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EC140 Final: Macroeconomics Final Exam Review

Course Code
Ken Jackson
Study Guide

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Macroeconomics Entire Course Review:
Ch. 19:
Macroeconomics the study of the determination of economic aggregates, such as total
output, total employment, the price level, and the rate of economic growth (studies the
performance of an economy as a whole)
Short run and long run macroeconomic variables:
- output/income result of the production of goods and services, national production =
national income
- employment
- inflation
(government policy can influence these variables)
- investment (long run)
- technology (long run)
National income what the economy actually produces = add up the values of the many
different goods and services produces / important because it measures economic performance
(we cannot add tonnes of steel to loaves of bread, but can add the dollar value of steel
production to the dollar value of bread production)
Nominal national income (nominal GDP) measures the value of national income at current
prices with no adjustment for the effects of inflation (changes in nominal national income can
be caused by a change in either the physical quantities or the prices on which it is based)
Real national income (real national GDP) measures the volume of output. It is adjusted for
inflation and measured at constant prices (when economists are discussing economic growth
they are referring to real GDP)
Business Cycle fluctuations of real national income
- Recession fall in the level of real GDP (2 consecutive quarters of negative growth in real
- Trough lowest point of real GDP produced and in business cycle (economies start to expand
after this)
- Expansion rise in the level of real GDP
- Peak highest point in real GDP and of the business cycle (economies start to recess after
Potential output/Potential GDP (Y*) the real GDP that the economy would produce if its
productive resources were fully employed
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Actual output/Actual GDP (Y) the real GDP that the economy can produce with the resources
they have
Output gap (Y Y*) difference between actual and potential GDP
Recessionary gap (Y < Y*) actual GDP is less than potential GDP = causes a downward
pessue o ages ad pies, failue to full eplo the eoo’s esoues
Inflationary gap (Y > Y*) actual GDP is greater than potential GDP = causes an upward
pressure on wages and prices (this can happen because workers may work longer hours than
normal, or factories may operate extra shifts)
Long run trend in real per capita national income important tool to determine improvements
in a society (when income per person grows, each generation can expect, on average, to be
better off than the preceding ones i.e.: making money now vs 30 years ago / can also make
people worse off i.e.: shift away from agriculture to manufacturing, this will reduce some
people’s ateial liig stadads
National income and unemployment relation if more output is produced, either more
workers are used in production or existing workers must produce more
Employment number of persons 15 years of age or older who have jobs
Unemployment the number of persons 15 years of age or older who are not employed and
actively searching for a job
Labour force number of persons employed + the number of persons unemployed
Unemployment rate = (Number of people employed / Number of people in the labour force) X
There will always be some sort of unemployment even when the economy is said to be fully
Full employment real GDP = potential GDP
Frictional employment when people leave their jobs to find better ones, can also be due to
being fired
Structural unemployment mismatch between the jobs available and the skill levels of the
unemployed (difficult for some groups to find jobs, tends to be because they lack the skill level
fo that patiula jo ie: if ou do’t hae a uiesit diploa)
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Cyclical unemployment when workers lose their jobs because of downturns in the business
Long term unemployment is associated with crime, mental illness and general social unrest
Productivity measure of the amount of output an economy produces per unit of input
Labour productivity the amount of real GDP produced per unit of labour employed, (Real
GDP / Level of employment (or total hours worked))
Price level (P) the average level of all prices in the economy expressed as an index number
Inflation a rise in the average level of all prices (the price level)
Consumer price index (CPI) an index of the average prices of goods and services commonly
bought by households
Rate of inflation = ((CPI2 CPI1) change in price level) / ((Initial price level) CP1) X 100%
it measures the annual rate of increase in the price level
Purchasing power of money the amount of goods and services that can be purchased with a
unit of money (purchasing power of money is negatively related to the price level ex: if the
price doubles, a dollar will buy only half as much, inflation reduces the purchasing power of
money and the real value of any sum fixed in nominal dollar terms)
Anticipated inflation if households and firms anticipate inflation, they will be able to adjust
many nominal prices and wages so as to maintain their real values
Unanticipated inflation leads to more changes in the real value of prices and wages
Interest rate the price paid per dollar borrowed per period of time, expressed either as a
proportion (ex: 0.06) or a percentage (ex: 6%)
Nominal interest rate the price paid per dollar borrowed per period of time (interest rate
before taking inflation into account)
Real interest rate = nominal interest rate rate of inflation the nominal rate of interest
adjusted for the change in the purchasing power of money (ex: if you lend $100 from your
friend with 8% interest on the loan, you have to give her back $108 at the end of the period. If
the price level rises by 8%, the real rate of interest would be zero because the $108 you repaid
her buys her the same quantity of goods as the $100 she originally gave up, therefore the real
rate of interest she earns would be -2%, meaning the repayment of the $108 will purchase 2%
fewer goods than the original loan of $100)
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