Quiz 6 Review.docx - Section 1 Measuring the Economy GDP Prices and Inflation 1.10 Be able to describe why the Fed has a goal of 2 for inflation as part

Quiz 6 Review.docx - Section 1 Measuring the Economy GDP...

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Section 1: Measuring the Economy: GDP, Prices, and Inflation 1.10 Be able to describe why the Fed has a goal of 2% for inflation as part of their dual mandate. (notes) Harm from inflation o There is an incentive to put off purchases when things will cost less in the future With a 2 percent deflation goal, can likely stay away from debilitating deflation in a recession Economists argue that prices and wages give signals and incentives o It is hard to cut people’s nominal wages, but with inflation, they regularly fall o Thus, a bit of inflation helps real prices and wages change and leads to better signals and incentives Do not want anything higher than 2 percent as it is more variable and less predictable o Economy is able to work around inflation when it is predictable Section 2: Why Economies Grow in the Long Run 2.7 Be able to explain how to use the "per-worker production function" graph and the corresponding equation. (Ch. 11.2 and notes) Y/L = A * (K/L)^0.3 A = total factor productivity – measures technology – human capital, better capital, and better organized firms Section 3: The Business Cycle and Unemployment 3.8 To be able to explain basic facts about the business cycle, including how real GDP and the unemployment rate behave during the business cycle, and how the 2007-2009 recession (sometimes called the "Great Recession") and its aftermath compares to other downturns. Finally, be able to explain how the Great Depression was much worse than any downturn since it. (Ch. 10.3 and notes)
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The Business Cycle o A business cycle is the combination of a recession and the expansion o During the expansion phase of the business cycle, production, employment, and income are increasing. The period of expansion ends with a business cycle peak. Following the business cycle peak, production, employment, and income decline as the economy enters the recession phase of the cycle. The recession comes to an end with a business cycle trough, after which another period of expansion begins o Real GDP declines during recessions and rises during expansions o Unemployment rate rises during recessions, and shortly after an expansion begins it starts to fall o As the economy nears the end of an expansion, interest rates are usually rising, and the wages of workers are usually increasing faster than prices. As a result of rising interest
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