Macro Review

Question 1

Natural rate of unemployment and full employment rate

Answer 1

Same rate, includes no cyclical unemployment only frictional and structural

Question 2

Economic Growth determinants

Answer 2

Quantity and quality of resources
Technology/productivity
Capital stock

Question 3

Economic growth shown graphically

Answer 3

Outward shift in the PPC or rightward shift of LRAS

Question 4

Economic growth path

Answer 4

Change in interest rate-change in investment spending, change in capital stock, change in economic growth

Question 5

What happens with a change of taxes?

Answer 5

Affects consumption and therefore shifts AD

Question 6

What happens with a change in business taxes?

Answer 6

Affects firm costs and therefore AS but also affects investment and therefore AD

Question 7

Types of unemployment

Answer 7

Frictional (in between jobs)
Structural (insufficient skills for job)
Cyclical (unemployment due to lack of demand)

Question 8

Determinants of Aggregate Demand

Answer 8

Consumption, Investment, Government spending, net exports

Question 9

GDP equation

Answer 9

GDP=C+I+G+(X-M)

Question 10

Determinants of Aggregate Supply

Answer 10

Input costs, technology, legal-institutional environment

Question 11

National income

Answer 11

Real GDP/output

Question 12

Real GDP

Answer 12

gross domestic product adjusted for inflation

Question 13

Nominal GDP

Answer 13

Gross domestic product not adjusted for inflation

Question 14

Determinants of the PPC

Answer 14

Change in technology
Change in quantity or quality of resources
Specialization and trade

Question 15

CPI equation

Answer 15

(Price of the current market basket/value of the market basket in the base year)*100

Question 16

Quantity theory of money

Answer 16

Identity (equation) that shows how an increase in the money supply will result in a proportional increase in prices

MV=PQ(p*q=nominalGDP)

Question 17

GDP deflator

Answer 17

Index number that shows how prices have changed for all goods and services
(Nominal GDP/real GDP)*100

Question 18

Does real GDP account for changes in price and is it adjusted for inflation?

Answer 18

Yes

Question 19

Mixed economy

Answer 19

Mixture of different economies

Aims to have private property, pricing and individual self interest

Question 20

Government deficit spending

Answer 20

**

Question 21

Supply Shock

Answer 21

Sudden unexpected change in aggregate supply

Question 22

Classical view

Answer 22

Aggregate supply is vertical and government does not need to get involved because wages and prices are flexible upward and downward

*Full employment level of real GDP stays the same regardless of price level

Question 23

Stagflation

Answer 23

Simultaneous increases in the inflation rate and unemployment rate

Question 24

Federal Funds Rate

Answer 24

The rate that banks charge one another on overnight loans from their excess reserves

Question 25

Scarcity

Answer 25

Unlimited wants and limited resources

Question 26

Circular Flow-Product market

Answer 26

Businesses sell goods and services in the product market which individuals buy. In return, individuals give money to businesses in the product market which is the business' revenue.

Question 27

Circular flow-resource market

Answer 27

Individuals give land labor capital (resources) to businesses. In return businesses pay individuals which turns to individual's income

Question 28

Free market

Answer 28

businesses, government and consumers

Question 29

GDP definition

Answer 29

dollar value of all final goods and services produced in a country's borders in a given year

Question 30

What is not included in GDP?

Answer 30

Intermediate goods non production transactions non market activities

Question 31

Nominal vs real GDP

Answer 31

Nominal is NOT adjusted for inflation real is adjusted

Question 32

GDP deflator

Answer 32

(Nominal GDP/Real GDP)*100

Question 33

CPI

Answer 33

Measure of inflation (market basket of current year/market basket in base year)*100

Question 34

Frictional unemployment

Answer 34

Unemployed because you are in between jobs

Question 35

Structural unemployment

Answer 35

Unemployed because of skills

Question 36

Cyclical unemployment

Answer 36

Happens because of recession

Question 37

In the short run, how are the wages, resource prices and price level affected?

Answer 37

Wages and resource prices do not change at the same pace as price level

Question 38

In the long run, how do wages resource prices and price level change?

Answer 38

They all change at the same pace which makes the LRAS vertical

Question 39

Fiscal Policy

Answer 39

Changes in government spending or taxation to influence the economy (affects C and G) Inflationary gap: decrease government spending or increase taxes Recessionary gap: increase in government spending or decrease taxes

Question 40

Monetary Policy

Answer 40

Changes in the money supply to influence the economy (affects I) Inflationary gap: decrease money supply Recessionary gap: increase money supply

Question 41

Keynesian View

Answer 41

Aggregate supply is horizontal Prices and wages are sticky downward Need government interference

Question 42

What are the two reasons that people demand money?

Answer 42

Transaction demand- households and businesses need money for daily transactions Asset demand- people may prefer holding money rather than other assets (bonds, stocks, real estate)

Question 43

Money market graph

Answer 43

Interest rate and quantity of money Demand is downsloping- higher interest rate=less money The fed supplies the money-perfectly vertical and inelastic supply

Question 44

Affect on interest rate when the fed changes the supply of money

Answer 44

If the fed increases the supply of money then the interest rate goes down and if the fed decreases the supply of money then the interest rate goes up

Question 45

3 Fed Tools (monetary policy)

Answer 45

1) reserve requirement (how much the bank has to hold in its reserves) 2) discount rate (interest rate that the fed charges banks to borrow money) 3) open market operations (buying and selling of government bonds-buy bonds to increase money supply and sell bonds to decrease money supply)

Question 46

The higher the interest rate the_____ investment

Answer 46

less

Question 47

Real interest rate=

Answer 47

nominal interest rate-expected inflation

Question 48

Lump sum taxes

Answer 48

The tax revenue of the government is the same at all GDP levels

Question 49

Demand pull inflation

Answer 49

Excess of total spending over the countries ability to produce---overissuance of money by the central bank Too much spending chasing too few goods

Question 50

Cost-push inflation

Answer 50

Output and employment decline while price level rises | Cost-push inflation is the result of supply shocks

Question 51

Functions of money

Answer 51

Medium of exchange, store of value, unit of account

Question 52

Money multiplier

Answer 52

1/reserve ratio