Circular Flow & GDP
Unemployment
CPI & Inflation
Real v. Nominal GDP
Business Cycles
100
How do you caluclate 'net exports'?
Exports - Imports
100
Who is considered part of the labor force?
all people classified as employed (both part time and full time) and unemployed
100
How do you calculate CPI?
CPI = current year market basket value / base year market basket value
100
How can you find real GDP using the GDP deflator?
Real GDP = (Nominal GDP / GDP Deflator) × 100
100
a. What is the point in the business cycle where real GDP stops falling and starts rising?
b. What is the point in the business cycle where real GDP stops rising and starts falling?
a. trough
b. peak
200
In the circular flow model of an economy, who owns economic reosurces?
Households/the household sector
200
Who is considered part of the working age population?
Civilian, 16 +, non institutionalized people
200
Who is hurt by unanticipated inflation (assuming loans are fixed-rate)?
Savers and lenders
200
How can you find real GDP using base year prices?
Real GDP = current year output x base year prices
200
On a business cycle graph, what do we call the difference between actual and potential GDP?
Output gap
300
Name two types of transactions that are not included in GDP, and examles of those transactions
non-market transactions and underground economic transactions
300
What is the formula for calculating unemployment rate?
# unemployed / labor force (unemployed + employed) X 100
300
Explain the difference betweem deflation and disinflation
Deflation - a decrease in price levels
Disinflation - A dcrease in the rate of inflation (inflation is still positive, it just slows down)
300
Which year is the base year for the price index, and how do you know?
Year 2
because nominal GDP = real GDP (0% inflation)
300
When actual GDP is below potential GDP, the economy has what kind of gap?
Recessionary gap (or negative output gap)
400
In the circular flow diagram of the economy, who purchases goods and services, and where do they purchase them?
Households purchase goods and services in the product market
400
What is the formula for calculating Labor Force Participation Rate?
( Labor force / working age population ) X 100
400
If CPI was 120 last year and 126 this year, what is the inflation rate?
(126 - 120) / 120 × 100 = 5%
400
If nominal GDP rises but real GDP stays the same, what happened?
Inflation (prices increased), output stayed the same or decreased
400
At full employment, the actual rate of unemployment equals what?
natural rate of unemployment
500
Define transfer payments and explain why they are not included in a nation's GDP
Transfer payments are payments made by the government to individuals for which no goods or services are produced in return (examples: social security benefits, unemployment insurance, welfare payments).
They are not included in GDO because when someone receives a transfer payment, no new output is created — it’s simply a redistribution of existing income/wealth.
500
Unemployed workers become discouraged and give up trying to find work. How does this impact:
a. the number of employed people
b. the number of unemployed people
c. the unemployment rate
a. no change
Reason: Discouraged workers were unemployed, not employed, so the number of employed people stays the same.
b. decrease
Reason: Since discouraged workers are no longer actively looking for work, they are removed from the count of unemployed people.
c. decrease
Reason: The unemployment rate = (Unemployed ÷ Labor Force) × 100.
Removing discouraged workers decreases the numerator (fewer unemployed) and the denominator (smaller labor force), but the numerator decreases proportionally more, so the unemployment rate falls, even though the actual number of people without jobs hasn’t changed in reality.
500
In 2023, Ms. Turcotte earned a salary of $1,000,000 as a teacher. In 2024, her income rose to $1,050,000. The ifnlation rate in 2024 was 2%.
a. Did Ms. Turcotte's nominal income increase, decrease or stay the same in 2024 compared to 2023?
b. Did Ms. Turcotte's real income increase, decrease, or stay the same in 2024 compared to 2023?
a. increase
nominal income increased by
((1,050,000 - 1,000,000)/1,000,000) X 100= 5 %
b. increase
Real income increased by 3% because the inflation rate (2%) is lower than the increase in nominal income.
500
How is the GDP deflator similar to CPI? How are they different?
Both measure price changes over time, but GDP deflator covers all goods and services while CPI focuses on consumer goods
500
Name 3 characteristics of an inflationary gap
High consumer confidence and spending
High inflation
Low unemployment
High aggregate demand