CLAS 110 Study Guide - Midterm Guide: Real Interest Rate, Fisher Equation, Longrun
!
Spring 2018
1!
REVIEW – MIDTERM 2
Spring 2018 – Ayesha Khalid
Disclaimer: the following topics are meant to give you an idea of which topics I consider
to be the most important of those we have studied. They do not necessarily reflect every
single topic that will be on the exam. As a result, you will need to know more than the
brief notes I’ve provided about each topic in this review. You should use this review
sheet as a starting point to help you study. You should also review lecture notes, and the
weekly practice questions.
Midterm Information
- will cover all the material up until the end of Thursday’s (May 17th ) class (Introduction
lecture, chapters 6, 7, 8, 9, 13, 15 and 16).
-!The exam will be comprehensive but there will a larger weight on post midterm 1
topics.
- 50 multiple choice questions
- I will provide Scantron
- bring student ID
- there will be a seating chart - show up early
Introduction
Business cycles: short-run fluctuations in GDP
§ expansion -> peak -> recession -> trough
§ expansion: phase of persistent increase in GDP
§ recession: phase of persistent decrease in GDP
Chapter 6 – GDP
GDP: market value of all final goods and services produced in a country during a specific
time period.
§ greater production -> greater income -> higher standard of living
§ GDP is our best measure of welfare
There are four parts to the GDP definition:
1. market value - allows you add up very different goods/services in a meaningful way
2. final goods and services - if it also included intermediate goods, they would be double-
counted
3. produced within a country - we care about domestic production
4. during a specific time period - don't want to count a good two different times
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Spring 2018
2!
GDP can be broken up into four components:
GDP = C + I + G + X – M
where
C: consumption - spending on goods/services by households (largest component of GDP)
I: investment - private spending on things used to make future goods/services (e.g.
machines, office buildings, etc.)
G: government spending - consumption and investment spending by the government
X-M: net exports - market value of exports - market value of imports
Different measures of GDP:
§ nominal GDP - can increase if either production or prices increase
§ real GDP: !"#$!%& !"#
!"# !"#$%&'(
∗100 - only increases if production increases
§ GDP per capita: !"#
!"!#$%&'"(
§ GDP growth: !"!
!!!"#
!!!
!"#
!!!
∗100
Real GDP per capita is arguably the best measure of welfare.
Problems with GDP:
§ doesn't account for nonmarket/unreported economic activity (e.g. homeschooling
your kids, selling drugs, etc.)
§ doesn't account for non-economic things like environmental quality, political
freedom, and leisure time
Chapter 7 – Unemployment
Unemployment rate: percentage of the labor force that is unemployed.
§ unemployment rate = !"#$%&'(#)
!"#$% !"#$%
∗100
§ unemployed: don't have a job but have looked for one within the past four weeks
§ labor force: sum of employed and unemployed people
High unemployment means lower GDP now and in the future.
The unemployment rate does not account for:
§ discouraged workers - want a job but haven't looked within the past 4 weeks
- unemployment rate will increase if discouraged workers re-enter the labor
force
§ involuntary part-time workers - have a part-time job but want to work full-time
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!
Spring 2018
3!
Failing to account for these things makes the labor market seem like it's doing “better”
than it is.
Three types of unemployment:
1. frictional - caused by the fact that it takes time to find a job/normal job turnover
2. structural - caused by a change in the structure of the economy that changes the
skills/locations required for jobs
3. cyclical - unemployment due to business cycles
There will always be some unemployment, even when the economy is doing well.
§ there is always frictional/structural unemployment
§ natural rate of unemployment: unemployment rate when all unemployment is
either frictional or structural
§ when we're at the natural rate of unemployment, we say the economy is at full
employment and output is at potential output (aka potential GDP)
Output gap: difference between actual output and potential output.
§ positive output gap => actual GDP > potential GDP => unemployment is below
the natural rate
§ negative output gap => actual GDP < potential GDP => unemployment is above
the natural rate
Chapter 8 – Inflation
Price level: number that summarizes average prices in a given year
Inflation: percentage change in the price level.
§ price level increase: inflation
§ price level decrease: deflation
High predictable inflation isn’t a problem, but high unpredictable inflation is. It causes:
§ wealth redistribution
§ wasted resources (e.g. menu/shoeleather costs)
§ price confusion/uncertainty
The most common price index is the Consumer Price Index (CPI).
§ compares the cost of a specific basket of goods/services in different years
§ since it's always the same basket, if the cost changes it must be because prices
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Disclaimer: the following topics are meant to give you an idea of which topics i consider to be the most important of those we have studied. They do not necessarily reflect every single topic that will be on the exam. As a result, you will need to know more than the brief notes i"ve provided about each topic in this review. You should use this review sheet as a starting point to help you study. You should also review lecture notes, and the weekly practice questions. Will cover all the material up until the end of thursday"s (may 17th ) class (introduction lecture, chapters 6, 7, 8, 9, 13, 15 and 16). The exam will be comprehensive but there will a larger weight on post midterm 1 topics. There will be a seating chart - show up early. Expansion -> peak -> recession -> trough. Expansion: phase of persistent increase in gdp recession: phase of persistent decrease in gdp.
