Economics Chapter on GDP and Unemployment

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Questions and Answers

What is the equation used in the expenditure approach to calculate GDP?

Y = C + I + G + NX (correct)

Y = C + I + G - NX

Y = C - I + G - NX

Y = C + I - G + NX

Which of the following is NOT included in GDP calculations?

Household consumption

Financial transactions (correct)

Government purchases

Gross private domestic investment

What does the term 'real GDP' refer to?

GDP calculated using current prices

GDP excluding government spending

GDP adjusted for inflation (correct)

GDP that excludes foreign factor income

Which statement accurately describes the relationship between nominal GDP and real GDP?

Real GDP uses present quantities and base year prices. Signup and view all the answers

Which type of unemployment results from a mismatch between workers' skills and available jobs?

Structural unemployment Signup and view all the answers

What is the formula to calculate the GDP deflator?

GDP deflator = (nominal GDP / real GDP) * 100 Signup and view all the answers

What is the main characteristic of durable goods?

Lasts for several years Signup and view all the answers

How is Net Investment calculated?

Net Investment = Gross Investment - Depreciation Signup and view all the answers

What happens to the unemployment rate during a recession?

It increases as companies reduce production Signup and view all the answers

What does inflation represent in an economy?

A rise in the general level of prices Signup and view all the answers

How is the unemployment rate calculated?

Number of unemployed divided by the labor force Signup and view all the answers

Which type of inflation is caused by an increase in input prices?

Cost-push inflation Signup and view all the answers

What does a fully employed economy indicate?

Only frictional and structural unemployment exists Signup and view all the answers

Which group of individuals is NOT considered part of the labor force?

Full-time students Signup and view all the answers

What typically happens to the inflation rate when real GDP increases?

It likely increases Signup and view all the answers

Which term describes individuals who are actively seeking work but are unable to find employment?

Frictionally unemployed Signup and view all the answers

What is the primary purpose of a bank in a 100-percent-reserve banking system?

To provide a safe place for depositors' money Signup and view all the answers

Which of the following statements about fractional-reserve banking is true?

Banks can lend out a portion of deposits Signup and view all the answers

How is the money multiplier calculated?

1 divided by the required reserve ratio Signup and view all the answers

What happens to the money supply when the Fed buys bonds from the public?

It increases due to higher deposits in banks Signup and view all the answers

In a banking system with a reserve ratio of 1/10, if a bank receives a deposit of $100, how much can it lend out?

$90 Signup and view all the answers

What do excess reserves represent in a banking context?

Reserves beyond the required minimum Signup and view all the answers

What is the relationship between deposits and reserves in a 100-percent-reserve banking system?

Reserves must equal deposits Signup and view all the answers

What is a major effect of banks operating under fractional-reserve banking?

They can increase the money supply through loans Signup and view all the answers

What does a negative GDP gap indicate about the unemployment rate?

Actual unemployment rate is greater than the natural rate of unemployment. Signup and view all the answers

Which factor contributes to the downward slope of the aggregate-demand curve?

Real wealth effect resulting from changes in money value. Signup and view all the answers

What is the primary reason for a leftward shift in the supply curve in the loanable funds market?

Increase in the price level leading to higher money demand. Signup and view all the answers

In the AD-AS model, the horizontal aggregate supply curve represents which time frame?

Immediate short run aggregate supply. Signup and view all the answers

Which of the following is NOT a shift factor for the aggregate demand curve?

Changes in the amount of available land. Signup and view all the answers

What effect does an increase in the domestic price level have on net exports?

Net exports decrease due to increased imports. Signup and view all the answers

What happens to the short-run aggregate supply curve when there is a supply shock?

It shifts to the left. Signup and view all the answers

What misconception might arise from the way part-time workers are recorded?

They are counted as fully employed regardless of hours worked. Signup and view all the answers

How does an increase in nominal GDP affect transaction demand for money?

It increases transaction demand. Signup and view all the answers

What is the relationship between interest rates and asset demand for money?

They are negatively correlated. Signup and view all the answers

Which statement is true about the total demand of money?

It is the sum of asset demand and transaction demand. Signup and view all the answers

What effect does an increase in the discount rate have on commercial banks' reserves?

It prompts banks to hold more reserves. Signup and view all the answers

How does the Federal Reserve control the money supply?

Through open market operations, reserve ratio, and discount rate. Signup and view all the answers

What is the impact of interest on reserves on commercial bank behavior?

It incentivizes banks to reduce risky loans and increase reserves. Signup and view all the answers

In the context of bonds, how is the bond price related to interest rates?

They vary inversely. Signup and view all the answers

What effect does changing the required reserve ratio have on the money multiplier?

It reduces the money multiplier. Signup and view all the answers

What is the relationship between interest on reserves (IOR) and the federal funds rate (FFR) during ample reserves?

IOR and FFR can be equal. Signup and view all the answers

Which policy action is associated with an expansionary monetary policy in the context of limited reserves?

Lowering the discount rate. Signup and view all the answers

What does the short-run Phillips Curve (SRPC) indicate about inflation and unemployment?

They are inversely related. Signup and view all the answers

What primarily drives the current account in a country's balance of payments?

Net exports (NX) of goods and services. Signup and view all the answers

How does a liquidity trap affect monetary policy effectiveness during ample reserves?

It can hinder investment stimulation. Signup and view all the answers

What occurs in the balance of payments when there is a trade surplus?

Current account surplus arises. Signup and view all the answers

What is indicated by the long-run Phillips Curve (LRPC)?

Long-term unemployment rates are influenced by natural rate only. Signup and view all the answers

Study Notes

AP Macroeconomics Review Material

This document is a review guide for AP Macroeconomics.
It was created by Qiu Jinyue and Qiao Yijia.
The document is reviewed by Wang Qing.
The document is divided into 25 pages.

Circular Flow Diagram

A simplified model showing the flow of goods, services, and resources in an economy.
Represents the interaction between households and businesses in the resource and product markets.
Illustrates the flow of money and resources between households and businesses.

Production Possibility Frontier (PPF)

Shows the maximum possible combinations of goods that can be produced with given resources and technology.
The shape of the PPF (bowed outward) indicates increasing opportunity costs. This is because resources are not equally productive in all areas of production.
A shift outward of the PPF indicates economic growth, either through improvements in technology, or an increase in resources.

Trade

Trade allows both countries to benefit by specializing in the production of goods in which they have a comparative advantage.
Absolute advantage is when a country can produce a good using fewer inputs.
Comparative advantage is when a country can produce a good at a lower opportunity cost.

Financial Investment / Economic Investment

Financial investment encompasses the purchase of assets like stocks, bonds, and real estate to gain financial returns.
Economic investment refers to spending on the production and acquisition of newly created capital goods.

Interest Rate-Investment Relationship

Investment decisions depend on the marginal benefit (expected rate of return) and marginal cost (interest rates).
Businesses will borrow when their expected rate of return exceeds the interest rate.

Shift Factors of Investment Demand

Acquisition, maintenance, and operating costs, business taxes, technological change, stock of capital goods on hand, planned inventory changes, and expectations all influence investment demand.

Measuring Economic Activity (GDP)

GDP (Gross Domestic Product) is the total market value of all final goods and services produced within a country in a year.
Intermediate goods are not included in GDP to avoid double counting.
GDP can be calculated using the expenditure approach (Y = C + I + G + NX) or the income approach.
where Y = GDP = output, C = consumption, I = investment, G = government spending, NX = net exports.

Other Accounts

Net Domestic Product (NDP) = GDP - depreciation
National Income (NI) = NDP + net foreign factor income

Inflation

Inflation is a rise in the general level of prices.
Demand-pull inflation occurs when an increase in demand outpaces the economy's ability to supply goods.
Cost-push inflation results from a decrease in the supply of goods or an increase in input costs (e.g., energy)
Inflation can cause a redistribution of income and wealth.

Consumer Price Index (CPI)

CPI measures the overall cost of a basket of goods and services purchased by a typical consumer.
It is used to track inflation and adjust for its impact on purchasing power.
It has some biases (substitution bias, new goods, quality change).

Production and Growth

Economic growth is defined as an increase in real GDP or real GDP per capita over a period of time.
Factors determining growth include, increasing the quantity and quality of natural resources, increasing the quantity and quality of human resources, increasing the stock of capital goods, and technological progress.

Supply Factors

Increases in the quantity and quality of natural resources, human resources, and capital goods are supply-side factors that increase potential GDP.
Technological improvements also contribute to increased potential GDP.

Demand Factors

Increases in total spending drive economic growth.

Efficiency Factors

Economic efficiency and full employment are necessary to achieve the full production potential of an economy

Business Cycle

Recessions and expansions are normal economic fluctuations. The economy often dips into a recession, and then, recovers.

Unemployment

Unemployment rates fluctuate with the business cycle.
Unemployment arises during recessions because businesses reduce production and cut back on hiring.
Types of unemployment include frictional, structural, and cyclical.

GDP Gap

GDP gap describes the difference between actual GDP and potential GDP.
A negative GDP gap indicates unemployment exceeding the natural rate.
A positive GDP gap indicates that the actual rate of unemployment is below the natural rate.

Aggregate Demand (AD)

Aggregate Demand (AD) is the total quantity of goods and services demanded at various price levels in a given time period.
AD curve slopes downward because of the real-balance effect, the interest-rate effect, and the exchange-rate effect, meaning they all react inversely to inflation.
Factors affecting AD include changes in consumption (C), investment (I), government purchases (G), and net exports (NX).

Aggregate Supply (AS)

Short-run aggregate supply (SRAS) is upward sloping because input prices are fixed in the short-run.
Long-run aggregate supply (LRAS) is vertical because input prices are flexible in the long run. Input prices will adjust to changing price levels so that the economy always operates at full employment.

Fiscal Policy

Fiscal policy includes changes in government spending or taxes.
An increase in government spending or decreases in net taxes will increase aggregate demand. Conversely, a decrease in government spending or an increase in net taxes will decrease aggregate demand.

Automatic Stabilizers

Automatic stabilizers reduce the severity of economic fluctuations.
The progressive income tax system and transfer payments are examples of automatic stabilizers.

Money

Money functions as a medium of exchange, a unit of account, and a store of value.
Types of money include currency, demand deposits, and other checkable deposits.

Banking System

Fractional-reserve banking allows banks to create money.
When banks only hold a fraction of deposits as reserves, the money supply can increase by a multiple of the initial deposit.

Monetary Policy

Monetary policy includes changing the money supply to affect interest rates and macroeconomic aggregates like investment, consumption, employment, GDP, and Price Level to manage the economy.
Policy tools include open market operations, changes to the reserve requirement, and the discount rate.
During a recession, expansionary monetary policy is used and during inflation, restrictive monetary policy is used.

Phillips Curve

The trade-off between inflation and unemployment is illustrated by the Phillips Curve.
The short-run Phillips curve (SRPC) shows an inverse relationship between inflation and unemployment.
The long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment.

Balance of Payments

A nation's current account and capital account are in balance.
The current account reflects the flow of goods, services, and investment income across borders.
The capital account records international purchases and sales of assets.

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Test your knowledge of essential economic concepts related to GDP and unemployment. This quiz covers key terms, definitions, and relationships within the economy, including real GDP, inflation, and labor force participation. Perfect for students looking to deepen their understanding of macroeconomics.