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Hakan TASCI
Where the telescope ends, the microscope begins. Which of the two has the
grander view?
VICTOR HUGO
1. Todays Outline
Aggregation and Macroeconomics
Supply and Demand in Macroeconomics
Gross Domestic Product
Growth
Unemployment
Inflation
2. Aggregation and Macroeconomics
In Microeconomics, the spotlight is on how individual decision-making units behave. For
example farmer decides how much does he produce. Individuals decide how much they
consume. On the other hand, macroeconomics concentrates on the behavior of the entire
economies. Macroeconomics study the overall price level, unemployment rate, inflation,
growth etcof which we call economic aggregates.
Economic Aggregates: is an abstraction that people use to describe some salient feature
of economic life. Although we observe only price of electricity, rent, tickets, college
everyday, we never see the price level economy wide. By putting some weight for each
product in the market a price index can be found like Consumer Price Index
Aggregation: The process by which real objects are combined into an abstraction like
total domestic product etc is aggregation.
The Foundations of Aggregation
All goods in the market have some weight in aggregation
The composition of demand and supply in various markets is of little
consequence for the economy-wide issues of growth, inflation, and
unemployment.
During economic fluctuations, markets tend to move up or down together.
Not individually. For example if market is going up, there is more demand
for potatoes and tomatoes, pickles etc
3. Supply and Demand in Macroeconomics
Aggregate Demand: shows the quantity of domestic product that is demanded at each
possible value of the price level.
Aggregate Supply: shows the quantity of domestic product that is supplied at each
possible value of the price level.
Good
Price(2003) Price(2004) Output
Bananas
$0.5
$0.6
20 tons
Oranges
$1
$1.2
30 tons
Apples
$1.5
$1.4
50 tons
Nominal GDP =
Real GDP
=
Real GDP counts only the change in production.
Nominal GDP counts not only the change in production but also change in prices
Growth Policy: refers to government policies intended to make economy grow faster in
the long run.
Potential GDP: is the real GDP that the economy would produce if its labor and other
resources were fully employed.
Growth of US Economy
Costs of Inflation:
Inflation changes the income distribution. Lenders lose money and borrowers earn
money. So there is a wealth transfer from lenders to borrowers. If there is
deflation just the opposite is valid.
Inflation redistributes the benefits of the economy.
High inflation can distort the economy as a whole. (German hyperinflation in
1930s, Turkish cas in 1990s, Argentina, Brazil..
Menu costs. Retailers have to change their prices frequently
Shoe Cost: Consumers in order to not to be affected from inflation, they go to
bank more frequently.
Inflation distorts measurements.
Nominal Interest Rate: The interest rate that we observe in real world. Federal funds
rate, overnight rates etc
Real Interest Rate: Nominal Interest rate is adjusted to the prices (Nominal interest rate
minus expected inflation )
2.
3.
While their respective subject matters differ greatly, both microeconomists and
macroeconomists rely on the same basic tools; that is, both rely on
a. government contracts to promote research and publications.
b. demand-and-supply analysis.
c. the economic theory of John Maynard Keynes.
d. consumer protection laws and antitrust legislation.
4.
5.
6.
7.
Real GDP
a. is nominal GDP adjusted for changes in the price level.
b. is also called nominal GDP.
c. measures GDP minus depreciation of capital.
d. will always change when prices change.
8.
If the prices of all goods and services rise during the year,
a. real GDP may fall.
b. nominal GDP must rise.
c. nominal GDP may increase.
d. real GDP must rise.
9.
A good produced in 2000 and held in inventory until it is sold in 2001 would be included in
which measure of GDP?
a. Half the value in 2000 and half the value in 2001
b. In 2001 GDP
c. In both 2000 and 2001 GDP
d. In 2000 GDP
10.
General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and
sells it in the United States. In which countrys GDP is it included?
a. Sweden and the United States
b. The United States because it was sold there
c. The United States because GM is a U.S. company
d. Sweden because it was produced there
11.
12.
13.
In 2001 severe floods hit the state of Texas causing extensive damage. What is the most
likely effect of this natural disaster on GDP and well being?
a. Decreased GDP, decreased well being
b. Increased GDP, decreased well being
c. Decreased GDP, increased well being
d. Increased GDP, increased well being
e. Economists cannot predict these effects.
14.
Large sport utility vehicles (SUVs) add significantly to air pollution because they do not
have to meet passenger auto emission standards. The purchase of an SUV
a. adds less to GDP since the pollution costs are subtracted from GDP.
b. adds to nominal but not real GDP because of the pollution costs.
c. is a net loss to GDP because the pollution costs are so large.
d. increases GDP.
15.
16.
When Keynes took the British civil service exam, his lowest score was on the
_____________ section.
a. logic
b. mathematics
c. statistics
d. economics
e. history
17.
Faster economic growth in the United States may lead to the serious macroeconomic
problem of higher
a. levels of unemployment.
b. federal budget deficits.
c. levels of inflation.
d. levels of poverty.
18.
Potential GDP is an estimate of the economys ability to produce goods and services if the
a. labor force is fully employed.
b. price level is stable.
c. trade balance is zero.
d. federal budget is balanced.
19.
The growth rate of potential GDP depends, among other factors, on the
a. rate of technological progress.
b. unemployment rate.
c. size of the labor force.
d. rate of capital stock depreciation.
20.
To measure how productive an economy is becoming, the best measure to use would be
a. real GDP.
b. GDP per capita.
c. GDP per hours of work.
d. GDP divided by population.
21.
If the labor force grows faster than the number employed, the
a. unemployment rate will fall.
b. unemployment rate will rise.
c. labor force rate will rise.
d. employment rate will rise.
22.
Someone who is out of work because they are between jobs is experiencing
a. frictional unemployment.
b. structural unemployment.
c. seasonal unemployment.
d. cyclical unemployment.
23.
The use of automated teller machines (ATMs) has caused some bank tellers to lose their
jobs. This is an example of
a. cyclical unemployment.
b. seasonal unemployment.
c. frictional unemployment.
d. structural unemployment.