The questions below are to help you make sure you know/understand the material.
1. What is economics? What is macroeconomics?
-Economics: production, distribution, and consumption of goods and services.
-Macroeconomics: operation and health of an entire economy, The branch of economics concerned with
large economic aggregates such as GDP, total employment, overall price level.
2. What are the main goals of macroeconomics?
- *Economic Growth: the increased output of goods and services over time
- *Full Employment:
- *Price Stability/Low Inflation
3. How does this recession compare to the Great Depression? What are similarities and differences?
-Banks failed in both. 6000 in Great Depression, 3 of 5 investment banks in 2008
4. How do you measure economic growth? How big is the US economy today?
-Gross Domestic Product (GDP): the total dollar value of all goods and services produced in a given year
5. What is the difference between real and nominal GDP? Why is this important?
-Nominal GDP: GDP in that years dollars
-Real GDP: GDP adjusted for changes in prices
-Real GDP= nominal GDP/price index
6. What are two main problems with the measurement of the GDP?
-Price changes make it difficult to compare GDP from one year to another using the GDP deflator to
measure Real GDP is the solution to this problem
-Quality changes: prices may decline for goods even if the quality has improved.
-GDP does not measure social well-being or income distribution
-GDP does not take into account economic “bads” such as pollution or other costs to the environment/health
7. How do you calculate unemployment in the macroeconomy? What is “hidden” unemployment? What is
-Unemployment Rate= # of Unemployed/ Labor Force
-Labor force= number of employed plus unemployed
-Unemployed: anyone who wants to work, is not currently employed, and is currently seeking employment
8. Name four types of unemployment included in the official unemployment rate.
-Frictional: searching for jobs (college graduates)
-Seasonal: work varies with seasons (lifeguard)
-Structural: mismatch between skills needed in job and skills possessed by job seeker (replaced by machine)
9. What are two problems with the current measure of unemployment? Explain.
10. How do you measure inflation (Hint: Explain what a price index is)
- Consumer Price Index(CPI): CPI= current cost of basket/cost of basket in base year X 100%
- -Inflation is the measure of percent change in the general price level.
- Inflation rate = (Current CPI – last years CPI)/ (last years CPI) X 100%
11. What is the Consumer Price Index? How is it used?
-Consumer Price Index: government collects price data on a bundle of goods the average household
consumes, and tracks these prices over time.
-Inflation Rate: the percentage change in the price index
12. How well has the macroeconomy in the U.S. performed since WWII? Be able to discuss different eras with
some generalities and historical specifics.
-Five General Time Periods:
1. Rise of Pax Americana,: productivity increased, low unemployment, focus on economy
2. Decline of Pax Americana,: severe recession in ‘70s, high inflation, low unemployment
3. Late 1980’s early 1990s: stock market crashed 1987, Rebirth of Pax Americana
4. New Economy 1990s: productivity growth, unemployment low
5. 21 century : recession 2001, stock market crashed 2001, 2008 banks fail, GDP falls, 2010 unemployment
at record levels 13. What is Say’s Law? How and why does Keynes disagree?
-Output creates enough demand to consume or purchase all of the output, supply creates its own demand,
Keynes said government intervention is needed
14. What are the different types of Taxes we use in the U.S.? What is the difference between progressive,
proportional and regressive taxes? Give examples of each.
-Regressive: those with higher income pay a lower % of their income in taxes (Sales taxes)
-Proportional: everyone pays the same % of their income (state income tax, social security)
-Progressive: those with higher incomes pay a higher % of their income in taxes (federal income tax)
15. According to Keynes when a business decides to invest the impact on the macroeconomy is much greater
than that business’ initial investment. What is that called and how does it work?
16. Explain why total expenditure, total output, and total income must all equal each other in the
-equilibrium: wages, interest rates and prices adjust so that the quantity demanded equals the quantity
supplied, Aggregate expenditures equal aggregated output.
17. What are the four sectors in Keynesian macroeconomic models?
-Consumption, Investments, Government Spending, Imports/Exports. (household, business, government,
18. In the Keynesian Model, what determines consumption? Investment?
-Consumption: purchasing of goods and services, spending of income for necessities and luxuries, level of