Interm Macro Exam 1 - Review

Variable determined in the model

Endogenous

Variable determined outside the model

Exogenous

To avoid double counting in the computation of gross domestic product (GDP), GDP includes only the value of _____ goods.

Final

Are goods that are used to consume

Final Goods

In the long run, prices are ______

Flexible

A person's annual savings:

Flow

The govt budget deficit:

Flow

Government spending

G

the total market value of all final goods and services produced annually in an economy

GDP

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

GDP deflator

Intangible items purchased by consumers.Examples: dry cleaning, air travel

services

Models are used to:

show relationships, explain behavior, and devise policies

In the short run, prices are ______

sticky

An assumption of _____ is more plausible for studying the short-run behavior of the economy, while an assumption of _____ is more plausible for studying the long-run, equilibrium behavior of the economy.

sticky prices; flexible prices

A quantity measured at a point in time

stock

The amount of capital in an economy is a(n) _____, and the amount of investment is a(n) _____.

stock; flow

The assumption that the factor's supply (supply of K or L) is fixed will imply that the factor's:

supply curve is vertical

All of these EXCEPT _____ are important macroeconomic variables.

the marginal rate of substitution

The price received by each factor of production is determined by:

demand and supply of factors

With a Cobb-Douglas production function, the share of output going to labor:

does not depend on the amount of labor in the economy

wage income equation

hourly wage x number of hours worked

What is considered labor?

the physical and mental efforts

In a Cobb-Douglas production function, the marginal product of capital will increase if:

the quantity of labor increases

Gross national product (GNP) equals gross domestic product (GDP) _____ income earned domestically by foreigners _____ income that nationals earn abroad.

minus; plus

R =

nominal rental rate

W =

nominal wage

Unemployment rate

number of employed / labor force x 100

An economy's factors of production and its production function determine the economy's:

outputs of goods and services

A fixed-weight price index like the consumer price index (CPI) _____ the change in the cost of living because it _____ take into account that people can substitute less expensive goods for ones that have become more expensive.

overestimates; does not

Private saving equation

(Y-T)-C

y = c (y - t) + I (r) + G

Aggregate demand

a subset of the marginally attached workers, have given a job-market-related reason for not currently looking for a job.

Discouraged workers

An increase in r might also reduce saving (increase consumption)

Income effect

Slope of the consumption function

MPC

The change in C when disposable income increases by $1

Marginal propensity to consume

States that each each factor input is paid by the factor prices -- its marginal product

Neoclassical theory of distribution

not employed, not looking for work

Not in the labor force

The government dept:

Stock

The unemployment resulting from real wage rigidity and job rationing

Structural unemployment

Public saving

T-G

Production function

Y = F(K,L)

National saving

Y-C-G

Cobb-Douglas production function

Y=AK^aL^1-a

Real gross domestic product (GDP) is a better measure of economic well-being than nominal GDP because real GDP:

measures changes in the quantity of goods and services produced by holding prices constant.

the production of goods and services valued at current prices

nominal GDP

A graph of the rate of inflation in the United States over the twentieth century shows:

periods of deflation mixed with positive rates of inflation before 1955 but only positive rates of inflation after 1955.

P =

price of output

A person's wealth:

stock

An increase in the price of goods bought by firms and the government will show up in:

the GDP deflator but not in the CPI

In Chapter 3's model, the supply and demand for goods and services are balanced by:

the interest rate

What is considered capital?

tools, machines, structures

total expenditure = __________

total income

C = C(Y - T)

consumption function

Components of Aggregate Demand

consumption, investment, government spending

House holds divide their disposable income between _______ and _______

consumption; saving

The real interest rate is the ___________

cost of borrowing

Periods of falling prices

deflation

Total income minus total taxes

disposable income

Assume that govt spending & total taxes are _________

exogenous

the division of income between capital and labor

factor shares

In a boom, the actual unemployment rate _________ the natural rate

falls below

caused by the time it takes workers to search for a job

frictional unemployment

Real GDP per capita _______ over time but growth rate is not _______

grows; steady

The demand for loanable funds comes from ______

investment

I = I (R)

investment function

There are two reasons why the job finding is not instantaneous:

job search, wage rigidity

Wages depend on ________ productivity

labor

The extra output the firm can produce using an additional unit of labor (holding other inputs fixed):

marginal product of labor

persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Persons notin the labor force.

marginally attached workers

The average rate of unemployment around which the economy fluctuates

natural rate of unemployment

3 Types of Saving

private, public, national

F =

rate of job finding

The 3 Most Important Indicators

real GDP, inflation rate, unemployment rate

R denotes the __________

real interest rate

R/P =

real rental wage

W/P =

real wage

cost =

real wage

Each firm hires labor up to the point where ____________

real wage equals marginal product of labor

In a recession, the actual unemployment rate __________ the natural rate

rises above

steady state condition equation

s x e = f x u

changes in the composition of demand among industries or regions—Cause of Frictional unemployment

sectoral shifts

the labor market is in ____________ if the unemployment rate is constant

steady state

An increase in r makes saving more attractive and increases the reward for postponing consumption

substitution effect

In the U.S. economy today (2022), real gross domestic product (GDP) per person, compared with its level in 1900, is about:

ten times as high.

An increase in the price of imported goods will show up in:

the CPI but not in the GDP deflator.

Shows the relationship between quantity demanded and price, other things equal

Demand Curve

Which is more severe: recession or depression?

Depression

Goods that last a long time. Examples: cars, home appliances

Durable goods

Total income earned by the nation's factors of production, regardless of where located

GNP

What is GNP?

Gross National Product

the percentage change in the overall level of prices

Inflation rate

Goods not consumed for their own sake but are used in the production of other goods

Intermediate goods

I

Investment

Spending on newly produced capital, a physical asset used in future production

Investment

the amount of labor available for producing goods and services

Labor force

Simplified versions of more complex realities with irrelevant details stripped away

Macroeconomic models

An assumption that prices are flexible and adjust to equate supply and demand

Market Clearing

Net exports

NX

measures these values using current prices

Nominal GDP

GDP deflator equation

Nominal GDP/Real GDP x 100

Goods that last a short time. Examples: food, clothing

Nondurable goods

Shows the relationship between quantity supplied and price, other things equal

Supply Curve

2 ways to think about GDP:

Total expenditure on domestically produced final goods/services & total income earned by domestically located factors of production

Not employed but looking for a job

Unemployed

The value of output minus the value of the intermediate goods used to produce that output

Value added

Compared with real gross domestic product (GDP) during a recession, real GDP during a depression:

decreases more severely.

Macroeconomics is the study of the:

economy as a whole.

Working at a paid job

employed

Macroeconomic models are used to explain how _____ variables influence _____ variables.

exogenous; endogenous

Net exports equation

exports - imports

the prices per unit firms pay for the factors of production

factor prices

Technology is _______

fixed

A quantity measured per unit of time

flow

The unemployment rate:

has never been 0 in the U.S.

When saving (the supply of loanable funds) increases as the interest rate increases (i.e. we have a upward sloping saving curve), an increase in investment demand results in a _____ real interest rate and _____ in the quantity of investment.

higher; an increase

An example of an imputed value in the gross domestic product (GDP) is the: (Hint: Related to the required reading material "Rules for computing GDP".)

housing services enjoyed by homeowners

In Chapter 3' model, a decrease in the real interest rate could be the result of a(n):

increase in taxes

L =

labor

labor force participation rate

labor force / adult pop. x 100

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

labor productivity is growing rapidly

if T < G, T - G is negative then:

budget deficit

if T > G, T - G is positive then:

budget surplus

K =

capital

if T = G, T - G is zero then:

balanced budget

U =

unemployed

U/L =

unemployment rate

he failure of wages to adjust to a level at which labor supply equals labor demand

wage rigidity

Disposable income equation

y - t

CPI equation

100 x (cost of basket in current year/cost of basket in base year)

If bread is produced using a constant returns to scale production function, then if the:

amounts of equipment and workers are both doubled, twice as much bread will be produced.

marginal product of labor =

benefit

The two MOST important factors of production are:

capital and labor

Changes in nominal GDP can be due to:

changes in prices and quantities

C

consumption

Recessions are associated with:

unusually high unemployment

During the period between 1900 and 2000, the unemployment rate in the United States was highest in the: (Hint: The unemployment rate peaked during the Great Depression.)

1930s

ratio of nominal consumer spending to real consumer spending

Personal consumption expenditure

National income accounts identity

Y=C+I+G+NX

a measure of the overall cost of the goods and services bought by a typical consumer

consumer price index

In the national income accounts, the purchases of durables, nondurables, and services by households are classified as:

consumption

The value of all goods and services bought by households, including

consumption

When some iPads are produced but unsold this year and put away for the future sale, they are called:

investment in inventories

Government spending excludes __________

transfer payments