question
Gross domestic product
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a measure of the market value of final goods and services produced within the borders of a country during a specific time period, usually a year
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income transfers, purely financial transactions, and exchanges of goods and assets
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what is not included in GDP because they do not involve current production?
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four major GDP components
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1. personal consumption
2. gross private investment
3. government consumption and gross investment
4. net exports
2. gross private investment
3. government consumption and gross investment
4. net exports
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direct income components and indirect business taxes, depriciation, and the net income of foreigners
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what does GDP equal when derived by the resource cost-income approach?
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GDP deflator and consumer price index (CPI)
answer
what are the most widely used price indexes?
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price indexes
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measure the changes in the general level of prices over time
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rate of inflation
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the percentage change in the general level of prices from one year to the next
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GDP formula
answer
Real GDP2 = Nominal GDP2 x GDP deflator 1 / GDP deflator 2
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per capita GDP
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a broad indicator of income levels and living standards across time periods
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3 percent
answer
how much has GDP in the US grown at an average annual rate?
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expansion, peak, contraction, and recession
answer
what are the four phases of the business cycle?
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frictional, structural, and cyclical
answer
what are the three types of unemployment?
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full employment
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the employment level consistent with the economy's natural rate of unemployment
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potential output
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the maximum sustainable output level consistent with the economy's resource base and current institutional arrangements
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inflation
answer
an increase in the general level of prices
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inflation harmful effects
answer
1. adverse impact on investment and other time-dimension contracts
2. distortion of relative prices
3. the shift of productive resources into activities designed to prevent inflation from eroding one's wealth
2. distortion of relative prices
3. the shift of productive resources into activities designed to prevent inflation from eroding one's wealth
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circular flow of income and expenditures
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shows how money flows through the four basic markets that make up the macroeconomy
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four markets of macroeconomy
answer
1. goods and services
2. resource
3. loanable funds
4. foreign exchange
2. resource
3. loanable funds
4. foreign exchange
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aggregate demand curve
answer
shows the various quantities of domestically produced goods and services that purchasers are willing to buy at different price levels. slopes downward and to the right because the quantity purchased by consumers, investors, governments, and foreigners will be larger at lower price levels
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aggregate supply curve
answer
shows the various quantities of goods and services that domestic suppliers will produce at different price levels. slopes upward and to the right because higher product prices will improve profit margins
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long-run aggregate supply curve
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vertical because output is constrained by the economy's resource base, current technology, and efficiency of its existing institutions
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long- run equilibrium
answer
these two conditions are necessary for ________
1. the quantity demanded must equal the quantity supplied
2. the actual price level must equal the price level decision makers anticipated when they entered into their long term agreements
1. the quantity demanded must equal the quantity supplied
2. the actual price level must equal the price level decision makers anticipated when they entered into their long term agreements
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aggregate demand-aggregate supply model
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reveals the determinants of the price level and real output
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macroeconomic equilibrium
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requires that equilibrium be achieved in all four key macroeconomic markets and that they be in harmony with one another
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john maynard keynes
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developed a model that implied a market economy could remain below full employment for lengthy periods of time
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federal budget
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the primary tool of fiscal policy
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fiscal policy
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changes in ______ ______ must be timed properly if they are going to exert a stabilizing influence on an economy
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automatic stabilizers
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help promote stability because they are able to add demand stimulus during a recession and restraint during an economic boom without legislative action
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crowding out model
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indicates that expansionary fiscal policy will lead to higher real interest rates and less private spending, particularly for investment
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new classical model
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stresses that financing government spending with debt rather than taxes changes the timing, but not the level, of taxes. people will expect higher future taxes, which will lead to more saving and less private spending
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tax cuts
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can generally begin to exert an impact on the economy more rapidly than spending increases
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aggregate supply
answer
when fiscal policy changes marginal tax rates, it influences _________ ______ by altering the attractiveness of productive activity relative to leisure and tax avoidance
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