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MacroEcon Exam1
Macro Econ Exam 1
39
Economics
Undergraduate 3
01/27/2013

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Term
Big Idea 1. Incentives Matter
Definition
Incentives are rewards and penalties that motivate behavior
Term
Big Idea 2. Good Institutions align self-interest with the social interest
Definition
Think about the Invisible hand
Term
Big Idea 3. Trade-offs are everywhere
Definition
• Recognizing trade-offs is the first step in making wise decisions
• The Opportunity Cost is the best alternative sacrificed for a chosen alternative.
Term
Big Idea 4. Thinking on the Margin
Definition
• Marginal Analysis is an examination of the effects of additions to or subtractions from a current situation.
Term
Big Idea 5. Tampering with the Laws of Supply
and Demand Has Consequences
Definition
Interference by government decree in the mechanisms of this model rarely works.
Term
Big Idea 6. The Importance of Wealth and
Economic Growth
Definition
• Wealth brings higher standards of living.
• Understanding economic growth (how economies increase wealth) is one of the most important tasks of economics.
Term
Big Idea 7.
Definition
• Such institutions include property rights, political stability, honest government, a dependable legal system, and competitive and open markets.
Term
Big Idea 8. Economic Booms and Busts Cannot be avoided but can be moderated
Definition
Business Cycles are normal
Term
Big Idea 9. Prices Rise When the Government
Prints Too Much Money
Definition
• Prices rise when the government prints too much money
• Monetary policy can be used to mitigate economic fluctuations, but it can create unwanted side effects.
• Inflation is an increase in the general level of prices.
• Inflation comes about when there is a sustained increase in the supply of money.
Term
Big Idea 10. Central Banking Is a Hard Job
Central banking is a hard job
Definition
Central Banking Is a Hard Job
Central banking is a hard job
Term
Three Basic Goals of MacroEconomics
Definition
1. Rapid Economic Growth
2. High Employment
3. Stable Prices (Or low inflation rates)
Term
Aggregation
Definition
Combining different indices and measures into a single category to get a macro perspective
Term
Business Cycle
Definition
Peak-Trough-Peak or vice-versa
Term
Definitions of a recession
Definition
The Official definition of a recession is a significant, widespread decline in economic activity spread across the economy, lasting for more than a few months, normally visible [as a decline] in real GDP, real income, employment, industrial production, and wholesale-retail sales.

However, in the news: In the news a recession is generally considered to be a period when real GDP falls for 6 or more consecutive months. (This is only a “rule of thumb”)
Term
Counter-Cyclical Variable
Definition
variable that falls when real GDP rises. An example is unemployment.
Term
Pro-Cyclical Variable
Definition
a variable that rises when real GDP rises. Examples are investment spending and employment.
Term
Gross Domestic Product
Definition
is the total market value of final goods and services produced within an economy in a given year.

• Calculation: Sum of all final goods and services produced in a given year multiplied by their respective prices
Term
Intermediate Goods
Definition
are sold to firms and then bundled or processed with other goods or services for sale at a later stage.
Term
GDP National spending (or expenditure) Approach:
Definition
Y = C + I + G + NX
Term
GDP Factor income (or Payment) approach:
Definition
Y = Wages + Rent + Interest + Profit
Term
Personal Consumption factor of GDP
Definition
Durable goods: goods that lasts for long period of time. However, it does not include new homes

Non-durable goods: goods that lasts for short periods of time

Services
Term
Gross Private Domestic Investment factor of GDP
Definition
Purchases by business of

• On new plants and equipment

• Newly produced housing (Spending by consumers on new houses)

• Inventory investment

Note: Depreciation is the wear and tear of capital as it is used in production

Gross investment = net investment +
Depreciation
Term
The government factor of GDP
Definition
• Government Consumption Expenditures

• Government Gross Investment

Government purchases do not include transfer payments
Term
Net Exports factor of GDP
Definition
Exports (X) – Imports (M)

Net exports > 0 is a trade surplus
Net exports < 0 is a trade deficit
Term
The factor Income Approach to GDP
Definition
GDP = wages and salaries + interest +
rent + profit
Term
Value Added approach to GDP
Definition
is the revenue a firm receives minus the cost of the intermediate goods and services it buys.
Term
Real Vs. Nominal GDP
Definition
Nominal variables are measured with out adjustment for the change in the value of currency over time.

Real variables are measured with an adjustment for the change in the value of currency over time.
Term
GDP Deflator
Definition
is a price index calculated by dividing nominal GDP by real GDP, and multiplying by 100. This produces an index that measures how the prices of goods included in GDP change over time.
Term
GDP Deflator Equations
Definition
(NGDP2007 / RGDP2007) * 100

From the above we see that

RGDP = (NGDP/GDPdef) * 100
Term
Gross National Product
Definition
is the market value of all final goods and services produced by a nation’s residents, no matter where they are located.

• GNP = GDP + net income earned abroad
Term
Net National Product
Definition
GNP – depreciation
Term
National Income
Definition
NNP - indirect business taxes
Term
Personal Income
Definition
National income + Transfer payments + personal interest income ─ Corporate Retained profits – Social Security taxes
Term
Problems with GDP as a measure
Definition
• It ignores non-market transactions.

• GDP ignores leisure time.

• It ignores the underground economy.


• It ignores changes in the environment. or other negative effects of production

• GDP is not adjusted for changes in crime and other social problems.


• GDP does not measure distribution of income.
Term
Rule of 70
Definition
Periods to double = 70 ÷ percentage of growth rate
Term
Finding the Growth rate in the growth formula
Definition
g = (E/B)^1/n – 1
Term
The Factors of Production
Definition
• Physical capital: the stock of tools, structures, and equipment.

• Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.

• Technological knowledge: knowledge about how the world works that is used to produce goods and services.
Term
The institutions that lead to economic growth
Definition
1. Property rights

2. Political stability

3. Honest government

4. A dependable legal system

5. Competitive and open markets
Term
The Solow model of Economic Growth
Definition
The model can be written as an aggregate production function Y = F(A, K, eL).

This says that RGDP, Y, depends on the following.

• K: Physical capital
• eL: Human capital times Labor
• A: Ideas
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