Quiz 7 Reveiw.docx - Section 1 Measuring the Economy GDP Prices and Inflation 1.1 Be able to calculate real and nominal GDP and explain what they

# Quiz 7 Reveiw.docx - Section 1 Measuring the Economy GDP...

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Section 1: Measuring the Economy: GDP, Prices, and Inflation 1.1. Be able to calculate real and nominal GDP and explain what they measure. This includes related terms like capital, intermediate goods, and investment. (Ch. 8.1 & 8.3 and notes) Capital Goods – Manufactured goods owned by businesses to produce other goods and services – last for several years and can be reused Investment – the purchase of capital goods, or addition of inventories by a business or the purchase of a new house or apartment Intermediate Good is used up and/or transformed in the production process Final Good – A final good is purchased by the final user GDP by expenditures = C+I+G+NX GDP by production GDP by income To go from nominal to real use constant quantity but change the price to the base year and multiply 1.3. Be able to calculate the GDP deflator and CPI and explain what they measure. (Ch. 8.3 & 9.4 and notes) GDP Deflator = (Nominal GDP/Real GDP) * 100 Measures the average price of all goods and services in the economy relative to the base year (often use 2012) CPI = (value of market basket in period t) / (value of market basket in base period) *100 The ratio of the value of a market basket of goods and services for the typical household in one month compared to the market basket value in the arbitrary base period. Core CPI ignores prices on energy and food Section 4: Explaining the Economy's Movements in the Short Run 4.1. Be able to explain what aggregate demand and supply describe about the economy. (notes) Aggregate Demand o All spending in an economy for different values of the price level o AD = C + I + G + NX o If AD grew faster than economy could produce, than prices would rise Aggregate supply o What the economy is willing to produce at different values of p o Because costs rise less than price, profits rise, and production rises which causes SRAS to be upward sloped
o Describes what the economy can produce, and it clearly cannot be exceeded Role of Price level o When p increases, wealth falls, consumption falls, and as a result AD falls Note wages may increase but wealth does not o When p increases, us exports cost rise, net exports fall, and so does AD o When p increases, loan demands increase, interest rates rise, so c and I fall, and as a result AD falls 4.2. Be able to explain the components of aggregate demand (AD), what influences them, and how the curve behaves (move along it and shifts). (Ch. 13.1 and notes) Change in P shifts along curve, all other factors shift the curve AD = C + I + G + NX o Consumption – 68% of GDP House-hold disposable income rises than so does consumption

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