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ECON 204

by: Courtney Aplin

ECON 204 ECON 204

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Courtney Aplin

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Study guide for Exam 1. Modules 1, 9-18
Principles of Macroeconomics (GT-SS1)
Steven J Shulman
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This 6 page Study Guide was uploaded by Courtney Aplin on Wednesday February 10, 2016. The Study Guide belongs to ECON 204 at a university taught by Steven J Shulman in Spring 2016. Since its upload, it has received 27 views.

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Date Created: 02/10/16
Exam 1 Chapters 1, 9-18 1. An aggregate production function shows the relationship between a. Productivity and physical capital per worker 2. An improvement in technology can illustrate by an upward shift in the a. An upward shift in the aggregate production function 3. If real GDP per capita grows at 2% per year, how many years will it take to double a. 35 4. The consumer price index in the base year always equals a. 100 5. Who is hurt by inflation? a. Banks 6. Annual GDP is a measurement of a. All final goods and services produced in a year 7. Long-run economic growth can be drawn on a graph as a. A “best fit” trend line through the cyclical pattern of actual real GDP 8. The difference between nominal GDP and real GDP is a. Real GDP is adjusted to account for inflation and nominal GDP is not 9. “Efficiency wages” is an explanation of a. Structural unemployment 10. If consumption = 1000, taxes = 100, investment = 200, imports = 100, exports = 100, government spending = 300 and wages = 800, then GDP = a. 1500 11. The resources used to produce goods and services are bought and sold in a. Factor markets 12. “Disposable income” shows the amount of income left after a. Taxes 13. The largest economy in the world is a. U.S. 14. Which is a topic of a macroeconomics issue? a. The effect of an increase in federal spending on inflation Module 1: The Study of Economics  Economics: the study of scarcity and choice  Choice: the decision by an individual of what to do  Resource: anything that can be used to produce something else o Physical capital o Human capital  Opportunity cost: the real cost of something is what you must give up in order to get it  Macroeconomics: the aggregate behavior of the economy o Tends to be more concerned with policy  Positive economics: the branch of economic analysis that describes the way the economy actually works  Normative economics: makes prescriptions about the way the economy should work Module 9: Introduction to Macroeconomics  Business cycle: the short-run back and forth between economics downturns and upturns  Depression: a very deep and prolonged downturn  Recessions: are periods of economic downturns when output and employment are falling  Expansions: are periods of economic upturns when output and employment are rising  Unemployment: the total number of people who are actively looking for work but aren’t currently employed  Long-run economic growth: the sustained upward trend in the economy’s output over time  Inflation: a rising aggregate price level  Deflation: a falling aggregate price level  Price stability: when the aggregate price level is changing only slowly Module 10: The Circular-Flow Diagram and the National Accounts  The Circular-Flow Diagram  Product markets: are where goods and services are bought and sold  Factor markets: are where resources like capital and labor are bought and sold  Stock: share in the ownership of a company  Bond: loan in the form of an IOU that pays interest  Expanded Circular-Flow Diagram Module 11: Gross Domestic Product (GDP)  GDP: measures the total value of all final goods and services produced in the economy during a given year  GDP= C+I+G+(X-M) o C=consumption o I=investment o G=government spending o X=exports o M=imports  GDP o Measures production of goods and services o Measures production within national borders o Inputs, used goods, financial assets (stocks and bonds) are not in GDP Module 12: Interpreting Real Gross Domestic Product  Aggregate output: the measure of the economy’s growth with accuracy o Total quantity of final goods and services the economy produces o Value of aggregate output=GDP  Real GDP: the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year  Nominal GDP: the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced Module 13: Defining Unemployment  Employment: the number of people currently employed in the economy, either full time or part time  Unemployment: the number of people who are actively looking for work but aren’t currently employed  Labor force: employment + unemployment  Unemployment rate: the percentage of the total number of people in the labor force who are unemployed Module 14: Categories of Unemployment  Frictional unemployment: unemployment due to the time workers spend in job search  Natural rate of unemployment: 5-6%  Structural unemployment: occurs when there are more people seeking jobs in a labor market than there are jobs available at the current wage  Minimum wages: a government-mandated floor on the price of labor  Efficiency wages: wages that employers set above the equilibrium wage rate as an incentive for better performance  Natural rate of unemployment: the normal unemployment rate around which the actual unemployment rate fluctuates o Arises from the effects of frictional plus structural unemployment  Cyclical unemployment: a deviation in the actual rate of unemployment from the natural rate  Natural unemployment= frictional unemployment + structural unemployment  Actual unemployment= natural unemployment + cyclical unemployment  Factors that affect the natural rate of unemployment o Changes in labor force o Changes in labor market o Changes in government policy Module 15: The Costs of Inflation  Real wage= nominal wage rate/ price level  Inflation rate  Costs of Inflation o Shoe-leather costs: the increased costs of transactions o Menu costs: the real cost of changing a listed price Module 16: Measuring Inflation  Aggregate price level: measure of the overall level of prices in the economy  To measure the aggregate price level, calculate the cost of purchasing a market basket  Price index: the ratio of the current cost of that market basket to the cost in a base year   Inflation rate: the percentage change in a price index  Consumer Price Index (CPI): measures the cost of the market basket for a typical family  Producer Price Index: goods purchased by firms  GDP deflator: measures the price level by calculating the ratio of nominal to real GDP Module 17: Sources of Long-Run Economic Growth  Labor Productivity: output per worker  Physical capital: human-made resources (machines, buildings)  Human capital: improvement in labor created by the education and knowledge embodied in the workforce Module 18: Productivity and Growth  Aggregate production function: hypothetical function that shows how productivity depends on the quantities of physical capital per worker and human capital per worker, and the state of technology  Diminishing returns to physical capital occurs when holding the amount of human capital and the state of technology fixed, each successive increase in the amount of physical capital leads to a smaller increase in productivity  Growth accounting: estimates the contribution of each factor toward economic growth  Total factor productivity: the amount of output that can be achieved with a given amount of factor inputs 


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