Econ 201: Exam 2

Two methods of measuring GDP are

the income approach and the expenditure approach

GDP is

the market value of final goods and services produced within a country in a given time period

Real GDP decreases during

the movement from peak to trough

Potential GDP is

the value of production when all the nation's resources are fully employed, the maximum amount of GDP that can be produced ceteris paribus assuming all resources are fully and effectively employed in the economy

Real Gross Domestic Product is

the value of total production linked back to the prices of a single year.

Intermediate goods are excluded from GDP because

their inclusion would involve double counting.

The employment-to-population ratio is defined as

total employment divided by the working-age population then multiplied by 100.

In the computation of GDP, Social Security payments count as

transfer payments and are not included in GDP

The Consumer Price Index is a measure of the average of the prices paid by ________ for a fixed basket of consumer goods and services.

urban consumers

Labor Force Participation Rate

(labor force/working-age population) * 100

Unemployment rate

(unemployed/labor force)*100

In a country with a working-age population of 130 million, 90 million workers are employed and 10 million workers are unemployed. What is the unemployment rate?

10%

Suppose the CPI last year is 121 and the CPI this year is 137. The correct method to calculate the inflation rate is

13.2%

Suppose there are currently 100 people unemployed, 1500 people employed, and 2000 people in the working age population. The labor force participation rate equals 100 times

1600/2000

If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals

225

If the number of people unemployed is 100, the number of people employed is 1000, and the working-age population is 1400, then the unemployment rate is

9.1%

GDP=

C+I+G+X-M

Which type of price index theory averages the base year and current year's quantities?

Fisher's Mean

Which type of price index theory uses base year's quantities?

Laspeyres

Which type of price index theory uses current year's quantities?

Paasche

Suppose the Consumer Price Index is 143.6. What does that number mean?

Prices rose 43.6 percent over the reference base period, on average.

Net Domestic Income at factor prices

W+I+P+R

Cyclical unemployment occurs when

a business cycle recession decreases employment.

Deflation represents

a reduction in the aggregate price level

Discouraged workers ________ counted as officially unemployed because they _______

are not; are not actively seeking work

The use of purchasing power parity prices

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

If Nike, an American corporation, produces sneakers in Thailand this would

add to Thailand's GDP but not to U.S. GDP.

The consumer price index (CPI)

compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.

The largest component of national income is

compensation of employees

Personal consumption expenditures includes

consumer durable goods, consumer nondurable goods, consumer services

Goods that are produced this year, stored in inventories, and then sold to consumers next year

count in this year's GDP

Unemployment caused by the fluctuation of the business cycle is called ________ unemployment.

cyclical

Depreciation is defined as the

decrease in the stock of capital due to wear and tear.

The difference between gross investment and net investment is

depreciation

Economists distinguish real GDP from nominal GDP to

determine whether real production has changed.

Income taxes are

direct taxes

Real GDP can be criticized as a measure of economic welfare because it

does not take account of the degradation of environmental quality, does not include the value of products produced in the household, does not include leisure time available to a society

The business cycle refers to

fluctuations in the level of real GDP around potential GDP.

When a student finishes college and begins looking for work

frictional unemployment increases.

The three types of unemployment are

frictional, structural, cyclical

Because of a bank merger, Ms. Davis lost her position as Vice President and had to seek work with other banks. Ms. Davis has the skills necessary to find a new job, thus she is best considered as

frictionally unemployed

Net investment equals

gross investment minus depreciation

What is a part of the expenditure approach to measuring GDP?

gross private domestic investment, personal consumption expenditures, net exports of goods and services

During a recession, what happens to marginally-attached workers?

increase

Cigarette sales, taxes on utility bills are

indirect taxes

As currently calculated, the CPI tends to overstate the true inflation rate because

it fails to correctly measure quality changes for some products

When using the income approach to measure GDP, the largest share of GDP generally consists of

labor income

What causes reported GDP to increase when, in fact, total production is unchanged?

legalization of previously illegal activities, a shift from household production to market production

GDP-depreciation=

net domestic product

The biases in the CPI include the

new goods, quality change, and substitution biases

Frictional unemployment comes about because of

normal labor market turnover.

Marginally attached workers fall into which of the population categories?

not in the labor force

Full employment occurs

only if the unemployment rate is equal to the natural rate of unemployment.

The unemployment rate measures the percentage of

people in the labor force who can't find a job

The productivity growth slowdown refers to the

period during the 1970s and for some years afterwards.

The largest component of GDP in the expenditures approach is

personal consumption expenditures

In the expenditure approach to GDP, the largest component is

personal consumption expenditures.

The currently used method for calculating the CPI

probably overstates inflation by about 1 percentage point.

The base-year method of calculating real GDP compared

quantities produced in different years using prices from a year chosen as a reference period.

Ms. Krupsky has shorthand and typing skills and still finds herself unemployed. In today's economy, Ms. Krupsky is an example of what type of unemployment?

structural unemployment

When the automobile replaced horse-drawn carriages as the principal means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing

structural unemployment

Substitution bias in the CPI refers to the fact that the CPI

takes no account of the substitution of goods by consumers when relative prices change.

Structural unemployment is the result of

technological change, absolute job skills, or foreign competition.

Pollution is a by-product of some production processes, so on this count real GDP as measured

tends to overstate economic welfare.

Looking at inflation rates in the United States since the 1970s we see that

the 1970s experienced the highest inflation rates