Economic Performance & Business Cycle

Question 1

GDP

Answer 1

Gross Domestic Product: Market value of final goods and services, newly-produced during a specific time period within a country’s border’s.
Measure of the total “stuff” being produced by the economy.

Question 2

3 GDP Measurement Approaches

Answer 2

1. Expenditure Approach - Sum spending on all “final” goods & services,
2. Value-Added Approach - Sum “value added” at each production stage,
3. Income Approach - Sum “returns” to all productive factors.

Question 3

Value-added

Answer 3

Revenue - Costs of material inputs

Question 4

Nominal GDP

Answer 4

GDP in current prices

Question 5

Expansion

Answer 5

Periods of increasing real GDP

Question 6

Recession

Answer 6

Periods of decreasing real GDP, 2 quarters of negative real GDP growth

Question 7

Depression

Answer 7

Severe recession

Question 8

GDP Deflator

Answer 8

Measure of the price level for the economy that tells us how much lower or higher prices are in any year compared to the base year.
(Nominal GDP / Real GDP) x 100.0

Question 9

Per Capita GDP

Answer 9

Measure of living standards for the average citizen of a country.

Question 10

PPP

Answer 10

Purchasing Power Parity: Real GDP converted to US dollars using market exchange rates to compare differences in living standards across countries.

Question 11

Gini Index

Answer 11

AKA Gini Coefficient. Used to measure inequality.

0 = Perfect equality, 1 = Perfect inequality.

Question 12

Inflation

Answer 12

Prices increasing on average. Unexpected inflation redistributes wealth (purchasing power) from workers to firms, and from creditors to borrowers.

Question 13

Deflation

Answer 13

Prices decreasing on average. Unexpected deflation can essentially destroy an economy. Sustained declines in all prices indicate macroeconomic crisis. “Debt deflation” is the biggest problem where deflation increases the real value of debt.

Question 14

Disinflation

Answer 14

Commonly used by the fed to describe a period of slowing inflation. Not necessarily bad.

Question 15

CPI

Answer 15

Consumer Price Index: Weighted average of prices where the weights reflect consumer purchasing patterns. CPI calculated using prices for goods and services in “basket of goods.”

Question 16

Real Interest Rate

Answer 16

Rate at which the real value of an asset increase over time. True real interest rate is ex ante (expected) version.
Real Interest Rate = Nominal Interest Rate + Expected Interest Rate

Question 17

Fisher Effect

Answer 17

Positive relationship between interest rate and inflation rate.

Question 18

Working Age Population

Answer 18

Employed, Unemployed, Not in Labor Force

Question 19

EM Ratio

Answer 19

Employment to Population Ratio = Employment / Civilian Noninstitutional Population

Question 20

Civilian Noninstitutional Population

Answer 20

People 16 years of age or older, not inmates of institutions, not active military.

Question 21

Long Term Unemployment

Answer 21

Unemployed workers that include those who have been unemployed more than 27 weeks.

Question 22

Marginally Attached Workers

Answer 22

Not in labor force but want to be and are available for a job. Searched for work sometime in the last 12 months but not past 4 weeks.

Question 23

Discouraged Workers

Answer 23

Subset of Marginally Attached Workers. Searched for work sometime in the last 12 months. Not currently looking because they don’t believe there are jobs available for which they qualify.

Question 24

U-3

Answer 24

Total unemployed as percent of the civilian labor force. Definition used for official unemployment rate.

Question 25

Natural Rate of Unemployment

Answer 25

AKA “Full Employment.” Rate of unemployment when the economy is using all available resources efficiently. When economy is operating at full capacity, further attempts to stimulate real GDP will result in higher inflation, with no increase in real economic activity.

Question 26

Frictional Unemployment

Answer 26

Search activity of firms and workers due to heterogeneity of preferences and skills, matching process takes time, includes first-time job seekers.

Question 27

Structural Unemployment

Answer 27

Long-term and chronic unemployment that exists even when the economy is not in a recession due to mismatch of skills and skill requirements.

Question 28

NAIRU

Answer 28

Non-Accelerating Inflation Rate of Unemployment: Rate of unemployment at which inflation remains stable. Trying to use policy to decrease unemployment below this rate will accelerate inflation, but otherwise, it will have little effect on the inflation rate.
NAIRU = (Normal Frictional + Normal Structural) / Labor Force

Question 29

GDP Components

Answer 29

Consumption + Investment + Gov’t Spending + Net Exports

• Consumption: Durable & Non-Durable Goods, Services
• Investment: Residential & Non-residential, Changes in Private Inventories
• Gov’t Consumption: Federal, State & Local
• Net Exports: Exports - Imports

Question 30

Wealth Effect

Answer 30

As prices increase, real value of HH wealth falls, which is why AD is downward sloping.

Question 31

Consumption Smoothing

Answer 31

When HH wish to purchase same set of goods and services even as prices increase. HHs use savings or borrow to adjust.

Question 32

Interest Rate Effect

Answer 32

Interest rates increase, causing investment to fall, which in turn causes GDP to fall.

Question 33

Shifts in AD

Answer 33

Generated by changes in spending by HH, firms, gov’ts, or foreigners that are generated for any other reason besides change in the price level.

Question 34

Supply Side Economics

Answer 34

Focuses on AS as the driver in the economy. Used to encourage growth in potential output (shifting AS to the right). This is done by:

• Removing unnecessary regulation
• Maintaining efficient legal system
• Encouraging technological progress

Question 35

Stagflation

Answer 35

Typically business cycles are caused by fluctuations in AD, however, int he case of an expected inflation increase, there is a negative “supply shock” which shifts SRAS to the left.

Question 36

LRAS

Answer 36

Determined by factors of production. Increase in Investment or Labor Growth Size would shift LRAS.

Question 37

Phillips Curve

Answer 37

Dynamic version of AS/AD that emphasizes negative correlation between inflation and unemployment.

Question 38

Okun’s Law

Answer 38

There is an empirical relationship between real GDP and unemployment. Unemployment rises, labor force falls, hours per worker declines, and labor productivity declines.
2% output reduction associated with 1% increase in unemployment rate.

Question 39

Sacrifice Ratio

Answer 39

Percentage loss of output (real GDP) for each 1-percentage point reduction in the inflation rate.