Download Unit 4 Overview

Unit IV – Measurement of Economic Performance (8%-12% of AP Macroeconomics exam) and
National Income, Price Determination and Economic Growth (15-20% of AP Macroeconomics exam)
Objectives:
 NCEE Content Standard 3 – Different methods can be used to allocate goods and services. People
acting individually or collectively through government, must choose which methods to use to allocate
different kinds of goods and services.
 NCEE Content Standard 7 – Markets exist when buyers and sellers interact. This interaction
determines market prices and thereby allocates scarce goods and services.
 NCEE Content Standard 8 – Prices send signals and provide incentives to buyers and sellers. When
supply or demand changes, market prices adjust, affecting incentives.
 NCEE Content Standard 18 – A nation’s overall levels of income, employment, and prices are
determined by the interaction of spending and production decision made by all households, firms,
government agencies, and others in the economy.
 NCEE Content Standard 19 – Unemployment imposes costs on individuals and nations.
Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily
redistributes purchasing power. Inflation can reduce the rate of growth of national living standards
because individuals and organizations use resources to protect themselves against the uncertainty of
future prices.
Vocabulary: Big Topics in Bold
GDP categories and formula
Per capita GDP
Expenditure Approach
Problems with CPI
Producer Price Index
Types of Inflation and Formula
Anticipated and Unanticipated
Unit of Account Costs
Labor Force
Natural Rate of Unemployment
Structural Unemployment
Discouraged Workers
Wealth Effect
Short Run/Long Run AS
Misperceptions Theory
Marginal Propensity to Consume
Average Propensity to Consume
Economic Growth
Catch Up Effect
GDP vs GNP
Real vs Nominal GDP
GDP Deflator
Income Approach
Consumer Price Index and Formula
Dollar figures from different times Indexation
Nominal versus Real Interest Rate
Cost Push Inflation
Demand Pull Inflation
Shoeleather Costs
Menu Costs
Types of Unemployment and formula
Labor Force Participation formula Full Employment
Cyclical Unemployment
Frictional Unemployment
Underemployment
Hidden Unemployment
Aggregate Demand
Aggregate Supply
Interest Rate Effect
Net Export Effect
Sticky Wage Theory
Sticky Price Theory
Marginal Propensity to Save
Average Propensity to Save
Spending Multiplier
Tax Multiplier
Determinants of Economic Growth Human Capital
Foreign Direct Investment
Foreign Portfolio Investment
Numbers:
GDP Formula
GDP Deflator
CPI Formula
Inflation Rate Formula
Labor Force and Participation Rate Formula
Unemployment Rate Formula
Spending Multiplier
Tax Multiplier
Visuals:
Circular Flow Diagram including government and Production Possibilities Frontier
Aggregate Demand and Supply Model
AP Multiple Choice Answers: (Answers to Macroeconomics Unit 1, 2, 3 and 6 M/C Sample Questions)
Unit 1:
Unit 3:
Unit 6:
9. C
27. D
28. D
1. E
9. A
17. E
1. E
8. A
15. D
2. C
10. B
18. A
2. D
9. E
16. D
Unit 2:
3. C
11. B
19. D
3. B
10. E 17. D
1. D 6. A 11. B 16. A
4. A
12. C
20. D
4. D
11. D 18. B
2. C 7. E 12. D 17. A
5. E
13. A
21. A
5. D
12. B 19. D
3. C 8. B 13. C 18. A
6. A
14. B
22. E
6. E
13. C 20. C
4. D 9. A 14. A 19. A
7. B
15. D
23. A
7. E
14. E
5. B 10. C 15. B 20. A
8. A
16. C
24. C
25. D
Unit IV Calendar:
Monday
28
Tuesday
29
Macro
Overview
GDP
Hwk: Read
Modules 2, 10-11
Hwk: Read
Module 15 and
AP Macro
Activities 2-1,
2-2
5
Inflation
Wednesday
6
Inflation
Thursday
Friday
30
December 1
Consumer
CPI cont.
Price Index
Hwk: Unit 4 RP
due Monday, 12/14
7
Unemployment
Hwk: Read Module
19 and AP Macro
Activities 3-3, 3-4
Hwk: Read
Modules 12 and 13
Hwk: AP Macro
Activities 3-5, 3-6,
3-7, 3-8, 3-9
Hwk: Read Modules
37-40
Hwk: Read
Module 14
and AP
Macro
Activity 2-4
8
Aggregate Demand Multipliers
Hwk: Read Module
Hwk: Read Module
16 and AP Macro
17 and AP Macro
Activity 3-1
Activity 2-6
12
13
14
15
Aggregate Supply
Short Run Model
Long Run Model
Economic Growth
Hwk: AP Macro
Activity 2-3, 2-5
2
9
Hwk: Read
Module 18 and AP
Macro Activity 3-2
16
Unit 4 Test
Hwk: AP Macro
Activities 6-1, 6-2,
6-3 and Review for
Test
What you should know at the end of this unit?
 Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total
income in the economy.
 GDP measures an economy’s total expenditure on newly produced goods and services and the total income
earned from the production of these goods and services. GDP = C+I+G+NX
 Nominal GDP uses current prices and Real GDP uses constant base-year prices to value the economy’s
production of goods and services. The GDP Deflator measures the level of prices in the economy.
 CPI shows the cost of a basket of goods and services relative to the cost of the same basket in the base year.
The percentage change in the consumer price index measures the inflation rate.
 The consumer price index is an imperfect measure of the cost of living for three reasons: Substitution Bias,
Introduction of new goods and Unmeasured Quality change.
 Various laws and private contracts use price indexes to correct for the effects of inflation. The tax laws,
however, are only partially indexed for inflation.
 The real interest rate equals the nominal interest rate minus the rate of inflation.
 The unemployment rate is the percentage of those who would like to work but do not have jobs. Some people
who call themselves unemployed may actually not want to work, and some people who would like to work
have left labor force after an unsuccessful search and therefore are not counted as employed.
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One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and
skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy
designed to protect workers’ incomes.
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All societies experience short-run economic fluctuations around long-run trends. These fluctuations
are irregular and largely unpredictable. When recessions do occur, real GDP and other measures of
income, spending, and production fall, and unemployment rises.
Economists analyze short-run economic fluctuations using the model of aggregate demand and
aggregate supply. According to this model, the output of goods and services and the overall level of
prices adjust to balance aggregate demand and aggregate supply.
The aggregate-demand curve slopes downward for three reasons: Wealth Effect, Interest rate Effect
and Exchange Rate Effect.
Any event or policy that increases or decreases the components of gross domestic product will
increase or decrease aggregate demand.
The long run aggregate supply curve is vertical. In the long run, the quantity of goods and services
supplied depends on the economy’s labor, capital, natural resources, and technology, but not on the
overall level of prices.
The three theories explaining why the short run aggregate supply curve is upward sloping: Sticky
Wage Theory, Sticky Price Theory, and Misperceptions Theory.
Events that alter the economy’s ability to produce output, such as changes in labor, capital, natural
resources, or technology, shift the short run aggregate supply curve (and may shift the long run
aggregate supply curve as well.)
When the aggregate demand curve shifts to the left, output and prices fall in the short run. Over time,
as a change in the expected price level causes perceptions, wages, and prices to adjust, the short run
aggregate supply curve shifts to the right. This shift returns the economy to its natural rate of output
at a new, lower price level.
When the short run aggregate supply curve shifts to the left, the short run effect is falling output and
rising prices – a combination called stagflation. Overtime, as perceptions, wages, and prices adjust,
the short run aggregate supply curve shifts back to the right, returning the price level and output back
to their original levels.
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Economic prosperity, as measured by GDP per person, varies substantially around the world. The average
income in the world’s richest countries is more than 10 times that in the world’s poorest countries. Because
growth rates of real GDP also vary substantially, the relative positions of countries can change dramatically
over time.
The standard of living in an economy depends on the economy’s ability to produce goods and services.
Productivity, in turn, depends on the amounts of physical capital, human capital, natural resources and
technological knowledge available to workers.
Government policies can try to influence the economy’s growth rate in many ways: encouraging saving and
investment, encouraging investment from abroad fostering education, promoting good health, maintaining
property rights and political stability, allowing free trade, and promoting the research and development of new
technologies.
The accumulation of capital is subject to diminishing returns: the more capital an economy has, the less
additional output the economy gets from an extra unit of capital. As a result, although higher saving leads to
higher growth for a period of time, growth eventually slows down as the economy approaches a higher level of
capital, productivity, and income. Also because of diminishing returns, the return to capital is especially high
in poor countries. Other things being equal, these countries can grow faster because of catch up effect.
Population growth has a variety of effects on economic growth. On the one hand, more rapid population
growth may lower productivity by stretching the supply of natural resources and by reducing the amount of
capital available for each worker. On the other hand, a larger population may enhance the rate of technological
progress because there are more scientists and engineers.