Aggregate Output, Prices, and Economic Growth Flashcards
What is GDP?
- Gross domestic product.
- The market value of all final goods and services produced within a country during a certain time period.
How is GDP calculated using the expenditure approach?
The total amount spent on goods and services produced in the country during a time period.
How is GDP calculated using the income approach?
The total income earned by households and businesses in the country during a time period.
What are the two approaches that the expenditure approach to measuring GDP can use?
- The sum-of-value-added method or
- The value-of-final-output method.
How is the sum-of-value-added used to measure GDP?
- Used with the expenditure approach
- GDP is calculated by summing the additions to value created at each stage of production and distribution.
How is the value-of-final-output method used to calculate GDP?
- Used with the expenditure approach
- GDP is calculated by summing the values of all final goods and services produced during the period.
What is nominal GDP a measure of?
Nominal GDP values goods and services at their current prices.
What is real GDP a measurement of?
Real GDP measures current year output using prices from a base year.
What is the GDP deflator?
A price index that can be used to convert nominal GDP into real GDP by removing the effects of changes in prices.
What are the four components of GDP?
- Consumption spending,
- business investment,
- government spending, and
- net exports.
What is the GDP equation?
GDP = C + I + G + (X − M).
What is National Income?
The income received by all factors of production used in the creation of final output.
What is Personal Income?
The pretax income received by households.
What is Personal Disposable Income?
Personal income after taxes.
A fiscal deficit must be financed by some combination of which two things?
- A trade deficit or
- An excess of private saving over private investment.
- (G − T) = (S − I) − (X − M).
What does the IS curve illustrate?
- 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.

What does the LM curve illustrate?
- “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.

What does the short-run aggregate supply curve illustrate?
- 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).
What does the long-run agregate supply curve illustrate?
- 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).
What causes movement along the aggregate demand or aggregate supply curves?
Changes in the price level.
What are seven examples of things that can shift the demand curve?
- Changes in household wealth,
- Business and consumer expectations,
- Capacity utilization,
- Fiscal policy,
- Monetary policy,
- Currency exchange rates, and
- Global economic growth rates.
What are six examples of things that shift the short-run aggegate supply curve?
- Changes in nominal wages or other input prices,
- Expectations of future prices,
- Business taxes,
- Business subsidies, and
- Currency exchange rates, as well as by the factors that affect long-run aggregate supply.
What four things cause shifts in the long-run aggreagte supply curve?
- Changes in labor supply and quality,
- The supply of physical capital,
- The availability of natural resources, and
- The level of technology.
A recessionary gap occurs when..?
- A recessionary gap occurs when real GDP is less than potential real GDP,
- Causes downward pressure on input prices.