Econ 201 Study Guide for Final 1 questions introductory material Chapter 5 Macro goals Economic growth high employment stable prices Aggregation total behavior Keynes AD Wage and Price rigidities markets don t clear it might take time for economy to self correct govt should intervene to stimulate output employment capitalist Business cycle Expansion increasing real GDP output Recession decline in real GDP output Peak Trough 6 question Chapter 6 Included of GDP GDP definition Total value of all final goods and services produced for the marketplace during a given period within the nation s borders C I G NX Consumption Spending purchased by households as final users represents 70 o Not included imported consumption goods and components new construction o Items included even though households don t actually buy them total value of food products produced on farms that are consumed by farmers and families total value of housing services provided by owner occupied homes Private Investment business purchases of plant equipment and software new home construction changes in inventories o Adds to the nation s capital stock o Excludes govt investment consumer durables human capital o Ignores depreciation o Net investment investment depreciation Government purchases spending by federal state local govts on goods and services and govt investment in bridges highways etc o Govt outlays govt purchases transfer payments o Transfer payments Payments not associated w production of goods and services Money redistributed from one group of citizens to another Included in govt budgets as outlays NOT included in govt purchases component of GDP Net Exports Total exports minus total imports Not included Non market goods and services such as chores performed at home by family members underground activities sales of used goods financial transactions such as trading of stocks and bonds Government transfer payments Value added revenue a firm receives minus the cost of the intermediate goods it buys GDP sum the values added by all firms in the economy Intermediate and final goods intermediate used in production not included in GDP Unemployment definition the percentage of the labor force that is unemployed Different measures of unemployment Six U s Involuntary part time workers individuals who would like full time job but who are working only part time considered employed Discouraged workers individuals who would like a job but have given up searching for one not in labor force Marginally attached to the labor force can give any reason for not currently searching for work not in labor force Unemployment calculation number unemployed total labor force GDP deflator Nominal GDP Real GDP x 100 Real GDP measures the value of all final goods and services using the prices of a base year How to interpret the GDP price index 2 questions Chapter 7 How to calculate CPI Define a market basket Determine how much it would cost to purchase the market basket in the current year and in the base year Divide the dollar cost of purchasing the market basket in the current year by the dollar cost of purchasing the market basket in the base year Multiply the quotient by 100 CPI cost in current year cost in base year x 100 How to use CPI as a policy target to index payments to translate from nominal to real values Included part of GDP that consumers purchase as final users household purchases of used goods such as used cars or used computers household purchases of imports Not included Goods and services purchased by anyone other than consumers prices of assets such as stocks bonds and homes How to calculate real value from nominal value using an index Real wage Nominal wage CPI x 100 Real Interest Rate nominal interest rate inflation Nominal interest rate Actual interest rate borrowers pay and lenders earn from making a loan 1 questions Chapter 8 Labor market equilibrium market clears in the classical model the economy achieves full employment on its own Full employment market clears classical model economy achieves full employment on its own Potential output economy has not gotten back to potential GDP labor demand and supply curves intersect to determine employment then Aggregate production function shows potential GDP Usefulness of classical model as a long run model In the classical long run view the economy tends towards its potential full employment level of output on its own Key assumptions of classical model markets clear The price in every market will adjust until quantity supplied and quantity demanded are equal in the long run quantities of other resources and technology are fixed Solve for equilibrium interest rate in the loanable funds model 1 question This is the transition chapter from Long run to short run Chapter 10 Labor demand shifts leftward due to decrease in labor productivity decrease in total spending Labor supply shifts occur very slowly classical model CANNOT explain fluctuations through shifts in the supply of labor Why classical model cannot explain economic fluctuations and unemployment Once we step away from the classical model and the assumption that all markets clear a combination of a sudden drop in spending combined with wage rigidity can explain economic fluctuations Cannot explain booms and recessions bc it assumes markets respond very quickly to spending so that the economy remains at full employment labor markets always clear Evidence suggests that this assumption is not valid over short time periods rigid The alternative view the short run macro view is that markets respond slowly to wages shocks rigidity 5 questions Chapter 11 Disposable income definition income Taxes Transfers transfers increase DI Consumption Function as disposable income rises consumption spending rises C a b Y T Variables that affect household consumption behavior Disposable income wealth interest rate expectations about the future Autonomous consumption part of consumption spending that is independent of income measured by the vertical intercept of the consumption function How do these factors affect the consumption function Increases when disposable income rises wealth rises interest rate falls households become more optimistic about the future MPC b change in consumption change in disposable income Change in Y causes a movement along the curve all other factors cause the consumption function to shift Know which way If income increases and net taxes remain unchanged disposable income will rise consumption spending will
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