ECON 201 Study Guide - Midterm Guide: Black Market, Intermediate Good, Menu Cost

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11 Apr 2018
2nd Midterm
Macroeconomics: study of economy as a whole
Business cycle: periods of economic expansion and economic recession
Expansion: total production and total employment are increasing
Recession: total production and total employment are decreasing - caused by fall in AD
Level of employment affected by business cycle in the short -run not long-run
Economic growth: ability of an economy to produce increasing quantities of goods and
Inflation rate: percentage increase in the price level from one year to the next
When inflation is anticipated: paper money loses value and firms incur menu costs
When inflation is unanticipated: actual inflation rate can turn out to be different than
expected inflation rate
Income is redistributed as some people gain and some lose
GDP: market value of all final goods and services produced in a country during a period of time
Final: purchased by a final user
Intermediate good or service: input into another good (ex: tire)
Used goods not included
GDP=income= expenditure
Transfer payments: payments made by the government to households for which the
government does not receive a new good or service in return
Ex: social security payments
Components of GDP
Consumption: spending by households on goods and services not including spending
on new houses (spending on houses included in investment)
Services: medical care, education, haircuts
Nondurable goods: food and clothing
Durable goods: automobiles and furniture
Investment: spending by firms on new factories, office buildings, machinery, inventory
and buying new houses
Business fixed investment: office buildings and machinery
Residential investment: new houes
Changes in business inventories: stocks of goods produced but not sold yet
Government purchases
Net exports
Value-added method: market value a firm adds to a product = difference between price
for which the firm sells a good and price it paid other firms for intermediate goods
GDP does not include:
Household production
Underground economy: buying and selling of goods and services that is
concealed from the government to avoid taxes and regulations
Value of leisure
Not adjusted for pullitions or negative side effects of production
Not adjusted from changes in crime or social problems
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Measures size of pie but not how it is divided
Nominal GDP: value of final goods and services evaluated at current year prices
Real GDP: value of final goods and services evaluated at base year prices
Holds prices constant → better measure of changes in production from one year to the
Measures changes in quantity of goods and services produced in the economy
Price level: average prices of goods and services in the economy
  
 
When price level is increases, real GDP is greater than nominal GDP in years before the
base year and less than nominal GDP for years after the base year
Employed: someone who has a job or temporarily away from his or her job
Unemployed: someone who is not at work but available for work and has actively looked for
Labor force: sum of employed and unemployed workers
Unemployment rate: percentage of labor force that is unemployed
  
 
Average time: 10 months
Frictional: short-term unemployment that arises from the process of matching
workers with jobs (temporary AD shocks)
Seasonal: unemployment due to factors of weather ex: toursim
Structural: unemployment that arises from a persistent mismatch between the
skills or attributes of workers and the job requirements (minimum wage, unions,
long run trend)
Cyclical: unemployment caused by a business cycle recession
Natural rate of unemployment: normal rate of unemployment consisting of frictional
unemployment and structural
Efficiency wage: above-market wage that firm pays to increase workers’ productivity
Labor force participation rate: percentage of the working age population in the labor force
 
Employment- population ratio: percentage of working-age population that is employed
 
Consumer price index (CPI) : measure of the average change over time in the prices a typcial
urban family of 4 pays for the goods and services they produce
 
 
Measures cost of living
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