Real GDP measures the total income of everyone in the economy (adjusted for the level of prices).

The inflation rate measures how fast prices are rising. The unemployment rate measures the fraction of the labor force that is out of work Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model takes as given they assume that a market goes to the equilibrium of supply and demand. This assumption is called market clearing Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the marketplace. Macroeconomics is the study of the economy as a wholeincluding growth in incomes, changes in prices, and the rate of unemployment. Macroeconomists attempt both to explain economic events and to devise policies to improve economic performance. The consumer price index, or CPI, measures the level of prices. The unemployment rate tells us the fraction of workers who are unemployed GDP is as the total income of everyone in the economy.Another way to view GDP is as the total expenditure on the economys output of goods and services.gross domestic product (GDP) is the market value of all final goods and services produced within an economy in a given period of time A stock is a quantity measured at a given point in time, whereas a flow is a quantity measured per unit of time. The underground economy is the part of the economy that people hide from the government either because they wish to evade taxation or because the activity is illegal. Economists call the value of goods and services measured at current prices nominal GDP. real GDP, which is the value of goods and services measured using a constant set of prices. The GDP deflator reflects whats happening to the overall level of prices in the economy. Nominal GDP measures the current dollar value of the output of the economy. Real GDP measures output valued at constant prices. The GDP deflator measures the price of output relative to its price in the base year. Nominal GDP is the market value (money-value) of all final goods and services produced in a geographical region, usually a country. Real GDP is a macroeconomic measure of the value of output economy, adjusted for price changes. The adjustment transforms the nominal GDP into an index for quantity of total output. Consumption consists of the goods and services bought by households. It is divided into three subcategories: nondurable goods, durable goods, and services. Investment consists of goods bought for future use. Investment is also divided into three subcategories: business fixed investment, residential fixed investment, and inventory investment. Government purchases are the goods and services bought by federal, state, and local governments. Net exports are the value of goods and services exported to other countries minus the value of goods and services that foreigners provide us. Net exports represent the net expenditure from abroad on our goods and services, which provides income for domestic producers. GNP measures the total income earned by nationals (residents of a nation). In the national income accounts, depreciation is called the consumption of fixed capital. National income measures how much everyone in the economy has earned. The national income accounts divide national income into five components personal income, the amount of income that households and noncorporate businesses receive disposable personal income it is the amount households and noncorporate businesses have available to spend after satisfying their tax obligations to the government. increase in the overall level of prices is called inflation The CPI is the price of this basket of goods and services relative to the price of the same basket in some base year. The labor force is defined as the sum of the employed and unemployed, and the unemployment rate is defined as the percentage of the labor force that is unemployed. A related statistic is the labor-force participation rate, the percentage of the adult population that is in the labor force: negative relationship between unemployment and GDP is called Okuns law, The unemployment rate shows what fraction of those who would like to work do not have a job. Factors of production are the inputs used to produce goods and services.The two most important factors of production are capital and labor. Factor prices are the amounts paid to the factors of productionthe wage workers earn and the rent the owners of capital collect. The marginal product of labor (MPL) is the extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed. W/P is the real wagethe payment to labor measured in units of output rather than in dollars.

marginal propensity to consume (MPC) is the amount by which consumption changes when disposable income increases by one dollar. We define income after the payment of all taxes, Y T, as disposable income. The relationshipbetween consumption and disposable income is called the consumption function. Themarginal product of capital (MPK) is the amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant: The real rental price of capital is the rental price measured in units of goods rather than in dollars. The income that remains after the firms have paid the factors of production is the economic profit The nominal interestrate is the interest rate as usually reported: it is the rate of interest that investorspay to borrow money. The real interest rate is the nominal interest rate corrected for the effects of inflation. money isthe stock of assets that can be readily used to make transactions. The quantity of money available is called the money supply The control over the money supply is called monetary policy.M/P, is called real money balances. A money demand function is an equation that shows what determines the quantity of real money balances people wish to hold. The revenue raised through the printing of money is called seigniorage. Economists call the interest rate that the bank pays the nominal interestrate and the increase in your purchasing power the real interest rate According to the quantity theory, an increasein the rate of money growth of 1 percent causes a 1-percent increase in the rate of inflation.According to the Fisher equation, a 1-percent increase in the rate of inflation in turn causesa 1percent increase in the nominal interest rate. The one-for-one relation betweenthe inflation rate and the nominal interest rate is called the Fisher effect. Hyperinflation is often defined as inflation that exceeds 50 percent per month, which is just over 1 percent per day The real exchange rate is the relative price of the goods of two countries.That is, the real exchange rate tells us the rate at which we can trade the goods of one country for the goods of another The nominal exchange rate is the relative price of the currency of two countries. The law of one price applied to the international marketplace is called purchasing-power parity The net capital outflow is the excess of domestic saving over domestic investment. natural rate of unemploymentthe average rate of unemployment around which the economy fluctuates.The unemployment caused by the time it takes workers to search for a job is called frictional unemployment. Unemployment is the state in which individuals available to work are without work and are currently seeking work. The unemployment rate is the percentage of the labor force which is unemployed: Okuns law states that for every 2% GDP falls relative to potential GDP, unemployment rises 1% relative to natural rate of unemployment. When the economy operates at productive capacity, it will experience the Natural rate of unemployment frictional unemployment means the situation than individuals will take time to find and secure another suitable job. The voluntary short-run unemployment (causes: imperfect information, disincentives); structural unemployment is the result of technological changes, when the structure of working places is not corresponding with the structure of labor force (causes: economic change, globalization, capital replacement); cyclical unemployment that characterizes the variations in the levels of unemployment over the business cycle (causes: recession, economic crisis, AD, AS ), seasonal unemployment will result in the level of employment in the agriculture, construction (causes: seasonal variation in demand, supply).Natural rate of unemployment (NAIRU) means the unemployment rate in conditions of full employment of labor force and economic stability Economists call a change in the composition of demand among industries or regions a sectoral shiftwage rigidity the failure of wages to adjust until labor supply equals labor demand.The unemployment resulting from wage rigidity and job rationing is called structural unemploymentsome individuals may wantjobs but, after unsuccessful searches, have given up looking. These discouragedworkers are counted as being out of the labor force and do not show up in unemployment statisticsStructural unemployment results when the real wage remains above the level that equilibrates labor supply and labor demand The Solow growth model shows that in the long run, an economys rate of saving determines the size of its capital stock and thus its level of production.The higher the rate of saving, the higher the stock of capital and the higherthe level of output Aggregate demand (AD) is the relationship between the quantity of output demanded and the aggregate price level.

In other words, the aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices AD is the total amount of final goods and services produced in the country that population, business, government and foreigners plan to buy. AD is the amount of real GDP demanded. AD curve shows the relationship between quantity of real GDP demanded and the price level. Aggregate supply (AS) is the relationship between the quantity of goods and services supplied and the price level. Aggregate Supply is the total amount of final goods and services which will be produced and offered for sale by businesses. AS means the amount of real GDP supplied. AS curve shows the level of real GDP produced at various price levels. Macroeconomic equilibrium occurs when the amount of real GDP demanded equals to the amount of real GDP supplied, or AD = AS. Long-run equilibrium is the state toward which the economy is heading. In the Long-run Real GDP moves toward potential if AS is changed: Short-run equilibrium is the normal state of the economy as it fluctuates around potential GDP. In the short-run real GDP can be greater or less than potential GDP. stabilization policy to refer to policy actions aimed at reducing the severity of short-run economic fluctuations.The aggregate demand curve slopes downward. It tells us that the lower the price level, the greater the aggregate quantity of goods and services demanded. Governmentpurchases multiplier; it tells us how much income rises in response to a $1 increase in government purchases tax multiplier, the amount income changes in response to a $1 change in taxes.how a monetary expansion induces greater spending on goods and services a process called the monetary transmission mechanism debt-deflation theory, describes the effects of unexpected falls in the price level.Another channel through which falling prices expand income is called the Pigou effect.A reduction in the value of the currency is called a devaluation, and an increase in its value is called a revaluation The MundellFleming model is the ISLM model for a small open economy.It takes the price level as given and then shows what causes fluctuations in income and the exchange rate. The MundellFleming model shows that fiscal policy does not influence aggregate income under floating exchange rates. The MundellFleming model shows that monetary policy does not influence aggregate income under fixed exchange rates The IS/LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market. The intersection of the IS and LM curves is the "General Equilibrium" where there is simultaneous equilibrium in both markets. IS/LM stands for Investment Saving / Liquidity preference Money Supply.The sticky-wage model shows what a sticky nominal wage implies for aggregate SupplyThe Phillips curve in its modern form states that the inflation rate depends on three forces: Expected inflation; The deviation of unemployment from the natural rate, called cyclical unemployment; Supply shocks. Low unemployment pulls the inflation rate up. This is called demand-pull inflation because high aggregate demand is responsible for this type of inflation. High unemployment pulls the inflation rate down.The parameter b measures how responsive inflation is to cyclical unemployment. An adverse supply shock, such as the rise in world oil prices in the 1970s, implies a positive value of u and causes inflation to rise. This is called cost-push inflation because adverse supply shocks are typically events that push up the costs of production combination of inflation and unemployment on this curve, called the short-run Phillips curve. sacrifice ratio, the percentage of a years real GDP that must be forgone to reduce inflation by 1 percentage point Hysteresis is the term used to describe the long-lasting influence of history on the natural rate. households do not spend all of their income, i.e., they save. This represents a leakage from the circular flow firms need capital to produce goods and services, thus they must engage in investment spending. This represents an injection into the circular flow. Consumption function means the relations between consumption of households and their income. MPC represents the changes in consumption, resulting from changes in income by one monetary unit MPS represents the changes in saving,resulting from changes in income by one monetary unit Saving is the part of income , that is not spent on the consumption, Investiment is the sum of money,that is transformed into capital stock. The investment demand curve shows the total amounts which will be invested at various possible real interest rates. Multiplier represents the amount by which a change in autonomous variable is multiplied to determine the change in equilibrium income.

Investment multiplier Is the number by which the change in autonomous investment must be multiplied in order to determine the resulting change in total output. Investment multiplier means the effect of an increase in autonomous investment on the production, on the income, on the consumption , and on the equilibrium Y. A Budget deficit is an excess of government expenditures above its revenues in a particular year. Structural deficit means the difference between government expenditures and revenues when the economy is at full employment. The Cyclical deficit is a budget deficit caused by a recession. The cyclical deficit is the actual deficit minus the structural deficit. Public debts the total amount that the government has borrowed. It is the sum of all past budget deficits, minus surpluses. Taxes are obligatory payments of the juridical and physical persons for public goods and services in accordance with the state legislation. Laffer curve shows the interdependence between the tax rate and the total sum of collected taxes in the state budget. Fiscal policy is the use of government spending and taxes to achive macroeconomic objectives such as the economic growth, full employment and price-level stability. Tax multiplier is the amount by which an increase (decreases) in taxes is magnified to determine an increase (decrease) in real GDP. K.Haavelmo theorem : the multiplier of the balanced budget equals to 1. The business cycle is the periodic repeated fluctuations in national output, employment and price levels which characterize the economic activity.The rate of inflation is the rate of change of the general price levelDeflation occurs when the general level of prices is falling Disinflation means the reduction in the rate of inflation but not enough to cause deflation. The Phillips curve shows the trade off between inflation and unemployment. Money represents the means of exchange used directly and accepted by all members of community in market transactions Mass of money is the quantity of money in the circulation in a definite period of timeSupply of Money represents the quantity of money in the circulation (Sm), includes the currency and the Bank deposits :