1. GDP
    • -most important measure in macroeconomic performance
    • Mkt value for all goods and services = quantity x price = GDP

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  2. Nominal GDP
    actual GDP for a particular year that
  3. Real GDP
    account for inflation or deflation

    • e.g. if 1990 serves as the base year;
    • real GDP for 1995; take quantities of all 1995 goods and services and multiply them by 1990's prices.
  4. GDP deflator and CPI
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    • % Change in GDP deflator would = rate of inflation or deflation

    CPI measures the price of a "basket of goods" consumed by a typical household

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  5. Unemployment Rate
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    Civilian labor force = 16 and up willing to work and not in jail

    Unemployed must be actively looking for job in past month
  6. Frictional and Structural Unemployment
    Frictional is from difficulties of matching qualified unemployed with jobs; usually because of lack of info about new jobs

    Structural means something big happened and workers need to change their skills or move to get a new job
  7. Reason why Aggregate Demand has an inverse relationship between price level and the quantity demanded of real GDP
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    • As price level rises people are not able to purchase as much, so Real GDP goes down. When prices fall they purchase more goods and services. Wealth Effect

    As price rises people need more money, but the supply of money is assumed fixed by the government, so the cost of capital, interest rate, increases

    As domestic prices rise foreign imports become cheaper, so their demand increaes. Also our exports become more expensive too, cuz price is rising. Net Exports decline.
  8. Short Run Aggregate Supply
    • Changes in SAS curve is because the time it takes for inputs to increase after there has been an increase in price.
    • Image Upload 6Shift in SAS curve is from Change in input prices not from a change in price level, or price you get for a good; an increase in price of Oil from decrease in production causes the quantities of byproducts to be reduced at all levels, because SAS curve is under assumption that input prices remain constant
  9. Long Run Aggregate Supply (LAS)
    • Also economic growth can shift the supply curve; this can be because an increase in productive resources like labor and capital which leads to more goods
    • -Moves the natural GDP level

    LAS is not affected by price, because economy is fully employing all of its available resources

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  10. Combining AD and AS Supply Curves
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    • intersection of the two curves determines both the equilibrium price level and the quilibrium level of real GDP
  11. Say's Law and the Classical Theory
    • -economy always capable buying all the output that it produces; when economy produces at a certain level of Real GDP it also generates the income needed to purchase that level of GDP
    • -People save money, this could put the economy below natural level of real GDP, but money market adjusts for this. Increase in saving means lower interest rate and more spending, vice versa.
    • -They also say there is only voluntary unemployment, that if people would just accept lower wages they would get employed.
  12. Say's Law and the Classical Theory Graph
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    • Classical theory of output and price level adjustment during a recessionThe immediate, short-run effect is that the economy moves down along the SAS curve labeled SAS1, causing the equilibrium price level to fall from P1 to P2, and equilibrium real GDP to fall below its natural level of Y1 to Y2. If real GDP falls below its natural level, the economy's workers and resources are not being fully employed. When there are unemployed resources, the classical theory predicts that the wages paid to these resources will fall. With the fall in wages, suppliers will be able to supply more goods at lower cost, causing the SAS curve to shift to the right from SAS1 to SAS2. The end result is that the equilibrium price level falls to P3, but the economy returns to the natural level of real GDP.Read more:,articleId-9741.html#ixzz1BFyCPlqs
  13. Keynesian Theory & Sticky prices
    Says that the components of GDP; investment I, government G and net exports NX are independent of income. except the component consumption. Aggregate consumption = autonomous consumption + marginal propensity to spend(real GDP); = C + mpc(Y).

    • Aggregate Expenditure, AE=A+mpc(Y)
    • A= total Autonomous expenditure= C+I+G+NX

    • multiplier
    • Y=A+mpc(Y) Y=m(A)
    • m=1/(1-mpc)

    Prices will not fall to far, because unemployed workers and resources will resist any reduction in their wages
  14. MPC; marginal propensity to consume
    MPC = Change in consumption / change in disposable income

    - if you found an extra dollar and .65 of it you used on consumption, then your MPC would be .65
  15. Types of money;
    Commodity; gold coins good whose value is serves as value of money

    Fiat; dollar bills

    Bank; checks
  16. demand for money
    Transactions motives; money is needed to make transactions, when you sell something there is a transaction/exchange. The more transactions or things sold, the more need for money

    Precautionary motive; people like to have money in case of the unexpected, e.g. wreck car need money

    Speculative motive; when it is perceived less risky to hold onto money than it is to invest it, holding on to money has opportunity cost of interest that could be earned
  17. money multiplier & multiplier effect
    • amount by which banks expand because of an increase in excess reserves (the amount required to keep on hand)
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    • Reciprocal of the reserve requirment

    -any increase in autonomous aggregate expenditures, has a multiplier effect on aggregate demand
  18. Expansionary Fiscal Policy
    • increase in gov expenditures and/or decreases in taxes
    • -This causes budget deficit to increase or surplus to decrease
  19. Contractionary Fiscal Policy
    • decrease gov expenditures and/or increase intaxes
    • -causes govs budget deficit to decrease or its budget surplus to increase
  20. Keynesian Views of Fiscal Policy
    expansionary and contractionary fiscal policies can be used to influence economic performance

    -Government should spend more, run at a deficit when in recession, doesn't have to spend total amount of GDP it wants to gain, just a small amount because of the multiplier effect
  21. Classical view of fiscal policy
    • Gov fiscal policies are unneccesary
    • -market mechanisms keep economy near natural level of GDP at all times
    • -mechanisms e.g.; flexible adjustment of prices and wages
    • -Also believe Gov should have balanced budget every year

    • -Where Keynesians believe gov fiscal policy can combat inflation and recession, Classical says that by Gov spending that causes a deficit reduces the amount of money available to borrow, cuz Gov took it all, Crowding Out Effect
    • -When gov reduces spending, therby less borrowing, you have crowding in effect, loans are cheaper and higher Aggregate demand, which leads to inflation
Card Set
Macroeconomics CLEP