GDP & Business Cycle
Real GDP divided by population, shows average economic output per person
What is Real GDP per Capita?
What economic indicator measures changes in prices paid by consumers for a typical basket of goods and services?
The Consumer Price Index (CPI).
The total number of employed + unemployed people actively seeking work.
What is the Labor Force?
Which two major tools does the federal government use in fiscal policy?
Government spending and taxation.
The central bank of the USA
What is "The Fed" or the "Federal Reserve"?
What does income inequality describe?
How unevenly income is distributed among people or households.
What does GDP measure?
The total market value of final goods and services produced within a country during a given period.
A drought destroys crops, raising ingredient costs for restaurants. Identify the type of inflation.
Cost-push inflation: rising production costs put upward pressure on prices.
Worker not fully utilized in the economy
What is an Underutilized Worker?
During a recession, Congress increases infrastructure spending. Is this expansionary or contractionary fiscal policy?
Expansionary fiscal policy.
The decision-making body that dictates Monetary Policy.
What is the FOMC? (Federal Open Market Committee)
Two countries have similar GDP per capita but very different poverty rates. What is one likely explanation?
Their income distributions differ. Similar average output does not mean households share equally in economic prosperity.
A company produces 1,000 cars but sells only 800. Do the 200 unsold cars count in this year's GDP?
Yes. Newly produced unsold cars count as inventory investment.
A worker's wages rise 3%, but prices rise 5%. What happens to their purchasing power?
Their purchasing power falls. Their wages increased more slowly than prices.
A recent graduate is temporarily unemployed while searching for a first job. Identify the type.
Frictional unemployment.
Type of fiscal policy used to slow down an overheating economy and combat high inflation
Contractionary fiscal policy
To stimulate borrowing and spending during a recession, would monetary policy generally raise or lower interest rates? And what is this type of monetary policy?
Lower interest rates: expansionary monetary policy.
Let's say a country's GDP grows 4%. Explain why economic growth may not improve everyone's standard of living.
Economic gains can be distributed unevenly, leaving many households with little additional income or improvement in living conditions.
Real GDP declines, businesses lay off workers, and consumer spending weakens. Identify the business-cycle phase.
Contraction (or recession, if referring to a broad and sustained decline in economic activity).
Inflation drops from 8% to 3%. Have prices generally fallen? Explain.
No. This is disinflation: prices are still increasing, but at a slower rate. Deflation would mean a decline in the overall price level.
A factory worker loses their job after automation changes the skills needed in the industry. Identify the type.
Structural unemployment.
Congress reduces income taxes to stimulate a weak economy. Explain how this could increase employment.
Lower taxes can increase disposable income, encouraging consumer spending. Stronger demand can lead businesses to raise production and hire workers.
Monetary policy raises interest rates to combat inflation. Explain how this might affect household spending.
Borrowing tends to become more expensive, so households may delay financed purchases, reducing demand and inflationary pressure.
A country has rising GDP, worsening pollution, and increasing inequality. Identify two additional indicators you would use to evaluate its well-being and explain why.
Examples: Gini coefficient/lorenz curve for inequality, poverty rates for hardship, life expectancy for health, or environmental indicators for pollution. Both indicators must address limitations GDP alone cannot measure.
GDP rises from $2 trillion to $2.1 trillion. Calculate the percentage increase.
5%. ($0.1 trillion ÷ $2 trillion) × 100.
The CPI increases from 250 to 265. Calculate the inflation rate.
6%. [(265 − 250) ÷ 250] × 100.
A country has 180 million employed people and 20 million unemployed people actively seeking jobs. Calculate the unemployment rate.
10%. 20 million ÷ (180 million + 20 million) × 100.
During rising inflation, the government reduces spending. Explain the intended economic effect.
Reduced government spending lowers total demand, potentially easing inflationary pressure, but it can also weaken output and employment.
The two goals under the dual mandate.
Maximum employment and stable prices.
Name three factors that contribute to income inequality in the United States.
Examples might be...differences in education and skills, discrimination, inherited wealth, technological change, and globalization.
Country A has much higher GDP per capita than Country B, but lower life expectancy. What does this show about GDP's limitations?
GDP per capita measures average economic output, not the distribution of income, health outcomes, or overall well-being.
This is a cause of inflation where prices rise because demand for goods and services increases.
What is "Demand-Pull Inflation"?
Unemployment falls, but many workers who want full-time jobs can only find part-time work. Explain why the unemployment rate may be misleading.
Underemployed workers count as employed. The unemployment rate doesn't fully capture insufficient hours, discouraged workers, or other labor underutilization.
As unemployment rises, unemployment-benefit payments increase without a new law. Identify the mechanism and explain its purpose.
An automatic stabilizer. Benefits help support household income and spending during a downturn without requiring new legislation.
Inflation is 6% and unemployment is rising. Why is this a difficult policy situation? Explain.
Raising rates could reduce inflation but worsen unemployment; lowering rates could support jobs but add inflationary pressure.
Name three government policies that can help reduce income inequality in the United States.
Examples might include...progressive income taxes, cash payments to the needy, minimum wage laws, government assistance programs (such as SNAP or Medicaid), investments in public education, and job training programs.