Podcast
Questions and Answers
What shape does the AS curve take in the long run?
What shape does the AS curve take in the long run?
Which factor primarily determines output in the long run?
Which factor primarily determines output in the long run?
What leads to changes in output in the short run?
What leads to changes in output in the short run?
What is the relationship between AD and unemployment in the short run?
What is the relationship between AD and unemployment in the short run?
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Which statement is true regarding inflation in the long run?
Which statement is true regarding inflation in the long run?
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What happens to the AS curve when aggregate demand pushes output above the sustainable level?
What happens to the AS curve when aggregate demand pushes output above the sustainable level?
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How is the Phillips curve significant in understanding the economy?
How is the Phillips curve significant in understanding the economy?
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What primarily drives short-run changes in prices and output according to the AS curve?
What primarily drives short-run changes in prices and output according to the AS curve?
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What factor contributes to growth in GDP?
What factor contributes to growth in GDP?
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Which statement about economic growth is true?
Which statement about economic growth is true?
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What does the output gap measure?
What does the output gap measure?
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How is the inflation rate estimated?
How is the inflation rate estimated?
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What characterizes periods of economic growth when driven by aggregate demand (AD)?
What characterizes periods of economic growth when driven by aggregate demand (AD)?
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What indicates potential output in an economy?
What indicates potential output in an economy?
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What is a result of periods of contraction in an economy?
What is a result of periods of contraction in an economy?
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What is the primary focus of macroeconomics?
What is the primary focus of macroeconomics?
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Which model is primarily concerned with understanding changes in output and unemployment due to shifts in aggregate demand?
Which model is primarily concerned with understanding changes in output and unemployment due to shifts in aggregate demand?
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In the context of macroeconomics, what does the term 'very long run' refer to?
In the context of macroeconomics, what does the term 'very long run' refer to?
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How does the Long Run Model primarily determine potential output?
How does the Long Run Model primarily determine potential output?
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What does macroeconomics utilize to measure the performance of an economy?
What does macroeconomics utilize to measure the performance of an economy?
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Which of the following best defines the relationship between macroeconomics and microeconomics?
Which of the following best defines the relationship between macroeconomics and microeconomics?
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What is a key determinant of future economic growth according to growth theory?
What is a key determinant of future economic growth according to growth theory?
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In macroeconomics, what does the short run refer to in terms of pricing and output?
In macroeconomics, what does the short run refer to in terms of pricing and output?
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Study Notes
Macroeconomics
- Study of the economy as a whole and government policies that influence it
- Focuses on total output, unemployment, inflation and exchange rates
- Examines the economy in the short and long run
- Short run: fluctuations in the business cycle
- Long run: economic growth
Macroeconomics in Three Models
- Macroeconomics uses three models to explain economic activity: very long run, long run and short run
- Very Long Run: Domain of growth theory, focuses on growth of the economy's production capacity
- Long Run: A snapshot of the very long run model with fixed capital & technology, determining the level of potential output; prices are determined by changes in Aggregate demand (AD)
- Short Run: Business cycle theories, changes in AD determine how much of the economy's productive capacity is used, output and unemployment; prices are fixed
Very Long Run Growth
- US income per person has grown at 2-3% per year over the last century
- Growth theory examines how increases in inputs and technology lead to higher living standards
- Saving is a significant factor in future well-being and economic growth
The Long Run Model
- In the long run, the aggregate supply (AS) curve is vertical and pegged at the potential level of output
- Output is determined by the supply side of the economy and its productive capacity
- Price level is determined by demand relative to productive capacity
- High inflation rates in the long run are caused by changes in AD
The Short Run Model
- Short run fluctuations in output are largely due to changes in AD
- The AS curve in the short run is flat because prices are fixed, changes in output are driven by changes in AD
- Changes in AD in the short run create phases of the business cycle
- AD determines output and thus unemployment
The Medium Run
- The medium run AS curve slopes upwards toward the long run AS curve position
- As AD drives output above the sustainable level, firms increase prices
- With increasing prices, the AS curve is no longer pegged at a particular price level
The Phillips Curve
- Prices adjust slowly, allowing AD to temporarily drive the economy
- The Phillips curve shows the relationship between inflation and unemployment
- In the short run, the AS curve is relatively flat, and changes in AD influence prices, output, and unemployment
Growth and GDP
- The growth rate of the economy is the rate at which GDP increases
- Most developed economies grow at a few percentage points per year
- The average US real GDP growth was 3.4% per year between 1960 and 2005
- GDP growth is driven by:
- Increased available resources (labor and capital)
- Increased productivity of resources
The Business Cycle and the Output Gap
- The pattern of expansion and contraction in economic activity around the trend growth path is the business cycle
- The trend path of GDP is the path GDP would follow with full utilization of factors of production
- The difference between actual and potential output is the output gap
- Output gap = actual output - potential output
- It measures cyclical deviations of output from the potential level
Inflation and the Business Cycle
- The consumer price index (CPI) measures inflation
- CPI calculates the cost of a typical household's basket of goods
- Economic growth driven by AD results in increased prices and inflation during expansion phases
- Economic contraction is associated with lower prices and negative inflation rates.
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Description
This quiz explores the fundamental concepts of macroeconomics, including the study of the economy as a whole and government policies. It covers the short run, long run, and very long run models that explain economic activity and fluctuations in the business cycle. Test your understanding of these essential economic principles!
