Aggregate Output, Prices & Economic Growth

Question 1

Includes only new purchases of goods and services

Answer 1

Gross Domestic Product (GDP)

Question 2

GDP is calculated by summing the amounts spent on goods and services produced during that period

Answer 2

Expenditure Approach

Question 3

GDP is calculated by summing the amounts earned by households and companies during the period, including wage income, interest income and business profits.

Answer 3

Income Approach

Question 4

Expenditure Approach is also known as

Answer 4

Value-of-Final-Output method

Question 5

Summing the additions to value created at each stage of production and distribution

Answer 5

Sum-of-the-Value Approach

*The total value added is the price at the final stage of production

Question 6

Calculation for Nominal GDP

Answer 6

SUM( Pi,t * Qi,t)

*inflation increases Nominal GDP

Question 7

Type of GDP that measures output using prices from the base year, removing the effect of changes in price, such as inflation.

Answer 7

Real GDP

Question 8

A price index that can be used to convert nominal GDP into real GDP

Answer 8

GDP deflator = [nominal GDP / (value of year t output at year t)] *100

Question 9

Real GDP divided by the population

Answer 9

Per capita Real GDP

Question 10

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

Answer 10

Expenditure Approach

Question 11

GDP = national income + capital consumption allowance + statistical discrepancy

Answer 11

Income Approach

Question 12

Compensation of employees + Corporate and Gov’t enterprise profit before taxes + interest income + unincorporated business net income + rent + indirect business taxes - Subsidies

Answer 12

National Income

Question 13

Unit measures that depreciation of goods and services over a period of time

Answer 13

Capital Consumption Allowance (CCA)

Question 14

A measure of the pretax income received by households and is one determinant of consumer purchasing power and consumption

Answer 14

Personal Income

Question 15

National income + transfer payments to households - indirect business taxes - corporate income taxes - undistributed corporate profits ==

Answer 15

Personal Income

Question 16

Personal Income - Personal Taxes

Answer 16

Personal Disposable Income (PDI)

Question 17

GDP = C + S + T

• C = Consumption Spending
• *S = Household and Business Savings
• **T = Net Taxes ( Taxes paid - transfer payments)

Answer 17

Fundamental Relationship between saving, investment and the fiscal balance and trade balance

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

• (G-T) = Fiscal Balance
• • (X-M) == Trade Balance

Question 18

The proportion of additional income spent on consumptions

Answer 18

Marginal Propensity to Consume

Question 19

IS Curve uses
(S-I) = (G-T) + (X-M)

• interest Rate vs. Aggregate Income(GDP Output)
• • As r ^, Aggregate Income Decreases

Answer 19

• Higher aggregate income, causes fiscal deficit to decrease, because taxes increase with income.
• • Higher aggregate income causes a trade surplus (X-M) to decrease, because imports increase with income increasing.

Question 20

As the interest rate, r, increases the aggregate income decreases.

Answer 20

Inverse relationship between real interest rate and income.

** What IS curve is representing

Question 21

The IS curve plots the combinations of real income and real interest rates for which aggregate output and income equally planned expenditures

Answer 21

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Question 22

The LM curve shows the combinations of GDP or real income (Y) and real interest rate (r) that keep the quantity of real money demanded equal to the quantity of real money supplied

Answer 22

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Question 23

(M / P) = (1/V) * Y
* M = Money Supply 
P = Price level 
V = Velocity of money in transactions
Y = Real GDP

Answer 23

Function representing LM Curve

Question 24

Curve that shows the relationship between quantity of real output demanded(which equals real income) and the price level.
* Income(Output) vs. Price Level

Answer 24

Aggregate Demand

• As Income increases, prices increase
• As real output demanded increases, price increases

Question 25

Describes the relationship between the price level and the quantity of real GDP supplied when all other factors are held constant.

*Real GDP Supplied vs. Price Level

Answer 25

Aggregate Supply Curve

*The amount of output at differing price levels

Question 26

Very Short Run Supply Curve

Answer 26

Assume wages, input costs and prices are fixed so that producers can increase or decrease output without affecting price. (perfectly elastic, horizontal)

Question 27

Long Run Aggregate Supply Curve

Answer 27

Perfectly Inelastic (Vertical)

Question 28

Short Run Supply Curve

Answer 28

Output prices change proportionally to the price level but at least some input prices are sticky

Question 29

A change in the price levels are represented as a movement along the Aggregate Demand Curve

Answer 29

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Question 30

Factors that increase Aggregate Demand

Answer 30

1. Increase in Consumers Wealth – C Increases
2. Business Expectations – I increases
3. Consumer Expectation of Future Money – C Increases
4. High Capacity Utilization – I Increases
5. Expansionary Monetary Policy – C and I Increases (because interest rates decrease)
6. Expansionary Fiscal Policy – C Increases for tax cut, G Increases for Spending
7. Exchange Rates – X Increases, M Decreases
8. Global Economic Growth – X Increases

**Opposites decrease Aggregate Demand

Question 31

SRAS curve reflects the relationship between output and the price level when wages and other input prices are held constant.

Answer 31

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Question 32

Factors that increase Aggregate Supply

Answer 32

1. Labor Productivity – ^ in productivity makes cost per unit cheaper, letting producers ^ output
2. Input Prices – If input prices decrease, production ^
3. Expectations of Future Output Prices – When business expect price to ^, they produce more.
4. Taxes and Gov’t Subsidies – Decrease in business taxes, or ^ in gov’t subsidies makes cost per unit cheaper, letting producers produce more.
5. Exchange Rates – Appreciation of currency will decrease cost of imports, so producers buy more inputs, ^ production.

Question 33

Long Run Aggregate Supply

Answer 33

Vertical at full employment level of real GDP

Question 34

Factors that shift LRAS

Answer 34

1. Increase in Supply and Quality of Labor – An ^ in labor force, ^ output, ^ LRAS
2. Increase in the supply of natural resources – An ^ in available inputs, ^ real GDP, ^ LRAS
3. Increase in stock of physical output
4. Technology – ^ labor productivity, ^ real output, ^ LRAS

Question 35

Long Run Equilibrium is at intersection of LRAS and AD

Answer 35

• Excess demand == inflationary gap

* * Excess Supply == recessionary gap

Question 36

Five important sources of economic growth

Answer 36

1`. Labor Supply

2. Human Capital – More educated
3. Physical Capital Stock - ^ in Investment rate
4. Technology – Efficiency
5. Natural Resources– More natural resources, likely to grow faster.

Question 37

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

Answer 37

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Question 38

Describes the relationship between the output and labor, the capital stock and productivity

Answer 38

Production Function

Y = A * f(K,L)

Y == aggregate economic output
A == total factor productivity
K = Amount of Capital Available
L = Size of labor force

Question 39

A multiplier that quantifies the amount of output growth that cannot be explained by increases of labor and capital. (i.e. technological advances.)

Answer 39

Total Factor Productivity

Y/L = A * f(K/L)

Y/L = output per worker
K/L = physical capital per worker
A = Total Factor Productivity 

• Assume production function have diminishing marginal productivity

Question 40

Solow Model

Answer 40

GDPgrowth = A + Wl (labor growth) + Wc(Capital Growth)

GDPgrowth per capita = A/L + Wc/L