Homework Assignments: Unit 3 Test. Name Date Period

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1 Name Date Period APE Macro Unit 3: Measurement of Economic Performance Workbook #3 Objectives: These are the key concepts that you must be able to answer after Unit 3. Students should be able to explain macroeconomics and how it differs from microeconomics AND answer the following question: Why is it that what is good for the part is not necessarily good for the whole? Explain why the business cycle is important and why policy makers seek to diminish the severity of business cycles? Illustrate a business cycle. Explain what long-term growth is and how it affects a country s standard of living. Explain the difference between nominal and real variables; inflation and deflation. Illustrate how to calculate the unemployment rates and why there is unemployment at full employment. Explain the characteristics of an open economy and how countries trade goods, services and assets. Explain why policy makers and economists prefer price stability in the macroeconomy. Explain how economists use aggregate measures to track the performance of the economy. Define GDP and explain the three ways to calculate it. Explain the difference between real GDP and nominal GDP and why real GDP is the appropriate measure of real economic activity. Explain the significance of the unemployment rate and how it relates to the business cycle. Explain what a price index is and how it is used to calculate the inflation rate. Explain some of the specific price indexes/indices, how they are computed and how economists use them. Chapter 23 Vocabulary: economics, macroeconomics, microeconomics, economic aggregates, business cycle, depression, recession, expansions, employment, unemployment, labor force, discouraged workers, underemployment, unemployment rate, aggregate output, stabilization policy, monetary policy, fiscal policy, long-run growth (aka secular long-run growth), nominal, real, aggregate price level, inflation, deflation, price stability, inflation rate, closed economy, open economy, open-economy macroeconomics, exchange rate, trade balance, capital flows (32). Chapter 24 Vocabulary: national income and product accounts/national accounts, consumer spending, stock, bond, government transfers, disposable income, private savings, financial markets, government borrowing, government purchases of goods and services, exports, imports, final goods and services, intermediate goods and services, gross domestic product (GDP), aggregate spending, value added, net exports, real GDP, nominal GDP, GDP per capita, market basket, price index, inflation rate, consumer price index (CPI), producer price index (PPI), GDP deflator (27). Homework Assignments: Chapter 23 Materials Vocabulary Chapter 23 Vocabulary Notecards: Due: Vocab Quiz: Textbook: Chapter 23: Macroeconomics: The Big Picture (pp ) Due: Chapter 23 Quiz: Chapter 24 Materials Vocabulary Chapter 24 Vocabulary Notecards: Due: Vocab Quiz: Textbook: Chapter 24: Tracking the Macroeconomy (pp ) Due: Chapter 24 Quiz: Extra Unit Practice: Krugman/Wells website animated graph tutorials at Refenomics.com fantastic interactive website to guide you through a variety of concepts ACDCLeadership.com: -Our units are based on Mr. Clifford s work check his site out! Unit 3 Test

2 Unit 3 General Problem Sets: Answer these on this sheet of paper unless otherwise noted. Measuring Growth Definition of Gross Domestic Product (GDP)- Nominal GDP- Real GDP- GDP = C: I: G: GDP Deflator- Nx: Three things not included in GDP: Define GDP, identify what is not included, define the four components, and give an example of each 2. Explain the difference between nominal GDP and real GDP. Use a simplified numerical example with two different years to show your understanding.

3 Business Cycle Label peak, recession/contraction, trough, expansion GDP Deflator Practice 1. The Nominal GDP is $100 billion and the Real GDP is $80 billion. Calculate the GDP deflator. Real GDP 2. The Real GDP is $100 billion and the GDP deflator is 200. Calculate the Nominal GDP. 3. The Real GDP is $200 billion and the GDP deflator is 120. Calculate the Nominal GDP. Time 4. The Nominal GDP is $300 billion and the GDP deflator is 150. Calculate the Real GDP. 5. The Nominal GDP is $100 billion and the GDP deflator is 125. Calculate the Real GDP. 1. If someone told you that the nominal GDP increased by 4% in 2004 explain why you would need two additional pieces of information to conclude that the standard of living for the typical person also increased by 4%. 1. Frictional Unemployment Measuring Unemployment* Full Employment Natural Rate of Unemployment (NRU) 2. Structural Unemployment

4 3. Cyclical Unemployment Problems With Unemployment Rate Discouraged Job Seekers- Underemployed (part-time) Workers- 1. Define and give examples of the three types of unemployment discussed in class. 2. How is the unemployment rate calculated? What is the Natural Rate of Unemployment? Do we want zero unemployment? Market Basket- Measuring Inflation CPI Practice* Using the values of the market baskets below, calculate the CPI for each year. Start with 2009 as the base year then recalculate with 2010 as the base year. Lastly, recalculate with 2011 as the base year. Year Market Basket Base Year 2009 Base Year 2010 Base year $ Consumer Price Index (CPI) Equation 2010 $ $ CPI = x 100

5 Helped or Hurt by Unexpected Inflation Assume expected inflation is 2% but actual inflation turns out to be 5%. Who is helped and hurt by inflation? Real interest rate= Interest Rates and Inflation Helped Hurt Nominal interest rate= 1. If the nominal interest rate is 7% and expected inflation is 3%, what is the real interest rate? 2. If the real interest rate is -2% and the nominal interest rate was 3%, what was the inflation rate? Causes of Inflation Quantity Theory of Money 1. Quantity Theory of Money Equation: x = x Assume the amount of money is $5 and it is being used to buy 10 products with a price of $2 each. 1. How much is the velocity of money? 2. If the velocity and output stay the same, what will happen if the amount of money increases to $10? 1. Define and identify how to calculate the Consumer Price Index (CPI)? Explain the meaning of the following CPIs relative to a base year. Year 1=90, Year 2=100, Year 3=125, Year 4=150. Lastly explain why the percent change in prices from year 3 to year 4 is NOT 25%.

6 2. Identify how to calculate nominal interest rates and real interest rates. Assume that you put $100 in the bank. Use numeric examples to explain three different scenarios in which your REAL income falls, stays the same, and increases. 3. If the actual inflation is greater than the anticipated inflation, fully explain who would benefit and who would be hurt and explain WHY?