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ECO 3200 Midterm Review SheetChapter 1:I.Macroeconomics:study of the behavior the economy as a wholeA.What determines fluctuations in output and employment; what causes the businesscycle?B.What causes inflation?C.What is the relationship between unemployment and inflation?D.What economic policy should be used to solve these problems?
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Chapter 2:Measurement of Macro VariablesI.Measurement of Economy’s PerformanceA.Market Value:the amount at which something can be sold for on the marketB.GDP:1.Excludes goods and services produced by Americans abroad and include thoseproduced within the U.S. by foreigners.2.Counts onlyfinalgoods and services3.Financial transactions (the sale of stocks and bonds, etc.) are not counted4.Components of GDPa)Consumption(C): the total spending of households on durable and non-durable goods and services(1)Makes up about 70% of GDPb)Investment(I): spending by businesses on plant and equipment(1)Fixed investment expenditures for newly produced capital goods(2)Changes in business inventories(3)Residential housing constructionc)Government Spending and Gross Investment(G): the value of goods andservices the government purchases(1)Transfer payments such as SS benefits are not includedd)Net Exports(X-M):(1)Exports (M): total expenditure of foreigners on domesticallyproduced goods and services(2)Imports (X): total revenue of foreign goods purchased by
domestic residentse)In a closed economy, GDP = C+!+Gf)In an open economy, GDP = C+I+G+X-M5.Shortcomings:a)Only captures market activity; excludes unpaid workb)Ignores the distribution of incomec)Ignores the kid and quality of productsd)Quantitative and not qualitativee)Neglects leisure timef)Doesn’t include the underground economyg)Doesn’t capture negative externalities such as pollution6.Nominal vs. Real GDPa)Nominal GDP is based on current market prices. An increase in nominalGDP is due to:(1)Output increase and/or(2)Price increaseb)Real GDP is the value of goods and services produced in the currentperiod, valued at the base year’s pricesc)Nominal GDP = P (given year) * Q (given year)d)Real GDP = P (base year) * Q (given year)e)GDP Deflator = Nominal GDP / Real GDPC.CPI: the most widely used measure of inflation1.Only includes consumer goods and services (consumption)a)CPI = cost of market basket of products in current year/cost of marketbasket products at base yearb)