Reading 16: Aggregate Output, Prices, and Economic Growth

Question 1

Please explain GDP using expenditure approach and income approach.

Answer 1

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

GDP inc= C+S+T
TDIP

Question 2

Please explain to me the sum-of-value-added approach to measuring GDP.

Answer 2

GDP= sum of value added at each stage from production, packaging, to sale on store shelfs.

GDP= sum of all values added amongst each stage

Question 3

Compare nominal GDP, real GDP, & GDP Deflator.

Answer 3

Nominal GDP- nominal GDP is GDP that is calculated without taking inflation into consideration.

Real GDP- real GDP is GDP after inflation is fixed

GDP Deflator- this is an index used to calculate the Real GDP from the nominal GDP.

GDP DEFLATOR= (CURRENT GDP/ BASE GDP)
Real GDP= NOMINAL GDP/ (GDP DEFLATOR)

Question 4

Explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance.

Answer 4

GDP exp= GDP inc

G-T= (S-I) - (X-M)

Fiscal Balance= (S-I) - (Trade Balance)

Question 5

Explain the IS and LM curves and how they combine to generate the aggregate demand curve.

Answer 5

IS-LM model

-both apart of the same graph (GDP on x axis + bank IR on Y axis)

Explains the relationship between Investment- Savings & Liquidity- Money for the average consumer.

Question 6

Explain the aggregate supply curve in the long-run and the short-run.

Answer 6

VSRAS (perfectly elastic)- meaning that there is no change in the wage, but by opening the firm up for longer hours, increasing productivity of workers, increasing work time, you can INCREASE QUANTITY PRODUCED FROM THEM

SRAS (elastic)- you can have increase productivity at first by hiring more people, this is like increasing capital and what not

LRAS (perfectly inelastic)- it is set in stone for the nation; changes in LRAS has to do with major changes like- technology, increase capital spending, increased labor knowledge and specialization, etc.

Question 7

Distinguish between the following types of macroeconomic equilibrium:

a. ) long-run full employment
b. ) recessionary gap
c. ) inflationary gap
d. ) stagflation
e. ) increase in SRAS

Answer 7

a.) Long-Run Full Employment
POINT OF NATURAL EQ AT THE RIGHT GDP

b. ) Recessionary Gap (AD Movement)
- Recessionary Gap occurs when there is a shift in AD to the left
- less consumption by people due to lack of wealth effect (AD shifts LEFT) -> New LOWER GDP established

c. ) Inflationary Gap (AD Movement)
- inflationary gay occurs when there is a shift in AD to the right
- more consumption by people because “AD” MOVES TO THE RIGHT
- new HIGHER GDP is the RESULT

d. ) Stagflation- results in the left shift of SRAS; there is a decrease in the GDP and a decrease in immediate labor supply (increase PRICE LEVELS, Decrease GDP)
e. ) increase in SRAS- more people are willing to work; shift to the right for SRAS (Increase GDP, Decreased Prices)

Question 8

What are the 5 important sources of economic growth?

Answer 8

1. ) Labor Supply
2. ) Human Capital
3. ) Physical Capital
4. ) Technology
5. ) Natural Resources