PSYC 1010 Study Guide - Final Guide: Output Gap, Business Cycle

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1 Mar 2017
Macroeconomics Chapter 19 A First Look at Macroeconomics
Origins and Issues of Macroeconomics
o Started in the 1750s but modern economics didn’t emerge until the Great
Depression (1929-1939)
o 20% of the labour force was unemployed
o Decade of high unemployment and stagnant production throughout the world
o Short-Term vs. Long Term Goals
Keynes’s theory – depression and high unemployment result from insufficient
private spending and to cure these problems, the government must increase its
spending Short-term
Long-term problems will return inflation and slow economic growth, lower
long-term growth rate, economy creates fewer jobs
Growth and Fluctuations
o Your richness will depend on the rate of economic growth
o Economic Growth = Expansion of the economy’s production possibilities
(outward shift of the production possibilities frontier)
o Measure economic growth by the increase in real gross domestic product
o Real GDP = Value of the total production of all the nation’s farms, factories,
shops, and offices measured in the process of a single year.
o Use dollar prices in a single year to eliminate the influence of inflation (1997) and
determine how much production has grown from one year to another
o Inflation = The increase in the average level of prices
o RGDP is not a perfect measure of total production because it does not include
everything that is produced (housework, illegal activities, etc.) but it is the best
o Potential GDP = When all the economy’s labour, capital, land, and
entrepreneurial ability are fully employed
o Long-term economic growth is measured by the growth rate of P-GDP
o Productivity Growth Slowdown = Growth rate of output per person slowed
o Business Cycle Periodic but irregular up-and-down movement in production
o Every business cycle has 2 phases:
o Two turning points
o Recession = Period during which R-GDP deceases (-) for at least 2 successive
o Expansion = Period during which GDP increases
o Peak = When a business cycle expansion ends and recession begins
o Trough = When a business cycle recession ends and expansion begins
o R-GDP sometimes sinks below P-GDP without recession growth rate remains
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