Econ 102 Final

Inflation rate equation

(CPI this year - CPI last year)/CPI last year * 100 (Price of year 2 - Price of year 1)/Price of year 1 * 100

The labor force participation rate is calculated as

(Labor force/working age population)*100

What is the employment to population ratio?

(Number employed/working age population) * 100

Unemployment rate equation

(Number unemployed/labor force)* 100

What determines potential GDP

- Aggregate production function - Aggregate labor market

What makes potential GDP grow

- Growth of the supply of labor - Growth of labor productivity

Inflation is a problem when

- It causes resources to be diverted from productive uses - It causes the value of money to vary unpredictably - It is unpredictable

Currency outside of banks increases from $100 million to $200 million. This change is considered

A currency drain

Common definition of a recession is a time with

A decrease in real GDP for two or more successive quarters

What does not shift the long-run aggregate supply curve

A fall in the price level

Discouraged worker

A person who is not working and has stopped looking for a job because of repeated failure

The best definition for economic growth is

A sustained expansion of production possibilities measured as the increase in real GDP over a given period

____ increases households saving

A tax cut that increases disposable income

Cyclical unemployment example

A worker who is laid off because of economic reasons

The use of purchasing power parity prices

Accounts for differences in the prices of same goods in different countries when measuring real GDP

GDP equals

Aggregate expenditure and equals aggregate income

In the circular flow of economic activity

Aggregate expenditure measures the dollar value of purchases of final goods and services

Working age population

Anyone over 16 years old and are not in jail or the hospital

Natural unemployment

Arises from fractional and structural change when there is no cyclical unemployment

Frictional inemployment

Arises from the normal turnover on jobs

Structural unemployment

Arises when changes in technology or international competition change the skills needed

In the short run, when the fed decreases the quantity of money

Bond prices fall and the interest rate rises

In the short run, when the fed increases the quantity of money

Bond prices rise and the interest rate falls

When the fed wants to undertake open market operations kt

Buys or sells securities

How does a country maintain a fixed exchange rate

By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate

What is part of a commercial banks reserve

Cash in the bank vaults

Economic growth is measured by

Changes in real GDP

Which theory of economic growth concludes that in the long run real GDP per person will be at its subsistence level

Classical theory

Commodity substitution bias

Consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price fell

GDP equation

Consumption+Investment+Government Purchases+Exports-Imports

The unemployment rate is at the natural unemployment rate when

Cyclical unemployment equals zero

If the economy enters a recession

Cyclical unemployment increases

If the desired reserve ratio rises, the money multiplier

Decreases

A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from

Decreases in the expected profit

If the world real interest rate falls, then a country that is a net foreign lender

Decreases the amount of its lending

A decrease in the government budget deficit decreases the ____ loanable funds and an increase in the government budget surplus increases the ____ loanable funds.

Demand for; supply of

If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, then the dollar has ___ and the yen has ___.

Depreciated; appreciated

The demand for labor curve is

Downward sloping because productivity diminishes as more workers are employed

Size of labor force equation

Employed + unemployed

A country will achieve faster growth by

Encouraging free trade

The Rule of 70 is used to

Estimate how long it will take the level of any variable to double

In the foreign exchange market, a change in what results in a movement along the demand curve

Exchange rate

The law of demand in the foreign exchange market refers to the relationship between the

Exchange rate and the quantity of U.S. dollars demanded

If the inflation rate is negative, the price level in an economy is

Falling

If the fed sells U.S. dollars the exchange rate

Falls

Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the equilibrium real interest rate ___ and the quantity of loanable funds ____.

Falls; decreases

GDP is defined as the market value of all

Final goods and services produced in a country in a given time period

Cyclical unemployment

Fluctuates over the business cycle

According to the neoclassical growth theory,

Forces other than GDP growth determine population growth

Unemployment caused by people voluntarily leaving their jobs is classified as

Frictional

Unemployment caused by the normal labor turnover is called

Frictional

In the global funds market

Funds flow into countries with the highest risk adjusted interest rates and out of countries with the lowest risk adjusted interest rates.

GDP per person is found by

GDP/Population

The crowding out effect refers to

Government spending crowding out private investment

Net investment equals

Gross investment minus depreciation

Net investment is

Gross investment minus depreciation

If labor and capital grow more quickly, then real GDP will

Grow more quickly

When the government has a budget surplus, the surplus

Helps finance investment

A workers stock of knowledge is known as

Human capital

The biases in the CPI are

Important since they effect nearly 1/3 of federal government spending

If the fed wants to depreciate the dollar against the yen, the fed will

Increase the supply of dollars by buying yen.

If the price level rises relative to the money wage rate, firms ____ the quantity of labor they demand and workers ____ the quantity of labor they supply.

Increase; decrease

What does NOT increase labor productivity

Increases in aggregate hours

A higher savings rate that leads to an increase in capital stock leads to

Increases in labor productivity

Technological change

Increases potential GDP and generates economic growth

If the U.S. interest rate rises while interest rates in the rest of the world do not change, then the high U.S. interest rate

Increases the demand for dollars

During a economic expansion, real GDP ____ and unemployment ____.

Increases; decreases

The presence of ____ creates a difference in the value between the market price and the factor cost of a product

Indirect taxes and subsidies

The quantity theory of money states that

Inflation increases when the money growth rate increases

On the job training is an example of

Investment in human capital

The natural unemployment rate

Is the unemployment rate that occurs when the economy is at full employment

Savings is an important factor influencing economic growth because

It can influence new investment and capital formation

What is an example of using money as a store value

Keeping $200 on hand for an emergency

New growth theory assumes that

Knowledge does not experience diminishing returns

The ____ equals the number of ___.

Labor force; unemployed and employed persons

If the quantity of capital per worker increases

Labor productivity increases

The more education workers have, the ____ is their human capital and the ____ their productivity.

Larger; higher

According to the Ricardo-Barro effect, government deficits

Lead to simultaneous increases in private saving and no effect the equilibrium real interest rate and investment.

What is the riskiest assets held by commercial banks

Loans

When you buy a hamburger for lunch you are using money as a

Medium of exchange

The real wage rate equals

Money wage rate/price level

As labor increases, there is a

Movement along the aggregate production function and real GDP will increase less with each additional increase in labor

An increase in the opportunity cost of holding money creates a ____ the money demand curve and an increase in real GDP creates a ____ the money demand curve.

Movement up along; rightward shift of

Investment is financed by

National saving and borrowing from the rest of the world

The capital stock increases whenever

Net investment is positive

Gross Investment Equals

Net investment plus depreciation

Frictional unemployment comes about because of

Normal labor market turnover

The working age population can be divided into two groups

People in the labor force and people who are not in the labor force

The unemployment rate is the ___ who are unemployed

Percentage of people in the labor force

The largest component of GDP is

Personal consumption expenditures

Factors that influence labor productivity include

Physical capital, human capital, and technology

If both the supply of labor and the demand for labor increase, then

Potential GDP increases

To prevent frictional unemployment, we would have to

Prevent people from leaving their jobs

The short-run aggregate supply curve is upward sloping because in the short run the

Price level changes but the money wage rate does not

National saving is defined as the amount of

Private saving and government saving

What is included in the supply of loanable funds

Private saving, government budget surplus and international borrowing

Neoclassical growth theory

Proposition that real GDP per person grows because of technological change

The real wage rate measures the

Quantity of goods and services that an hour of work will buy

If the fed buys $100 in securities from a commercial bank the

Quantity of reserves will increase

The quantity of money people want to hold increases if

Real GDP increases

New growth theory

Real GDP per person grows because of the choices people make

Which of the following is used to calculate the standard of living

Real GDP/Population

The demand for loanable funds is the relationship between loanable funds and the ____ other things remaining the same.

Real interest rate

Nominal interest rate equals

Real interest rate + the inflation rate

When the inflation rate is zero

Real interest rate equals the nominal interest rate

The major role of a commercial bank is to

Receive deposits and make loans

Four parts of the business cycle occur in what order

Recession, trough, expansion, peak

Federal reserve policy tools include what

Required reserve ratio, last resort loans and open market operations

Along the aggregate production function, as the quantity of labor rises, real GDP

Rises

An indirect tax is exemplified by

Sales tax

What is the equation for private sector balance

Savings - Investment

An increase in real GDP

Shifts the demand for money curve rightward

The short-run aggregate supply curve

Shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant

Human capital is

Skill and knowledge accumulated by humans

When calculating the consumption of the employees part of GDP

Social security contributions must be included

The best example of a cyclically unemployed individual is

Someone loses their job in real estate when the housing market went soft because of a recession

In the neoclassical theory of growth, growth in ____ is the result of luck

Technology

Circular flow of income shows

That governments purchase goods and services

A fall in the money wage rate shifts

The SAS curve rightward but leaves the LAS curve unchanged

The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if

The U.S. interest rate differential decreases

The term business cycle most clearly refers to

The alternating periods of expansions and recessions

The velocity of circulation is

The average number of times per year a dollar is spent on goods and services in GDP.

For a commercial bank, the term reserves refers to

The cash in its vaults and its deposits at the federal reserve.

Because of the choices people make in the pursuit of profit, new growth theory argues that

The economy can enjoy persisting economic growth

If prices in the U.S. rise faster than those in other countries

The exchange rate falls

Output gap

The gap between real GDP and potential GDP

Regarding the circular flow diagram

The government, households and firms all have transactions in the goods market

The smaller the currency drain

The larger the increase in the quantity of money from an increase in reserves

Potential GDP is

The maximum amount of production that can be produced while avoiding shortages of labor, capital, land and entrepreneurship that would bring rising inflation

Assume the inflation rate falls from 4 percent to 2 percent. This means that

The price level is increasing more slowly

The quantity of loanable funds demanded increases so there is a movement downward along the demand for loanable funds curve when

The real interest rate falls

A decrease in the quantity of reserves supplied to commercial banks could be the result of

The sale of government securities by the federal reserve

What is not important in the growth of labor productivity

The speed in which prices fall

An economy is at full employment when

The unemployment rate equals the natural unemployment rate

Real GDP is

The value of total production of all the nation's farms, factories, shops and offices measured in the prices of a single year

Classical growth

The view that the growth of GDP per person is temporary

Intermediate goods are excluded from GDP because

Their inclusion would involve double counting

If the real interest rate increases from 3% to 5%

There will be a movement up along the demand for loanable funds curve

Lower GDP growth rate percentage shifts the PPF

To the right

Real gross domestic product is the value of ____ linked back to the prices of a single year

Total production

What is an example of something that creates a demand for U.S. dollars

Toyota, a Japanese firm, buying land in Texas.

What is not part of the monetary base

U.S. government securities owned by the fed

Frictional unemployment is

Unemployment associated with the changing of jobs in a changing economy

Full employment

Unemployment rate equals the natural unemployment rate

A major characteristic of structural unemployment that differentiates it from frictional unemployment is that structural unemployment

Usually lasts longer than frictional

Marginally attached workers

Want to work but are no longer looking for a job