Econ Text Number 2

national income

Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms

GDP equation

Y = C + I + G + NX

inflation

a general increase in the price of goods and services

Nominal Gross Domestic Product

a measure of GDP in which the quantities produced are valued at current-year prices

net exports

difference between exports and imports NX=X-M positive= exports greater than imports negative= imports greater than exports

what does it mean when the graph is at a 45 degree angle

disposable income and savings will be zero

Real GDP

metric used to keep prices constant and compare production across time -inflation adjusted

recently, the level of GDP has declined by $60 billion in an economy where the marginal propensity to consume is .75. Aggregate expenditures must have fallen by

$15 million

growth rate formula

(GDP2-GDP1)/GDP1 x 100

Expenditures

- if they rise= factories hire MORE workers to produce more outputs - if they fall= factories idle/ reduce workers and produce less output -Solution to the Great Depression: INCREASE in these

investment demand curve

-interest rate DOES NOT shift the investment -as interest rate goes up, investment levels drop -you invest more with lower interest rate -high interest rates makes new capital more expensive (capital is closely linked with growth)

Tax Multiplier

-tells us how much output will eventually change for any initial changes in taxes -directly related to the MPC, because as income decreases some consumption and savings will be lost -illistrates the impact a change has on real GDP Multipler T= -MPC/1-MPC ∆Y= Multiplier t x ∆Tax

Growth occurs when

-we obtain additional resources: Land, Labor, Capital, entrepreneurial activity -invent new technology -existing resources become more productive

The following are national income account data for a hypothetical economy in billions of dollars: gross domestic investment ($320), imports ($35), exports ($22), personal consumption expenditures ($2460), and government purchases ($470). What is GDP in this economy

3,237 billion

Free trade: A. discourages growth by increasing competitive pressures on domestic firms. B. encourages growth by effectively eliminating all patent and copyright barriers to growth. C. discourages growth compared to situations where the government strongly controls foreign trade. D. encourages growth by promoting the rapid spread of new inventions and innovations.

B. encourages growth by effectively eliminating all patent and copyright barriers to growth.

John Maynard Keynes

British economist who is largely heralded as the father of modern macroeconomics

Inventory Investment

Changes in inventories from one year to the next. -Positive if firms produce more than they sell -Negative if firms sell more than they produce

final goods and services

Goods and services that are sold to the end user and are not used to produce another product for subsequent goods

net investment equation

Gross Investment - Depreciation

GDP price index formula

Nominal GDP/Real GDP x 100

multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP multipler e = 1/(1-MPC) ∆y=Multipler e x ∆Expenditures

inflationary gap

The difference, or gap, between expenditure when real GDP is above the full-employment level and the level of expenditure at full-employment real GDP -often occurs when unemployment rate falls below the NRU -if aggregate expenditures expand beyond the level necessary to produce at the NRU, this occurs -when the unemployment rate is less than the natural unemployment rate

gross investment

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a fixed time period -business fixed investment -residential investment -inventory investment

Marginal Propensity to Consume (MPC)

The fraction of each additional dollar of income that is spent on consumption ∆consumption/∆Income

Rule of 72

a rule of thumb used to estimate, given a constant rate of growth, how long it will take for a value to double in size -to sustain growth you have to invest in capital (both human and fiscal)

If disposable income increases from $912 to $927 billion and MPC= 0.6 then consumption will increase by

a. 9 billion

Suppose there are two economies, Alpha and Beta, that have the same production possibilites curves. If beta devotes more resources to produce capital goods than consumer goods as compared to Alpha, then in the future a. Beta will experience greater economic growth than Alpha b. Alpha will not be able to achieve full employment or production efficiency c. Beta will not be able to achieve full employment or production efficiency d. Alpha will experience greater economic growth than Beta

a. Beta will experience greater economic growth than Alpha

Which of the following is not a supply factor in economic growth a. aggregate expenditures of households, businesses, and government b. the stock of capital c. technological advance d. the size and quality of the labor force

a. aggregate expenditures of households, businesses, and government

Adding the market value of all final and intermediate goods and services in an economy in a given year would result in: a. an amount greater than GDP for that year b. an amount less than GDP for that year c. the calculation for NDP for that year d. the calculation of GDP for that year

a. an amount greater than GDP for that year

Real GDP per capita

a. cannot grow more slowly than real GDP b. necessarily grows more rapidly than real GDP c. cannot grow more rapidly than real GDP d. can grow either more slowly or more rapidly than real GDP

Real GDP per capita is found by a. dividing real GDP by population b. subtracting population from real GDP c. dividing population by real GDP d. adding real GDP and population

a. dividing real GDP by population

Which of the following best measures improvements in the standard of living of a nation a. growth of real GDP per capita b. growth of nominal GDP c. growth of real GDP d. growth of national income

a. growth of real GDP per capita

The investment demand curve is drawn with the amount of investment on the a. horizontal axis and the expected rate of return and investment drawn on the vertical axis b. vertical axis and the expected rate of return and interest on the horizontal axis c. horizontal axis and disposable income on the vertical axis d. vertical axis and disposable income on the horizontal axis

a. horizontal axis and the expected rate of return and investment drawn on the vertical axis

The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because: a. households may not spend all of an increase in disposable income b. tax declines tend to be more expansionary c. the MPC that applies to the incomes of households always exceeds the MPC that applies to business incomes d. the multiplier is high when the MPS is low

a. households may not spend all of an increase in disposable income

when GDP investment exceeds deprecation, it can be concluded that a. net investment is positive b. the economy is importing more than it exports c. the economy is exporting more than it imports d. net investment is negative

a. net investment is positive

One basic assumption of the aggregate expenditures model is that a. the average price level in the economy is fixed b. the economy is operating at full employment c. there in inflation in the economy d. there is no public sector in the economy

a. the average price level in the economy is fixed

The most basic premise of the aggregate expenditures model is that: a. total output produced in the economy depends directly on the level of total spending b. unemployment level in the economy is inversely related to the inflation rate c. total output produced depends mostly on the total capacity of firms to produce d. level of employment in the economy depends inversely on the real wage rate

a. total output produced in the economy depends directly on the level of total spending

Which of the following institutional arrangements in most likely to promote growth a. unrestricted trade between nations b. strong government control over resource allocations decisions c. patents and copyrights that expire quickly and are loosely enforced d. all of these

a. unrestricted trade between nations

Consumption

all expenditures made by households on goods and services like clothing, food, electronics, and recreation during a fixed period of time -consumer durables -consumer nondurables -services

expected rate of return

an anticipated increase in profit resulting from additional investment; expressed as a percentage of the monetary cost of the additional investment

Income Approach

an approach to measuring GDP that adds up all income earned by the factors of production in the course of producing total output within a year; includes wages, rent, interest and profits

Economic Growth

an increase in REAL GDP or REAL GDP per capita -is important because it lessens the burden of scarcity

government purchases

any level of government that buys something

Real GDP refers to: a. GDP data that do not reflect changes in both physical output and the price level b. GDP data that have been adjusted for changes in the price level c. GDP data that embody changes in the price level but not changes in physical output d. the value of the domestic output after adjustments have been made for environmental pollution and changes in the distribution of income

b. GDP data that have been adjusted for changes in the price level

John Maynard Keynes developed the aggregate expenditures model in order to understand the a. oil crises of the 1970's and the 1980's b. Great Depression c. Great Recession of 2007-2009 d. Second World War

b. Great Depression

In the treatment of US exports and imports, national income accountants a. subtract both exports and imports in calculating GDP b. add exports but subtract imports in calculating GDP c. add both exports and imports in calculating GDP d. subtract exports but add imports in calculating GDP

b. add exports but subtract imports in calculating GDP

When planned investment exceeds savings in a private closed economy a. consumption plus investment will equal GDP b. aggregate expenditures will exceed GDP c. aggregate expenditures will be less than GDP d. aggregate expenditures will equal GDP

b. aggregate expenditures will exceed GDP

If Matt's disposable income increases from $4,000 to $4,500 and his level of saving increases from $200 to $325, it may be concluded that his marginal propensity to: a. save is .30 b. consume is .75 c. consume is .80 d. consume is .60

b. consume is .75

If Matt's disposable income increases from $4,000 to $5,000 and his level of saving increases from $200 to $400, it may be concluded that his marginal propensity to: a. save is .30 b. consume is .80 c. consume is .60 d. consume is .75

b. consume is .80

Personal savings is equal to a. consumption minus disposable income b. disposable income minus consumption c. disposable income plus consumption d. consumption divided by disposable income

b. disposable income minus consumption

In an open mixed economy, the inflationary expenditure gap may be described as the: a. excess of Sa +M+T over Ig+X+G at the full employment GDP b. excess of Ca+Ig+Xn+G at the full employment GDP c. excess GDP over Ca+Ig+Xn+G at the full employment output d. extra consumption that occurs when investment increases in a full employment economy

b. excess of Ca+Ig+Xn+G at the full employment GDP

Which of the following does not correctly characterized modern economic growth a. it has occurred only in the last 200 or so years b. it has not affected the average lifespan of human beings c. it has spread slowly across the globe, with some societies not having experienced it yet d. it drastically alters the culture and politics of society

b. it has not affected the average lifespan of human beings

A change in the amount saved due to a change in income is represented by a: a. change in the marginal propensity to consume b. movement along the saving schedule c. shift of the entire saving schedule d. change in the marginal propensity to save

b. movement along the saving schedule

Which of the following is not a result of modern economic growth a. spread of universal education and elimination of ancient social norms b. movement towards democracy and the abolishment of feudalism c. less time for ordinary people to enjoy leisure activities because the primary focus is on production and work d. vast increases in wealth and living standards for many groups in the economy

b. movement towards democracy and the abolishment of feudalism

The multiplier can be calculated by dividing the a. change in real GDP by the initial change in spending b. one by one minus the marginal propensity to save c. the initial change in spending by the change in real GDP d. one by one minus the marginal propensity to invest

b. one by one minus the marginal propensity to save

Strong property rights are important for modern economic growth because: a. they allow governments to extract the gains from private citizens investments b. people are more likely to invest of they don't fear that others can take their returns on investment without consumption c. business cycle fluctuations will be smaller and less likely to disrupt investment patterns d. they insure an equitable distribution of income

b. people are more likely to invest of they don't fear that others can take their returns on investment without consumption

For a nation's real GDP per capita to rise during a year: a. investment spending must increase b. real GDP must increase more rapidly than population c. consumption spending must increase d. population must increase more rapidly than real GDP

b. real GDP must increase more rapidly than population

Society can increase its output and income by increasing basically one or both of two factors: a. private and public sectors of the economy b. resources and the productivity of the resources c. spending and investment d. markets and prices

b. resources and the productivity of the resources

One basic assumption of the aggregate expenditure model is that a. there is inflation in the economy b. the average price level in the economy is fixed c. the economy is operating at full employment d. there is no public sector in the economy

b. the average price level in the economy is fixed

Before the Industrial Revolution, living standards in the world a. were declining because of rapid increases in population b. were relatively stagnant for long periods of time c. were already rising significantly for many decades d. are not known, for lack of reliable records from that period

b. were relatively stagnant for long periods of time

GDP Price Index

based on all goods & services counted in the GDP

In a private closed economy, there will be an unplanned increase in inventories when a. (C+I) exceeds aggregate expenditures. b. aggregate expenditures exceed GDP c. GDP exceeds aggregate expenditures d. aggregate expenditures exceed (C+I)

c. GDP exceeds aggregate expenditures

As disposable income decreases, consumption a. decreases and savings increase b. increases and savings decreases c. and savings both decrease d. and saving both increase

c. and savings both decrease

which of the following is a measure of economic growth that is useful for measuring geopolitical preeminence or military potential a. decreases in the rate of unemployment b. growth in nominal GDP c. increases in real GDP d. increases in real GDP per capita

c. increases in real GDP

If depreciation exceeds gross domestic investment, we can conclude that a. the economy's production capacity is expanding b. the economy is importing more than it exports c. net investment is negative d. nominal GDP is rising but real GDP is declining

c. net investment is negative

In the aggregate expenditure model, the equilibrium GDP is

c. not necessarily equal to the full employment GDP

Economic growth can be portrayed as a. movement from one point to another point on a fixed production possibilities curve b. movement from one point on to a point inside a production possibilities curve c. outward shift of the production possibilities curve d. inward shift of the production possibilities curve

c. outward shift of the production possibilities curve

For a nations real GDP per capita to fall during a year, a. real GDP must increase more rapidly than the population b. consumption spending must increase c. population spending must increase d. investment spending must increase

c. population spending must increase

Which of the following is the so-called efficiency factor of economic growth a. having a efficient financial system b. having free trade c. reaching full production potential d. enhanced quantity and quality of human resources

c. reaching full production potential

Saving is $40 billion and planned investment is $28 billion at the $175 billion level of output in a private closed economy. At this level: a. actual investment will be $28 million b. consumption will be $147 billion c. unplanned investment will be positive $12 billion d. unplanned investment will be negative $12 billion

c. unplanned investment will be positive $12 billion

If disposable income increases from $912 billion to $937 billion and MPC= 0.8 then consumption will increase by a. $6 billion b. $56 billion c. $9 billion d. $20 billion

d. $20 billion

In a private closed economy where MPC= 0.8, if consumers reduced their spending by $10 billion and firms cut investments by $5 billion, then equilibrium GDP will decrease by a. $15 billion b. $18.8 billion c. $25 billion d. $75 billion

d. $75 billion

A nation's average annual real GDP growth rate is 12%. Based on the "rule of 72" the approximate number of years that it would take for this nations real GDP to double is a. 20 years b. 17 years c. 12 years d. 6 years

d. 6 years

the saving schedule shows the relationship of saving of households to the level of

d. disposable income

Human capital refers to the a. number of workers available in the economy b. tools and equipment available to workers c. amount of financing available to start-up firms d. education, training, and skills of workers

d. education, training, and skills of workers

GDP tends to overstate economic well-being because it takes into account: a. illegal activities of individuals and businesses b. non market activities, such as the productive work of homemakers c. improvements to product quality over time d. expenditures undertaken to correct pollution

d. expenditures undertaken to correct pollution

Which of the following is not a supply factor in economic growth a. improvement in technology b. better education and training c. expansion of capital stock d. increases in purchases of output

d. increases in purchases of output

Economic Historians identify which invention as a major factor that started the Industrial Revolution in Britain a. automobile b. electric motor c. telephone d. steam engine

d. steam engine

Suppose an economy is initially operating at a point on its PPC. If it then experiences an expansion in its production capacity and its total spending rises as fast as its capacity, the economy will end up a. outside its PPC b. inside its PPC c. on one of the axes of its PPC d. still on its PPC

d. still on its PPC

intermediate goods

goods that are used to make another product that will be used for subsequent goods

consumer durables

goods that have an average useful life of 3 years or more -ex: car, house

Consumer Nondurables

goods that have an average useful life of less than 3 years -ex: meals, clothing

Keynesian economics

is short term -labor and production is determined by how much people spend -the size of the economy (real GDP) depends on the total amount of expenditures

Services

outputs, often intangible, of the direct activities of another person

Business investment

purchases by firms of new capital goods, such as offices, factories, tools and machinery

residential investment

purchases of new homes; also includes home improvements

Real GDP per capita

real GDP divided by population -not perfect measure of gauging the standard of living (but a good indicator) -measures averages and thus masks distributions -correlates higher with commonly used measures of well-being

positive net investment

the capital stock of the country is growing

negative net investment

the capital stock of the country is shrinking

Depreciation

the consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete in a year -Ex; an new phone comes out every year

recessionary gap

the difference, or gap, between expenditure when real GDP is below the full employment level and the level of expenditure at full employment GDP -occur when the aggregate expenditures are less than amount necessary to operate at the equilibrium level of real GDP -If aggregate expenditures decrease and output falls below the full employment level of output produced at the NRU the result is this

Marginal Propensity to Save (MPS)

the fraction of each additional dollar income that is saved ∆Savings/∆Income

Standard of Living

the level of overall well being enjoyed by an average individual, group or society

Gross Domestic Product

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

Growth Rate

the rate of change of a variable over a specified period of time; usually expressed as a percentage change

capital

the tools, machines, knowledge and buildings used to produce goods and services