CHAPTER 23: MEASURING A NATION’S INCOME

1. GDP is the market value of all final goods and services produced within a country in a given
period of time.
2. GDP measures total income of everyone in the economy and also measures total expenditure
on the economy’s output of goods and services.
3. GDP accounts for only the final goods and services to avoid double counting.
4. YES. Each of person have national income in economy
5. YES. Four components: Consumption (C): Total spending by households on goods and
services, Investment (I): Total spending on goods that will be used in the future to produce more
goods, Government Purchases (G): All spending on the goods and services purchased by the
government, Net Exports (NX): = exports – imports
6. List 10 goods or services that belong to consumption? pens, physical books, salt, apples,
hats, doctors, lawn care workers, dentists, barbers, waiters
7. List 10 goods or services that belong to investment? business structures, equipment,
intellectual property product, landlord’s apartment building; a homeowner’s personal
residence, goods produced but not yet sold, stocks, bonds, insurance
8. List 10 goods or services that belong to government spending? government borrowing,
taxes, custom duties, the sale or lease of natural resources, and various fees like national park
entry fees or licensing fees.
9. List 10 goods or services that belong to export? machinery, equipment, tools, spare parts,
cafe, rubber, cashew nuts, vegetables, cassava and cassava products, seafood
10. List 10 goods or services that belong to import? phones, components, machinery
equipment, computers, footwear, rice; textiles; means of transportation
11. Values output using current prices and not corrected for inflation, Real GDP: Values output
using the prices of a base year and is corrected for inflation
12. Presenting Example 1A, B, C, D?
13. GNP is the total income earned by a nation’s permanent resident
14. • GDP is the main indicator of a country’s economic well-being, even though it is not perfect -
VietinBank, • GNP is more appropriate to measure total income of citizens – Starbuck Coffee
15. Nominal GDP is measured using current prices. Real GDP is measured using the prices of a
constant base year and is corrected for inflation.
16. measures the current level of prices relative to the level of prices in the base year and a
measure of the overall level of prices.
GDP deflator = (nominal GDP / real GDP) x 100
17. Main indicator of the average person’s standard of living
18. But GDP is not a perfect measure of well-being. Is it possible for GDP to rise at the same time
that per capita GDP is falling explain is it possible for per capita GDP to rise at the same time that
GDP is falling explain?
CHAPTER 24: MEASURING THE COST OF LIVING
1. Measure of the overall cost of goods and services bought by a typical consumer (measure cost
of living)
2. The CPI is computed and reported every month by the Bureau of Labor Statistics (BLS)
3. CPI = [Basket’s cost in current year / Basket’s cost in base year] ×100
4. List of typical basket of goods and services of Vietnam and USA? cereal, milk, and
coffee, housing costs, transportation expenses, medical care costs, recreational expenses
5. Substitution Bias, Introduction of New Goods, Unmeasured Quality Change
 The CPI overstates increases in the cost of living
6. CPI: fixed basket; prices of all goods and services bought by consumers
GDP deflator: prices of all goods and services currently produced domestically
7. Inflation makes it harder to compare dollar amounts from different times.
8. The nominal interest rate - reflect exactly the value of deposit:
 Interest rate not corrected for inflation
 Rate of growth in the dollar value of a deposit or debt
The real interest rate:
 Corrected for inflation
 Rate of growth in the purchasing power of a deposit or debt
CHAPTER 25: PRODUCTION AND GROWTH
1. nutrition, housing, healthcare, life expectancy, and so on
2. Physical capital, Human capital, Natural resources, Technological knowledge

Key determinant of living standards: when a nation’s workers are very productive, real
GDP is large and incomes are high
 Write and explain the production equation? Y = A × F(L, K, H, N),

o The level of technology, A

o Physical capital per worker, K/L
o Human capital per worker, H/L
o Natural resources per worker, N/L
3. Market economy, scarcity is reflected in market prices. If the world were running out of
natural resources, their prices would be rising over time
4. To raise future productivity
5. Refers to society’s understanding of how to produce goods and services
 Results from the effort people expend to acquire this knowledge investment in human
capital
6. In countries with significant malnourishment, raising workers’ caloric intake raises
productivity
7. To foster economic growth
8. Aim to raise living standards by avoiding interaction with other countries
9. Stretching natural resources, diluting the capital stock, Promoting technological progress.

CHAPTER 28: UNEMPLOYMENT

1. Labor force? Employed + Unemployed
2. People not working who have looked for work during previous 4 weeks
3. U-rate= 100x (#of unemployed / labor force)
4. Percentage of adult population that is in the labor force
5. Labor-force participation rate : 68.50%, population: 97.58, unemployment rate: 3.72
6. YES, The deviation of unemployment from its natural rate
7. The normal rate of unemployment around which the unemployment rate fluctuates
8. HIGHER
9. As it takes time and resources for workers to find new jobs and for employees to find new
workers, people do not move between jobs instantly. So basically there will always be some
people who are unemployed. Economists call the rate of unemployment caused by these
frictions, the natural rate of unemployment.
10. Keeps the labor force more fully employed / Reduce the inequities inherent in a constantly
changing market economy
11. A government program that partially protects workers’ incomes when they become
unemployed
12. Minimum-Wage Laws, Unions, Efficiency Wages
13. May exceed the equilibrium wage for the least skilled and least experienced workers,
causing structural unemployment
14. What is Union? Worker association that bargains with employers over wages, benefits,
and working conditions
What are advocates and critics for unions?
 Unions counter the market power of large firms
 Make firms more responsive to workers’ concerns
 Keep a happy and productive workforce

15. What is Efficiency Wages? Firms voluntarily pay above-equilibrium wages to boost
worker productivity and increase firm profitability
What are advocates and critics for Efficiency Wages? That firms may willingly pay
extra-high wages in order to increase the productivity of their workers.
CHAPTER 29: THE MONETARY SYSTEM

1. The set of assets in an economy that people regularly use to buy goods and services from
other people
2. Medium of exchange, a unit of account, and a store of value
3. Commodity money, Fiat money
4. The quantity of money circulating in the economy
5. The central bank of the United States
An institution designed to oversee the banking system and regulate the quantity of money in
the economy
6. An institution which accepts deposits,
makes business loans, and offers related services.
7.
Central bank: to ensure banks and financial institutions follow the laws intended to promote safe
and sound banking practices
Commercial bank: Allowing for a variety of deposit accounts, such as checking, saving, and time
deposits and create money
8. An institution designed to oversee the banking system and regulate the quantity of money in
the economy
9.
In a fractional reserve banking system, banks keep a fraction of deposits as reserves and use the
rest to make loans.
10. = fraction of deposits that banks hold as reserves = total reserves as a percentage of total
deposits
11. Banks keep a fraction of deposits as reserves and use the rest to make loans.
12. Amount of money the banking system generates with each dollar of reserves and is the
reciprocal of the reserve ratio

13. The money supply refers to the quantity of money available in the economy

14. No banking system, 100% reserve banking system; Banks hold 100% of deposits as reserves,
make no loans, Fractional reserve banking system
15. Price levels, inflation, and the business cycle. 
16. The central bank conducts open-market operations when it buys government bonds from or
sells governmentmbonds to the public
17. The Fed buys government securities from securities dealers, supplying them with cash
18. The interest rates charged to borrow money tend to be lower when there is more of it.
19. An increase in interest rates would impact aggregate demand (AD) by impacting consumer
spending, business investments and exports-imports. 
20. The money supply decrease
21. The money supply grows at a faster rate than the economy's ability to produce goods and
services

CHAPTER 30: MONEY GROWTH AND INFLATION

1. The total cash in circulation and bank account deposits. Determined by the Fed, the banking
system, and consumers.
2. The demand for money represents the desire of households and businesses to hold assets in a
form that can be easily exchanged for goods and services. Depends on P: an increase in P
reduces the value of money, so more money is required to buy goods and services.
3. The Fed buys and sells government securities in the open market. If the Fed wants to increase
the money supply, it buys government bonds.
4. Increase in the overall level of prices. Four level: creeping, walking, galloping, and
hyperinflation. Types of inflation (Demand-Pull inflation: It occurs when the demand for goods
or services is higher when compared to the production capacity, Cost-Push inflation: It occurs
when the cost of production increases. Increase in prices of the inputs (labour, raw materials, etc.)
increases the price of the product, and Built-In inflation: Expectation of future inflations results in
Built-in Inflation. A rise in prices results in higher wages to afford the increased cost of living.
5. At the initial P, an increase in MS causes an excess supply of money. Result: increased
demand for goods and services.
6. But supply of goods does not increase, so prices must rise, so the quantity of money demanded
increases because people are using more dollars for every transaction.
7. Inflation drives up prices and drives down the value of money.
8. Shoeleather costs: The resources wasted when inflation encourages people to reduce their
money holdings. Menu costs: the costs of changing prices
9. Inflation causes people to pay more taxes even when their real incomes do not increase. They
contradict the strong and widespread belief that inflation hurts the poor more than the rich and
thus increases income inequality
10. Theoretical separation of nominal and real variables. Nominal variable: – including prices –
will double, and Real variable: including relative prices – will remain unchanged. For example: a
bundle of commodities, such as Gross Domestic Product, and income.
11. According to monetary neutrality, changes in the supply of money affects nominal variables.
Real variables (production, employment, real wages, and real interest rates) are unchanged. The
same applies to employment of capital and other resources; since employment of all resources is
unchanged, total output is also unchanged by the money supply.
12. The rate at which money changes hands. Money supply and the velocity of money are
inversely proportional.
CHAPTER 34: THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE
DEMAND

1. Is the process by which the monetary authority of a country controls the money supply, often
targeting an interest rate for the purpose of promoting growth and stability. The tools of
monetary policy: the reserve requirement, open market operations, the discount rate, and
interest on reserves. The CB’s policy instrument is MS =) to change the interest rate and shift
the AD curve
2. MS curve is vertical: Changes in r do not affect MS, which is fixed by the Fed.
MD curve is downward sloping: A fall in r increases the quantity of money demanded.
3. A fall in r increases I and the quantity of good & service demanded, Y.
4. If loose monetary policy seeking to end a recession goes too far, it may push aggregate
demand so far to the right that it triggers inflation.
5. If prices rise faster than their target, central banks tighten monetary policy by increasing
interest rates or other hawkish policies.
6. Presenting Active Learning 2: Monetary policy
7. If interest rates have already fallen to around zero, monetary policy may no longer be effective,
since nominal interest rates cannot be reduced further - aggregate demand, production, and
employment may be "trapped" at low levels. A central bank continues to have tools to expand
the economy by Forward guidance and Quantitative easing
8. Setting the level of government purchase (G) and taxation (T) by government policymaker. An
increase in G and/or decrease in T, shifts AD right. A decrease in G and/or increase in T, shifts
AD left A.
9. Higher government spending causes AD to shift to the right
10. Consumers might spend less because the cost of living is rising or because government taxes
have increased. Consumers may decide to spend less and save more if they expect prices to
rise in the future. This could shift AD to the left.
11. The additional shifts in AD that result when fiscal policy increases income and thereby

increases consumer spending. The formula:

12. The bigger the MPC, the bigger the multiplier. A bigger MPC means changes in Y cause
bigger changes in C, which in turn cause bigger changes in Y.
13. Offset in aggregate demand, results when expansionary fiscal policy raises the interest rate.
Thereby reduces investment spending which reduces the net increase in aggregate demand.
So, the size of the AD shift may be smaller than the initial fiscal expansion.
14. But higher Y increases MD and r, which reduces AD.
15. Fiscal policy have the rightward shift in AS increases income, which, in turn increases the tax
base. Some supply-siders believe that the increase in income and the tax base are so large
that a tax rate cut ends up INCREASING tax revenue rather than decreasing it.
CHAPTER 35: THE SHORT-RUN TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT

1. Inflation is the rate of increase in prices over a given period of time. Indicators: CPI. Impact:
The inflation rate depends mainly on growth in the money supply.
2. People are on temporary layoff, looking for a job during previous 4 weeks or waiting for the
start date of a new job. Unemployment (the “natural rate”) depends on the minimum wage,
the market power of unions, efficiency wages, and the process of job search.
3. Unemployment (the “natural rate”) depends on the minimum wage, the market power of
unions, efficiency wages, and the process of job search. Frictional and structural
4. The Phillips curve is an economic theory that inflation and unemployment have a stable
and inverse relationship. Short-run trade-off between inflation and unemployment.
5. The trade-off was temporary. Based on the classical dichotomy and the
vertical LRAS curve

6.
7. An event that directly alters firms’ costs and prices and Shifting the AS and PC curves
– Example: large increase in oil prices in1974 and 1979, OPEC restricted the supply
of oil: higher oil prices

8. Over time, expected inflation falls, PC shifts downward. In the long run, point C: the natural
rate of unemployment, lower inflation.
9. 5 (to reduce inflation rate 1%, must sacrifice 5% of a year’s output). Sacrifice ratio is
percentage points of annual output lost
per 1 percentage point reduction in inflation
10. Inflation and unemployment were low during most of Alan Greenspan’s years as Fed
Chairman.
11. Sharp drop in aggregate demand, steep rise in unemployment

CHAPTER 31: OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS

1. Closed economy: Economy that does not interact with other economies in the world and Open
economy: Economy that interacts freely with other economies around the world
2. Trade surplus (NX > 0): Exports are greater than imports and the country sells more goods and
services abroad than it buys from other countries and Deficit (NX < 0): Imports are greater than
exports and the country sells fewer goods and services abroad than it buys from other countries
3. Presenting Active Learning 1: Variables that affect NX
4. Consumers’ tastes for foreign and domestic goods, Prices of goods at home and abroad,
Exchange rates at which foreign currency trades for domestic currency, Incomes of consumers at
home and abroad, Transportation costs, Government policies
5. Foreign direct investment and Foreign portfolio investment
6. When NCO > 0, “capital outflow”: Domestic purchases of foreign assets exceed foreign
purchases of domestic assets
When NCO < 0, “capital inflow”: Foreign purchases of domestic assets exceed domestic
purchases of foreign assets
7. Real interest rates paid on foreign assets, real interest rates paid on domestic assets,
perceived economic and political risks of holding foreign assets, government policies affecting
foreign ownership of domestic assets
8. NCO = NX
9. The Nominal Exchange rate: Rate at which one country’s currency trades for another and we
express all exchange rates as foreign currency per unit of domestic currency.
The Real Exchange rate: Rate at which the goods and services of one country trade for the
goods and services of another
10. The formula of real exchange rate: = e x P / P* (P = domestic price, P* = foreign price - in
foreign currency, e = nominal exchange rate - foreign currency per unit of domestic currency)
11. Depreciation is a decrease in the value of a currency relative to another
currency. Appreciation is an increase in the value of a currency relative to another currency
12. A theory of exchange rates, whereby a unit of any given currency should be able to buy the
same quantity of goods in all countries.