Econ 2020 Final Review.docx - Econ 2020 Final GDP o Whats...

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Econ 2020 Final GDP o What’s included GDP= C + I + G +NX o Calculating Nominal GDP = Quantity x Price (total $) Real GDP= (quantity x base year’s $) GDP Deflator = nominal real × 100 o Nominal to Real 1 0 0 L e v e l P r i c e G D P N o m i n a l G D P R e a l t t t o Growth Rates = value t value t 1 value t 1 × 100 Unemployment o What is it Important indicator of an economy’s health o Calculating Number Unemployed Labour Force × 100 o Labour Force Participation Rate Labour Force Population × 100 Labour Force includes people who are employed or actively seeking work Not in the labour force: not actively seeking work, retirees, students, institutionalized o Natural Rate u*--typical rate in a healthy economy Structural and Frictional are included in u* Y*--full economic output o Types Structural Changes in the economy over time Workers must retrain, reeducate, or relocate Frictional Unemployment caused by time delays—college graduates, spouse of person who moves for a job Cyclical Caused by economic downturns Inflation o Price Level Inflation is general increase in the price level o CPI
Measure of the price level based on consumption pattern of a typical consumer basket price base year basket price × 100 goal is to measure the cost of living o Inflation Rate Use the growth rate formula with two different year’s CPI o How do unemployment and GDP relate to the inflation rate? Unemployment and inflation are inversely related (see Phillips curve) o Examples o Problems Inflation Brings Shoe Leather Costs: resources that are wasted when people change their behavior to avoid holding money Money Illusion: when people interpret nominal changes in wages or prices as real changes Menu Costs: the costs of changing prices Financial Markets o Loanable Funds Market Savings channeled into investment Movement along the curve: change in interest rate Shift in the supply: changes in income & wealth, time preferences, consumption smoothing Shift in demand: changes in productivity of capital, investor confidence Suppliers in the loanable funds markets are: households, lenders, foreigners Supply increases when interest rates increase o Interest Rate The price of loanable funds I n c e p t i o n a t P r i c e I n c e p t i o n a t P r i c e V a l u e F a c e R a t e I n t e r e s t Fisher equation: Interest Rate Effect: when a change in the price level leads to a change in

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