Answer 20

Changes in the price level.

Question 21

What are seven examples of things that can shift the demand curve?

Answer 21

1. Changes in household wealth,
2. Business and consumer expectations,
3. Capacity utilization,
4. Fiscal policy,
5. Monetary policy,
6. Currency exchange rates, and
7. Global economic growth rates.

Question 22

What are six examples of things that shift the short-run aggegate supply curve?

Answer 22

1. Changes in nominal wages or other input prices,
2. Expectations of future prices,
3. Business taxes,
4. Business subsidies, and
5. Currency exchange rates, as well as by the factors that affect long-run aggregate supply.

Question 23

What four things cause shifts in the long-run aggreagte supply curve?

Answer 23

1. Changes in labor supply and quality,
2. The supply of physical capital,
3. The availability of natural resources, and
4. The level of technology.

Question 24

A recessionary gap occurs when..?

Answer 24

• A recessionary gap occurs when real GDP is less than potential real GDP,
• Causes downward pressure on input prices.

Question 25

An inflationary gap occurs when..?

Answer 25

• An inflationary gap occurs when real GDP is greater than potential real GDP,
• Causes upward pressure on input prices.

Question 26

What is stagflation?

Answer 26

• Simultaneous high inflation and weak economic growth
• Can result from a sudden decrease in short-run aggregate supply.

Question 27

What are six sources of economic growth?

Answer 27

1. Increases in the supply of labor,
2. Increases in human capital,
3. Increases in the supply of physical capital,
4. Increasing availability of natural resources, and
5. Advances in technology.

Question 28

The sustainable rate of economic growth is determined by which two things?

Answer 28

1. The rate of increase in the labor force and
2. The rate of increase in labor productivity.

Question 29

What is a production function?

Answer 29

• A function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.
• Relates economic output to the supply of labor, the supply of capital, and total factor productivity.

Question 30

What is total factor productivity?

Answer 30

A residual factor, which represents that part of economic growth not accounted for by increases in the supply of labor and capital. Increases in total factor productivity can be attributed to advances in technology.