Macroeconomics Exam 2 Study Guide

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Economic Growth
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Aggregate Supply & Demand, Inputs and Outputs
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Full Employment
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Everyone who is willing and able to work can find a job Unemployment rate is still positive
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Low Inflation
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Volume of goods and services that it will buy Wage rate – adjusted for inflation Nominal wage divided by price index Volume of goods and services that the nominal wages will buy
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Production Function
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Shows the volume of output that can be produced From given inputs (such as labor and capital) Given the available technology
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Potential GDP
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Real GDP the economy would produce if labor and other resources were fully employed
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Growth Rate of Potential GDP
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Depends on: Growth rate of labor force Growth rate of capital stock Rate of technical progress GDP = Hours of work x Labor Productivity
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Labor Force
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Number of people holding or seeking jobs.
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Labor Productivity
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Amount of output one worker produces of labor
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Unemployment/Unemployment Rate
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People currently not working, Temporarily laid off, or actively looking for a job after being fired (4 weeks)/ Number of unemployed people as percentage of labor force
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Frictional Unemployment
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People who are temporarily between jobs -Moving or changing occupations -unemployed for similar reasons
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Structural Unemployment
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Workers displaced by automation Their skills are no longer in demand
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Cyclical Unemployment
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Portion of unemployment that is attributable to a decline in the economy’s total production Rises during recessions Falls as prosperity is restored
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Discouraged Worker
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An unemployed person who gives up looking for work and is no longer counted as part of the labor force
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Inflation
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Increase in average price
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Consumer Price Index(CPI)
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Bureau of Labor Statistics (BLS) Monthly Representative typical urban household budget Same bundle of goods and services
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Real Interest Rates
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Percentage increase in purchasing power Increased ability to purchase goods and services that the lender earns
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Nominal Interest Rates
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Percentage by which the money the borrower pays back exceeds the money that was borrowed Making no adjustment for any decline in the purchasing power of this money that results from inflation Nominal interest = Real interest + Expected Inflation Rate
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Three Pillars of Productivity Growth
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-Rate at which the economy builds up its stock of capital -Rate at which technology improves -The rate at which workforce quality (or \”human capital\”) is improving
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Land, Labor, and Capital
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Factors of economic growth
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Technology
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Creates higher labor production for a given capital and given labor force
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Human Capital
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Investing in yourself such as Education and training
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Physical Capital
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Machinery, Equipment, Things you can touch
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Convergence Hypothesis
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Nations with low levels of productivity -Tend to have high productivity growth rates International productivity differences shrink over time Poorer countries -Higher productivity growth rates than richer countries
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Invention
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Act of discovering new products or new ways of making products
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Innovation
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Act of putting new ideas into effect
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Growth Policy
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Encouraging capital formation: -Government must somehow persuade private businesses to invest more -Lower real interest rates -Tax provisions -Technical change -Growth of demand -Political stability and property rights
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Aggregate Supply
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Shows, for each possible price level -The quantity of goods and services that all the nation’s businesses are willing to produce during a specified period of time -All other determinants constant Slopes upward
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Recessionary Gaps
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Equilibrium below potential GDP Aggregate demand – weak
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Inflationary Gaps
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Equilibrium is above the potential GDP Excess aggregate demand
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Economy’s Self Correcting Mechanism
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The way money wages react to either a recessionary gap or an inflationary gap Wage changes shift the aggregate supply curve -Change equilibrium GDP and the equilibrium price level
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Aggregate Demand
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Total amount that all -Consumers -Business firms -Government agencies -Foreigners Spend on final goods and services
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Injections
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Investments, Government Purchases, Exports, Transfers
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Leakages
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Savings, Imports, Taxes
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Expenditure Schedule
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Shows the relationship between national income (GDP) and total spending
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Equilibrium
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Situation in which neither consumers nor firms have any incentive to change their behavior
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Multiplier
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Ratio of change in equilibrium GDP

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