E202

NI

NDP - indirect business taxes - transfers + net US Income abroad + other business income adjustments

PI

NI - corporate taxes - social security - retained earnings + government and business transfers

Real GDP

Nominal GDP/Price Index * 100

Real interest rate

Nominal interest rate - inflation rate

per capita real gdp change

per capita real gdp base year- inflation rate * growth rate

Disposable Income

personal income after personal income taxes have been paid

Calculate Real GDP

quantities* base year prices

Calculate Nominal GDP

quantities* current year prices

Consumption

spending by households on g and s, not including spending on new houses

Personal Income

the amount of income that households actually receive before they pay personal income taxes

National Income

the sum of all income to resource owners: wages, rent, interest, profit, depreciation, indirect business taxes

The simple circular flow model shows that

total income received by households must be equal to the dollar value of all goods and services produced

The cost of inflation to society includes

unpredictable changes in the value of money

wealth effect

when price levels rise, the real value of household wealth declines, and so will consumption, thereby reducing the demand for g and s and vice versa

DI

PI- personal taxes

Gross Domestic Product

The market value of all final goods and services produces in a country during a period of time, typically one year

The unemployment rate is at at the natural rate of unemployment when

cyclical unemployment equals zero

Full Employment

frictional + seasonal + structural

labor force participation rate

labor force/ working age population (non-institutionalized adult pop)

Real values

measurements after adjustments have been made for changes in the average of prices between years, expressed in constant dollars

Nominal values

measurements in terms of the actual market prices at which goods are sold, expressed in current dollars

Inflation rate

new-old/ old

Who is most likely to gain from inflation?

Borrowers

GDP expenditure approach

GDP= C + I + G + NX

Net Exports

Exports - imports

Unemployment rate

Frictional + seasonal + structural + cyclical unemployment/ labor force

NDP

GDP- depreciation

Government Purchases

Spending by federal, state, and local governments on g and s

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new homes

What causes the aggregate demand curve to slope downward?

Wealth effect interest rate effect open economy effect

Open economy effect

a higher price level in the US relative to other countries the g and s demanded by other countries will decrease and imports will increase causing the demand for us g and s to fall and vice versa

Interest rate effect

a higher price level will increase the interest rate and reduce investment spending, thereby reducing the quantity of g and s demanded and vice versa

Decrease in LRAS

an increase in the expected future price level an increase in workers and firms adjusting to having previously underestimated the price level an increase in the expected price of an important natural resource

Increase in LRAS

an increase in the labor force or the capital stock an increase in productivity

Increase in AD

an increase in government purchases an increase in household expectations of their future incomes an increase in firms expectations of the future profitability of investment spending

Decrease in AD

an increase in interest rates an increase in personal income taxes or business taxes an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP an increase in the exchange rate relative to foreign currencies

anticipated price index

base year (100) + expected inflation rate*base year

price index

cost of today market basket/ cost of base year market basket

recession

the period of a business cycle during which total production and total employment are decreasing

expansion

the period of a business cycle during which total production and total employment are increasing

The natural rate of unemployment is best defined as

the rate of unemployment after all workers and employers have fully adjusted to all the changes in the economy