GDP & Economic Goals
What does GDP measure?
GDP measures the total value of all final goods/services produced in a country in a year
What shifts AD right?
Increase in consumer spending, investment, gov. spending, or net exports
What is cyclical unemployment?
Caused by downturn in economy; demand for workers falls
Name one fiscal policy tool
Government spending or taxation
What is a progressive tax?
A tax where higher earners pay a greater % of income
Is a used car sale in GDP?
No – used goods are not included in GDP
What shifts AS right?
Increase in productivity, fall in input costs, new tech
What is CPI used for?
a measure of inflation and changes in consumer prices.
Name one monetary policy tool
Interest rate changes, reserve requirements, open market operations
What is a regressive tax?
A tax that takes a larger % of income from lower earners (e.g., sales tax)
Name 3 macroeconomic goals
Promote growth, limit unemployment, control inflation
Define a leakage in the circular flow
Savings, taxes, and imports
Define hyperinflation
hyperinflation is a very high and typically accelerating inflation
Give one risk of expansionary policy
Inflation, higher debt, asset bubbles
What does the Gini coefficient measure?
Gini measures income inequality (0 = perfect equality, 1 = total inequality)
What is the difference between real and nominal GDP?
Real GDP adjusts for inflation, nominal GDP does not
Give an example of an injection
Investment, gov. spending, and exports
What happens to unemployment during a contraction?
Unemployment rises as firms cut jobs due to reduced demand
Explain how BOC fights recession
Gov increases spending/lowers taxes; BOC lowers interest rates to boost AD
What is a Lorenz curve used for?
A Lorenz curve shows the distribution of income across a population
Explain why real GDP is more useful than nominal GDP.
Real GDP allows better comparison over time by removing effects of inflation
Explain how a tax cut affects AD
A tax cut increases disposable income, raising consumption and shifting AD right
Explain 2 effects of inflation.
Decreases purchasing power, increases uncertainty, can reduce investment
Compare fiscal vs monetary policy in a recession
Fiscal = gov’t spending/taxes, Monetary = interest rate control; both aim to boost demand
Give 1 benefit and 1 limitation of using taxes to reduce inequality
Benefit: supports low-income earners. Limitation: may reduce incentives or increase debt