Macro Perspective

Question 1

What are the goals of macroeconomics?

Answer 1

Economic Growth

Low Unemployment

Low Inflation

Question 2

What is the framework an economist can use to analyze the Macroeconomy?

Answer 2

Aggregate Demand and Supply

Keynesian Model

Neoclassical Model

Question 3

What are the policy tools governments can use to manage the macroeconomy?

Answer 3

Monetary Policy

Fiscal Policy

Question 4

How is economic growth measured, why is it important to understand, and what is the goal growth rate?

Answer 4

Percentage change in real GDP

Economic growth determines the prevailing standard of living in a country

growth rate between 2-4% is ideal

Question 5

How is unemployment measured, and why is it good to keep it low, how low is low?

Answer 5

Measured by the unemployment rate.
Total employed / total workforce

When a country has unemployment it is wasting its labor resource to produce goods

Under 5% is considered low

Question 6

What is inflation, why do we care, and what is the goal for inflation rates?

Answer 6

Inflation is the overall increase in price levels measured by the CPI

If many people face prices rising faster than their wages there will be widespread unhappiness as the standard of living declines

low inflation is 1-2%

Question 7

What is nominal GDP, and what does it measure?

Answer 7

the value of all final goods and services produced within a country in a given year.

It is used to measure the overall size of a nations economy

Question 8

What are the four main components of Demand GDP

Answer 8

C - Consumption, Consumer Spending

I - Investment, Business Spending (this is where jobs are created)

G - Government Spending

Nx - Net Exports

Question 9

How do the components of Demand GDP account for total GDP?

Answer 9

Consumption - 60% - 70%

Investment - 15 - 20%

Government Spending - 20%

Question 10

What are the five Supply side GDP components?

Answer 10

Durable Goods

Nondurable Goods

Services

Structures

Change in inventories

Question 11

What is GNP, and how is it calculated?

Answer 11

Gross National Product

GDP - wages made domestically by foreign workers

Question 12

What is NNP, and how is it calculated?

Answer 12

Net National Product

GNP - depreciation of physical capital

Question 13

What does GDP not tell us about the economy?

Answer 13

It tells us how large the economy is as a whole, however, it does not tell us the overall well being of the laborers inside the country

Question 14

What is a GDP deflator, and how does it help to understand an economy’s growth?

Answer 14

GDP deflator is a price index measuring the average prices of all goods and services within an economy

In order to see how much the GDP has actually risen, we need to remove inflation from nominal GDP

Question 15

What is Real GDP, and how do you calculate it?

Answer 15

Real GDP compares the growth of GDP in terms of a base years prices. It removes inflation to see how much the economy has grown.

Real GDP = Nominal GDP / (price index/100)

Question 16

How do you calculate the % change in nominal GDP?

Answer 16

% change in nominal = % change in P + % change in Q

Question 17

What is the difference between a recession and a depression?

Answer 17

Recession - a significant decline in Real GDP

Depression - a lengthy and deep recession

Question 18

What is the business cycle, and what are the movements within a business cycle?

Answer 18

The business cycle is the movement of the economy in and out of a recession and rarely a depression.

Peak - is the highest point of an economy before it contracts and moves into a recession

Trough - is the lowest point of a recession before moving into an expansion

Question 19

On average, how often does the US see a recession, and how long do they typically last?

Answer 19

Since WW2 the US has experienced a recession every six years.

They tend to last roughly 11 months

Question 20

If the US sees a recession every 6 years, how long do the expansions last?

Answer 20

Since recessions happen every 6 years, and typically last 11 months, there is roughly 5 years of expansion before we will se the next recession

Question 21

How do you compare GDP’s of two different countries, and what is the formula?

Answer 21

You must convert to a common denominator using an exchange rate

GDPa in b’s $ = GDPa / Exchange Rate

Question 22

How do you calculate GDP per capita?

Answer 22

Total GDP / Total Population

Question 23

The central African Republic has a GDP of 1.1 Trillion CFA francs and a population of 4.8 million. The current exchange rate is 286 CFA francs per US Dollar. Calculate the GDP per capita in US dollars.

Answer 23

First get the foreign currency into US dollars

1.1 Trillion / 286 francs per dollar = 3.8 billion US dollars

Now take the GDP in US dollars by the total population

3.8 billion / 4.8 million = $801 = GDP per capita

Question 24

Does a rise in GDP overstate or understate the rise in the standard of living in the US?

Answer 24

Because GDP does not capture leisure, health, environmental factors, new technology, or increases in varieties, the actual rise in standard of living in the US has exceeded the rise in GDP.