!Exam%#%1%Study%Guide%Lectures:%1%5%11%!Lecture!1!(September!8)!!Introduction!to!Macroeconomics!(Chapter!5)!• Macroeconomics!Concerns:!!o Output!Growth!o Unemployment!o Inflation!and!Deflation!• Components!of!the!Macroeconomy:!o The!Circular!Flow!Graph!o The!Role!of!the!Government!in!the!Macroeconomy!!Definitions:!- Macroeconomics:!Deals!with!the!economy!as!a!whole.!Macroeconomics!focuses!on!the!determinants!of!total!national!income,!deals!with!aggregates!such!as!aggregate!consumption!and!investment,!and!looks!at!the!overall!level!of!prices!instead!of!individual!prices.!!!!- Aggregate!Behavior:!The!behavior!of!all!households!and!firms!together.!- Sticky!prices:!Prices!that!do!not!always!adjust!rapidly!to!maintain!equality!between!quantity!supplied!and!quantity!demanded.!!!- Business!Cycle:!The!cycle!of!shortKterm!ups!and!downs!in!the!economy.!!- Aggregate!Output:!The!total!quantity!of!goods!and!services!produced!in!an!economy!in!a!given!period.!!- Recession:!A!period!during!which!aggregate!output!declines.!Conventionally,!a!period!in!which!aggregate!output!declines!for!two!consecutive!quarters.!!- Depression:!A!prolonged!and!deep!recession.!- Expansion!or!Boom:!The!period!in!the!business!cycle!from!a!trough!up!to!a!peak!during!which!output!and!employment!grow.!!!- Contraction,!Recession,!or!Slump:!The!period!in!the!business!cycle!from!a!peak!down!to!a!trough!during!which!output!and!employment!fall.!- Unemployment!rate:!The!percentage!of!the!labor!force!that!is!unemployed.!- Inflation:!An!increase!in!the!overall!price!level.!!- Hyperinflation:!A!period!of!very!rapid!increases!in!the!overall!price!level.!- Deflation:!A!decrease!in!the!overall!price!level.!- Circular!Flow:!A!diagram!showing!the!income!received!and!payments!made!by!each!sector!of!the!economy.!!!- Transfer!Payments:!Cash!payments!made!by!the!government!to!people!who!do!not!supply!goods,!services,!or!labor!in!exchange!for!these!payments.!They!include!Social!Security!benefits,!veterans’!benefits,!and!welfare!payments.!!- Treasury!Bonds,!Notes,!and!Bills:!Promissory!notes!issued!by!the!federal!government!when!it!borrows!money.!!- Corporate!Bonds:!Promissory!notes!issued!by!firms!when!they!borrow!money.!- Shares!of!Stock:!Financial!instruments!that!give!to!the!holder!a!share!in!the!firm’s!!!!!!!!!ECON!104!!!11th!Edition!! !ownership!and!therefore!the!right!to!share!in!the!firm’s!profits.!- Dividends:!The!portion!of!a!firm’s!profits!that!the!firm!pays!out!each!period!to!its!shareholders.!!!- Fiscal!Policy:!Government!policies!concerning!taxes!and!spending.!!- Monetary!Policy:!The!tools!used!by!the!Federal!Reserve!to!control!the!shortKterm!interest!rate.!!- Great!Depression:!The!period!of!severe!economic!contraction!and!high!unemployment!that!began!in!1929!and!continued!throughout!the!1930s.!- FineSTuning:!The!phrase!used!by!Walter!Heller!to!refer!to!the!government’s!role!in!regulating!inflation!and!unemployment.!!!- Stagflation:!A!situation!of!both!high!inflation!and!high!unemployment.!!!Diagrams:!Circular!Flow!Diagram!!!! Leakages!(Recession):!Saving,!Imports,!Taxes!!! Injection!(Inflation):!Imports,!Exports,!Government!Expenditure!!o If!Leakages!and!Injections!are!not!equal,!it!could!either!lead!to!an!Injection!or!Recession.!!Summary!(From!the!Lectures):!- America!has!the!largest!economy.!- Recession:!Two!consecutive!quarters!of!negative!economic!growth!- Unemployment!Insurance:!Money!given!to!people!who!have!lost!their!jobs!and!are!looking!for!another.!(Temporary)!!!Lecture!2!(September!10),!Lecture!3!(September!15),!Lectur e !4!(Septem ber!17),!and!Lecture!5!(September!22)!!Measuring!National!Output!and!National!Income!(Chapter!6)!• Gross!Domestic!Product!o Final!Goods!and!Services!! !o Exclusion!of!Used!Goods/Paper!Transactions!o Exclusions!of!Output!Produced!Abroad!by!Domestically!Owned!Factors!of!Prod.!• Calculating!GDP!o The!Expenditure!Approach!o The!Income!Approach!• Nominal!vs.!Real!GDP!• Limitations!of!the!GDP!Concept!o GDP!and!Social!Welfare!o The!Informal!Economy!o Gross!National!Income!per!Capita!!Definitions:!- National!Income!and!Product!Accounts:!Data!collected!and!published!by!the!government!describing!the!various!components!of!national!income!and!output!in!the!economy.!!!- Gross!Domestic!Product!(GDP):!The!total!market!value!of!all!final!goods!and!services!produced!within!a!given!period!by!factors!of!production!located!within!a!country.!!- Final!Goods!and!Services:!Goods!and!services!produced!for!final!use.!- Intermediate!Goods:!Goods!that!are!produced!by!one!firm!for!use!in!further!processing!by!another!firm.!- Value!Added:!The!difference!between!the!value!of!goods!as!they!leave!a!stage!of!production!and!the!cost!of!the!goods!as!they!entered!that!stage.!- Gross!National!Product!(GNP):!The!total!market!value!of!all!final!goods!and!services!produced!within!a!given!period!by!factors!of!production!owned!by!a!country’s!citizens,!regardless!of!where!the!output!is!produced.!!- Expenditure!Approach:!A!method!of!computing!GDP!that!measures!the!total!amount!spent!on!all!final!goods!and!services!during!a!given!period.!- Income!Approach:!!A!method!of!computing!GDP!that!measures!the!income—wages,!rents,!interest,!and!profits—received!by!all!factors!of!production!in!producing!final!goods!and!services.!!!- Personal!Consumption!Expenditures!(C):!Expenditures!by!consumers!on!goods!and!services.!- Durable!Goods:!Goods!that!last!a!relatively!long!time,!such!as!cars!and!household!appliances.!!- Nondurable!Goods:!Goods!that!are!used!up!fairly!quickly,!such!as!food!and!clothing.!- Services:!The!things!we!buy!that!do!not!involve!the!production!of!physical!things,!such!as!legal!and!medical!services!and!education.!!- Gross!Private!Domestic!Investment!(I):!Total!investment!in!capital—that!is,!the!purchase!of!new!housing,!plants,!equipment,!and!inventory!by!the!private!(or!nongovernment)!sector.!!!- Nonresidential!Investment:!Expenditures!by!firms!for!machines,!tools,!plants,!and!so!on.!!- Residential!Investment:!Expenditures!by!households!and!firms!on!new!houses!and!apartment!buildings.!!- Change!in!Business!Inventories:!The!amount!by!which!firms’!inventories!change!during!a!period.!Inventories!are!the!goods!that!firms!produce!now!but!intend!to!sell!later.!!! !o GDP!=!Final!sales!+!Change!in!business!inventories!- Depreciation:!The!amount!by!which!an!asset’s!value!falls!in!a!given!period.!-
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