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MacroEconomics Chapters 6-9 Review... McConnel, Brue, Flynn Book 18TH Edition McGraw-Hill

Business Cycles

Recurring upswings and downswings in an economy's real GDP over time are called:


A period of declining real GDP, accompanied by lower real income and higher Unemployment

Net Domestic Product (NDP)

GDP less the part of the year's output that is needed to replace the capital goods worn out in producing the output;the nation's total output available for consumtion or additions to the capital stock

Net exports (Xn)

Exports minus imports

Real GDP

GDP adjusted for inflation; GDP in a year divided by the GDP price index for that year, the index expressed as a decimal.

Nominal GDP

The GDP measured in terms of the price level at the time of measurement (UN-adjusted for Inflation)


The Failure to use all available "Economic Resources" to produce desired goods and services; the failure of the economy to fully employ its labor force.


A rise in the general level of prices in an economy.

Modern Economic Growth

The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita


The accumulation of funds that results when people in an economy spend less (consume less) than their incomes during a given time period


Spending for the production and accumulation of capital and additions to inventories.

Financial Investment

The purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as house, land, or factories) or the building of such assets in the expectation of financial gain.


The anticipations of consumers, firms, and others about future economic conditions.


Sudden, unexpected changes in demand (or aggregate demand) or supply (or aggregate supply)

Demand Shocks

Sudden unexpected changes in Demand

Supply Shocks

Sudden, exexpected changes in aggregate supply.


Goods that have been produced but remain unsold.

Inflexible Prices

Product prices that remain in place (atleast for a while) even though supply or demand has changed; stuck prices or sticky prices.

Flexible Prices

Product prices that freely move upward or downward when product demand or supply changes.

What does Macroeconomics study?

Long-run Economic Growth and Short-run Economic Fluctuations.

Macroeconomists focus their attention on what three key economic statistics?

Real GDP, Unemployment, and Inflation


Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also knowns as Capital Goods.

How do banks and other financial institutions help to convert saving into investment?

By taking the savings generated by households and lending it to businesses that wish to make investments.

Expectations have an important effect on the economy for what two reasons?

1st : If people and businesses are more positive about the future, they will save and invest more.
2nd : Individuals and firms must make adjustments to shocks

What is the only way for the economy to adjust to often inflexible real-world prices in the short run?

Through changes in output levels

Sticky prices combine with shocks to do what?

Drive short-run fluctuations in output and employment.

If demand remains low for an extended period of time, what happens to inventory levels?

They become too high and firms will have to cut output and lay off workers

When prices are inflexible how does the economy adjust to unexpected low demand?

Through changes in output and employment rather than through changes in prices.

National Income Accounting

The techniques used to measure the overall production of the economy and other related variables for the nation as a whole.

Intermediate Goods

Products that are purchased for resale or further processing or manufacturing

Final Goods

Goods and Services that have been purchased for final use and not for resale or further processing or manufacturing.

Multiple Counting

Wrongly including the value of intermediate goods in the GDP; counting the same good or service more than once.

Value Added

The value of the product sold by a firm less the value of the products (materials) purchased and goods by the firm to produce the product.

Expenditures Approach

The method that adds all expenditures made for final goods and services to measure the GDP.

Income Approach

The method that adds all the income generated by the production of final goods and services to measure the GDP.

Personal Consumption Expenditures (C)

The expenditures of households for durable and nondurable consumer goods and services.

Gross private domestic investment (Ig)

Expenditures for newly produced capital goods ( such as machinery, equipment, tools, and buildings) and for additions to inventory.

Net private domestic investment

Gross private domestic investment less consumption of fixed capital ; the addition to the nation's stock of capital during a year.

Government Purchases

Expeditures by government for goods and services that govt. consumes and providing public goods and for public (or social) Capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services.

Taxes on production and Imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariff which firms treat as cost of producing a product and pass on (in whole or in part) to buyers by charging a higher price.

National Income

Total Income earned by resource suppliers for their contributions to GDP + taxes on production and imports; The sum of wages and salaries, rent, interest, profit, propiertor's income, and such taxes.

Consumption of Fixed Capital

An estimate of the amount of capital worn out or used up ( consumed) in producing the GDP ; also called depreciation.

Personal Income (PI)

The earned and unearned income available to resource suppliers and others before the payment of personal taxes.

Disposable Income (DI)

Personal income less personal taxes, income available for personal consumption expenditures and personal saving.

Nominal GDP

The GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

Price Index

An index number that shows how the weighted-average price of a "market basket" of goods changes over time.

What is Gross Domestic Product (GDP) ?

A basic measure of an economy's economic performance ; the market value of all final goods and services produced within the borders of a nation in a year.

When calculating GDP what is purposely excluded?

Intermediate goods, Nonproduction transactions, and Secondhand sales.

GDP may be calculated by...

Summing total expenditures on all final output or by summing the income derived from the production of that output.

By the expenditures approach, GDP is determined by...

Adding consumer purchases of goods and services, gross investment spending by businesses, government purchases, and net exports: GDP = C + Ig + G + Xn.

Gross investment is divided into...

(A) replacement investment (required to maintain the nation's stock of capital at its existing level) and...
(B) net investment (the net increase in the stock of capital).

By the income or allocations approach, GDP is calculated by...

The sum of compensation to employees, rents, interest, proprietors' income, corporate profits, taxes on production and imports minus net foreign factor income, plus a statistical discrepancy and consumption of fixed capital.

How are price indexes computed?

By dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiplying the result (the quotient) by 100.

GDP is a reasonably accurate and very useful indicator of a nation's economic performance, but what are its limitations?

It fails to account for nonmarket and illegal transactions, changes in leisure and in product quality, the composition and distribution of output, and the environmental effects of production.

Economic Growth

(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology;
(2) An increase of real output (GDP) or real output per capita.

Real GDP Per Capita

Inflation adjusted output per person; Real GDP/Population

Rule of 70

A method for determining the number of years it will take for some measure to double, given its annual percentage increase.
Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.

Leader Countries

As it relates to economic growth, countries that develop and use advanced technologies, which then become available to follower countries.

Follower Countries

As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.

Supply Factor

An increase in the availability of a resource, an improvement in its quality, or an expansion of technological knowledge that makes it possible for an economy to produce a greater output of goods and services.

Demand Factor

The increase in the level of aggregate demand that brings about the economic growth made possible by an increase in the production potential of the economy.

Efficiency Factor

The capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors (of growth) make possible.

Labor Productivity

Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.

Labor Force Participation Rate

The percentage of the working age population that is actually in the labor force.

Growth accounting

The bookeeping of the supply side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.


The capital goods usually provide by the public sector for the use of its citizens and firms

Human Capital

The knowledge and skills that make a person productive.

Economies of Scale

Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.

Information Technology

New and more efficient methods of delivering and receiving information through the use of computers, fax machines, wireless phones, and the Internet.

Start-up firms

A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.

Increasing Returns

An increase in a firm's output by a larger percentage than the percentage increase in its inputs.

Network Effects

Increases in the value of a product to each user, including existing users, as the toal number of user rises.

Learning by doing

Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.

The "ingredients" of economic growth to which we can attribute changes in growth rates are...

4 supply factors: changes in the quantity and quality of natural resources,changes in the quantity and quality of human resources, changes in the stock of capital goods, and improvements in technology);
1 demand factor: (changes in total spending); and
1 efficiency factor: (changes in how well an economy achieves allocative and productive efficiency).

The growth of a nation's capacity to produce output can be illustrated graphically by...

an outward shift of its production possibilities curve.

The recent productivity acceleration is based on...

(a) Rapid technological change in the form of the microchip and information technology,
(b) Increasing returns and lower per-unit costs, and
(c) Heightened global competition that holds down prices.

The main sources of increasing returns in recent years are...

(a) use of more specialized inputs as firms grow,
(b) the spreading of development costs,
(c) simultaneous consumption by consumers,
(d) network effects, and,
(e) learning by doing. Increasing returns mean higher productivity and lower per-unit production costs.


The point in a bussiness cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.


The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion (recovery) begins.


A phase of the business cycle in which real GDP, income and employment rise.

Labor Force

Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.

Unemployment Rate

The percentage of the labor force unemployed at any time.

Discouraged workers

Employees who have left the labor force because they have not been able to find employment.

Frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Structural Unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

Cyclical Unemployment

A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).

Full-employment rate of unemployment

The unemployment rate at which there is no cyclical unemployment of the labor force ; equal to between 4 and 5 percent in the US because some frictional and structural unemployment is unavoidable.

Natural Rate of Unemployment (NRU)

The full-employment unemployment rate; the unemployment rate occuring when there is cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.

Potential Output

The real out GDP an economy can produce when it fully employs its available resources.

GDP gap

Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap)

Okun's Law

The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment unemployment rate is associated with a rise in the negative GDP gap by 2 percent of potential output ( potential GDP)

Consumer Price Index (CPI)

An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.

Demand-pull Inflation

Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand.

Cost-push Inflation

Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.

Per-unit production costs

The average production cost of a particular level of output; total input cost divided by units of output.

Nominal Income

The number of dollars received by an individual or group for its resources during some period of time.

Real income

The amount of goods and services that can be purchased with nominal income during some period of time, nominal income adjusted for inflation.

Unanticipated Inflation

Increases in the price level (Inflation) at a rate higher than expected.

Anticipated Inflation

Increases in the price level (Inflation) that occur at the expected rate.

Cost-of-Living-Adjustments (COLAs)

An Automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers.

Real Interest rate

The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.

Nominal Interest rate

The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.


A decline in the economy's price level


A very rapid rise in the price level ; an extremely high rate of inflation.

The Business cycle has greater effects on...

Output and employment in the capital goods and durable consumer goods industries than in the services and nondurable goods industries.

What does Inflation reduce?

The purchasing power of money.

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