ECON101 - Principles of Macroeconomics Flashcards

Question 1

What is Gross Domestic Product (GDP)?

Accepted Answer

GDP is the total market value of all final goods and services produced within a country's borders in a specific time period, usually a year or a quarter.

Question 2

What are the four components of GDP?

Accepted Answer

The four components of GDP are Consumption (C), Investment (I), Government Purchases (G), and Net Exports (NX). The formula is $GDP = C + I + G + NX$.

Question 3

Differentiate between Nominal GDP and Real GDP.

Accepted Answer

**Nominal GDP** measures the value of goods and services at current prices, reflecting both price changes and output changes. **Real GDP** measures the value of goods and services at constant prices (using a base year's prices), thus reflecting only changes in the quantity of output.

Question 4

How is the GDP Deflator calculated, and what does it measure?

Accepted Answer

The GDP Deflator is a measure of the overall price level. It is calculated as: $GDP \ Deflator = \frac{Nominal \ GDP}{Real \ GDP} 	imes 100$. It measures the change in prices for all new, domestically produced, final goods and services in an economy.

Question 5

Define Inflation.

Accepted Answer

Inflation is a general increase in the prices of goods and services in an economy over a period of time, resulting in a fall in the purchasing value of money.

Question 6

What is the Consumer Price Index (CPI)?

Accepted Answer

The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It's a key indicator of inflation.

Question 7

How is the Inflation Rate calculated using the CPI?

Accepted Answer

The inflation rate is the percentage change in the CPI from one period to another. $Inflation \ Rate = \frac{CPI_{current \ year} - CPI_{previous \ year}}{CPI_{previous \ year}} 	imes 100\%$.

Question 8

Define the Unemployment Rate.

Accepted Answer

The Unemployment Rate is the percentage of the labor force that is unemployed. It is calculated as: $Unemployment \ Rate = \frac{Number \ of \ Unemployed}{Labor \ Force} 	imes 100\%$.

Question 9

What is Frictional Unemployment?

Accepted Answer

Frictional unemployment is temporary unemployment that results from the time it takes for workers to search for and find new jobs that best suit their skills and tastes. It's a natural part of a healthy economy.

Question 10

What is Structural Unemployment?

Accepted Answer

Structural unemployment arises from a mismatch between the skills workers have and the skills demanded by employers, or from a persistent surplus of labor in certain industries or regions. It often requires retraining or relocation.

Question 11

What is Cyclical Unemployment?

Accepted Answer

Cyclical unemployment is unemployment that rises and falls with the business cycle. It increases during economic recessions (downturns) and decreases during economic expansions (upturns).

Question 12

What is the Natural Rate of Unemployment?

Accepted Answer

The natural rate of unemployment is the normal rate of unemployment around which the actual unemployment rate fluctuates. It includes frictional and structural unemployment but excludes cyclical unemployment. It's the unemployment rate when the economy is producing at its potential output.

Question 13

Explain the Aggregate Demand (AD) curve.

Accepted Answer

The Aggregate Demand (AD) curve shows the total quantity of all goods and services demanded in an economy at different price levels, holding all other factors constant. It slopes downward due to the wealth effect, interest-rate effect, and exchange-rate effect.

Question 14

Explain the Aggregate Supply (AS) curves (SRAS and LRAS).

Accepted Answer

The **Short-Run Aggregate Supply (SRAS)** curve shows the total quantity of goods and services firms produce and sell at different price levels in the short run. It is upward-sloping. The **Long-Run Aggregate Supply (LRAS)** curve is vertical at the economy's natural rate of output (potential GDP), representing the economy's full employment output level, independent of the price level.

Question 15

How is macroeconomic equilibrium determined in the AD-AS model?

Accepted Answer

Macroeconomic equilibrium occurs at the intersection of the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SRAS) curve. At this point, the quantity of aggregate output demanded equals the quantity of aggregate output supplied, determining the equilibrium price level and real GDP.

Question 16

What is Fiscal Policy and what are its main tools?

Accepted Answer

Fiscal policy refers to the government's use of spending and taxation policies to influence the economy. Its main tools are **government purchases of goods and services** and **taxes**.

Question 17

Differentiate between Expansionary and Contractionary Fiscal Policy.

Accepted Answer

**Expansionary Fiscal Policy** involves increasing government spending or decreasing taxes to stimulate aggregate demand and boost economic growth, often used during recessions. **Contractionary Fiscal Policy** involves decreasing government spending or increasing taxes to reduce aggregate demand, often used to combat inflation.

Question 18

What is Monetary Policy and what is the role of a Central Bank?

Accepted Answer

Monetary policy refers to actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals. A **Central Bank** (like the Federal Reserve) manages the money supply, interest rates, and oversees the banking system.

Question 19

List the main tools of Monetary Policy.

Accepted Answer

The main tools of monetary policy include:
1.  **Open Market Operations (OMOs)**: Buying/selling government bonds.
2.  **The Discount Rate**: The interest rate at which commercial banks can borrow money directly from the central bank.
3.  **Reserve Requirements**: The fraction of deposits that banks must hold in reserve.
4.  **Interest on Reserves**: The interest rate paid by the central bank on reserves held by commercial banks.

Question 20

Explain the Phillips Curve (short-run vs. long-run).

Accepted Answer

The **Short-Run Phillips Curve** shows an inverse relationship between inflation and unemployment. The **Long-Run Phillips Curve** is vertical at the natural rate of unemployment, implying that in the long run, there is no trade-off between inflation and unemployment.

Question 21

What is Okun's Law?

Accepted Answer

Okun's Law describes the empirical relationship between unemployment and losses in a country's production. It states that for every 1% increase in the unemployment rate above the natural rate, real GDP will decrease by 2% to 3% (the exact coefficient varies by country and time period).

Question 22

What is the Business Cycle?

Accepted Answer

The business cycle refers to the short-run fluctuations in economic activity, specifically the ups and downs in real GDP. It consists of four phases: expansion (recovery), peak, contraction (recession), and trough.

ECON101 - Principles of Macroeconomics

Cards in this deck

Related Flashcard Sets

TypeScript - Advanced Type Systems, Generics & Design Patterns

Harvard ECON1011 - Intermediate Microeconomics: Game Theory & Market Structures

MIT 18.03 - Differential Equations: Ordinary Differential Equations, Laplace & Fourier

CPA Exam FAR - Financial Accounting & Reporting: US GAAP & Revenue Recognition