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

Consumers Price Index

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

Trend
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:

Nominal GDP
GDP deflator = 100
Real GDP

CPI = Consumers Price Index = measures the average price of a basket of goods that are commonly
consumed by a typical urban working family.

Whats in the CPIs Basket?

6% 5% 5%
Housing
5% Food/Beverages
6% Transportation
Medical Care
17% 40%
Apparel
Recreation
16%
Other
Education and
communication

PPI = Producers Price Index = measures the average cost of production; thus it is often used as a
predictor of future inflation

If the cost of production rises today, theres a good chance that the price of goods will rise tomorrow.
And dont 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 doesnt 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 %

Heres 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?

And how did you know?

 Causes of Inflation
Demand-pull inflation is Cost-push inflation is caused
caused by a rise in total spending by supply shocks which raise the
when the economy is at or near full costs of production and with them
production the price level

Of course, the true underlying cause of all inflation is too much money in circulation relative to a
nations capacity to produce.

The Business Cycle is the non-periodic fluctuation of economic activity in a nation over time.
The Trend reflects a nations average capacity to produce over time.

Real GDP in the United States :

(the business cycle with recessions highlighted)
Billions of
1992 Dollars
8,000

7,000

6,000

5,000

4,000

3,000
1970 1975 1980 1985 1990 1995 2000
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 nations 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

_______Which of the following are part of the underground economy? A) cocaine sales
B) hiring your underage nephew to work in the family store C) not reporting
all the tips you make as a waiter D) all of the above
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

Countercyclicalis a policy which reduces the fluctuations of the economy

Base Yearis the year in which nominal GDP equals real GDP

Natural Rate.is the lowest sustainable, non-inflationary rate of unemployment

Trade Deficitis indicated whenever Net Exports are negative

Supply Shock...is a specific labor skill or resource shortage

Trendreflects 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

Cost Push Inflation..is a rise in the average price level due to supply shocks