The Business Cycle
Two consecutive quarters of declining real GDP define this.
What is a recession?
The expenditures approach to GDP is summarized by this formula.
What is GDP = C + I + G + (X − M)?
If consumption is $600, investment is $200, government spending is $300, social security spending is $400, exports are $100, and imports are $150, GDP equals this.
What is $1,050?
GDP measured using current prices is called this.
What is Real GDP?
A sustained increase in the overall price level is called this.
What is inflation?
The lowest point of economic activity in the business cycle is called this.
What is the trough?
This component of GDP includes spending on new machinery, factories, and changes in inventories.
What is Investment (I)?
If exports are $300 and imports are $450, net exports equal this value.
What is −$150?
Real GDP is preferred when comparing output across years because it removes this effect.
What is inflation?
This term refers to the measurement of the average change in prices paid by consumers.
What is the Consumer Price Index (CPI)?
An economy operating below potential GDP will most likely experience this type of unemployment.
What is cyclical unemployment?
Spending on Social Security checks is excluded from GDP because it is this type of payment.
What are transfer payments?
GDP is $2,000. If consumption is $1,200, investment is $400, and government spending is $500, net exports must be this.
What is −$100?
If nominal GDP rises but real GDP stays the same, this must have increased.
What is the price level?
When consumers substitute cheaper goods as prices rise, CPI may overstate inflation due to this bias.
What is substitution bias?
During a recession, actual GDP falls below potential GDP, creating this gap.
What is a recessionary (negative) output gap?
This GDP component includes spending by federal, state, and local governments on goods and services.
What is Government spending (G)?
GDP is $1,800. If net exports are $100, government spending is $400, raw materials spending is $800 and investment is $300, consumption equals this.
What is $1,000?
GDP adjusted for changes in the price level is called this.
What is Real GDP?
This term is used to describe something that is reduced during inflation.
Purchasing power
If real GDP is rising but at a decreasing rate, the economy is most likely in this part of the business cycle.
What is the late expansion (approaching a peak)?
When imports increase, this part of the GDP formula causes GDP to change in this direction.
What is net exports decrease?
GDP is $2,500. Consumption is 60% of GDP. Government spending is $700. Net exports are −$100. Investment equals this amount.
C = 0.60 × 2,500 = 1,500
GDP = C + I + G + (X − M)
2,500 = 1,500 + I + 700 − 100
I = 900
What is $900?
Two years have the same real GDP but different nominal GDP values. The year with the higher nominal GDP must have this.
What is a higher price level?
If nominal income rises by 6% while inflation is 8%, real income changes in this way.
What is decrease?