Mac Flashcards
What are two reasons why GDP is an imperfect measure of the standard of living?
1) It does not account for income distribution. 2) It ignores non-market activities like household labor and leisure.
How do you calculate GDP using the expenditure approach?
GDP = Consumption + Investment + Government Spending + (Exports - Imports).
What is the short-run impact on Dutch GDP if KLM buys airplanes from a French manufacturer?
Dutch GDP decreases as the purchase counts as an import, reducing net exports.
Name an example of private and public sector spending that boosts potential GDP.
Private: Investment in new machinery; Public: Government spending on infrastructure.
What does CPI measure, and why is it important?
CPI measures the average price change of a fixed basket of goods and tracks inflation over time.
What is the difference between cyclical and structural unemployment?
Cyclical is due to economic downturns; structural is due to a mismatch in skills.
Define a discouraged worker.
Someone who has stopped job hunting because they believe no suitable jobs are available.
How do you calculate CPI for a given year?
CPI = (Cost of basket in target year / Cost of basket in base year) × 100.
Who benefits during inflation, the borrower or lender?
The borrower benefits, as the real value of repaid money is lower.
Give an example of an event that affects short-run but not long-run aggregate supply.
A temporary spike in oil prices.
Explain sticky wages and long-run adjustment.
Sticky wages don’t adjust quickly to changes; firms eventually adjust wages to match economic conditions.
What happens to aggregate supply if crude oil prices drop significantly?
Short-run aggregate supply increases as production costs fall.
Describe the money market equilibrium after a rise in the money supply.
Interest rates fall, increasing investment and spending until equilibrium is restored.
How does an influx of immigrant workers impact the labor market?
It shifts the labor supply curve rightward, raising potential GDP.
Name a fiscal policy measure to stabilize an economy.
Expansionary fiscal policy, such as increased government spending or tax cuts.
How do higher interest rates impact the budget deficit?
They increase borrowing costs, potentially raising the deficit due to higher interest expenses.
What are three types of financing for a new business?
Equity financing, debt financing, venture capital.
If the inflation rate rises, what should happen to the nominal interest rate to keep the real rate constant?
The nominal interest rate should increase by the same amount as the inflation rate.
How do you calculate national saving in a closed economy?
National Saving = GDP - Consumption - Government Spending.
What does macroeconomics study?
The performance, structure, and behavior of entire economies, including growth, inflation, and employment.
What is the GDP deflator used for?
To measure the price level and differentiate between nominal GDP changes due to price shifts and real growth.
What are the main phases of the business cycle?
Peak, recession, trough, and expansion.
What is potential GDP?
The maximum output an economy can sustain without causing inflation.
Explain the wealth effect on aggregate demand.
Higher prices reduce consumer purchasing power, decreasing the quantity of goods demanded.
How does the government use contractionary fiscal policy?
By increasing taxes or reducing spending to slow down economic growth and curb inflation.
What does real GDP per capita measure, and why is it important?
It measures the average economic output per person, providing a more accurate indicator of the standard of living.
Why is investment in technology important for long-term economic growth?
Technology increases productivity, allowing more goods and services to be produced with the same resources.
How can government policy impact long-term economic growth?
Policies that support education, research, and infrastructure improvements can foster growth by enhancing productivity.
What is the natural rate of unemployment?
It’s the sum of frictional and structural unemployment when the economy is at full employment, with no cyclical unemployment.
How is the unemployment rate calculated?
Unemployment Rate = (Number of Unemployed / Labor Force) × 100.
What is hyperinflation, and what causes it?
Hyperinflation is extremely high inflation, often caused by an excessive money supply or loss of confidence in a currency.
What are menu costs in the context of inflation?
The costs businesses face when they frequently update prices due to inflation.
Define the real interest rate.
Real Interest Rate = Nominal Interest Rate - Inflation Rate; it reflects the true cost of borrowing after inflation adjustments.
What is a demand shock? Give an example.
A sudden event that increases or decreases demand for goods/services, e.g., a major tax cut increasing consumer spending.
Explain the impact of an unexpected increase in aggregate demand on short-run output and prices.
It raises both output and price levels in the short run due to higher demand for goods and services.
What is a supply shock? Give an example.
A sudden change in the availability of goods/services, e.g., a natural disaster disrupting oil production.
How do sticky prices contribute to economic fluctuations?
When prices don’t adjust quickly, economic imbalances persist, leading to short-term shortages or surpluses.
What is expansionary fiscal policy?
A policy involving increased government spending or tax cuts to stimulate economic growth.
What is contractionary fiscal policy?
A policy aimed at reducing government spending or raising taxes to slow economic growth and control inflation.
Define open market operations.
Central banks’ buying or selling of government securities to influence the money supply and interest rates.
What is the discount rate?
The interest rate central banks charge commercial banks for loans, affecting the money supply and borrowing costs.
Explain quantitative easing.
An unconventional monetary policy where the central bank buys financial assets to increase the money supply and encourage lending.
How does venture capital support economic growth?
It provides startups with funding for innovation, creating jobs and contributing to GDP growth.
What is the difference between equity financing and debt financing?
Equity financing involves selling ownership in the company, while debt financing is borrowing funds to be repaid with interest.
Define the loanable funds market.
A market where savers supply funds for borrowers, with the interest rate balancing supply and demand.
What is the ‘crowding-out’ effect in fiscal policy?
When government borrowing raises interest rates, reducing private investment due to higher borrowing costs.
Why are interest rates important in the financial market?
They determine the cost of borrowing and influence investment, consumer spending, and overall economic activity.
What is nominal GDP, and how does it differ from real GDP?
Nominal GDP is measured at current prices, while real GDP is adjusted for inflation, reflecting true production changes.
What are leading economic indicators? Give an example.
Indicators that predict future economic activity, e.g., consumer confidence index.
What is a ‘recession’?
A period of declining economic activity, typically defined as two consecutive quarters of negative GDP growth.
What role does consumer confidence play in the economy?
High consumer confidence boosts spending, while low confidence leads to saving, impacting aggregate demand.
How does monetary policy influence aggregate demand?
By changing interest rates and the money supply, affecting consumer spending and business investment.
Describe the substitution effect in the context of aggregate demand.
When domestic prices rise, consumers substitute cheaper imports, reducing aggregate demand for domestic goods.
What is potential GDP, and how is it achieved?
The highest GDP level sustainable without increasing inflation, achieved with full resource utilization and efficiency.
Explain ‘full employment.’
An economic state where all available labor resources are being used efficiently, with only natural unemployment remaining.
What does the Phillips Curve illustrate?
The inverse relationship between inflation and unemployment in the short run.
What is the wealth effect in the aggregate demand model?
When rising price levels reduce real wealth, leading to less spending and lower aggregate demand.
Define ‘stagflation.’
A situation where high inflation and high unemployment occur simultaneously, usually due to supply shocks.
How do changes in exchange rates affect aggregate demand?
A stronger currency makes exports more expensive and imports cheaper, reducing aggregate demand for domestic goods.
What is the impact of high inflation on savings?
High inflation erodes the real value of savings, reducing purchasing power over time.
What role does human capital play in economic growth?
Human capital, or the skills and knowledge of the workforce, enhances productivity and innovation, leading to economic growth.
Explain the concept of diminishing returns in economic growth.
As capital increases, each additional unit contributes less to output, meaning growth slows unless technology or efficiency improves.
How does population growth affect potential GDP?
Increased population can raise potential GDP by expanding the labor force, but only if productivity and resources keep pace.
What is the ‘catch-up effect’ in economic growth?
Poorer countries tend to grow faster than richer ones as they adopt existing technologies, helping them ‘catch up’ in development.
Why does investment in education promote long-term growth?
Education builds skills, increasing labor productivity and encouraging innovation, both essential for sustainable growth.
What is the ‘output gap’?
The difference between actual GDP and potential GDP, indicating whether the economy is underperforming (recessionary gap) or overheating (inflationary gap).
What are shoe leather costs?
The increased costs of time and effort that people spend to counteract the effects of inflation, like making more frequent bank withdrawals.
Define core inflation.
Core inflation excludes volatile items like food and energy prices, providing a more stable measure of underlying inflation trends.
How does the labor force participation rate affect unemployment data?
A higher participation rate increases the labor supply and can impact unemployment rates if job growth doesn’t keep pace.
What is the ‘natural rate of unemployment’?
It’s the rate of unemployment expected in a healthy economy, reflecting only frictional and structural unemployment.
What is a positive demand shock?
An event that suddenly increases aggregate demand, such as a major government spending initiative or a surge in consumer confidence.
Describe the difference between temporary and permanent supply shocks.
Temporary shocks (like oil price spikes) only affect short-term supply, while permanent shocks (like a technological breakthrough) can increase long-term supply.
What is the role of automatic stabilizers in an economic shock?
Features like unemployment benefits automatically adjust to stabilize the economy without new government action, cushioning shocks.
How can expectations of future inflation create an inflationary spiral?
If people expect inflation to rise, they demand higher wages, leading to cost-push inflation as businesses raise prices to cover increased costs.
How does a decline in global demand affect aggregate demand?
It reduces exports, lowering aggregate demand and potentially leading to slower economic growth.
What is the ‘multiplier effect’ in fiscal policy?
It’s the process where an initial increase in spending (e.g., government investment) leads to a larger overall increase in economic activity.
Explain the concept of ‘monetary neutrality’ in the long run.
The idea that changes in the money supply only affect prices in the long run, not real GDP or employment.
What is the role of central bank ‘forward guidance’?
It’s when central banks communicate future policy intentions to influence market expectations and stabilize the economy.
How does a budget deficit affect the national debt?
A budget deficit occurs when government spending exceeds revenue, adding to the total national debt.
Define a balanced budget.
A budget where government revenue equals spending, with no surplus or deficit.
What is the purpose of stock markets in economic growth?
Stock markets allow companies to raise capital for expansion, which contributes to economic growth through job creation and increased output.
Describe the impact of high interest rates on consumer spending.
High rates increase borrowing costs, reducing consumer spending on credit-based purchases.
Describe the impact of high interest rates on consumer spending.
High rates increase borrowing costs, reducing consumer spending on credit-based purchases like homes and cars.
What is the difference between corporate bonds and government bonds?
Corporate bonds are issued by companies to raise funds, while government bonds finance public spending and national debt.
How does inflation affect the purchasing power of bonds?
Inflation erodes the real return on bonds, reducing purchasing power for bondholders if interest rates don’t keep pace.
Explain the concept of ‘yield’ in bonds.
Yield is the return a bond investor receives, based on the bond’s interest payments relative to its price.
What are ‘sticky prices,’ and how do they impact short-run economic adjustments?
Sticky prices don’t adjust quickly to changes in demand, leading to temporary imbalances and affecting output in the short run.
Explain the difference between fiscal and monetary policy lags.
Fiscal policy lags occur due to political decision-making delays, while monetary policy lags result from the time it takes for interest rate changes to impact the economy.
What is the marginal propensity to consume (MPC)?
MPC is the proportion of additional income that a household spends on consumption rather than saving.
Define ‘gross national product’ (GNP) and its difference from GDP.
GNP measures the total output of a country’s residents, including abroad production, while GDP measures output within the country’s borders.
What is the difference between the CPI and the GDP deflator?
CPI measures price changes for consumer goods, while the GDP deflator measures price changes across all domestically produced goods.
What is the velocity of money?
The rate at which money circulates in the economy, measured as GDP divided by the money supply.
Explain Okun’s Law.
It describes the relationship between GDP growth and unemployment, showing that lower growth rates increase unemployment.
How do exchange rate fluctuations affect domestic inflation?
A weaker currency makes imports more expensive, potentially increasing domestic inflation.
What is capital flight, and how does it impact a country?
Capital flight is the rapid movement of investments out of a country due to economic instability, reducing investment and currency value.
Explain the real exchange rate.
The exchange rate adjusted for inflation differences, reflecting the true purchasing power of currencies.
How does the Phillips Curve change in the long run?
In the long run, the curve is vertical, suggesting that inflation and unemployment are unrelated once expectations adjust.
What is demand-pull inflation?
Inflation that results from excessive demand in the economy, often occurring during an expansion.
Define cost-push inflation.
Inflation caused by rising production costs, such as wages and raw materials, which push up prices.
How do government subsidies affect aggregate supply?
Subsidies lower production costs, shifting aggregate supply outward and increasing output.
What is a trade deficit?
A situation where a country’s imports exceed its exports, which can affect currency value and GDP.
Describe the ‘terms of trade’ concept.
The ratio of export prices to import prices, indicating the relative cost of a country’s trade goods.
How does foreign direct investment (FDI) benefit the economy?
FDI brings capital, technology, and jobs, contributing to economic growth.
What is the purpose of the World Bank?
To provide financial and technical assistance for development projects that improve economic prospects in developing countries.
How does the International Monetary Fund (IMF) support global economic stability?
It provides financial assistance and policy advice to countries facing balance of payments issues.
Explain the difference between primary and secondary markets.
Primary markets issue new securities, while secondary markets facilitate the trading of existing securities.
