Chapter 8: GDP: Measuring Total Production and Income
Key Terms
Business Cycle, p.210
Investment, p.214
Consumption, p.214
Net exports, p.215
Economic growth, p.210
Nominal GDP, p.222
Expansion, p. 210
Price level, p. 224
Final good or service, p.211
Real GDP, p. 222
GDP deflator, p.224
Recession, p. 210
Government purchases, p.215
Transfer payments, p. 214
Gross Domestic Product (GDP), p. 211
Underground economy, p.219
Inflation rate, p.210
Value added, p. 218
Intermediate good or service, p.211
Concepts
 Know how to calculate GDP through value added or income approach.
 Know exactly how GDP is calculated (not thru quantities rather value, no intermediate
goods, only current production).
 Explain each component of GDP= C+I+G+NX
 Explain why the GDP is undervalued/overvalued due to black markets, underground
economies, and positive/negative effects of production.
 Calculate real and nominal GDP.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
 Calculate the 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 × 100
 Note: Price level is average prices of g/s in an economy. GDP deflator is a measure of
the price level. CPI is best measurement we have of price level.
 How is CPI calculated?
Chapter 9: Unemployment and Inflation
Key Terms
Consumer price index (CPI), p. 251
Cyclical unemployment, p. 245
Deflation, p.257
Discourage workers, p.236
Efficiency wage, p. 249
Frictional unemployment, p.244
Inflation rate, p. 250
Labor force, p.236
Labor force participation rate, p. 237
Menu costs, p. 258
Natural rate of unemployment, p. 246
Nominal interest rate, p. 255
Price level, p. 250
Producer price index (PPI), p. 253
Real interest rate, p. 255
Structural Unemployment, p. 245
Unemployment rate, p. 236
Concepts
 Be able to calculate the unemployment rate and the labor force participation rate.
 If I give you a table with data you must be able to calculate the above and solve for each
variable.
 Explain structural/frictional/cyclical unemployment and when it occurs.
 Full employment is 3-6%.
 Why would a firm use efficiency wages?
 What basket do we use to calculate CPI?
 𝐶𝑃𝐼 =
𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
× 100
 CPI is a measure of the price level.
 Is CPI accurate? No, because of substitution bias, increase in quality bias, new product
bias, and outlet bias.
 Inflation is the percentage increase in the price level from one year to the next.
 Be able to calculate the real and nominal interest rates
 𝑟𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒 𝑟𝑎𝑡𝑒 = 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 − 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
 How does anticipated/unanticipated inflation affect the economy? Think of menu costs
and loans!
Chapter 10: Economic Growth, the Financial System, and Business Cycles
Key Terms
Business cycle, p. 272
Financial systems, p. 280
Capital, p. 276
Labor productivity, p. 275
Crowding out, p. 284
Long-run economic growth, p. 272
Financial intermediaries, p. 280
Market for loanable funds, p. 282
Financial markets, p. 280
Potential GDP, p. 279
Concepts
 Long run growth requires technology change.
 Calculate growth grates (growth rate during a particular year is equal to the percentage
change from the previous year)
 Rule of 70= # of years it takes GDP to double. (This can also be used to calculate how
long it will take prices to double).
𝐺𝐷𝑃
 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 = 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛









Know potential GDP.
𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
𝑆𝑎𝑣𝑖𝑛𝑔𝑠𝑝𝑟𝑖𝑣𝑎𝑡𝑒 = 𝑌 + 𝑇𝑅 − 𝐶 − 𝑇
𝑆𝑎𝑣𝑖𝑛𝑔𝑠𝑝𝑢𝑏𝑙𝑖𝑐 = 𝑇 − 𝐺 − 𝑇𝑅
Understand the concept of S=I.
Be able to apply the model of loanable funds. (Similar to homework 3)
Show me a chart that depicts the business cycle, trough, expansion, peak recession.
How does the business cycle affect the unemployment rate, inflation, and GDP?
Since 1950, why is the economy more stable?
Chapter 11: Long-Run Economic Growth: Sources and Policies
Key Terms
Catch-up, p. 319
Per-worker production function, p. 309
Economic growth model, p. 308
Property rights, p. 323
Foreign direct investment (FDI), p. 325
Rule of Law, p. 323
Foreign portfolio investment, p. 325
Technological change, p. 309
Human capital, p. 309
Industrial revolution, p. 305
Labor productivity, p. 308
Patent, p. 314
Concepts
 In the long run, small differences in economic growth rates result in big differences in
living standards.
 What determines how fast economies grow? Better machinery/equipment, increases in
human capital, better means of organization and managing production (Technological
change and labor productivity)
 Be able to replicate the per-worker production function. An increase in capital causes a
movement along the line and an increase in technology creates a shift of the line.
 Technology is the key to sustaining economic growth.
 Why did Soviet Union’s economy fail? (p. 311)
 Why isn’t the whole world rich?
 Explain why low-income countries don’t experience rapid growth when we’d expect
them to be “catching up.”
 Explain the benefits of globalization.
 If we enhance property rights and rule of law it is easier for countries to grow.
 Is economic growth good or bad- Is this a normative or positive question?
Chapter 13: AD-AS Model
Key Terms
Aggregate demand and aggregate supply model
Aggregate demand curve
Fiscal policy
Long-run aggregate supply curve
Menu costs
Monetary policy
Short-run aggregate supply curve
Supply shock
Concepts
 Know why the AD curve is downward sloping.
 Be able to explain what shifts the AD and what causes a movement along the AD curve.
 Be able to explain what shifts the SRAS and what causes a movement along the SRAS
curve.
 Be able to explain what shifts the LRAS and what causes a movement along the LRAS
curve.
 Show a recession (actual GDP<potential GDP) using AD/AS analysis.
 Show an expansion (actual GDP>potential GDP) using AD/AS analysis.
 Know the difference between the SR equilibrium and the LR equilibrium.
 If we are initially in LR equilibrium what happens when a supply shock occurs? Show
where we will be in the short run and the long run using a dynamic AD/AS analysis.