Chapter 6 An Introduction to Macroeconomics Flashcards
What are the two main areas of focus in macroeconomics?
Long-run economic growth and short-run fluctuations in output and employment (the business cycle). Long-run growth leads to higher output and improved living standards, while fluctuations can lead to recessions.
What are the three primary economic indicators used to assess the economy?
- Real GDP: Measures the value of all final goods and services produced in a country, adjusted for inflation.
- Unemployment: Indicates the percentage of individuals actively seeking jobs but unable to find work.
- Inflation: Refers to the overall increase in prices of goods and services.
Why is Real GDP important?
It reflects actual economic output growth, distinguishing between increases in production and price changes, providing a clearer economic picture.
What are the implications of high unemployment rates?
High unemployment indicates underutilization of human resources, leading to potential goods and services loss and associated social issues like increased crime and political unrest.
What concerns are associated with rising inflation?
Rising inflation can erode purchasing power, affecting families’ living standards and diminishing savings value.
How did living standards change historically before the Industrial Revolution?
Living standards showed little growth over centuries, with total output growth often offset by population growth, leaving per capita output stable.
What marked the turning point for living standards during the Industrial Revolution?
The introduction of factory production and technological advancements led to output growth exceeding population growth, improving living standards.
How can modest annual increases in output lead to substantial improvements in living standards?
Due to the compounding effect, even a 2% annual growth can significantly increase income over time.
What accounts for the stark contrast in living standards between nations today?
The timing of industrialization; countries that industrialized earlier accumulated more wealth compared to those that industrialized later.
Why are saving and investment crucial for economic growth?
They allow for the allocation of current output towards future production, increasing the economy’s future output potential.
What is the difference between economic investment and financial investment?
Economic investment increases productive capacity (e.g., building factories), while financial investment involves purchasing assets that do not inherently increase productivity.
What role do financial institutions play in the economy?
They facilitate the transfer of household savings to businesses for investment, promoting economic growth and stability.
How does uncertainty affect investment and savings decisions?
Firms may reduce investment if they are pessimistic about future returns, impacting economic growth.
What are the two main types of shocks affecting the economy?
- Demand Shocks: Sudden changes in demand for goods and services.
- Supply Shocks: Unexpected changes in the supply of goods and services.
What are sticky prices, and why do they matter?
Sticky prices do not adjust quickly to changes in demand, leading to short-run fluctuations in output and employment rather than immediate price changes.
