MACRO TEST 2:
GDP (nominal GDP = current $ GDP)
Real GDP (constant $ GDP)
Intermediate Goods
Resold Goods
Underground Economy
Household Contributions
Indirect Business Taxes
Trade Deficit
Disposable Income
Price Index
Price Deflator
Producers’ Price Index
Inflation
Demand-Pull Inflation
Cost-Push Inflation
Recession
Depression
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Natural Rate of Unemployment
(Full-Employment Rate of Unemployment)
GDP Gap
Business Cycle
Countercyclical Policy
A Price Index is a statistic that measures the average level of prices.
Examples of price indexes include: PD, CPI, PPI
PD = Price Deflator = measures the average price of all final goods and services
The GDP price deflator is calculated as follows:
CPI = Consumers’ Price Index = measures the average price of a basket of goods that are commonly consumed by a typical urban working family.
Housing Food/Beverages Transportation Medical Care Apparel Recreation Other Education and communication
What’s in the CPI’s Basket?
40% 40% 16% 16% 17% 17% 6% 6% 5% 5%6%
6% 5%5% 5%5%
PPI = Producers’ Price Index = measures the average cost of production; thus it is often used as a predictor of future inflation
And don’t forget that there is an inverse relation between the purchasing power of currency and the price level.
Purchasing Power of $ = 1 / average price level
In other words, as prices rise, your dollar doesn’t buy as much.
Inflation = rising average price level = declining purchasing power of currency
And to calculate the rate of inflation, use this formula:
Inflation Rate = (change in the price index / price index) * 100 %
Here’s a simple example:
Year Price Index Inflation Rate
2005 75
2006 100 33 %
2007 110 10%
2008 121 10%
In the example above, which year is the Base Year?
Causes of Inflation
• Demand-pull inflationis caused by a rise in total spending when the economy is at or near full production
• Cost-push inflationis caused by supply shocks which raise the costs of production and with them the price level
Of course, the true underlying cause of all inflation is too much money in circulation relative to a nation’s capacity to produce.
The Business Cycle is the non-periodic fluctuation of economic activity in a nation over time. The Trend reflects a nation’s average capacity to produce over time.
Real GDP in the United States :
(the business cycle with recessions highlighted)
1970 1975 1980 1985 1990 1995
3,000 4,000 5,000 6,000 7,000 Billions of 1992 Dollars
Practice for Test # 2:
Multiple Choice:
_______ A good that contributes to the final value of another good is called: A) resold B) intermediate C) underground D) disposable
_______When imports are greater than exports, a nation has: A) balanced trade B) trade surplus C) negative net exports D) none of these
_______As cyclical unemployment grows: A) GDP Gap rises B) price level rises C) total unemployment rises D) A&B E) A&C
_______ As the price level doubles: A) so does the dollar's purchasing power B) so do the prices of all goods C) the dollar's purchasing power is halved
D) so does the unemployment rate
_______What are 2 things one can do with disposable income? A) push, pull B) consume, invest C) invest, save D) save, consume
_______Which price index is the best reflection of an average family's cost of living? A) price deflator B) consumer's price index C) producer's price index D) Dow Jones Industrial Average
_______Which of the following would NOT be included in the GDP?
A) new cars B) household cleaners C) illegal gambling profits D) none of these
_______Which statistic indicates the output a nation loses due to inefficient use of its resources? A) consumer's price index B) depression C) GDP gap D) cyclical unemployment
_______A severe decline in real output is called: A) recession B) depression C) calamity D) disaster
_______ Which of the following will NOT rise with the price level? A) price deflator B) nominal GDP C) real GDP
_______Adding the frictional and structural rates of unemployment yield:
A) the total unemployment rate B) the cyclical rate of unemployment
C) the natural rate of unemployment D) none of these
_______Which statistic indicates the value of a nation’s finished products adjusted for inflation? A) price deflator B) Nominal GDP C) Real GDP D) GDP Gap
_______When exports are greater than imports, a nation has a: A) balanced trade B) trade surplus C) negative net exports D) none of these
Fill Ins:
Inflation…………..……….is a decline in the purchasing power of the $
Recession……….…...is a reduction of real output for a half year or more
Consumers’ Price Index…..is a price index which best reflects an average family's cost of living
Countercyclical………is a policy which reduces the fluctuations of the economy
Base Year………is the year in which nominal GDP equals real GDP
Natural Rate……….is the lowest sustainable, non-inflationary rate of unemployment
Trade Deficit………is indicated whenever Net Exports are negative
Supply Shock………...is a specific labor skill or resource shortage
Trend………reflects the nation's average capacity to produce over time
Full-Employment Rate of Unemployment…….is also called the natural rate of unemployment
Producers’ Price Index…….is a price index which best reflects costs of production
Business Cycle……….is the irregular fluctuation of economic activity over time
Net Exports………..equals the difference between exports and imports
Purchasing Power of the $...is inversely related to the price level
Demand Pull Inflation…….is a rise in the average price level due to an increase in total spending
