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Macroeconomic Theory � Quiz 1

Macroeconomic Theory � Quiz 1 - Macroeconomic Theory...

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Macroeconomic Theory – Quiz #1 Chapter 1 – Introduction Three Important Variables in Macroeconomics: 1. Output: The level of production of the economy as a whole – and its rate of growth. 2. Unemployment Rate: The proportion of workers in the economy who are not employed and are looking for jobs. 3. Inflation Rate: The rate at which the average price of the goods in the economy is increasing over time. United States Growth (2007): Output – 2.1%, Unemployment – 4.6%, Inflation – 2.6% Recession: Period where there is a decrease in output. U.S. Central Bank = Federal Reserve Board Fed Interest Rate = Demand Trade Deficit: Difference between imports and exports. (US has a large trade deficit) Productivity: Output per hour worked. Productivity Growth: The rate of growth of output per hour worked. U.S. Trade Deficit: (1999) - $78 Billion or 1% of output, (2006) - $760 Billion or 6% of output. The U.S.’s ability to continue functioning with large trade deficits relies on other countries’ willingness to finance the U.S. trade deficit by buying U.S. Government Bonds or shares in the U.S. Stock Market U.S. Government Budget Deficits lead to the accumulation of government debt and the need for higher taxes in the future European Union (EU): A group of 27 European countries that form a common market an economic zone where people and goods can move freely. Five largest members: Germany, France, Italy, Spain, and the United Kingdom. Standard of Living: Level of output per person. EU Growth (2007): Output – 2.6%, Unemployment – 7.0%, Inflation – 1.8% Potential Reasons for EU Unemployment: 1. Monetary Policy followed by the European Central Bank has kept interest rates too high, leading to low demand and high unemployment.
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2. Labor Market Institutions: a. Protection policies preventing workers from losing their jobs makes it expensive to lay off workers, which deters firms from hiring in the first place. b. Protection policies for workers who have become unemployed, such as generous unemployment insurance, decrease incentive to find a job. Euro Area: Area in which the Euro is used – includes 15 countries. PPP (Purchasing Power Parity) – A measure that compares standards of living while taking account differences in culture. For example a meal in NYC is $20, whereas in Beijing an average meal comes out to about $2. Therefore China’s $2,100 output per person goes a lot farther, and can be considered more like $8,000 per person in comparison to the U.S.’s output per person.
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