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• 2 A tour of the book

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• What is Nominal GDP and what is Real GDP

  Nominal GDP is the sum of the quantities of final goods produced times their current prices. Nominal GDP increases over time for two reasons: production of goods increases and prices of goods increase.
  
  Real GDP is the sum of the quantities of final goods times constant prices. Real GDP must be defined as a weighted average of the output of all final goods.

• What is the formula for GDP growth

  
  GDP_growth=   Y_t−Y_t−1 / Y<sub>t−1
  
   A positive GDP growth is an expansion, a negative GDP growth a recession.</sub>
  

• Explain Employment, Unemployment and Labour force

  
  Employment is the number of people who have a job,
  
  Unemployment is the number of people who do not have a job but are looking for one.
  
  The labour force is the sum of employment and unemployment.       
  
  

  • L=N+U        Labourforce = Employment + Unemployment
    

• What is the unemployment rate?

  
  Unemployment rate is the ratio of the number of people who are unemployed to the number of people in the labour force.
  
  u =U / L
  
  Unemploymentrate = unemployment / labour force
  
  Only those who are looking for a job are counted as unemployed, those who are not looking are counted as not in the labour force. Employed who give up looking for a job and therefore are no longer counted as unemployed are called discouraged workers

• What is Inflation, Deflation and the measures of price level?

  Inflation is a sustained rise in the general level of prices (price level). The inflation rate is the rate at which the price level increases. Deflation is a sustained decline in the price level, it has a negative inflation rate.
  
  Measures of price level: GDP deflator and the consumer price index CPI.

• Why do economist care about inflation?

  • During periods of inflation, not all prices and wages rise proportionately and because they do not, inflation affects income distribution. 
  • Inflation leads to other distortions. Some prices, which are fixed by law, lag behind the others, leading to changes in relative prices. 

  
  Inflation is bad, but deflation is also not good, it limits the ability of monetary policy to affect output.

• What is the Phillips curve?

  The Philips curve is about the relation between unemployment and inflation. It says that when unemployment becomes very low, the economy is likely to overheat and that this will lead to upward pressure on inflation.
  
  This relation also yields a downward sloping curve (like Okun's law), but there is a less tight relation between the two variables.
  
  When unemployment has been below 6%, inflation has typically increased, suggesting that the economy was overheating, operating above its potential. But the relation is not tight enough to determine the moment at which the economy is overheating exactly.     

• What determines the level of aggregate output in an economy?

  
  

  • Demand for goods
  • How much the economy can produce 
  • Technology, labour skills and efficiency
    

• 3 The goods Market

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• Is investment een exogenous or an endogeneous variable?

  
  Investment is an exogenous variable (variable taken as given), in contrast to consumption which is an endogenous variable (variable that is explained within the model).
  
  Investment is written as (the bar on investment means that it is taken as given): I = Ī

• 100 MC Questions

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• Demand for central bank money? (name 3 points)

  • Consists of the demand for cash and reserves
  • Is positively related to the reserve requirement ratio
  • Depends positively on the proportion of money demand held in cash