There are two ways to determine a country's economic output: nominal GDP and real GDP. GDP (Gross Domestic Product) is the value of all goods and services produced in a country during a specific period, usually a year. Nominal GDP is determined by current market prices and represents the total worth of all products and services produced by a country in a year. On the other hand, real GDP is assessed at constant market prices and reflects the value of all goods and services produced in a year, which takes into account the effect of inflation. It is important to understand the difference between nominal and real GDP, as it helps to distinguish the real increase in production from the inflationary component of economic growth.

Changes in inflation can affect nominal GDP but not real GDP. Inflation is a general increase in prices, which reduces the purchasing power of money. Real GDP is adjusted for inflation, while nominal GDP is not. For example, suppose a country produces 200 units of a product priced at £15 in a year, generating a nominal GDP of £3000 (200 x £15). The next year, suppose the price of this product increases due to inflation to £20, but the country still produces the same number of units. In this case, the nominal GDP will increase to £4000 (200 x £20), but the real GDP remains the same (£3000 or 200 x £15). Thus, real GDP provides a more accurate reflection of the economy and should be used to measure economic growth. However, nominal GDP is also important as it provides information on the money entering the economy, which can be used to determine the amount of money available for investment and expenditure.

Nominal GDP has certain limitations as it does not necessarily reflect the actual state of the economy during negative GDP growth or a recession. A drop in prices, or deflation, could result in negative nominal GDP growth, even if the output is still rising. This could create a mistaken impression that the economy is experiencing a recession when production is still increasing. This may cause confusion and lead people and businesses to take precautionary actions such as decreasing spending and increasing saving, causing an actual economic slowdown and a fall in demand. Economists must use real GDP to analyze production and demand to avoid such negative effects.

In conclusion, although nominal GDP can be useful when contrasting with other variables, economists typically prefer real GDP as it incorporates the impact of inflation and provides a more accurate picture of economic growth. Nevertheless, nominal GDP has its uses as it provides information about the money flowing into the economy.

Section B: Feedback Loops and National Output Shock

The simple Keynesian model can help us understand the impact of feedback loops on the response of national output to aggregate demand shocks. The model argues that output levels are determined by the interaction between aggregate demand and aggregate supply in a country's economy. An aggregate demand shock occurs when the demand for goods and services in an economy changes unexpectedly, affecting the output levels.

When there is an aggregate demand shock like a recession or inflation, feedback loops can occur, leading to a change in output levels. Feedback loops occur when a change in output levels has an effect on the demand levels, which can further impact the output levels. For instance, if an aggregate demand shock leads to a fall in output levels, it can result in a fall in consumer demand, which can result in a further reduction in output levels.

The Keynesian model holds that in such a situation, government intervention can help restore the output levels by increasing demand through fiscal or monetary policies. However, such interventions could create their own feedback loops. For example, if the government injects funds into the economy to stimulate demand, it could result in inflation, leading to an increase in interest rates, which could negatively affect demand levels.

In conclusion, feedback loops can affect the response of national output to aggregate demand shocks in an economy, and the intervention of government policies can have a counter-effect on output levels. Therefore, a careful balance between government policies and market forces should be maintained to stabilize output levels and promote economic growth.

The multiplier effect is a well-known mechanism that results in a self-reinforcing process known as cumulative causation, where an initial increase in aggregate demand (AD) creates subsequent cycles of consumption and income creation, triggering an even higher increase in output (Y) due to the favorable influence on employment and income. This is one example of a feedback loop that amplifies the effects of an AD shock. On the other hand, the interest rate effect, which asserts that an increase in AD could result in an increase in interest rates, is another example of a feedback loop that could counteract or reduce the initial rise in Y due to a decrease in consumption and investment caused by a rise in borrowing costs.

Figure 1 shows the impact of an increase in government spending (G) on national output (Y). An increase in G boosts national output due to positive spillover effects on private sector spending, resulting in a constructive feedback loop that strengthens the multiplier effect. However, if the economy is close to reaching its potential output, G's growth may be offset by inflationary crashes. Also, negative feedback loops can occur when aggregate demand declines, resulting in a drop in national output, which can further reduce aggregate demand and output due to declines in income and consumption.

The simple Keynesian model's feedback loops amplify the initial changes in aggregate demand and result in bigger increases in national production. However, it is essential to consider the economy's starting point and the possibility of inflationary collapses when evaluating the effects of aggregate demand shocks. Additionally, the austerity and crowding-out approach could contribute to the negative effects of increased government spending.

Significant economic shocks can have enduring effects on the macroeconomy because of the short-term and long-term feedback loops they create. For example, the negative impacts of the 2008 financial crisis on the global economy have continued to linger due to prolonged periods of low interest rates, high debt, and weak growth. Therefore, it is crucial to consider the long-term aspects of the economy when evaluating the effects of significant economic shocks, rather than just short-term dynamics that the simple Keynesian model emphasizes.

The inherently precarious macroeconomic environment can be shaken by shocks that fall under two categories - aggregate supply and aggregate demand - and their effect is felt throughout the economy. The feedback loops created by these shocks can both inhibit or reinforce their negative effects. The outcome of these shocks can lead to either a recession or a boom. The economy's structure can also be altered by significant economic shocks. For example, a financial crisis might result in numerous bank failures and a consolidation of the industry, leading to less credit being available for long-term investment and growth. Meanwhile, the lasting impact of significant economic shocks on people's income, wealth, and consumption can likewise impede economic expansion.

Hysteresis refers to the persistence of scarring effects on the economy long after the initial disturbances have passed. This phenomenon often happens following prolonged or extreme economic events such as recessions or crashes. Hysteresis's impact can be seen in various areas such as wages and investments. Even after the economy has recovered, businesses may be reluctant to increase worker's salaries for fear of incurring higher labour costs when economic conditions improve. Furthermore, investment may be hesitant to invest in new ventures due to uncertainties about future economic conditions. Consumers may be hesitant to participate in new economic enterprises even though the economy is improving.

Significant economic shocks can have lasting impacts on an economy's growth and employment, and hysteresis, structural changes, and changes in consumption may contribute to macroeconomic problems. These effects could cause a decline in output, employment, wages, and investment, despite an economic recovery. It is vital to address these long-term effects through policies that consider the long-term consequences of economic disruptions.