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Chapter 1: Economics: The Core Issues
Scarcity exists because of the imbalance between our desires and available resources,
forces us to make economic choices, and implies the need to use resources efficiently.
Scarcity exists because of a lack of enough resources to satisfy all desired uses of those
resources.
Scarcity implies that an increase in law enforcement services produced in a given year
will decrease the amount of other goods and services that can be produced that year.
As a result of scarcity no matter what one has, it is never enough, getting more of one
thing means less of something else, and there is no such thing as a "free lunch."
The assertion that "There is no such thing as a free lunch" means that there are tradeoffs
whenever a decision is made.
Suzie is thinking about going to a movie tonight. Tickets cost $8 and she will have to
cancel a babysitting job that pays $25. The cost of going to the movie is $33.
If a nation is faced with scarcity this means the nation is unable to have as much as it
would like to have.
Ingredients for economic growth include capital (plant and equipment) accumulation,
growth in technology, and investment in education and skill enhancement programs.
These events would create economic growth: The economy's capital stock grows,
Technology improves, and Workers become more educated and skilled.
* The following statements are true given the information provided in the following
production possibilities table. The combination of 14 units of corn and 4 units of wheat
is currently unobtainable.
* If the following production possibility table were graphed, then the graph would be
downward sloping and bow out away from the origin.
* Consider the following production possibilities table. The opportunity cost of one unit
of wheat:
When moving from production possibility B to C is 4 units of corn.
Production Possibility A Production Possibility B Production Possibility C Production
Possibility D Production Possibility E
Corn production 20 18 14 8 0
Wheat production 0 1 2 3 4
The market mechanism allows buyers and producers to communicate indirectly.
The market mechanism relies on market prices and sales to signal desired outputs.
A major challenge for all societies in allocating goods and resources is to strike a balance
between the use of the market mechanism and government directives in economic affairs.
An inverse (or negative) relationship exists between two variables when as one goes up in
value, the other goes down.
If there is a direct or positive relationship between two variables, this means that a(n)
increase in the value of one variable will cause an increase in the value of the other.
If the value of X increases and there is no change in the value of Y, then we can conclude
there is no relationship (or correlation) between these two variables.
If there is a negative (inverse) relationship between price and quantity, then the graph
will be downward sloping (negatively sloped).
If the quantity supplied (the quantity put up for sale) rises as the price rises, then the
graph will be positively sloped.
If a graph relating two variables is downward sloping (negatively sloped), then there is an
inverse (negative) relationship between the two variables.
The slope of a line equals the change in the value on the vertical axis divided by the
change in the value on the horizontal axis.
self-interest.
Chapter 4
Government intervention in the marketplace is justified by a variety of market failures.
The micro failures of the market originate in public goods, externalities, market power,
and an inequitable distribution of income. These flaws deter the market from achieving
the optimal mix of output or distribution of income.
Public goods are those that can't be consumed exclusively; they're jointly consumed
regardless of who pays. Because everyone seeks a free ride, no one demands public
goods in the marketplace.
© Externalities are costs (or benefits) of a market transaction borne by a third party.
Externalities create a divergence between social and private costs, causing suboptimal
market outcomes.
© Market power enables a producer to thwart market signals and maintain a suboptimal
mix of output. Antitrust policy seeks to prevent or restrict market power. The government
may also regulate the behavior of powerful firms.
© The market-generated distribution of income may be unfair. This inequity may prompt
the government to intervene with taxes and transfer payments.
© The macro failures of the marketplace are reflected in unemployment and inflation.
Government intervention is intended to achieve full employment and price stability.
© The federal government expanded greatly after 1930. More recent growth, however,
has been in transfer payments, which now account for over half of federal expenditure.
© State and local governments purchase more output (11 percent of GDP) than the
federal government (7 percent) and employ three times as many workers.
© Income and payroll taxes provide most federal revenues. States get most revenue from
sales taxes; local governments rely on property taxes.
© Government failure occurs when intervention moves us away from rather than toward
the optimal mix of output (or income). Failure may result from outright waste
(operational inefficiency) or from a misallocation of resources. All government activity
must be evaluated in terms of its opportunity cost, that is, the private goods and services
forgone to make resources available to the public sector.
© Allocation decisions within the public sector may be based on benefit-cost analysis or
votes. The self-interests of government agents may also affect decisions of when and how
to intervene.
© Fire protection, police protection, education, and other services can be produced more
efficiently by the private sector than by the public sector. You should recognize now that
the existence of externalities and the free-ride problem force society to produce some
goods and services through public-sector expenditures. Many of the goods and services
we take for granted (such as education) would not be produced in sufficient quantities if
left to the private sector. And can you imagine trying to provide for your own defense
against foreign countries?
Chapter 5
© National-income accounting is the measurement of our annual output and income
flows. The national-income accounts provide a basis for assessing our economic
performance, designing public policy, and understanding how all the parts of the
economy interact.
© The most comprehensive measure of our output is gross domestic product (GDP), the
total market value of all final goods and services produced within a nation's borders
during a given time period.
© In calculating GDP, we include only the value added at each stage of production. This
procedure eliminates the possibility of the double counting that would result because
business firms buy intermediate goods from other firms and include the associated costs
in their selling price. For the most part, only marketed goods and services are included in
GDP.
© To distinguish physical changes in output from monetary changes in its value, we
compute both nominal and real GDP. Nominal GDP is the value of output expressed in
current prices. Real GDP is the value of output expressed in constant prices (the prices of
some base year).
© Each year some of our capital equipment is worn out in the process of production.
Hence GDP is larger than the amount of goods and services we could consume without
reducing our production possibilities. The amount of capital used up each year is referred
to as "depreciation."
© By subtracting depreciation from GDP we derive net domestic product (NDP). The
difference between NDP and GDP is also equal to the difference between gross
investment - the sum of all our current plant and equipment expenditures - and net
investment - the amount of investment over and above that required to replace worn-out
capital.
© All the income generated in market sales (GDP) is received by someone. The sequence
of flows involved in this process is:
GDP
less depreciation
equals NDP
less indirect business taxes
equals national income (NI)
less corporate taxes,
retained earnings, and
Social Security taxes
plus transfer payments and
net interest
equals personal income (PI)
less personal income taxes
equals disposable income (DI)
© The incomes received by households, business firms, and governments provide the
purchasing power required to buy the nation's output. As that purchasing power is spent,
further GDP is created and the circular flow continues.
© Income and output are two entirely different things. This is fundamental. Every time a
dollar's worth of final spending takes place, the seller must receive a dollar's worth of
income. It could not be otherwise. Remember that profits are used as a balancing item.
Don't confuse the term "income" with the term "profit". Profits can be negative, whereas
output for the economy cannot.
© Comparisons of per capital GDP between countries tell you which population is better
off. Simple comparisons of per capita GDP ignore how the GDP is distributed. A country
with a very high per capita GDP that is unequally distributed may well provide a standard
of living that is below that of another country with a lower per capita GDP which is more
equally distributed. There are other problems with inter-country comparisons of per
capita GDP because of exchange-rate distortions, differences in mix of output in two
counties, and how the economy is organized. GDP per capita is an indicatory only of the
amount of goods and services each person could have, not what each person does have.
© Value added is a measure of a firm's profit. In computing value added, a firm subtracts
from total revenue the cost of items sold to the firm in "arm's-length" transactions. There
are additional cost items that normally would be subtracted to calculate "profit" but
which are not subtracted in the computation of value added. Those items include the cost
of capital, land, and labor. When value added for all economic units is combined, the
total of payments to capital (interest), land (rent), labor (wages), and risk taking (profits)
will equal the total gross national product.
Chapter 6
©To understand unemployment, we must distinguish the labor force from the larger
population. Only people who are working (employed) or spend some time looking for a
job (unemployed) are participants in the labor force. People neither working nor looking
for work are outside the labor force.
©The size of the labor force affects production possibilities. As the labor force grows, so
does the capacity to produce goods and services.
©Unemployment implies that we're producing inside the production possibilities curve
rather than on it.
©The macroeconomic loss imposed by unemployment is reduced output of goods and
services. Okun's Law suggests that 1 percentage point in unemployment is equivalent to a
2 percentage point decline in output.
©The human cost of unemployment includes not only financial losses but social,
physical, and psychological costs as well.
©Unemployment is distributed unevenly; blacks, teenagers, and the less educated have
much higher rates of unemployment. Also hurt are discouraged workers - those who've
stopped looking for work at part-time or menial jobs because they can't find full-time
jobs equal to their training or potential.
©There are four types of unemployment: seasonal, frictional, structural, and cyclical.
Because some seasonal frictional unemployment is inevitable and even desirable, full
employment is not defined as zero unemployment. These considerations, plus fear of
inflationary consequences, result in full employment being defined as an unemployment
rate of 4 to 6 percent.
©The "natural" rate of unemployment is based on frictional and structural forces, without
reference to short-term price (inflation) pressures.
©Unemployment rates got as high as 25 percent in the 1930s. Since 1960, the
unemployment rate has ranged from 3.4 to 10.8 percent.
©Our ability to achieve full employment in the future depends on our success in closing
the skills gap. This necessitates more and better education and training activity
What was that again?
1.The government should eliminate unemployment. Under the Full Employment and
Balanced Growth Act of 1978, the government sets an unemployment goal for itself, but
this goal is well short of zero unemployment. As we shall see in subsequent chapters, the
government may have to sacrifice such goals as price stability if it lowers unemployment
too much. In this chapter, we have seen that it would be very difficult and even
undesirable to eliminate frictional or seasonal unemployment.
2.A rise in the unemployment rate of 0.1 or 0.2 percent for a month is bad. Small changes
in the unemployment rate tell us nothing about what is happening to disguised
unemployment, discouraged workers, or changes in the labor force. Large changes in
seasonal or frictional unemployment are not necessarily bad and could not be easily
remedied even if they were. Be careful in interpreting short-run changes in the
unemployment rate.
3.Everyone who is counted as unemployed qualifies for unemployment benefits. Many of
those who are counted as unemployed do not qualify for unemployment benefits. Those
who are new entrants to the labor force, those who have not worked at their last job for an
extended period and those who quit their last job are ineligible in many states. In
addition, some who are among the "seasonally unemployed" frequently will not qualify.
Unemployment Rule = Number of people unemployed divided Labor force
labor force - All persons over age 16 who are either working for pay or actively seeking
paid employment.
labor-force participation rate - The percentage of the working-age population working or
seeking employment.
production possibilities - The alternative combinations of final goods and services that
could be produced in a given time period with all available resources and technology.
unemployment - The inability of labor-force participants to find jobs.
Okun's Law - 1 percent more unemployment is estimated to equal 2 percent less output.
unemployment rate - The proportion of the labor force that is unemployed.
discouraged worker - An individual who isn't actively seeking employment but would
look for or accept a job if one were available.
underemployment - People seeking full-time paid employment who work only part time
or are employed at jobs below their capability.
seasonal unemployment - Unemployment due to seasonal changes in employment or
labor supply.
frictional unemployment - Brief periods of unemployment experienced by people moving
between jobs or into the labor market.
structural unemployment - Unemployment caused by a mismatch between the skills (or
location) of job seekers and the requirements (or location) of available jobs.
cyclical unemployment - Unemployment attributable to a lack of job vacancies, that is, to
an inadequate level of aggregate demand.
full employment - The lowest rate of unemployment compatible with price stability;
variously estimated at between 4 percent and 6 percent unemployment.
natural rate of unemployment - Long-term rate of unemployment determined by
structural forces in labor and product markets.
skills gap - Gap between skills required for emerging jobs and the skills of workers.
Sample Questions:
People become labor force participants when they: Take a full-time job.
(pg. 106 Main, Macro) The labor force is composed of all persons over the age of sixteen
who are working for pay or who are looking for paid employment. Students, retired
persons, and those involved in household activities who do not work for pay and are not
looking for a job are not part of the labor force.
The macro consequence of unemployment is: Lost output for the economy.
(pg. 107 Main, Macro) Unemployment means that labor-force participants are unable to
find jobs. Any time available resources are not being used, in this case labor, the
economy is inside its production-possibilities curve. The result is that actual output is less
than potential output.
Which of the following would cause the institutional production-possibilities curve to
shift outward in the short run?
(pg. 107 Main, Macro) The institutional production-possibilities curve lies inside the
physical production-possibilities curve. Institutional constraints, such as child labor laws
and environmental protection, are the reason the institutional curve is inside the physical
curve. If these restrictions are relaxed or more students join the labor force because they
do not receive loans, the productive capacity increases or shifts to the right.
As economic output increases and an economy moves toward full employment:
Production moves closer to the institutional production-possibilities curve, but not
beyond it.
(pg. 107 Main, Macro) The institutional production-possibilities curve represents the
maximum amount of output that can be produced with the institutional constraints, or
limits, that society has chosen. As the economy employs more of its available resources it
moves closer to the institutional-production-possibilities curve. Unless the institutional
constraints are relaxed, the level of output can only move closer to the curve or on to the
curve, but not beyond the curve.
When the growth rate of the labor force is more rapid than the growth rate of the
unemployed, then it is certain that:
(pg. 109 Main, Macro) The labor force is composed of the employed plus the
unemployed. If the growth rate of the labor force is greater than the growth rate of the
unemployed, then more people must be employed. The labor-force participation rate is
the percentage of the population that is in the labor force. Since there is no information
given about the population, changes in the labor-force participation rate cannot be
determined.
When an economy enters a recession, then:
(pg. 108 Main, Macro) A recession is a decrease in the level of real GDP. During a
recession fewer workers are needed because there is not enough demand for the goods
and services labor produces. The result is an increase in cyclical unemployment.
Discouraged workers are those who would look for a job if they thought they could find
one. If the prospects are slim, more people become discouraged. The duration of
unemployment is the length of time people remain unemployed. Obviously if the level of
real output is decreasing it will take longer to find a job.
Individuals who are working part-time while seeking full-time employment are classified
as:
(pg. 111 Main, Macro) Once people are working for pay they are considered employed.
People seeking full-time paid employment who work part-time or work at a job below
their capability are underemployed.
The official unemployment statistics may exaggerate the significance of unemployment
by including the:
(pg. 111 Main, Macro) The phantom unemployed are those who report they are looking
for a job but really have little interest in finding a job. They are counted in the
unemployment statistic, but since they are not really interested in taking a job they
exaggerate the unemployment problem.
Which of the following is believed to have contributed to an increase in the level of
structural unemployment during the 1970s and 1980s?
(pg. 115 Main, Macro) Structural unemployment is unemployment caused by a mismatch
between the skills of job seekers and the skills required in the available jobs. During the
1970s and 1980s more youth and women entered the labor force and, because they did
not have the skills necessary for the available jobs, structural unemployment increased.
Changes in demand during this time meant workers in certain industries became
structurally unemployed, and liberal transfer programs discouraged people from
acquiring the skills necessary for employment.
In terms of the musical chairs analogy in the text, which of the following is a description
of cyclical unemployment? There are too few chairs.
(pg.115 Main, Macro) Cyclical unemployment results from inadequate demand for goods
and services. There are plenty of workers with the necessary skills, but there are not
enough jobs for all the workers. In the musical chair analogy this means there are not
enough chairs.
Which of the following government programs would be most appropriate to counteract
cyclical unemployment?
(pg. 115 Main, Macro) Cyclical unemployment occurs because there is an inadequate
demand for goods and services in the economy. The unemployed do not need job training
or placement assistance necessarily. The only way to reduce this type of unemployment is
through an increase in aggregate demand or economic growth.
Inflation is most likely to be a problem in an economy that:
(pg. 116 Main, Macro) Inflation becomes a concern as the economy moves closer to full
employment. As long as there are large quantities of unemployed resources, inflation is
not much of an issue. If the economy is producing between the institutional productionpossibilities curve and the physical production-possibilities curve then it is near full
employment and inflation is more likely to be a problem.
Chapter 6: Unemployment
The unemployment rate is the number of people classified as unemployed as a percentage
of the labor force.
Unemployment results in production inside the nation's production possibilities curve.
A growing labor force will most likely cause a rightward shift of the nation's production
possibilities curve.
Cyclical unemployment is considered to be the most controllable through macroeconomic
policy
Suppose many lumberjacks lose their jobs because more construction companies begin to
rely on alternatives to wood in building new homes. The dismissed lumberjacks are
appropriately called structurally unemployed.
Full employment describes a condition where the actual rate of unemployment is equal to
or less than the natural rate of unemployment.
Structural unemployment results from changes in both technology and patterns of
demand.
Cyclical unemployment usually increases during a recession
During a recession, cyclical unemployment increases.
A decrease in the natural rate of unemployment will increase potential real GDP.
The natural rate of unemployment is the sum of frictional and structural unemployment.
Suppose the natural rate of unemployment is 5.8%. If the actual unemployment rate is
also 5.8%, then full employment will exist.
Potential real GDP corresponds to the level of real GDP for which the natural rate of
unemployment is attained.
If the U.S. economy achieves "full employment," the unemployment rate will equal the
natural rate of unemployment.
4 percent unemployment rate and 3 percent inflation rate was a stated goal of the
Humphrey-Hawkins Act
Full employment in the United States exists when the unemployment rate is between 4%6%.
The unemployment rate will never be at zero
When migrant workers seek employment after the crops have been picked, the
unemployment rate goes up. This is an example of seasonal unemployment.
The type of unemployment that increases most when teenagers look for temporary
summer jobs is seasonal unemployment.
Services is most likely to account for up to 98 percent of the jobs in the next decade
The skills gap refers to the difference between the skills required for emerging jobs and
the existing skills of the workers.
Suppose a country has 1 million people, half of whom are in the labor force, with 50,000
unemployed. What is the unemployment rate? 10 percent
A person who chooses to go to college instead of working is not counted as part of the
labor force.
The phantom unemployed are people who report that they are actively seeking a job even
when they have little or no intention of finding one.
The official unemployment statistics may exaggerate the significance of unemployment
by including the phantom unemployed.
For purposes of calculating the unemployment rate, a person who works only 20 hours
per week is counted as being employed.
A discouraged worker is one who leaves the labor force after an unsuccessful job search.
The most widely used measure of the unemployment rate is found by the U.S Census
Bureau in monthly surveys to determine if people are working or are willing to work.
Individuals who are working part-time while seeking full-time employment are classified
as underemployed.
a person is not able to use his or her full capabilities in his or her job.
Black teenagers are the most likely to be affected by unemployment
Job losers comprises the largest segment of unemployed persons during a recession
The economic cost of unemployment is the loss of potential output that can never be
realized
Suppose the natural rate of unemployment was believed to be 5.8%. If actual
unemployment at that time is 6.2%, then cyclical unemployment was 0.4% of the labor
force.
Frictional unemployment increases when a worker quits one job in order to search for
another.
Unemployment that results from an overall lack of job opportunities during a recession is
cyclical unemployment.
Government programs would be most appropriate to counteract cyclical unemployment
greater government expenditures to increase GDP
When there is a mismatch between the skills required for a job and the skills of job
seekers, the unemployment that results is an example of structural unemployment.
Structural unemployment occurs when workers do not have the skills required to fill the
vacant positions in the job market.
Full employment in the U.S. economy means the economy has reached the lowest level
of unemployment compatible with price stability.
Cyclical unemployment is usually caused by declines in real GDP during periods of
contraction.
A layoff is a temporary suspension of employment without pay.
Gehrig graduates from Oklahoma University and cannot yet find a job that pays what he
thinks he is worth, but he continues to search for a job. Gehrig is considered to be
frictionally unemployed
Unemployment that results from changes in the composition of output produced by the
economy, or by technological changes, is called structural unemployment
The type of unemployment that increases most when teenagers look for temporary
summer jobs is seasonal unemployment
If the unemployment rate is 6.4%, this means 6.4% of the total labor force is
unemployed.
Long-term technological changes that make some goods obsolete are likely to have their
greatest impact on structural unemployment.
The lowest level of unemployment compatible with price stability is referred to as full
employment.
Chapter 7
©Inflation is an increase in the average price level. Typically it's measured by changes in
a price index such as the Consumer Price Index (CPI).
©At the micro level, inflation redistributes income by altering relative prices, income,
and wealth. Because not all prices rise at the same rate and because not all people buy
(and sell) the same goods or hold the same assets, inflation doesn't affect everyone
equally. Some individuals actually gain from inflation, whereas others suffer a loss of
real income or wealth.
©At the macro level, inflation threatens to reduce total output because it increases
uncertainties about the future and thereby inhibits consumption and production decisions.
Fear of rising prices can also stimulate spending, forcing the government to take
restraining action that threatens full employment. Rising prices also encourage
speculation and hoarding, which detract from productive activity.
©Fully anticipated inflation reduces the anxieties and real losses associated with rising
prices. However, few people can foresee actual price patterns or make all the necessary
adjustments in their market activity.
©The U.S. goal of price stability is defined as an inflation rate of less than 3 percent per
year. This goal recognizes potential conflicts between zero inflation and full employment
as well as the difficulties of measuring quality improvements and new products.
©From 1800 to 1945 prices both rose and fell, leaving the average price level unchanged.
Since then, prices have risen nearly every year but at widely different rates.
©Inflation is caused by either excessive demand (demand-pull inflation) or structural
changes in supply (cost-push inflation).
©Cost-of-living adjustments (COLAs) and adjustable-rate mortgages (ARMs) help
protect real incomes from inflation. Universal indexing, however, wouldn't eliminate
inflationary redistributions of income and wealth.
©Worldwide inflation rates have diminished in recent years. Experience with inflation
and changing patterns of asset ownership are creating political pressure for greater price
stability.
Causes of Inflation:
1.Demand Pull: To much money changing too to few goods.
2.Push: Price of component of a good linked to _______
inflation - An increase in the average level of prices of goods and services.
deflation - A decrease in the average level of prices of goods and services.
relative price - The price of one good in comparison with the price of other goods.
nominal income - The amount of money income received in a given time period,
measured in current dollars.
real income - Income in constant dollars; nominal income adjusted for inflation.
money illusion - The use of nominal dollars rather than real dollars to gauge changes in
one's income or wealth.
Analysis - The uncertainty caused by rising prices causes stress and may alter
consumption and investment decisions.
hyperinflation - Inflation rate in excess of 200 percent, lasting at least 1 year.
bracket creep - The movement of taxpayers into higher tax brackets (rates) as nominal
incomes grow.
Consumer Price Index (CPI) - A measure (index) of changes in the average price of
consumer goods and services.
inflation rate - The annual percentage rate of increase in the average price level.
base period - The time period used for comparative analysis - the basis for indexing, for
example, of price changes.
item weight - The percentage of total expenditure spent on a specific product; used to
compute inflation indexes.
GDP deflator - A price index that refers to all goods and services included in GDP.
nominal GDP - The value of final output produced in a given period, measured in the
prices of that period (current prices).
real GDP - The value of final output produced in a given period, adjusted for changing
prices.
price stability - The absence of significant changes in the average price level; officially
defined as a rate of inflation of less than 3 percent.
cost-of-living adjustment (COLA) - Automatic adjustments of nominal income to the rate
of inflation.
real interest rate - The nominal interest rate minus the anticipated inflation rate.
adjustable-rate mortgage (ARM) - A mortgage (home loan) that adjusts the nominal
interest rate to changing rates of inflation.
Sample Questions:
If the price of computers falls 5 percent during a period when the level of average prices
falls 10 percent, the relative price of computers compared with other goods:
(pg. 123 Main, Macro) Relative price is the price of one good in comparison with the
price of other goods. If other goods are decreasing in price by 10 percent on average and
computers decrease in price by only 5 percent, then relative to other goods, the price of
computers has increased. Obviously in absolute terms computers have decreased in price.
When an economy experiences a zero rate of inflation, which of the following statements
is definitely true? There is no redistribution of income and wealth because of inflation.
(pg. 124 Main, Macro) Inflation causes a redistribution of income and wealth because
people buy different combinations of goods and services, own different assets and sell
different goods and services. If inflation is zero then there is no redistribution. Real
incomes can change even if inflation is zero and so can relative prices.
If actual inflation is greater than anticipated inflation in an economy: Borrowers would
experience an increase in real income.
(pg. 125 Main, Macro) Real income is nominal income adjusted for inflation. If the actual
rate of inflation is greater than the anticipated rate then the real interest rate will be less
than expected. Borrowers will pay less for borrowed funds than expected, and they will
experience an increase in real income. Lenders, on the other hand, will receive less than
expected in real terms and will experience a decrease in real income.
Which of the following groups is likely to lose as a result of unanticipated deflation?
(pg. 125 Main, Macro) Deflation is a decrease in the average price level. If there is an
unanticipated decrease in the price level and interest rates are fixed, then the real interest
rate will increase. Borrowers will pay more for the funds they borrowed in real terms.
People with fixed income or wages will be better off because their income will remain
the same while the cost of goods decrease on average. Adjustable-rate mortgages adjust
the nominal interest rate to the rate of inflation to protect lenders.
Suppose you get a 10 percent raise during a year in which the price level rises by 10
percent. Then over the year:
(pg. 125 Main, Macro) Nominal income is the actual amount of money income. Real
income is the nominal incom
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performance designing policy understanding parts economy interact most comprehensive
measure gross domestic product total final within nation borders during given time period
calculating include only added each stage procedure eliminates double counting result
business firms intermediate firms include associated costs their selling part only marketed
included distinguish physical changes monetary changes compute both nominal real
nominal expressed current prices real expressed constant prices some base year each
some capital equipment worn process hence larger amount could consume without
reducing possibilities amount used each referred depreciation subtracting depreciation
derive domestic product difference also equal difference gross investment current plant
equipment expenditures investment over above required replace worn generated sales
received someone sequence flows involved process less depreciation equals less indirect
business equals national corporate retained earnings social security plus transfer
payments interest personal personal disposable incomes received households business
governments purchasing required purchasing spent further created circular flow continues
entirely different things fundamental every time dollar worth final spending takes place
seller must receive dollar worth could otherwise remember profits used balancing item
confuse term with term profit profits whereas economy cannot comparisons countries tell
which population better simple comparisons capita ignore distributed country very high
capita unequally distributed well standard living below another country lower capita
which equally distributed problems inter country comparisons exchange rate distortions
differences counties organized indicatory only person could what person does added
measure firm profit computing added firm subtracts total revenue items sold firm length
transactions additional items normally subtracted calculate profit subtracted computation
those items land labor combined total interest land rent labor wages risk taking profits
equal gross product understand unemployment must distinguish labor force larger
population people working employed spend time looking unemployed participants force
people neither working looking work outside size affects grows does capacity produce
unemployment implies producing inside curve rather macroeconomic loss imposed
reduced okun suggests percentage point equivalent percentage point decline human
includes financial losses social physical psychological well unevenly blacks teenagers
educated much higher rates hurt discouraged workers stopped looking work part menial
jobs they find full jobs equal their training potential four types seasonal frictional
structural cyclical seasonal frictional inevitable even desirable full employment defined
zero considerations plus fear inflationary consequences employment being defined rate
percent natural rate based frictional structural forces without reference short term
inflation pressures rates high since ranged ability achieve future depends success closing
skills necessitates better training activity what again should eliminate under balanced sets
goal itself goal well short zero shall subsequent chapters sacrifice goals stability lowers
much seen very difficult even undesirable eliminate seasonal rise month small changes
tell nothing about happening disguised discouraged large necessarily easily remedied
even they were careful interpreting short everyone counted unemployed qualifies benefits
many counted unemployed qualify benefits entrants worked their last extended period
quit last ineligible states addition among seasonally frequently qualify rule number
people divided persons over either working actively seeking paid participation percentage
population seeking alternative combinations final period available technology inability
participants find jobs okun estimated proportion discouraged worker individual actively
seeking look accept were underemployment paid work part employed below capability
supply brief periods experienced moving into structural caused mismatch skills location
seekers requirements location cyclical attributable lack vacancies inadequate level
aggregate demand lowest compatible stability variously estimated natural long
determined forces markets skills required emerging sample questions become participants
take main macro composed persons sixteen paid students retired persons involved
household activities macro consequence lost main unable find being used case inside
curve actual potential cause institutional curve shift outward main institutional lies inside
physical institutional constraints child laws environmental protection reason restrictions
relaxed students join receive loans productive capacity increases shifts right increases
moves toward moves closer beyond represents maximum constraints limits society
chosen employs closer unless constraints relaxed level move closer beyond rapid certain
composed employed plus greater participation since information about participation
cannot determined enters recession recession decrease level real during recession fewer
needed enough demand produces cyclical look thought prospects slim become duration
length remain obviously decreasing take longer individuals while classified once
considered below capability underemployed official statistics exaggerate significance
including phantom report really little finding counted statistic since really interested
taking exaggerate problem believed contributed during caused mismatch seekers youth
women entered necessary increased demand meant certain industries became structurally
liberal programs acquiring necessary terms musical chairs analogy text description chairs
results inadequate plenty necessary musical chair analogy chairs programs appropriate
counteract occurs inadequate need training placement assistance necessarily reduce type
through aggregate inflation likely problem becomes concern long large quantities issue
producing near likely number classified results growing likely cause rightward shift
considered controllable through macroeconomic policy suppose lumberjacks lose
construction companies begin rely alternatives wood building homes dismissed
lumberjacks appropriately called structurally describes condition where actual natural
results both patterns usually decrease potential suppose actual exist corresponds attained
achieves stated goal humphrey hawkins united states never zero migrant seek after crops
been picked goes example type teenagers look temporary summer account next decade
refers difference emerging existing suppose million half whom person chooses college
instead phantom report actively little intention finding official statistics exaggerate
significance including phantom purposes calculating works hours week being worker
leaves after unsuccessful search widely measure found census bureau monthly surveys
determine willing individuals while classified underemployed able capabilities black
teenagers affected losers comprises largest segment loss never realized believed worker
quits order search another overall lack opportunities appropriate counteract greater
expenditures mismatch seekers example occurs fill vacant positions reached lowest
compatible usually caused declines periods contraction layoff temporary suspension
without gehrig graduates oklahoma university cannot pays thinks worth continues search
gehrig considered frictionally composition technological called type temporary summer
long technological make obsolete greatest impact lowest compatible referred average
typically measured index consumer index micro redistributes altering relative wealth rise
same sell same hold same assets doesn affect everyone equally individuals actually gain
whereas others suffer loss wealth threatens reduce uncertainties future thereby inhibits
consumption decisions fear rising stimulate spending forcing restraining action threatens
rising encourage speculation hoarding detract productive activity fully anticipated
reduces anxieties losses associated rising however foresee patterns adjustments defined
recognizes conflicts difficulties measuring quality improvements products both rose fell
leaving average unchanged risen nearly every widely different rates either excessive pull
supply push living adjustments colas adjustable mortgages arms help protect incomes
universal indexing however wouldn eliminate inflationary redistributions wealth
worldwide diminished recent years experience changing patterns asset ownership
creating political pressure greater causes pull money changing push component good
linked average deflation relative good comparison nominal money received measured
current dollars constant dollars adjusted money illusion dollars rather gauge analysis
uncertainty causes stress alter consumption hyperinflation excess lasting least bracket
creep movement taxpayers into higher brackets incomes grow consumer index consumer
annual base comparative analysis basis indexing example item weight expenditure spent
specific compute indexes deflator refers included measured adjusted changing absence
significant officially living adjustment cola automatic adjustments minus anticipated
adjustable mortgage mortgage home loan adjusts sample questions computers falls falls
relative computers compared good comparison decreasing computers increased obviously
absolute terms decreased experiences statements definitely true redistribution causes
redistribution different combinations assets sell redistribution anticipated borrowers
experience adjusted expected borrowers borrowed funds expected experience lenders
hand receive expected groups lose unanticipated deflation deflation unanticipated fixed
borrowers funds borrowed fixed wages better remain while adjustable mortgages adjust
protect lenders raise rises incom
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