Macro Exam 2

If in 2016, consumption spending is $7,000, gov. purchases is $2,000 and investment is $1500. If GDP is $10300, then export is _________ and import is _________

$500 and $700

Three Ws GDP cares about

What: monetary value Where When

For any change in __________ there is a corresponding but smaller change in planned ______________ and ______________ savings

Yd, consumption, planned

Formula for disposable income

Yd= GDP- taxes +transfer payments

If a consumer becomes more pessimistic consumption will

decrease

If price level increases, consumption power will

decrease

If price level increases, purchasing power will

decrease

if consumers expect their incomes to fall in the future, consumption will

decrease

if taxes increase, consumption will

decrease

if taxes increase, disposable income will

decrease

If wealth decreases consumption

decreases

unemployment rises inflation _____ so there are _______

decreases, surplus

type of inflation when congress lowers taxes, increases government expenditure, with deficit spending leading to economic growth and an increase in the CPI

demand pull inflation

What is the primary determinant of household saving/consumption?

disposable income

Types of unemployment: Cyclical

downturn in economy, recession, depression

The demand for loanable funds is ________ sloping because _______ respond to lower interest rates by ______ their quantity demanded for loanable funds

downward, investors, increasing

Types of unemployment: frictional

due to friction or informational inefficiencies quit lower level job to find a better one job skills match job openings

Types of unemployment: Structural

due to structural shifts in economy force people to get new skills bad for individual, good for economy

To avoid __________, it is important and necessary to differentiate between _______ and __________ economic values.

economic illusion, nominal, and real

One person's _________ is another's __________

expenditure, income

GDP tends to overstate our economic well being by including _________

expenditures used for crime prevention, payments for cleaning up the environment, and repairs for structures destroyed by storms

In the united states, over the last 40 years, as a percentage of gross domestic product:

exports and imports have grown

The growth rate of GDP is above historical average, the there is a tendency for the unemployment rate to

fall

exports are a ___________ imports are a __________

injection leakage

I induced

investment expenditure that is a positive function of GDP

I automous

investment expenditure that is independent of GDP

In the consumption function, an individual household's consumer spending

is positively related to its current disposable income

If you're unemployed you will have ______, _________, and __________ consequences

personal, social, economical

Problems with GDP: Costs of ___________ are not netted out

pollution

GDP real

value of GDP measured in constant year prices/dollars

Unemployment rate formula

# unemployed / #in labor force

Labor force participation rate formula

#labor force/ # working age population

A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The GDP would be:

$180

The boeing corp. buys $3 million worth of steel from the steel manufacturers, $2.5 million worth of computerized hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing corp. sells this model at $10 million. The value added by Boeing is

$3.5 million

If the MPS = .1 , then the value of MPC is ____ the multiplier equals ________

.9, 10

APC + APS ALWAYS EQUALS

1

Multiplier =

1/ 1-MPC

To be in the working age population you must:

16-64 years old not institutionalized not in military

To be in the labor force you must:

16-64 years old not institutionalized not in military working or actively seeking work

The CPI in 2007 was 207.3. In 2008, it was 215.3. What was the rate of inflation between 2007 and 2008

3.86%

The consumer price index in 2012 was 207.3. In 2013, it was 215.3. What was the rate of inflation from 2012 to 2013?

3.86%

If CPI is 180 in year 1 and 190 in year 2, the inflation rate was

5.56%

If the population of the United states is 260 mill, the labor force is 130 mill, and 120 mill workers are employed, the rate of unemployment is:

7.7%

A bank wishes to make a 5% rate of return on a one year loan but expects that inflation over the course of the loan will be roughly 3%. If the bank charges an interest rate of _____________, this will guarantee it to earn the expected return

8% of higher.

As income increases both consumption and savings will increase but by an amount less than the change in income. Therefore, both MPC and MPS have value greater than _________ but less than ________

APS, APC

Inflation measurement formula

CPI2-CPI1 / CPI 1

CPI formula

CPI= Cost of base year market basket in the given year/ cost of base year market basket in the base year x 100

An increase in the minimum wage and higher costs for natural resources cause the CPI to rise and GDP to fall

Cost push inflation

Unemployment rate - natural rate =

Cyclical

Problems with GDP: ________ is not netted out

Depreciation

Costs of unemployment: (economical) Unemployment causes ____________

GDP to operate inside of its PPF

Summation of expenditure

GDP= Consumption + Investment + Government + exports - imports

Summation of factor incomes

GDP= Wages+ rent + interest + profot

What will be the equilibrium level of GDP?

GDP=National Income (Y) = Real planned aggregate expenditure leakages +injections

I total =

I autonomous+ I induced

What happens to consumption as income increases?

Increases

What happens to savings as income increases

Increases

Problems with GDP: GDP only accounts for __________ and ________ market transactions

Legal and reported. Underground economy is left out Self value added- housewife value

M= change in GDP/ change in I

M= change in GDP/ change in I

Components of a CPI

Market basket, Base year, and Index formula

If I hire a lawn service to mow my grass, the money I pay the service are included in the GDP whereas if I mow my own lawn, the value of this service is not included in the GDP. This fact represents a criticism on GDP's focus on

Market produced goods and services

Formula for marginal propensity to save

S=MPS= change in S/ Change in Yd

higher unemployment rates for computer help center workers in US because of out sourcing jobs to India

Structural

Last month, Brent lost his job at the auto parts factory, because it moved to Asia. Brent is classified as:

Structurally unemployed

Problems with Price Index

Substitution bias, quality bias, index number problem

Types of unemployment: Seasonal

Tahoe after ski resorts close

The Multiplier

The ability of a given change in autonomous expenditure to induce a larger change in equilibrium GDP the ratio of change in equilibrium GDP relative to the initial change of expenditure

Problems with GDP: ____________ is not accounted for

Value of leisure

Summation of Value added

Value of output- value of input

Inflation

a sustained increase in the general price level

Costs of inflation: Unanticipated inflation leads to

arbitrary redistribution of income with windfall profits for borrowers and windfall loses for lendors

Index formula

base year weighted formula to answer this question: how much does it cost to purchase the base year market basket in a given year

Unexpected inflation ______ borrowers and ________ lenders

benefits, hurts

Average propensity to consume:

ch. Consumption/ ch. Yd

changes in supply of loanable funds

ch. in savings behavior ch. in capital inflows. ch. in capital outflows

Formula for marginal propensity to consume

change in C/ change in Yd

Marginal propensity to consume (MPC)

change in consumption/ change in YD

Changes in the demand for loanable funds

change in profit expectations change in government building change in capital inflows change in capital outflows

Marginal propensity to save (MPS) formula

change in savings/ change in YD

Determinants of net exports

change of foreign incomes exchange rates

both ________________ and _____________ are a _________ relation with ______________

consumption, savings, positive relation, disposable income

Costs of unemployment: (social) Increased levels of __________ and __________

crime and illness

After the election, economic uncertainty leads to layoffs across the country with falling GDP

cyclical

As incomes rise, does the APC increase or decrease

decrease

rule of the 70

for a constant rate of inflation, it is possible to estimate the # of period to double by dividing the inflation rate into 70.

Okuni's Law

for every 1% increase in the unemployment rate, above the natural rate of unemployment (4%) there is a loss of 2% GDP

Base year

frame of reference, year in which nominal GDP = real GDP and the index number is 100

a recent grad from the culinary academy is seeking employment as a pastry chef and restaurants are seeking to hire chefs

frictional

Natural rate of unemployment

frictional + structural

if we add up the consumer spending on goods and services, investment, government purchases of goods and services, and the value of exports and subtract the value of imports, we measure

gross domestic product

Inflation occurs in Zambia with excessive increases in the money supply and government spending being out of control

hyperinflation

Savings are ______ funds that are not _____________

income, consumed

As incomes rise, does the APS increase or decrease

increase

If a consumer becomes more optimistic consumption will

increase

If price level increases, savings will

increase

if consumers expect their incomes to rise in the future, consumption will

increase

if taxes decrease, consumption will

increase

Problems with GDP: wars and natural disasters _________ but _____________

increase spending but lower quality of life

If you get a 6% raise in your salary, but overall prices in the economy has increased by 4%, your real wage is

increased by 2%

If wealth increases consumption

increases

during a recession: unemployment ___________ and growth rate of real GDP ___________

increases, decreases

unemployment lowers, inflation _____, so there are _______

increases, shortages

Costs of inflation: Inflation leads to a _________ of purchasing power unless _______ change to keep pace

loss, wages

rise CPI = _________ purchasing power = ____________ inflation

lower lower

if $ appreciates

lower exports rise imports lower GDP

rise tax = __________ Yd __________ consumption _______ savings

lower, lower, lower

Types of inflation: Cost push

lowers aggregate supply, rises price level,lowers GDP, rises unemployment

The practical significance of the multiplier is that is

magnifies initial changes in spending into larger changes in GDP

planned investment spending is _______ to the interest rate because ______

negatively related, a rise in the market interest rate makes any given investment project less profitable

Components of investments

new capital goods change in business inventories new residential housing

To be classified as unemployed, a person must be

not working and actively looking for a job in the last four weeks

Determinants of investments (3)

profit expectations interest rate change change in taxes

example of frictional unemployment

real estate agent leaves a job in Texas, searches for a similar high paying job in California

Nominal Interest =

real interest + inflation premium

Costs of unemployment: (personal) ____________ in consumption

reduction

Costs of inflation: inflation leads to changes is ___________ or _________ forcing consumers to make new choices

relative prices, opportunity cost

Market basket

representative bundle of goods used in the index number calculation

if $ depreciates

rise in exports lower imports rise GDP

lower APC, ______ income

rise income

rise APS, ______ income

rise income

Types of inflation: Hyper

runaway increase in the price level with inflation rates exceeding 200% a year only source- gov. increasing $ supply

Average propensity to save:

savings/Yd

Costs of unemployment: (personal) Loss of _____________

self esteem

Shelley, who is 55 years old and has been a steel worker for 30 years is unemployed because the steel plant in his town is closed and moved to Mexico. He is experiencing ___________ unemployment

structural unemployment

Says law

supply creates its own demand

Problems w/ unemployment statistics

surveying through land lines lies part time v. full time Discouraged worker problem

Reason the actual value of the multiplier is lower than 1

taxation imports inflation

If the stock market crashes:

the aggregate consumption function will shift down

Of the following items, which would not be included GDP: the dollar value of a repair job done by me on my own bike the $ value of a lawyers services new car sales by a local car dealer the production of new cars that were not sold in the current year

the dollar value of a repair job done by me on my own bike

Banks are issuing loans at a interest rate of 9%. If expected inflation is supposed to be 3%, then

the real interest rate is 6% and the nominal rate is 9%

Real GDP is

the value of production of all final goods and services adjusted for price changes

short term goal of macro econ

to achieve noninflationary full employment gdp (opperate on PPF)

long run goal of macro econ

to increase gdp per capita (shift gdp outward)

Types of inflation: Demand pull

too much $ chasing too few goods shortages > raise CPI rises aggregate demand, rises price level, rises GDP, lowers unemployment

Initially, assume that there is a balance trade in the US. Then, as a result of an increase in the value of the dollar in relation to other currencies, American imports increase and exports decrease. this will lead to a

trade deficit, a decrease in US GDP

x smaller than m

trade deficit, lower GDP

x bigger than m

trade surplus, raise GDP

True/false inflation and unemployment lead to a decrease in purchasing power

true

Costs of inflation: ______________ __________ makes it risky to enter into long term contracts

unanticipated inflation

In equilibrium there will be: a recessionary gap w/ ______________ an inflationary gap w/ ______________ noninflationary ______________

unemployment inflation full employment

GDP nominal

value of GDP measured in a given year prices/dollars