ECON 102 1st Edition Exam 2 Study Guide Lectures 12 21 Lecture 12 September 20 Macroeconomics Theory Policy and History Key Terms Microeconomics Macroeconomics Self regulating economy Keynesian economics Monetary Policy Fiscal Policy Business Cycle Depression Recession Expansions Business Cycle Peak Business Cycle Trough Long Run economic growth Inflation Deflation Inflation Rate Price Stability Microeconomics Focuses on how decisions are made by individuals and firms and the consequences of those decisions Macroeconomics Examines the aggregate behavior of the economy that is how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole o EX Overall level of prices in economy rather than o The behavior of the whole macroeconomy is indeed greater than the sum of individual actions and market outcomes Policies Monetary Policy uses changes in the quantity of money to alter interest rates and affect overall spending Federal Bank Central Banks o Deals with money supply and interest rates o Not a part of the government Fiscal Policy uses changes in government spending and taxes to spending overall o Deals with taxes expenditure o Controlled by the government Long Run Economic Growth Long run economic growth the sustained upward trend in the economy s output over time A country can achieve a permanent increase in the standard of living of its citizens only through long run growth Lecture 13 September 23 Expanded Circular Flow Diagram and the National Accounts Key Terms Stock Bond Disposable Income Gross Domestic Product GDP Aggregate Spending National Income and Product Accounts Households earn income via the factor markets from wages interest on bonds dividends on stocks and rent on land Inventories are stocks of goods and raw materials held it facilitate business operations Final goods and services are goods and services sold Gross Domestic Product GDP Measurement of the total value of all final goods and services produced in the economy during a given year o Measurement of GDP Income Approach Spending Approach GDP C I G X IM Value Added Approach Aggregate Spending The sum of consumer spending investment spending government purchases of goods and services and exports minus imports is the total spending on domestically produced final goods and services in the economy Lecture 14 September 25 Tracking the Macroeconomy Key Terms Real GDP Nominal GDP GDP per Capita Aggregate Price Level Price Index Real GDP The total value of the final goods and services produced in the economy during a given year calculated using the prices of a selected base year Nominal GDP The value of all final goods and services produced in the economy during a given year calculated using the prices current in the year in which the output is produced o Except in the base year real GDP is not the same as nominal GDP output valued at current prices GDP per capita The measure of the average GDP per person o GDP per capita GDP Population It is not by itself an appropriate policy goal Does not tell us how growth is spread out Aggregate Price Level The measure of the overall level of prices in the economy o To measure the aggregate price level economists calculate the cost of purchasing a market basket Price Index The ratio of the current cost of that market basket to the cost in a base year multiplied by 100 Cost of market basket in a given year Cost of market basket in a base year X 100 Lecture 15 September 27 The Unemployment Rate Key Terms Employment Unemployment Labor Force Labor Force Participation Rate Unemployment Rate Discouraged Workers Marginally Attached Workers Underemployment Job Search Frictional Employment Structural Employment Minimum Wage Unions Efficiency Wages Labor Force Participation Rate The percentage of the population aged 16 or older that is in the labor force Labor Force Population age 16 and older x 100 Unemployment Rate The percentage of the total number of people in the labor force who are unemployed of unemployed workers labor force x 100 Efficiency Wages Wages that employers set above the equilibrium wage rate as an incentive for better performance o Side effects of Government Policies Public policies designed to help workers who lose their jobs these policies can lead to structural unemployment o Natural Unemployment Frictional Unemployment Structural Unemployment o Actual Unemployment Natural Unemployment Cyclical Unemployment Lecture 16 September 30 Long Run Growth Key Terms Productivity Physical Capital Human Capital Technological Progress Long Run Growth o Long run economic growth depends almost entirely on one ingredient rising productivity o What other factors are responsible for Long Run Growth 1 Physical Capital It s not enough for a worker to have good equipment they must also have the knowledge of how to use it Manufactured resources such as machines buildings and equipment o EX A worker operating a backhoe can dig a lot more feet of trench per day than one equipped only with a shovel 2 Human Capital The improvement in labor created by the education and knowledge embodied in the workforce o Some suggest that education and its effect on productivity is an even more important determinant of growth than increases in physical capital 3 Technological Progress An advance in the technical means of the production of goods and services o Workers today are able to produce more than those in the past even with the same amount of physical and human capital because technology has advanced over time Lecture 17 October 2 Aggregate Production Function Key Terms Rule of 70 Aggregate Production Function Rule of 70 A mathematical formula that states that the time it takes real GDP per capita or any other variable that grows gradually over time to double is approximately 70 divided by that variable s annual growth rate o 70 Variable s annual growth rate Aggregate Production Function Aggregate Production Function a hypothetical function that shows how productivity real GDP per worker depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology o o T represents an estimate of the level of technology Lecture 18 October 4 Growth Rates and Government Policies Key Terms Sustainability Differing Growth Rates A number of factors influence differences among countries in their growth rate These are government policies and institutions that alter o Savings and investment