Macro Economics 2

Question 1

3 Goals of every Economy

Answer 1

Promote Economic Growth, Limit Unemployment, Keep Prices Stable(limit inflation)

Question 2

Gross Domestic Product

Answer 2

The dollar value of all final goods and services produced within a country’s borders within one year

Question 3

GDP per Capita

Answer 3

GDP divided by population

Question 4

Calculate a % change in GDP

Answer 4

Year2 - Year1 / Year1 x 100

Question 5

Do Intermediate Goods count towards GDP?

Answer 5

Goods inside the final goods are not included in GDP

Question 6

Are non-production Transactions included in GDP?

Answer 6

Financial Transactions and Used Goods are not included in GDP

Question 7

Are non market and illegal activities included in GDP?

Answer 7

Household products are not included in GDP

Question 8

Expenditure Approach (calculating GDP)

Answer 8

GDP = C+I+G+(X-M), Add up all the spending on final goods

Question 9

Income Approach (calculating GDP)

Answer 9

Add up all the income earned from selling the final goods, GDP=Rent+Wages+Interest+Profit

Question 10

Nominal GDP

Answer 10

GDP measured in current prices, without taking inflation into account

Question 11

Real GDP

Answer 11

GDP adjusted to inflation rates

Question 12

What are the different stages of the Business Cycle?

Answer 12

Expansion, Peak, Contraction and Trough

Question 13

Unemployment

Answer 13

Workers actively looking for jobs but currently unemployed

Question 14

Frictional Unemployment

Answer 14

Temporary unemployed or being between jobs, workers have transferable skills

Question 15

Structural Unemployment

Answer 15

Changes in labour force make some skills obsolete, workers don’t have transferable skills.

Question 16

Cyclical Unemployment

Answer 16

Unemployment caused by a recession, as demand falls, demand for labor falls and workers gets fired

Question 17

Natural Rate of Unemployment

Answer 17

Frictional and Structural unemployment are present at all times, NRU is the rate of unemployment when the economy is healthy and growing

Question 18

Full employment output

Answer 18

Real GDP created when there is no cyclical unemployment

Question 19

Discouraged Workers

Answer 19

People not longer looking for a job because they have given up

Question 20

Inflation

Answer 20

Rising prices whilst decreasing consumer’s purchasing power

Question 21

Nominal Wage

Answer 21

Wage measured by dollars rather than purchasing power

Question 22

Real Wage

Answer 22

Wage adjusted to inflation

Question 23

Real Interest Rates

Answer 23

The percentage increase in purchasing power that a borrower pays (adjusted for inflation)

Question 24

Nominal Interest Rates

Answer 24

The percentage increase in money that the borrower pays (not adjusted for inflation)

Question 25

What is the CPI?

Answer 25

CPI stands for Consumer Price Index and is the most commonly used index when it comes to measuring inflation

Question 26

What is the GDP Deflator?

Answer 26

The GDP Deflator measures the prices of all goods produced, whereas the CPI just measures the prices only of goods and services bought by the consumers.

Question 27

How to calculate the GDP Deflator?

Answer 27

The GDP Deflator is calculated by dividing Nominal GDP by Real GDP times 100.

Question 28

What are the three causes for Infaltion?

Answer 28

1. The government prints too much money (the quantity theory)
2. Demand- pull inflation (Higher Demand leads to higher prices)
3. Cost push inflation (Higher production costs increase the prices)