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Unformatted text preview: Macroeconomics Article: trade off between long run and short run Pre-Keynesian Model- Classical Model- market clearing- prices self adjust such that Qd= Qs- labor is supplied in order to earn income to buy good- labor supply curve slopes upward because higher the wages the more people will work- labor demand slopes downward because as wages rise, companies higher fewer workers- economy achieves full employment on its own Keynesian Model:- classical model only works in the long run GDP and Aggregate Expenditure Chapter 19, 23, 24 Terms: Business Cycle- of expansion and recession Expansion- total production and employment increase Recession- total production and employment decrease Economic Growth- ability of economy to produce more goods and services Inflation Rate- percent change in price level from year to year Transfer payments- government pays, like social security, without a good or service Value Added Method- measures the value of GDP each step of production adds Price Level- measure of average price of goods and services in economy Gross National Product (GNP)- includes good produced by citizens who are outside of country at the time of production Net National Product- GNP minus depreciation of equipment (consumption of fixed capital) National Income- NNP minus value of taxes Personal Income- National Income minus corporate retained earning, plus transfer payments from G Disposable Personal Income- Personal income minus personal tax payments Marginal propensity to Consume- ratio of change in consumption over change in income (shows how much of income people spend) GDP- measures value (not quantity) of final (not intermediate/ inputs) goods produced all GDP must equal the income (Y- wages, interest, rent, profit) of the economy transfer payments (social security) are not included in GDP- there is no product can be measured by added value method- the value added at each stage of product Components of GDP: 1. Consumption (services, durable goods and nondurable/perishable goods)- wealthier countries produce more services than goods 2. Investment (business fixed investment, changes in inventory, residential investment by households). Business investment is largest part in US 3. Government Purchases- spending federal, state, local gov. on goods and services 4. Net exports- exports minus imports (negative in US) Shortcoming of GDP: Doesnt measure household production (things people produce for themselves) Doesnt measure underground economy/ informal sector- things that are concealed from government (to avoid taxes or because they are illegal) Value of leisure is not measured to determine well-being of country Doesnt measure negative effects of production (pollution) Doesnt measure crime or social problems Real vs. Nominal GDP Real GDP- value of final goods and services evaluated at base year prices Nominal GDP- value of final goods evaluated at current year prices (inflation) Price Level- measure of average price of goods and services in economy,...
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