Macroeconomics Exam 2 Study Guide

Economic Growth
Aggregate Supply & Demand, Inputs and Outputs
Full Employment
Everyone who is willing and able to work can find a job
Unemployment rate is still positive
Low Inflation
Volume of goods and services that it will buy

Wage rate – adjusted for inflation
Nominal wage divided by price index
Volume of goods and services that the nominal wages will buy

Production Function
Shows the volume of output that can be produced
From given inputs (such as labor and capital)
Given the available technology
Potential GDP
Real GDP the economy would produce if labor and other resources were fully employed
Growth Rate of Potential GDP
Depends on:
Growth rate of labor force
Growth rate of capital stock
Rate of technical progress
GDP = Hours of work x Labor Productivity
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Labor Force
Number of people holding or seeking jobs.
Labor Productivity
Amount of output one worker produces of labor
Unemployment/Unemployment Rate
People currently not working, Temporarily laid off, or actively looking for a job after being fired (4 weeks)/
Number of unemployed people as percentage of labor force
Frictional Unemployment
People who are temporarily between jobs
-Moving or changing occupations
-unemployed for similar reasons
Structural Unemployment
Workers displaced by automation
Their skills are no longer in demand
Cyclical Unemployment
Portion of unemployment that is attributable to a decline in the economy’s total production
Rises during recessions
Falls as prosperity is restored
Discouraged Worker
An unemployed person who gives up looking for work and is no longer counted as part of the labor force
Increase in average price
Consumer Price Index(CPI)
Bureau of Labor Statistics (BLS)
Representative typical urban household budget
Same bundle of goods and services
Real Interest Rates
Percentage increase in purchasing power

Increased ability to purchase goods and services that the lender earns

Nominal Interest Rates
Percentage by which the money the borrower pays back exceeds the money that was borrowed

Making no adjustment for any decline in the purchasing power of this money that results from inflation
Nominal interest = Real interest + Expected Inflation Rate

Three Pillars of Productivity Growth
-Rate at which the economy builds up its stock of capital
-Rate at which technology improves
-The rate at which workforce quality (or “human capital”) is improving
Land, Labor, and Capital
Factors of economic growth
Creates higher labor production for a given capital and given labor force
Human Capital
Investing in yourself such as Education and training
Physical Capital
Machinery, Equipment, Things you can touch
Convergence Hypothesis
Nations with low levels of productivity
-Tend to have high productivity growth rates
International productivity differences shrink over time
Poorer countries
-Higher productivity growth rates than richer countries
Act of discovering new products or new ways of making products
Act of putting new ideas into effect
Growth Policy
Encouraging capital formation:
-Government must somehow persuade private businesses to invest more
-Lower real interest rates
-Tax provisions
-Technical change
-Growth of demand
-Political stability and property rights
Aggregate Supply
Shows, for each possible price level
-The quantity of goods and services that all the nation’s businesses are willing to produce during a specified period of time
-All other determinants constant
Slopes upward
Recessionary Gaps
Equilibrium below potential GDP
Aggregate demand – weak
Inflationary Gaps
Equilibrium is above the potential GDP
Excess aggregate demand
Economy’s Self Correcting Mechanism
The way money wages react to either a recessionary gap or an inflationary gap
Wage changes shift the aggregate supply curve
-Change equilibrium GDP and the equilibrium price level
Aggregate Demand
Total amount that all
-Business firms
-Government agencies
Spend on final goods and services
Investments, Government Purchases, Exports, Transfers
Savings, Imports, Taxes
Expenditure Schedule
Shows the relationship between national income (GDP) and total spending
Situation in which neither consumers nor firms have any incentive to change their behavior
Ratio of change in equilibrium GDP