Chapter 5: An Introduction to Macroeconomics Flashcards
What are the two fields of economics?
- macroeconomics
- microeconomics
Microeconomics
How individual decision-making units behave
- one market
Macroeconomics
behavior of entire economies
- multiple markets
Domestic product
represents the total production of a nation’s economy
Aggregation
means combining many individual markets into one individual market
- total domestic product
Two foundations of aggregation
1.) Composition of demand and supply may be of little consequence for the economy-wide issues of growth, inflation, and unemployment
2.) During economic fluctuations, markets tend to move up or down together
Aggregate demand curve
shows the quantity of domestic product that is demanded at each possible value of the price level
Aggregate supply curve
shows the quantity of domestic product that is supplied at each possible value of the price level
Inflation
sustained increase in the general price level
- pushes the price level up (when AD moves to the right)
Recession and unemployment shift the AD curve to the_______
left
(Because total domestic product/output declines)
Recession
Period of time during which the total output of the economy declines
When both AD and AS shift to the right, it depicts______
Economic growth
Gross Domestic Product (GDP)
the sum of the money values of all final goods and services produced in the domestic economy and sold in organized markets during a specified period of time, usually a year
Nominal GDP
Calculated by valuing all outputs at current prices
Real GDP
calculated by valuing outputs of different years at common prices; therefore real GDP is a better measure than nominal GDP of changes in total production
Is Real or Nominal GDP a better measure of changes in total production?
Real
Problem with nominal GDP
It rises when prices rise– even if there is no increase in actual production
100 hamburgers are 100 hamburgers regardless of price
How to correct inflation (purpose of Real GDP)
values goods and services produced in different years at the same set of prices
“GDP corrected for inflation”
Recession is a period in which _____ GDP _____
Real; declines (for two or more consecutive quarters)
T/F The GDP for a particular year includes only goods ad services produced within the year; sales of items produced in previous years are explicitly excluded
True
T/F Only final goods and services count in GDP
True
Final goods and services
those that are purchased by their ultimate users
Intermediate goods
a good purchased for resale or for use in producing another good
Domestic
GDP counts production in the US only
T/F only goods and services that pass through organized markets count in the GDP
True
Is gambling counted in GDP
No
T/F Gross domestic product is NOT a measure of the nations economic well-being
True
T/F Mobilization for a war fought on some other nation’s soil normally causes a country’s GDP to rise rapidly
True
T/F Ecological costs are not deducted from the GDP in an effort to give us a truer measure of the net increase in economic welfare that our economy produces
True
Real GDP per capita
ratio of real GDP divided by population
A nation becomes richer only if its GDP grows _____ than its population
Faster
alternating periods of rapid and slow growth
Macroeconomic fluctuation; business cycles
Growth rate
the percentage change from one year to the next
Deflation
refers to a sustained decrease in the general price level
Great Depression
- decline in economic activity and rapid deflation
The General Theory of Employment, Interest, and Money (1936)
John Maynard Keynes
Fiscal policy
government plan for spending and taxation; it can be used to steer aggregate demand in the desired direction
High levels of Wartime spending causes what?
- Inflation
- Unemployment
Stagflation
inflation that occurs while the economy is growing slowly or in a recession
- economic stagnation AND inflation
- aggregate supply curve shifts to the left (inward)
Monetary policy
Refers to action taken by the Federal Reserve to influence aggregate demand by changing interest rates
Reaganomics
Believed large tax cuts would boost growth and reduce inflation
Clintonomics
- forced to concentrate on deficit reduction
- “New Economy”
“New economy”
a product of globalization and computerization that naturally performed better than the economy of the past
- outward AS curve (faster economic growth and lower inflation)
Tax cuts and government spending (fiscal policy) led to a shift of the AD curve ______
outward
Lower interest rates=
more spending
Obamanomics
- recommended more tax cuts, a burst of federal spending, and large-scale aid to state and local governments to help them avoid painful budget cuts
Stabilization policy
name given to government programs designed to prevent or shorten recessions and to counteract inflation (that is, to stabilize prices)
Government can reduce unemployment by ______ AD
increasing
- Congress can spend more or reduce taxes (fiscal policies) as it did with the 2009 stimulus bill
- The Federal Reserve can lower interest rates (monetary policy) as it did in late 2007 and 2008
- shifts the AD curve outward to the right
Recessions and unemployment are often caused by insufficient aggregate demand; when such situations occur, fiscal or monetary policies that successfully augment demand can be effective ways to _______ output and ______ unemployment. They also normally _______ prices
Increase; reduce; raise
Inflation is frequently caused by aggregate demand racing ahead too _____ when this is the case, fiscal or monetary policies that reduce aggregate demand can be effective anti-inflationary devices; but such policies also ______ real GDP and _____ unemployment
fast; decrease; raise
