Macroeconomics Unit 2 Study Guide

What is the difference between distinguish current and constant value?

Test date: 10/10/16

On the test: 33 questions

o 3 Q’s: double counting

o 4 Q’s: current vs. constant GNP

o 2 Q’s: circular flow of income

o 2 Q’s: what’s in the GNP

o 3 Q’s: types of unemployment

o 4 Q’s: unemployment graph

o 1 Q: multiplier

o 1 Q: who advised FDR in the New Deal?

o 1 Q: Keynesian/ classic

o 2 Q’s: types of income

o 10 Q’s: GNP

o Who is helped/hurt by inflation/deflation

Double counting (3): 

Double counting – use value added approach

Sector

Sales

Value Added

Wheat farmer

$50,000

50,000 (assuming 0  costs)

Miller

80,000

30,000

Baker

100,000

20,000

Retail grocer

160,000

60,000

Total

390,000

160,000

What is the circular flow of income?

Sum of added values = total

Current vs. constant GNP (4): 

Inflation – distinguish current vs. constant value (/nominal vs. real)

2004 – assume as base year

- 100 tractors produced and sold for $10,000 each

 $1,000,000 contribution to GNP

2005:

- 120 identical tractors produced and sold for $13,000 each  (120)*(13,000) = $1,560,000 current/nominal GNP

2004 -  (120)*(10,000) = $1,200,000 constant/real GNPWe also discuss several other topics like lowercase m in chemistry
Don't forget about the age old question of physics 1120

1,560,000

1,200,000=13,000

10,000 = 1.3 30% rate of inflation*

∙ Base year – stick with it for 18 years (as constant GNP)

∙    Inflation = increase in prices

How can you calculate gnp?

Don't forget about the age old question of 3. http //chemistry.about.com/od/acidsbases/a/acidbaseformula.htm

Circular flow of income (2): 

∙ Circular flow of income

o Households sell labor  paid wages

o Pay taxes  government provides police/fire protection

o Businesses pay taxes  get services

∙ Circular flow of income: we can track money in both directions (sell to each other, buy  from each other)

o *spending = earnings

What’s in the GNP (2): 

∙ GNP = C + I + G + (x – M) = Y

∙ Y = consumption + investors + government + (exports – imports)

∙ GNP = Gross National Product = sum value of all goods and services produced in a  country in a year, whether or not it has been sold at the final retail level

∙ Underemployment  GNP not as big as it could be

Types of unemployment (3):  

∙ Types of unemployment

o Frictional = people between jobs; recent college graduates; switching companies o Cyclical = unemployed due to business cycle:  weather, seasonal, holidays,  construction

o Structural = skills no longer demanded by the structure of the economy;  typewriter repairman; economy does not have the job anymore

o Natural = minimum rate that will always exist; include people who want a job, but can’t get one If you want to learn more check out dm fiu

∙ *test: as citizens, we should be most concerned with structural unemployment o Example: if natural rate is 3%, then full employment is 97% (if we keep it down  to natural rate)

Unemployment graph (4):  

a. Wage rate is flexible b. wage rate is  flexible

∙ Every point on the supply curve tells how many people are  willing to work for that wage or salary

∙ How many are willing to work at $10/hour? = 94M

o Actual # working = 87M

∙ Flexible wages  only voluntary unemployment

Multiplier (1):  

∙ Multiplier effect: federal government needs to add just enough $ ∙ MPC = marginal propensity to consume

o *we are spending $0.56 (MPC) on every dollar for American made goods and services (products)

∙ MPW = marginal propensity to withdraw Don't forget about the age old question of arrector pili muscle definition anatomy

∙ (for previous problem) M = multiplier =  = 2.27

1

MPW =  

1

1−MPC =  

1

0.44

∙ G2 = G1 +  

GAP

M = 4.50B +  

200 B

2.27 = $538.11B

Who advised FDR in the New Deal (1):  John Maynard Keynes

Keynesian / Classical (1): Keynesian Solution: 1

M =  

0.43 = 2.33

G2 = G1 + GAP

M = 300B +

Classical Solution:

107 B

2.33 = 300B + 45.92 =$345.92B

Yf = 2,200B = 900B + n2 * (2,200B)

1,300B = n2 * (2,200B)

n2 = 0.59 = MPC2

Recall: n1 = 0.57 = 0.7 * 0.82

n2 = 0.59 = 0.7 * (x) where x = 1 - TR2 Don't forget about the age old question of what predicts conformity

x = 0.84

∴ TR2 = 1 - .84 = 0.16 = 16% (new tax rate) 

Types of income (2):  

∙ Y = gross (before taxes taken out)

∙ Yd = disposable (after taxes taken out)

∙ Yde = discretionary (after you pay mandatory bills)

∙ Ye = equilibrium (suppliers produce the exact amount of 

services that consumers want to buy

∙ Yf = full employment (how much income all Americans 

would earn this year if everyone who wants a job has a job)

GNP (10):  

∙ GNP = Gross National Product = sum value of all goods and services produced in a  country in a year, whether or not it has been sold at the final retail level ∙ GNP is a measure of production (even the things not sold)

o Involves money changing hands

o Investors look at sectors of GNP

o Does not reflect quality of products

o If we produce junk, and someone buys it, GNP still goes up

o Money has to change hands legally

o NOT in GNP: quality of product, volunteer work, bartering

∙ GNP = C + I + G + (x – M) = Y

Who is helped / hurt by inflation / deflation?  

∙ Inflation: major problem

o Affects everyone

o Business owners benefit