ECON 2100 Economics and Society
Exam 3 Study Guide Outline
(HW 8 – ?)
Chapter 8: In Search of Prosperity and Stability
 Three Main Macro Goals
o Economic Growth
o Full Employment
o Stable Prices
1. Economic Growth
 Gross Domestic Product (GDP)
o Real GDP vs. Nominal GDP
 Sources of Economic Growth
o Growth of total labor inputs (population, labor force participation rate, average hours worked)
o Growth of labor productivity (productivity = output per worker, or output per labor hour)



Benefits of Economic Growth
o Higher average standard of living
o More goods and services
o Greater opportunities to choose between work and leisure
Costs of Economic Growth
o Budgetary Costs
o Consumption Costs
o Opportunity cost of workers’ time
o Other Social Goals
Business cycle
o Expansions
o Contractions
o Recessions
o Relationship with employment
2. Full Employment
 Unemployment
o Bureau of Labor Statistics (BLS)
o Types of Unemployment
 Frictional
 Seasonal
 Structural
 Cyclical
o UE rate
o Main economic cost of UE – opp cost of lost output
o Problems with measurement of UE
 Involuntary part-time workers
 Discouraged workers
 Full Employment
o Potential GDP
o Natural rate of unemployment
 Alternate measures of employment situation
o Payroll Survey
o Employment-Population Ratio
3. Stable Prices
 Price level
 Inflation
 Consumer Price Index (CPI)
o Calculate inflation rate (from period X to period Y)
𝐶𝑃𝐼𝑌 − 𝐶𝑃𝐼𝑋
 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
× 100
o
o

𝐶𝑃𝐼𝑋
Index payments
Translate from nominal to real variables
 i.e. wages
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑊𝑎𝑔𝑒𝑡
 𝑅𝑒𝑎𝑙 𝑤𝑎𝑔𝑒𝑡 =
× 100
𝐶𝑃𝐼𝑡
Costs of Inflation
o Redistributive costs
 Real Interest rate = nominal interest rate – inflation rate
o Resource costs
Chapter 9: The Circular Flow of Income and Expenditure
 Components of GDP: C, I, G, NX
o Consumption g/s
o Private investment g/s
o Government consumption and investment g/s
o Net exports = total exports – total imports
 Injections and Leakages
 Deficit and Surplus
 Total Spending = Total Output
 Planned Expenditure: EP = C + IP +G +NX
o Consumption Spending
 Key influences
 Disposable Income
 Wealth
 Interest rate
 Expectations/Consumer Confidence
 Autonomous Consumption Spending
 Marginal Propensity to Consume (MPC)
o Planned investment spending: IP = I - ∆ in inventories
 Key influences
 Interest Rate
 Business Confidence
 Investment Climate
o Government consumption and investment spending
 Exogenous
o Net Exports
 Endogenous (decrease during an expansion)
 Influenced by the exchange rate
 Expenditure Multiplier
1
o 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
o
∆𝐺𝐷𝑃 =
1
1−𝑀𝑃𝐶
1−𝑀𝑃𝐶
× ∆𝐼 𝑃 (Or ∆G, ∆NX, or ∆a)
Chapter 10: Measuring Economic Activity
 Gross domestic product (GDP)
 Gross national product (GNP)
 Measuring GDP
o Expenditure Approach
o Value Added Approach
o Factor Payments Approach (Income Approach)
 Shortcomings with measurement of GDP
 Real income and Price level
o GDP Deflator
o CPI
o Producer Price Index (PPI)
o Biases in CPI
 Substitution Bias
 Changes in Quality
Chapter 11: Money and The Banking System
 History of money
o Commodity money
o Fiat money
 Functions of money
o Means of payment
o Unit of Account
o Store of Value
 Money: asset widely accepted as a means of payment in an economy
o M1 = currency + checking accounts + travelers checks
o M2 = M1 + savings accounts + money market mutual funds + time deposits
o Money supply = M1
 Federal Reserve System
o “Responsibilities” (or Functions)
 Supervise and regulate banks
 “Bank for banks”
 Issue paper currency
 Check clearing
 “Guide the macroeconomy”
 Dealing with financial crises
o Board of Governors
o Regional Federal Reserve Banks
o Federal Open Market Committee
o Policy Tools
 Open Market Operations
 Discount Rate
 Reserve Requirements
 Interest rate on Reserves