Ap Econ Ch 20-21
Two solutions proposed for fighting the recession
1.Stimulus Solution- This opinion favored government stimulus. The government pushed interest rates low while massively increasing Government Spending (Majority Favored this solution ) 2. Structural Solution- economy required a structural adjustment. wanted to let the inefficient firms go bankrupt and then allow the invisible hand to reallocate the resources toward efficient firms
Assume that in an economy with an MPC of 0.8 investment increases by $7 billion. By how much will RGDP increase if the economy fully expands?
1/(1-0.8) = 1/0.2 = 1/1/5 = 5 5 x 7 billion = 35 billion
If the consumer price index for this year is 240 and the CPI for last year was 200, what is the inflation rate for this year?
20%
IF the 2009 real GDP of a country is $2.6 billion, and the 2008 real GDP was $2 billion, what was the rate of economic growth?
30%
If a bank charges customers a nominal interest rate of 12% for car loans and expects a 7% inflation rate over the life of a loan, what is the real interest rate?
5%
If real GDP increased 2% this year and the price level increased 4% this year, how much did nominal GDP increase this year?
6 %. % Change in Nominal GDP = % Change in Real GDP + % Change in Prices (2% - 4% = - 2%)
If RGDP increased 2% this year and the price level increased 4% this year, how much did nominal GDP increase this year?
6%
17. Which of the following is most likely to be an indication of higher unemployment?
A decrease in real GDP
36. Which of the following is an example of a supply shock?
A dramatic increase in energy prices increases production costs for firms in the economy.
Which of these is an example of investment, as economists define the term?
A firm purchases equipment to make production more efficient
GDP per capita is...
A measure of the average standard of living that can be used to compare countries.
28. Which of the following is the best example of investment as defined by economists?
A restaurant owner buys a freezer to store ingredients for the restaurant meals
26. Which of the following is the best example of financial investment?
A retiree purchases Google stock
Inventory
A store of output that has been produced but not yet sold.
23. Which of the following is not an adjustment made when comparing standards of living across countries?
Adjusting for different unemployment rates across countries
To calculate disposable income, which of the following adjustments are made to personal income?
All personal taxes are subtracted. Disposable income is equal to personal income minus all personal taxes.
How does an increase in government spending effect aggregate demand?
An increase in government spending causes an increase in aggregate demand.
Inflation
An increase in the overall level of prices Higher inflation reduces what people are able to buy and purchasing power of savings
Which of the following would be included in the calculation of U.S. GDP? A girl mowing her family's yard A student buying a used car A neighbor paying a babysitter with homemade cookies A senior citizen receiving a Social Security check A family buying dinner at a restaurant
Answers (A) and (C) are examples of home production, (B) is the purchase of a used good, and (D) is a purely financial transaction, none of which are counted in GDP.
27. Which of the following is the best example of economic investment?
Apple builds a new plant to manufacture iPads
What do banks do with savings?
Banks collect savings from citizens/households and loan them out to businesses for investment.
____ and ____ channel household savings toward businesses, which invest in equipment, factories, and other capital goods.
Banks; financial institutions
Demand shocks and sticky prices
Because prices are inflexible the economy is forced to respond in the short run to demand shocks primarily through changes in output and employment rather than through changes in prices (slow to change, or sticky)
Flexible prices
Commodities and raw materials- corn, oil, natural gas React within seconds to changes in supply and demand
32. Decisions about savings and investment are:
Complicated by the fact that the future is uncertain
37. Which of the following is an example of a demand shock?
Consumers become worried about job loss and buy fewer goods and services than expected.
_____ are unexpected changes in the demand for goods and services; supply shocks are unexpected changes in the supply
Demand shocks
The calculation of gross private domestic investment includes 1 firms' spending for equipment and machinery 2 all construction 3 changes in inventories
Depreciation is subtracted from gross private domestic investment to calculate net private domestic investment.
What happens to firms during economic slowdowns?
During economic slowdowns, firms reduce investment in physical capital due to demand decreasing.
On Thursday January 19, 2017 which central bank had a meeting and left the refi rate at 0.0 percent?
ECB
What is economic investment?
Economic investment is purchase of goods that create future production of goods and services, such as new machinery and tools for production and the construction of new warehouses and factories.
25. Which of the following statements is true?
Economic investment refers to the creation and expansion of business enterprises
____ occur when events unfold in ways that people weren't expecting. Expectations force firms to cope with shocks if not prepared.
Economic shocks
3. Which of the following statements is most accurate about advanced economies?
Economies experience a positive growth trend over the long run, but experience significant variability in the short run
20. The Industrial Revolution began in:
England in the late 1700's
Which of the following situations would most likely result in a decrease in the PL and a decrease in RGDP?
a decrease in consumer confidence (AD decrease)
Which of the following would be included in the U.S. calculation of GDP?
a family buying dinner at a restaurant
Which one of the following would be included in the calculation of US GDP?
a family buying dinner at a restaurant
The purchase of corporate stock is considered:
a financial investment
Which of these is an example of investment, as economists define the term?
a firm purchases equipment to make production more efficient
The important of the multiplier effect is the understanding that a change in spending ultimately causes..
a larger change in GDP than the initial change in spending
In response to the Great Recession, the majority of economists argued that the solution was
a significant increase in government spending for goods and services
38. Shocks to the economy occur when: .
actual economic events do not match what people expected.
42. (Last Word) Computerized inventory tracking has been credited with reducing the number and severity of recessions because these tracking systems:
allow firms to react more quickly and subtly to negative demand shocks, and avoid the large output reductions that frequently result in higher unemployment.
Which of the following factors would cause demand-pull inflation?
an increase in the money supply
Which one of the following factors would cause demand-pull inflation?
an increase in the money supply
8. Inflation is defined as:
an increase in the overall level of prices.
Inflation
an increase in the overall price level
Unemployment measure the percentage of people in the labor force who--
are actively looking for jobs
When firms expect a lower return on their investment in physical capital, they...
are less likely to invest in new physical capital
Savings are transferred to businesses for investment through
banks and financial institutions
Savings are transferred to businesses for investment through...
banks and financial institutions
A person is defined as unemployed if he...
cannot find work despite actively looking for a job
Which sectors of the economy are most strongly impacted by business cycles?
capital goods and consumer durable goods
The largest sect of expenditure model of GDP is the
consumer sector
What is the largest sector in the expenditure model of GDP?
consumer sector. Consumers account for more than two-thirds of spending in the U.S. economy
Which of the following situations would be most likely to result in increased consumer spending?
consumers expect significant price increases in the near future
Full employment is achieved when the economy experiences no--
cyclical unemployment
An increase in productivity does what to PL and RGDP?
decreases PL and increases RGDP
The measure of consumer income after payment of personal taxes is called
disposable income
The measure of consumer income after payment of personal taxes is?
disposable income. Disposable income is all household income after personal taxes have been paid. National income is the total income of all resource suppliers plus taxes. Personal income is household income before personal taxes are paid. Gross domestic product is the total economic output. Net domestic product is GDP minus depreciation.
The shortcomings of GDP as a measure of all economic activity in a country include all of the following EXCEPT that it
does not count government spending for public goods
The shortcomings of GDP as a measure of all economic activity in a country include all of the following except...
does not count government spending for public goods
The shortcomings of gross domestic product as a measure of all economic activity in a country include all of the following EXCEPT that it
does not count government spending for public goods. Government spending for public goods is a part of the expenditure formula forGDP: C + Ig+ G + X (G is the government sector).
Suppose a factory minimizes its average costs by producing 50 metal bars per week. It can produce this output profitable at an expected price of $4 each, corresponding to expected demand D. Production will likely fall to 35 bars per week if:
prices are inflexible and demand unexpectedly falls
The economy tends to exhibit short-run output fluctuations and long run stability because:
prices are more flexible in the long run than the short run
All of the following products would be included in the calculation of U.S. GDP except...
printers produced by American-owned companies manufactured and sold in China
12. Suppose that an economy's output does not change from one year to the next, but the price level doubles. What happens to real GDP?
real GDP doesn't change
9. The three statistics that are the main focus for those measuring macroeconomic health are:
real GDP, inflation, and unemployment.
Why are transfer payments not included in the calculation of GDP?
recipients have not produced any output in return for the payment
Firms within an industry are more likely to increase investment when...
relevant cost-cutting technological progress occurs
If prices are inflexible, an unexpected reduction in demand for a firm's product would result in:
rising inventories followed by cuts in production
According to the consumption function, if income increases by $100...
saving increases by less than $100
Compared to the beginning of the Industrial Revolution, living standards around the world:
show considerably more variation between rich and poor countries
Why must GDP calculated using the expenditure approach equal GDP calculated using the income approach?
spending in the economy must equal the incomes earned in the economy
18. Suppose a family's income increases by 5% at the same time that inflation is 6%. Then
the family's standard of living will fall
The amount of investment in a nation's economy is limited by...
the level of saving
gross domestic product is...
the measure of the value of all final products produced in a country in one year.
GDP is the measure of
the value of all final products produced in a country in one year
Gross domestic product is a measure of?
the value of all final products produced in a country in one year
Net exports as a factor in US GDP have been negative since 1980 because:
the value of imports has exceeded the value of exports
Net exports as a factor in U.S. GDP have been negative since the 1980s because
the value of imports has exceeded the value of exports,Net exports (Xn) is the value of exports (X) minus the value of imports (M). Because U.S. imports have been greater than U.S. exports since the 1980s, the net exports (Xn) componentof the GDP calculation will be negative.
Why are intermediate goods not included in the calculation of GDP?
they would be double-counted when the finished product is counted
The GDP price defoliator (index) is calculated by dividing
this year's market basket price by the base year's market basket price. The nominal GDP can then be divided by the GDP price deflator to convert nominal GDP to real GDP.
Because the underground economy and non market transactions are not included in the official calculation of a nation's GDP, the official GDP...
underestimates actual production in the economy
Because the underground economy and nonmarket transactions are not included in the official calculation of a nation's GDP, the official GDP
underestimates actual production in the economy. Economic activity is occurring in underground and nonmarket sectors, but because it is not counted in the official GDP statistics, official GDP underestimates the true level of economic activity in a country.
Supply Shock
unexpected changes in the supply of the goods and services
4. Real GDP measures the:.
value of final goods and services produced within the borders of a country, corrected for price changes.
The gross national product, calculated from the income approach, includes
wages, rents, profits, and taxes, but not investments.
The largest sector of the income approach model of GDP is
wages. Wages constitute more than half of the U.S. gross domestic product.
11. Real gross domestic product
will increase if there is an increase in the level of output
AS increases as the result of an increase in...
worker productivity
What does inflation refer to?
Inflation refers to the increase in the total level of prices in/throughout the economy.
Some prices are ____ in order to please retail customers, others because rival firms are afraid that price changes may trigger a price war.
Inflexible
How will "sticky" prices effect unemployment?
Inflexible prices cause a change in output, causing the change in unemployment.
Sticky prices
Inflexible, slow to change in the short run Price changes do not quickly equalize the quantities demanded of such goods and services with their respective quantities supplied. The economy is forced to respond in the short run to demand shocks primarily through changes in output and employment rather than through changes in prices.
The automobile firm above is operating at an optimal output of 900 cars. This firm faces a market condition that promotes macroeconomic
Instability, because the firm's output adjusts rapidly to demand shocks, even though price remains stable
Why are intermediate goods not included in the calculation of GDP?
Intermediate goods are sold to other firms to be included in the final product of the other firm. Counting it once when sold to the other firm, and then counting it again in the final product, double-counts the product
What is investment?
Investment is the spending in order to cause future economic growth. Ex) Spending to expand a plant or buy new equipment
19. Rapid and sustained economic growth of nations:
Is a modern phenomenon
Why is economic growth an important goal for society?
It reduces the burden of scarcity among people
Which of these topics would be included in the study of macroeconomics
Long-run economic growth
Uncertainty, Expectations, and Shock
Macroeconomics has to take into account expectations about the future.
What is the study of Macroeconomics?
Macroeconomics is the study of the economy as a whole. Macroeconomics mainly focuses on long-run economic growth and short-run business cycles.
Which product is most likely to be characterized by sticky prices?
Magazines
as per capita real output increases
Modern economic growth occurs
When does modern economic growth occur?
Modern economic growth occurs when the real per capital output increases.
33. Increased optimism about the future will lead to:
More current investment and more future consumption
29. Which of the following best represents the effect of an increase in investment?
Moving from point b to point d
The GDP, adjusted for depreciation, is...
NDP
Recession
Negative growth in an economy when output and living standards decline
34. Sharply rising oil prices are most likely to lead to a:
Negative supply shock
10. Which of the following countries would economists say definitively is achieving modern economic growth?
Nigeria experiences a 2.7 percent increase in real GDP per person.
40. (Consider This) Which of the following is an example of economic investment?
Nike buys a new machine that increases shoe production.
How will nominal GDP be effected if there is no change to output and price levels increase?
Nominal GDP will increase if there is no change to output and price levels increase.
Saving
Occurs when current consumption is less than current output (or when current spending is less than current income)
22. Under modern economic growth, the annual average increase in output per person is
Often not large, perhaps 2% per year
Recession
Output and living standards actually decline
21. Suppose that real GDP increases by 5% while the population of a country increases by 7%. Then
Output per person necessarily decreases
Modern Economic Growth (Since Industrial Revolution)
Output per person rises -Output grows faster than population so living standards rise over time
Modern economic growth
Output per person rises (as compared with earlier times when output (not output per person) increased) Output grows faster than population so that living standards rise over time
A decrease in interest rates does what to PL and RGDP?
PL and RGDP increase
Increase in exports does what to PL and RGDP?
PL and RGDP increase
An increase in wages does what to PL and RGDP?
PL decreases and RGDP increases
35. An increase in worker productivity will lead to a:
Positive supply shock
How sticky are prices?
Prices are more sticky (inflexible) on the way down than on the way up. If the price is lowered less money will be made. Wages could freeze or go down if price goes down. -many commodity prices are very flexible and change constantly (oil and gas) but other prices in the economy change very infrequently (newspaper or haircuts) -Some prices are inflexible because rival firms are afraid that price changes may trigger a price war. - prices tend to become more flexible over time
All of the following products would be included in the calculation of the U.S. GDP EXCEPT German cars produced in Kentucky haircuts done by Italian-owned firms in the United States printers produced by American-owned companies manufactured and sold in Canada an American firm's purchase of capital equipment produced in Arizona United States government spending on construction of interstate highways
Products produced and sold in other countries are counted in that nation's GDP, not ours, even if it is an American company producing the product. Therefore, printers produced and sold in Canada do not count in the GDP of the United States, but are included in the GDP of Canada. References
Supposed a factory minimizes its average costs by producing 50 meta bars per week. It can produce this output profitably at an expected price of $4 each, corresponding to expected demand of D. With flexible prices, which of the following is the most likely initial consequence of change in demand?
Profits will rise if demand unexpectedly rises
13. Suppose a small economy produces only MP3 players. In year 1, 10,000 MP3 players are produced and sold at a price of $100 each. In year 2, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?
Real GDP increases while nominal GDP decreases
Real GDP
Real Gross Domestic Product Measure of the value of the final goods and services produced within a country's borders during a specific period of time, usually a year
31. Savings are transferred from savers to borrowers through the following intermediaries, except:
Real estate brokers
Why are transfer payments not included in the calculation of GDP?
Recipients have not produced any output in return for payment.
Who has Donald Trump selected for his Energy Secretary?
Rick Perry
An economy can only grow if it invests and it can only invest if it saves some of its current output. Thus, ___ is crucial to increasing investment and, consequently, future output.
Saving
How is investment related to savings?
Savings are used by borrowers to invest in plant and equipment. Investment can only occur when savings are available.
When do savings occur?
Savings occur when consumption (spending) is less than current income.
The majority of spending in the consumer sector is spent for
Services, such as haircuts. Service purchases comprise approximately 60% of personal consumption expenditures
Business Cycle
Short-run economic fluctuations
Economic Shock
Situations in which you are expecting one thing to happen but something else happens. Events unfold in ways in which people are not expecting
Why must GDP calculated using the expenditure approach equal GDP calculated using the income approach?
Spending in the economy must equal the incomes earned in the economy. Money spent by one market participant is income to another. So if the numbers are accurately compiled (there has not been double counting), GDP will be the same using either method of calculation.
The automobile firm above is operating at an optimal output of 900 cars. This firm faces a market condition that promotes macroeconomic
Stability, because the firm can adjust prices rapidly to demand shocks, allowing the firm's output to remain stable.
All of the following products would be included in the calculation of the US GDP EXCEPT
Starbuck's coffee produced and sold in Canada
Real-world prices are often inflexible or ____ in the short run, so the economy responds to demand shocks through changes in output and employment rather than changes in prices
Sticky
shocks
Sudden, unexpected changes in demand aggregate demand or supply aggregate supply
Graph: Boom
T up = AD down = Y down = PL down = unemployment up -LRAS moves to the left
What does GDP measure?
The GDP measures the value of all final products produced and sold in one year. This includes goods and services.
What is GDP per capita?
The GDP per capita is the total GDP divided due to the population of the country/state. Once adjusted for purchasing power, GDP per capita is helpful in comparing standards of living.
Why are saving and investment so important for economic growth?
The amount of investment ins ultimately limited by the amount of saving.
Economic investment
The creation and expansion of business enterprises Spending on production and accumulation of newly created capital goods such as machinery, tools, factories, and warehouses
What are the most important statistics in macroeconomics?
The most important statistics in macroeconomics are real GDP, inflation rate, and the rate of unemployment.
How do you pay for investment?
The only way to pay for investment is to save money. To save, you must reduce current consumption to improve future consumption.
How is the output effected when a demand shock occurs in a stable economy?
The output stays constant demand shock occurs.
Suppose that the consumer price index rise for 100 to 200. From this information we may conclude that--
The prices in an average consumer's market basket are doubled
Unemployment
The state a person is in if he or she cannot get a job despite being willing to work and actively seeking work. High rates of unemployment are undesirable because they indicate that a nation is not using a large part of the talents and skills of its people.
Macroeconomics
The study of long-run economic growth and short-run economic fluctuations with a focus on real GDP, unemployment, and inflation.
Nominal GDP
The total dollar value of all goods and services produced within the borders of a country using their current prices during the year that they were produced Inflation included!
Why are intermediate goods not included in the calculation of GDP?
The would be double-counter when the finished product is counted
6. Why are high rates of unemployment of concern to economists?
There is lost output that could have been produced if the unemployed had been working.
Banks and financial Institutions
These institutions collect the savings of the household rewarding in interest in dividends. The banks then lends the funds to businesses, which invest in capital goods.
Economic Growth
To raise living standards over time an economy must devote at least some part of its current output to increasing future output
Normal GDP
Totals the dollar value of all goods and services produced within the boarders of a country using their current prices during the year that they were produced
Why are transfer payments not included in the calculation of GDP?
Transfer payments are made to recipients who do not contribute to the current year's production. For that reason, transfer payments are not included in the calculation of the current year's GDP.
Demand Shocks
Unexpected changes in the demand for goods and services
Demand Shock
Unexpected changes in the demand for the good or the service
Supply Shocks
Unexpected changes in the supply of goods and services
Financial Investment
What ordinary people mean by investment- purchases of stocks, bonds, and real estate in hopes of reaping a financial gain, either by selling at a higher price than original or by receiving a stream of payments from others who are allowed to use the asset
How is the output effected when a demand shock occurs in an instable economy?
When a demand shock occurs, optimal output will decrease.
Unemployment
When a person cannot get a job despite being willing to work and actively seek work -desirable to have unemployment low but not at zero - as unemployment goes down inflation goes up -as inflation goes down unemployment goes up
What kind of shock does crop failure cause?
When crops fail, the supply of crops decreases, causing a negative supply shock.
How does real GDP give a better representation of economic growth than nominal GDP?
When finding the real GDP, the inflation and distortion that may have occurred throughout the measuring period.
Investment
When resources are devoted to increasing future output- for instance by building a new research facility in which scientists invent the next generation of fuel-efficient automobiles or by constructing a modern, super-efficient factory
24. In 2009, output per person in the U.S was about
$46,000 per year
If prices are inflexible and demand declines for any length of time, the most likely impact on inventories, production, unemployment, and GDP would be...
-inventories = increase -production = decrease -unemployment = increase -GDP - decrease
A substantial increase in the cost of energy will most likely result in the following changes to per-unit production costs, SRAS, PL, and RGDP...
-per-unit production costs: increase -SRAS: decrease -PL: increase -RGDP: decrease
Consumer spending as a component of AD decreases when...
-personal taxes increase -consumer borrowing decreases
1. The two topics of primary concern in macroeconomics are:
. short-run fluctuations in output and employment, and long-run economic growth.
Macroeconomics is primarily concerned with two topics
1. Long run economic growth 2. Short run fluctuations in output and employment -also referred to as business cycle
16. Inflation is troublesome to consumers because of the following effects, except:
Workers' wages may be rising faster than the overall prices
When is a person considered unemployed?
You are considered unemployed when a person is willing and able to work, but cannot find a job.
All of the following products would be included in the calculation of U.S. GDP...
-German cars produced in Kentucky -haircuts done by Italian-owned firms in the U.S. -an American's firm purchase of capital equipment produced in Arizona -U.S. govt spending on construction of interstate highways
How will an increase in interest rates affect PL, real output, and unemployment in the short run?
-PL: decrease -output: decrease -unemployment: increase
Graph: Full employment self-correcting economy
-T down = C up = AD up = PL up = Y up = unemployment down -wages up = SRAS down = PL up = Y down = unemployment up
Last word: What caused the great recession?
1. Minksy explanation ( Euphoric Bubbles) -Easily obtained mortgage loans drove a massive bubble in housing plans 2. Austrian Explanation (excessively low interest rates) -Puts the blame on government actions that say they kept interest rates too low
The AD curve slopes downwards because...
-as the PL falls, the real value of personal assets increases, leading personal consumption spending to increase -as the PL falls, interest rate decreases, causing investment and interest-sensitive spending to increase -as the PL falls, exports increase and imports decrease, resulting in a positive change
Consumer spending as a component of AD increases when...
-consumer wealth increases -consumer expectations about the economy are optimistic
Macroeconomics tends to focus on just a few statistics when trying to asses the health and development of an economy
1. Real GDP (gross domestic product)- Measures value of final goods and services produced within the boarders of a country during a specified period of time, typically a year
Savings vs. Investments
1. Savings- Occurs when current consumption is less than current output ( or when current spending is less than current income) 2. Investment- Happens when resources are devoted to increasing future output Saving is crucial to increasing investment and consequently future output.
Economic Growth Problems
1. Technology 2. Skill levels 3. Uneven (does not occur at the same rate everywhere. This will make some places richer and others more poor)
If SRAS increases, which of the following is the likely effect on output and PL?
output increases and PL decreases
Economic investment includes
II. Purchases of new machinery and tools for production IV. Construction of new warehouses and factories to assist production
If all prices could quickly adjust to unexpected changes in demand:
output would remain constant and resources remain fully employed
If prices are inflexible and demand declines for any length of time, the most likely impact on inventories, production, unemployment, and GDP would be.
INVENTORIES: increase PRODUCTION: decreases UNEMPLOYMENT: increases GDP: decreases
Which of the following people is least likely to be hurt by unanticipated inflation?
people who have borrowed money at a fixed rate to buy cars
Which one of the following people is least likely to be hurt by unanticipated inflation?
people who have borrowed money to buy cars
Modern economic growth occurs when
per capita real output increases
recession.
period of reduced economic activity
Living standards in ancient Rome remained relatively constant for 1000 years because
population increased at approximately the same rate as output, leaving output per person unchanged
In order to compare production from year to year, RGDP is calculated to remove the distortion of...
price level changes
If prices are inflexible and demand declines for any length of time, what is the impact on inventories, production, unemployment, and gross domestic production?
If prices are inflexible and demand declines, inventories will increase, production will decrease, unemployment will increase, and GDP will decrease.
In order to promote economic growth, what must a nation invest in?
In order to promote economic growth, a nation must invest in gold, education, training, healthcare, and capital.
The shortcomings of GDP as a measure of all economic activity in a country include all of the following...
-does not include home production such as repairing one's own car -cannot measure improvements in quality of products -does not taking into consideration negative externalities -does not take into account increased leisure time or quality of life
An increase in each of the following would result in an increase in AD...
-exports -govt spending -firms expected return on investment -incomes in countries buying U.S. exports
Which of the following is not included in the U.S. calculation of GDP?
-girl mowing her family's yard -student buying a used car -neighbor paying a babysitter with homemade cookies -senior citizen receiving a Social Security check
If household disposable income remains constant, which of the following changes would most effectively increase the level of household saving and reduce the level of household consumption?
-household wealth = decreases -household borrowing = decreases -household expectations = pessimistic -real interest rate = increases
Gross private domestic investment for the current year includes
-all final purchases of machinery, equipment, and tools used to produce final goods and services -all changes in business inventories - all purchases of personal and business real estate Gross private domestic investment includes all final purchases of machinery, equipment, and tools used to produce final goods and services, all construction, and all changes in inventories.
Because nominal GDP uses the prices of goods and services in the year they were produced, in the next year nominal GDP will
Increase if the price level increases while there is no change in real output
Inflation
Increase in the overall level of prices -often times inflation impacts the standard of living
15. High rates of unemployment:
Indicate that society is not using a large portion of the talent and skills of its people
Before the ____, living standards did not show any sustained increases over time because any increase in output tended to be offset by an equally large increase in population
Industrial Revolution
What are financial institutions?
Financial institutions are a link to link savings to borrowers who buy land, plants or machinery to promote long run economic growth.
39. (Consider This) What is the difference between financial investment and economic investment?
Financial investment refers to the purchase of assets for financial gain; economic investment refers to the purchase of newly created capital goods.
Why are firms reluctant to change prices in the short run?
Firms are reluctant to change prices in the short run because consumers prefer stable prices, competition, planning becomes difficult, and customers who bought the items at high prices will feel taken advantage of.
Many commodity prices are extremely ____ and change constantly, but other prices in the economy change only very infrequently.
Flexible
Prices tend to become more ____ over time, so that as time passes, the economy can react to demand shocks with price changes as well as with output and employment changes
Flexible
Graph: Recession
G up = AD up = Y up = PL up = unemployment down -LRAS moves to the right
A measure of the average standard of living that can be used to compare countries is...
GDP per capita
30. Which of the following is the principal source of savings in an economy?
Households
A recession id generally characterized by- I. a decrease in real GDP II. a decrease in employment III. an increase in price level
I and II only
The calculation of gross private domestic investment includes I. firm's spending for equipment and machinery II. all construction III. depreciation IV. changes in inventories
I, II, and IV
Which factors best explain why prices tend to remain inflexible in the short run?
I. Consumers prefer stable, predictable prices. II. Many firms face market competition, and rivals will simply match price cuts. III. When prices are volatile, planning by firms and their customers becomes difficult IV. When prices are volatile, consumers who bought at high prices will feel exploited
The above diagram is for a specific economy. The shape of this curve suggest that:
each successive unit of decline in the unemployment rate is accompanied by a larger increase in the rate of inflation
Because most product prices tend to be "sticky," demand shocks tend to cause changes in...
employment
Firms will invest in capital as long as the real interest rate isles than or equal to the...
firm's expected real rate of return on the investment
A college graduate searching for her first job is experiencing-
frictional unemployment
In order to promote economic growth, a nation must invest in...
gold
7. Higher rates of unemployment are linked with:
higher crime rates as the unemployed seek to replace lost income.
How will an increase in govt spending effect PL, output, and employment in the short run?
increase all
As a result of the wealth effect, a sudden increase in the value of stock will cause households that hold a significant amount of stock assets to...
increase consumption and reduce saving
Because nominal GDP uses the prices of goods and services in the year they were produced, in the next year nominal GDP will...
increase if the price level increases while there is no change in real output
5. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last year's pizzas), but sold them for $12 each. Based on this information we can conclude that Harry's production of large
increased nominal GDP by $20,000, but left real GDP unchanged.
In order to compare production from year to year, real GDP is calculated to remove the distortion of
inflation
In order to compare production from year to year, real GDP is calculated to remove the distortion of...
inflation
Real GDP rather than nominal GDP is used to compare changes in national output of time, because real GDP removes the effects of...
inflation
Real GDP, rather than nominal GDP, is used to compare changes in national output over time, because real GDP removes the effects of
inflation. Because nominal GDP is calculated using the current value of money, nominal GDP would increase when prices rise, even if the same quantity of products is produced.Real GDP removes that distortion.
The SRAS curve is upward-sloping and assumes...
input prices are relatively inflexible and output prices are relatively flexible
An increase in each of the following would result in an increase in AD except...
interest rates
Unemployment
is the state a person is in if he or she cannot get a job despite being willing to work and actively seeking work.
Savings occur when current consumption is...
less than current income
Which of these topics would be included in the study of macroeconomics?
long-run economic growth
14. Economists and policy makers are committed to encouraging a large and growing real GDP because
more output means greater consumption opportunities
An unexpected drop in consumer spending would be classified as a:
negative demand shock
A significant crop failure would create a
negative supply shock
The gross domestic product, adjusted for depreciation, is
net domestic product. The net domestic product subtracts the depreciation of capital equipment from GDP, to calculate how much of annual production can be consumed without hurting the economy's ability to produce in the future.
What type of GDP will change more as a result of the fiscal policy that the government implements in a recession?
nominal GDP
41. (Consider This) Suppose that Toyota buys a factory previous owned by Chrysler Motors. Economists would:
not consider this to be an economic investment because no new capital is created through the purchase.
2. The term "recession" describes a situation where:
output and living standards decline.
