What does GDP stand for and what does it measure?
Gross Domestic Product. Total value of all final goods and services produced within a country in a given period.
What is the difference between real and nominal GDP?
Nominal = current prices × current quantities. Real = base year prices × current quantities. Real GDP removes the effect of inflation.
What is the consumption function and what do its components mean?
C = C₀ + cYd. C₀ = autonomous consumption, c = MPC (fraction of each extra €1 of income spent), Yd = disposable income.
What is disposable income?
Income after tax. Yd = Y − T. With a tax rate: Yd = (1−t)Y.
What is the MPS and how does it relate to MPC?
Marginal propensity to save. MPS = 1 − MPC. Always true that MPC + MPS = 1.
What is the national accounting identity?
Y = C + I + G. This is always true by definition — it’s an identity.
What is value added and why do we use it?
Value added = revenue − cost of intermediate goods. Used to avoid double counting when measuring GDP.
What is the labour force?
Labour force = employed + unemployed. Discouraged workers are NOT included.
What is the multiplier formula and what does it mean?
1/(1−MPC). It shows how much total output increases when autonomous spending increases by €1, because spending ripples through the economy.
What is the tax multiplier?
−MPC/(1−MPC). It’s negative because taxes reduce disposable income. Smaller in absolute terms than the government spending multiplier because some of a tax cut is saved.
What is the government spending multiplier?
1/(1−MPC). A €1 increase in G directly increases demand by €1, then ripples through the economy.
Why is the tax multiplier smaller than the government spending multiplier?
Because government spending goes directly into the economy, while a tax cut first goes through households who save part of it. So the initial boost to demand is smaller.
What is the balanced budget multiplier and what does it equal?
When G and T increase by the same amount, output still rises. The balanced budget multiplier = 1. So output rises by exactly the same amount as the spending increase.
What is the multiplier with a tax rate t?
1/(1−c(1−t)). Higher tax rate → smaller multiplier → economy less sensitive to shocks.
What are automatic stabilisers? Give two examples.
Features of the economy that automatically cushion recessions without new policy. Examples: income taxes (fall automatically in recessions) and unemployment benefits (rise automatically).
What is the difference between a behavioral equation, an identity, and an equilibrium equation?
Identity = always true by definition (Y = C + I + G). Behavioral = describes how people behave (C = C₀ + cYd). Equilibrium = condition for market to clear (Y = Z).
What is the ZZ line?
The aggregate demand line in the goods market diagram. Shows total demand (Z = C + I + G) as a function of output Y. Slopes upward with slope = MPC. Equilibrium where ZZ crosses the 45° line (Y = Z).
What shifts the ZZ line up?
Increase in autonomous consumption (C₀), increase in G, decrease in T, increase in I. Anything that increases demand at every level of income.
What is Okun’s law?
The empirical relationship between output growth and unemployment. When output grows faster than normal → unemployment falls. More output = more jobs = less unemployment.
What is the Phillips curve?
Shows the short run tradeoff between inflation and unemployment. Higher inflation = lower unemployment. Lower inflation = higher unemployment.
What is the GDP deflator formula?
GDP deflator = (Nominal GDP / Real GDP) × 100. To find Real GDP: Real GDP = (Nominal GDP / GDP deflator) × 100.
What is the saving function?
S = −C₀ + (1−c)Yd. The (1−c) term is the MPS. Saving is what’s left of disposable income after consumption.
If MPC = 0.75 and G increases by €400, by how much does output increase?
Multiplier = 1/(1−0.75) = 4. Output increase = 4 × 400 = €1600.
If MPC = 0.75 and T increases by €400, by how much does output change?
Tax multiplier = −0.75/0.25 = −3. Output change = −3 × 400 = −€1200.
