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Purdue AGEC 21700 - Exam 2 Study Guide
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AGEC 217 1st EditionExam # 2 Study Guide Lectures: 10 - 17Lecture 10 (February 17)What is macroeconomics?It is a study of economics that focuses on how the economy is doing as a whole. It looks at economic booms, expansions, recessions, inflation, and unemployment. The goal is for there to be economic growth and low inflation and unemployment. What are the two macroeconomic schools of thought?The Keynesian school of thought says that recessions in the economy will cause a new market equilibrium to form. The neoclassical school of thought says that a shift in the equilibrium is only temporary and does not cause a new market equilibrium to form. How do economists determine the size of an economy?It is determined by using Gross Domestic Product, or GDP. This is the value of all final goods and services produced within a country in a given year. Within a country refers to what is produced within a country’s geographical boundaries. What is the equation for GDP?GDP= consumer consumption + business investments + government spending + net exports, which is exports minus imports. Lecture 11 (February 19)How do the parts of the GDP equation change?Consumption follows the gentle elephant trend. This means that it tends to stay steady over time and doesn’t drastically change year to year. Business investments tend to vary a lot and areaffected by monetary policy. The government tends to spend more money when the economy isdown. Final goods can be broken down into nondurable goods such as food or clothes, and durable goods like a car. Structures including buildings and houses. What is Gross National Product?GNP is another way of measuring the economy. It adds in anything produced by domestic business and labor abroad that is done by citizens of the given country. It does not include anypayments sent home to other countries by foreign labor and businesses located in the country being measured. What is Net National Product?NNP is equal to GNP minus the depreciation of all goods and services. Depreciation refers to durable goods values decreasing over time. How do you find real GDP?Real GDP is equal to Nominal GDP divided by GDP deflation. GDP deflation is equal to the price index divided by 100. Lecture 12 (February 24)What is a GDP deflator?It is a price index measuring the price of all goods and services in the economy. What is an inflation rate?It is the percent change in GDP deflators. What is an economic growth rate?This is how fast the real GDP is rising. This number can be negative, but that is a bad sign for te economy. What are recessions and depressions?A recession is a decrease in real GDP that lasts at least a few months in a row. A depression is a recession that lasts at least 2 years. Lecture 13 (February 26)What is real GDP doing over time?People want to consume more over time. In general, real GDP is increasing over time. How are GDPs compared across countries?You have to account for the exchange rate, which is the value of one currency in terms of another. The market exchange rate is the day to day exchange. Purchasing power parity is another way to compare. This looks at a longer run exchange by comparing two of the exact same goods. What is GDP per capita?GDP per capita refers to the GDP per person. It is found by dividing a country’s GDP by its population. This measure doesn’t tell us anything about the distribution of wealth. Another criticism is that it doesn’t account for equity or leisure. Lecture 14 (March 5)What can GDP per capita measure and not measure?It measures money spent. Some spending included is related to undesirable activities. No measure is perfect and there is a strong relationship between money spent and quality of life. What drives economic growth?Economic institutions drive growth. This includes the rule of law, which the process of enacting laws to protect property rights. Labor productivity also drives growth. This is the value created by an average worker per period. How can productivity be increased?Monetary incentives such as pay raises can. Human capital, such as education, experience, and skills affect productivity. Physical capital such as machines and technology also affect it. What is the aggregate production function?This gives the equation for total GDP, which is equal to workforce + human and physical capital +technology. Over time when human and physical capital increase per capita, it is known as capital deepening. Lecture 15 (March 12)Who is counted as being in the workforce?Economists don’t count children, the elderly, people with disabilities, and parents who stay at home. These people are out of the workforce.What criteria classifies a person as unemployed?They have to be without a job. They have to be available to work. They also have to be actively looking for work in the last 4 weeks. What is the unemployment rate equation?Unemployment rate is given as a percent. It is equal to the number of unemployed people divided by the number of people in the labor force X 100. It will never be at 0%.What are some flaws in the unemployment rate equation?There is the problem of hidden unemployment. Part-time workers who want to work full-time or are over-qualified count in this group. They are counted as being employed though. Workers who are discouraged are counted as not being in the labor. Lecture 16 (March 24)What are properties of short run unemployment?It is assumed that the supply of labor is fixed and that the preferences for work don’t change. Education and skills also don’t change. The labor market equilibrium is determined by changes in demand. The unemployment is often cyclic and follows patterns of real GDP business cycles. What does it mean when wages are sticky?It means that they tend to be easier to move one way (up or down) more than the other. What are explicit reasons for stick wages?Minimum wages make it illegal to reduce wages below a certain point. Wage controls such as unions also are explicit reasons. What are some implicit reasons for wages being sticky?1. Implicit contracts: when the labor demand market is down, wages won’t go down and vice- versa. 2. Efficiency wages: if you pay a wage a little above the market equilibrium wage the worker will be happy. Happy workers are less likely to leave and will work harder. The employer will have lower turnovers and search costs. 3. Adverse Selection in wage cuts: workers with good abilities will leave and employers are stuck with not as good


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Purdue AGEC 21700 - Exam 2 Study Guide

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