Macro Exam 2

When the foreign sector is added to the aggregate expenditures model:

exports are injections into the economy, and imports are withdrawals

If the average propensity to consume is 0.75, and the marginal propensity to consume is 0.60, if income rises by $3,000, consumption will increase by _____. (Remember when we use APC versus MPC. Use only one for this question).

$1,800

If a country has a GDP of $250M that grows at an annual rate of 3%, what will it's GDP be in 20 years?

$452M Total Return = P (1+ r/n)^nt 250 (1+0.3/1) ^(20)(1) 250 (1.03) ^20 = 451.5

A person has been awarded an income increase to offset the effects of an increase in the overall cost of living in his country. This increment is tied to the consumer price index (CPI), which recently escalated from 116 to 120. What should his new salary be if he was earning $50,000 per yr. before the CPI increase?

$51,724 per year real value = nominal x current yr index/base yr index 50,000 x 120/116 = 51,724

what causes inflation?

-demand factors: higher demand, consumers competing for goods -supply shocks: price increases on inputs such as oil & natural resources -government policy: borrowing & printing money (spends more than receives in tax)

Higher Standards of Living

-reduced poverty rates -improved health and longer life expectancies -greater investment in education and technology

If a $5,000 increase in income leads to additional savings of $1,250, the marginal propensity to consume is _____.

0.75

If an economy's GDP will double in 25 years, then its growth rate must be about:

2.8%

If a country has an annualized GDP growth rate of 2.5%, and it's current GDP = $20,000,000. what will it's GDP be in 12 years?

29,316,778

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation. (increase money supply) Consequences: workers paid frequently; purchases made immediately -monetary system breaks down; barter is used -foreign currencies become the medium of exchange

Which statement describes the difference between APC and MPC?

APC is total consumption divided by total income, whereas MPC is the change in consumption divided by the change in income

Average Propensity To Consume (APC) & Average Propensity To Save (APS)

APC: % of income used for consumption =Consumption/Income APS: % of income that is saved = Savings/Income Total income = consumption + savings APC + APS = 1

If your income is $3000 and you save $500, your APC is ___ and APS is ___ .

APS: amount saved/income 500/3000=.166= 17% APC + APS =1 APC + .17 = 1 APC = .83 = 83%

developed vs developing countries

DEVELOPED: •more industrialized; advanced technological infrastructure •has a per capita income of at least $12,000 Ex/ U.S., Japan, Canada, France, Germany, Sweden, Italy DEVELOPING: Ex/ China, Mexico, Colombia, India, Israel, Egypt

A person works hard at a job and after her first year, she is rewarded with a 3% raise. Later, the government releases its inflation report stating that inflation is running at 5%. Given this information, which of these is TRUE of her standard of living? (Prices rose 2% more than her income)

It did not improve because the purchasing power of her income is less than what it was last year.

factors of production

Land and natural resources (N) Labor (L) Human capital (H) Physical capital (K) Entrepreneurship (A)

capital-to-labor ratio

Measures amount of physical capital per worker higher ratio = greater labor productivity Capital is subject to diminishing returns: each additional unit of capital increases output but by a smaller amount

Natural Rate of Unemployment

The natural rate of unemployment has ranged from 5% to 6% for much of the past 50 years. Frictional & structural unemployment always exists When we are at the natural rate of unemployment (around 5%) there is 0 cyclical unemployment. It is all frictional and structural NRU= frictional + structural

Use the Compounding Equation

Total return = P(1+r/n)nt P= principle r= interest rate (decimal) n= # of times interest is compounded per year; t= time (in years)

Which of the following is not an effective tool used by government to promote economic growth?

Trade barriers to protect domestic industries

Unemployed vs employed

Unemployed: they do not have a job, have been actively seeking work in the past 4 weeks Employed: work full/part-time, work a temp job, have a job but on vacation or ill or on leave or on strike full-time students without a job are neither employed; they are not in the labor force. A full-time student who works part-time as a personal trainer (even just a few hours a week) is employed

Which is NOT an example of infrastructure?

Walmart stores

Short-run economic growth is represented by:

a point that is closer to the PPF

Power of compounding

allows small rates of growth to turn into large increases in income over time

Which factor does NOT enhance an economy's productivity?

an increase in birth rates

rate of inflation

annual rate of increase in the price level

Price Level

average prices across all goods & services produced in the economy

Which of these is NOT part of a country's infrastructure?

clubhouse in a wealthy individual's residential property (private)

Aggregate Expenditure

consists of the components of GDP that are measured by spending: GDP = AE = C + I + G + (X-M) consumption (C): largest component, nearly 70% of GDP

What is a decrease in the rate of inflation called?

disinflation still inflation, just at a decreasing rate

After graduating from college, you work 10 hours per week at McDonald's while actively looking for a permanent job. You are classified as:

employed

How would the Bureau of Labor Statistics classify a person who was laid off from his job 4 weeks ago but has been doing 20 hours of temporary work every week while looking for another job?

employed

The ability to use physical resources in creative ways to produce goods and services is known as:

entrepreneurial ability, technology, and ideas

The decrease in aggregate spending necessary to bring an overheated economy back to full employment is called the recessionary gap

false

which type of unemployment is natural for an economy and can be considered beneficial because it allows individuals to look for better job opportunities?

frictional unemployment

Structural unemployment is:

generally long term in character

According to the Chapter 7 Lecture Video, countries with higher economic freedom have a ______________________.

higher average per capita GDP

What is the single most important factor influencing economic growth for an economy?

increased productivity

inflationary gap

is the decrease in aggregate spending needed to bring a(n) overheating economy back to full employment.

recessionary gap

is the increase in aggregate spending needed to being a(n) depressed economy back to full employment.

consumption

is the portion of income not saved: Income = C +S

PPI

measures the average change in prices received by domestic producers for their output PPI=cost in current period/cost in base period x 100 Problems: -excludes taxes -products measured are the same from month to month, so the PPI has the same problems as the CPI: quality changes, deleted products & manufacturers exiting the industry

The relationship between economic freedom and per capita GDP is:

positive

Investment

spending by businesses that adds to the productive capacity of the economy.

Which of the following would promote long-run economic growth?

technological advancement

How is the unemployment rate calculated, according to the Bureau of Labor Statistics?

the number of unemployed people divided by the labor force

If a country's population increases at a higher rate than the growth in its real GDP:

the standard of living in a country has declined

If a country's population increases faster than its growth in real GDP:

the standard of living in the country will decline

Real GDP

total output in a year measured in constant-year prices

Which policy will discourage economic growth?

trade restrictions to protect domestic industries tariffs restrict trade

Poor countries grow faster than rich ones due to the catch-up effect. This is because developing countries _____to make their inputs more productive; whereas developed countries must ___ to increase growth.

use existing technologies innovate

All of these can improve a country's labor productivity EXCEPT -on-the-job training -free public education -improvements in technology -use of less capital and more labor

use of less capital and more labor improves a workers productivity

purchasing power

what you can buy with the money you have right now (raise to keep up with inflation - at least 2%)

Short-run growth

when an economy makes use of existing but underutilized resources Short-run growth - movement pushes toward a PPF

Changes in labor force over time

•Population growth •Demographic changes •Socioeconomic reasons •Economic conditions

Measuring Unemployment

•size of the labor force (people >16 yrs. old; non-disabled; non-retired; seeking employment) •# of people employed •# of people unemployed Labor force = employed + unemployed Unemployment rate = # of people unemployed/labor force

If your salary was $50,000 last year, and this year you receive a cost-of-living increase tied to the consumer price index (CPI), what will your salary be this year assuming the CPI has risen from 110 to 114?

$51,818

The nominal GDP of Japan in the year 2010 was approximately $6.0 trillion. If the GDP deflator had a value of 100 in 2005 and 108 in 2010, what is the real GDP in 2010, using 2005 prices?

$6 trillion x 100/108 =600trillion/108 5.56 T "deflated"

Measuring Inflation/Price Level

- Consumer Price Index(CPI): measures the retail price level -Producer Price Index(PPI): measures wholesale prices -GDP Deflator: measures the average price of all items in GDP

If MPS is .17 (17%), MPC is _______. (Remember the connection between MPC and MPS)

0.83

Role of Government

1. Investing in infrastructure 2.contributing to physical capital, human capital (education), & technology 3. enforcing contracts, protecting property rights, & maintaining a stable financial system 4. promoting free & competitive markets

Determinants of Consumption

1.Wealth effect: more wealth = more consumption 2.Expectations about future prices & income 3.Household debt: more payments made towards debt, less money to spend on consumption 4.Taxes: reduces disposable income; reduces consumption & savings

If nominal GDP in 2014 is $20,000 billion while real GDP is $16,000 billion, then the GDP deflator in 2014 is:

125

Suppose you receive a stock tip that allows you to earn a 5% annual return. At this constant rate, how long will it take to double your money using the Rule of 70?

14 yrs 70/5=14

The Nominal GDP is $67,000 and Real GDP is $42,000. What is the GDP deflator?

160 GDP deflator = nominal/real x 100 67,000/42,000 x 100 = 159.5 = 160

A country has a GDP of $250M. It grows at an annual rate of 3%. How long will it take to double?

23.3 yrs Rule of 70 = 70/3 =23.3

If your income is $12,000 and you spend $5,500, your APC is ____ and your APS is _____ , respectively. Answer question as a whole percentage rounding up or down to two decimal places first (Ex/ 0.155555 = 0.16 = 16%).

46; 54

If there is an initial investment of $500 and the MPC = 0.8, the spending multiplier is ____ and the potential increase on income is ____

5; 2500

If a country grows at 3% per year, approximately how many years will it take for its GDP to double?

70/3=23.3 23 years

Who benefits/loses when inflation occurs?

Benefit: Borrowers because their fixed payments remain the same and their wages rise with inflation. Harmed: People living on fixed incomes see their purchasing power decline. Creditors (lenders) see the real value of their loan repayments fall. Unaffected: Workers whose wages have escalator clauses. Social Security recipients; benefits are adjusted with inflation. Banks that properly anticipate inflation.

CPI

Cost-of-goods index: compares the cost of a fixed bundle of goods from one period to the next 1. define a base year & find the cost of a market basket in that year 2. find the current cost of the same market basket; use the following formulas to compare costs CPI=cost in current period/cost in base period x 100 Problems: -measures only private goods & services: excludes public goods & conditions affecting the quality of life -CPI tends to overstate inflation because it uses a fixed-market basket: does not account for product substitution, quality improvements, or new products -CPI measures only consumers' out-of-pocket health care expenditure: does not measure the overall rise in health care costs

Suppose the price level is 100 in the year 2014, 130 in the year 2015, and 150 in the year 2016. In 2016 this economy is undergoing:

Disinflation

Measuring inflation

Disinflation: a reduction in the rate of inflation. Prices rise at a decreasing pace Deflation: a decline in the price level. Prices on average fall (lower income - unemployment; recession)

Which statement about economic growth is FALSE? -Economic growth leads to better medical care -Economic growth is equal to growth in nominal GDP -Economic growth can result in higher standards of living -Economic growth leads to longer life expectancies.

Economic growth is equal to growth in nominal GDP

Investment Demand

Investment levels depend on: 1.Rate of return on capital: investments earning a high rate of return are undertaken first 2.Interest rates: most business investment is financed with loans; as interest rates ↓, investment ↑ (cheaper to borrow money) 3.Expectations: as business expectations improve, investment demand ↑ 4.Technological change: innovations can ↑ investment 5.Capital goods on hand & operating costs: a buildup of inventories ↓ the need for investment (no need to expand production)

Marginal Propensity To Consume (MPC) & Marginal Propensity To Save (MPS)

MPC: "Change in Consumption" /"Change in Income" or "ΔC" /"ΔY" MPS: "Change in Savings" /"Change in Income" or "ΔS" /"ΔY" Because total income = Consumption + Savings MPC + MPS = 1

Labor Productivity

Measures how effectively inputs are converted to outputs output per labor total output/labor hours

To increase output, can a country just keep adding capital?

No, because there are diminishing returns to capital.

Nominal vs Real

Nominal value: has not been adjusted for inflation; is the current dollar value Real value: has been adjusted for inflation; allows the comparison of quantities as if prices had not changed

Unemployment

People not working but able and willing to work and actively seeking a job Problems: -underemployed workers -discouraged workers -marginally attached workers Common Causes: -Job searching & matching -Efficiency wages: wages kept above equilibrium to reduce turnover & improve productivity (morale boost) -High minimum wages: wages too costly, hiring likely to be reduced -Business cycle: recessions reduce consumer demand, leading to layoffs Types of Unemployment: Frictional: results from workers who voluntarily quit to search for a better position Structural: caused by changes in consumer demand/technology Cyclical: caused by contractions in the business cycle - decline in investment/ consumer spending leads to a slowing of the economy; can lead to a recession (and lay-offs) **Cyclical unemployment is the focus of most public policy

paradox of thrift

The idea that when many households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and aggregate demand will reduce income and employment.

Keynesian Consumption Function

What determines consumption & savings? Classical Economists à interest rates ↑ in interest rates = ↑ in savings Keynesians ---> income Consumption grows as income grows but not as fast. As income ↑, savings ↑ as a % of income

Long-run growth

When an economy finds new resources/ ways to use existing resources better. expansion of the PPF

Taxes

When taxes ↑ money is withdrawn from the economy's spending stream When taxes ↓ money is injected into the economy's spending stream

catch-up effect

Why poor countries grow faster than rich ones The catch-up effect is subject to diminishing returns to capital. Developing countries: use existing technologies to make their inputs more productive. Developed countries: must innovate to increase growth

Inflation

a general rise in the prices of goods and services over time measured using a market basket. some prices rise & some fall. But overall, the price level increases

Developing countries can achieve higher productivity per unit of capital because they can use technologies developed by other countries. This is known as the:

catch-up effect

All of these are measures of inflation EXCEPT: a. GDP Deflator b. consumer price index (CPI) c: domestic price index (DPI) d. producer price index (PPI)

domestic price index (DPI)

Arlina got a 5% raise while the rate of inflation was 6%. Arlina's standard of living:

fell by 1%

Which of these factors will result in higher investment at existing interest rates?

improvements in business expectations

Which factor has led to labor productivity growth in the U.S.?

improvements in technology

All of these help an economy to grow EXCEPT: · -legal enforcement of contract rights -a stable legal system that protects property rights -informally recognized land ownership -a stable financial system,

informally recognized land ownership

Which one of these is NOT correct cyclical employment? -it comes about because of changes in the business cycle -macroeconomics policies have their greatest impact on it, as compared to frictional and structural unemployment -it is generally short-term in duration -all of the above

it is generally short-term in duration not necessarily - depends on the duration of the recession

To spur economic growth, underdeveloped countries should do all of these EXCEPT: -trade with foreigners. -protect property rights. -educate their population. -keep a high rate of inflation

keep a high rate of inflation

A Small Country Has 1,200 Citizens: 800= Employed, 200= Unemployed, 100= Retired, 100= Kids In School The Unemployment Rate Is:

labor force = 800 + 200 = 1000 200/1000= .20 = 20%

____________________ or "leave-it- alone" is the best approach to markets when following the classical model of economic thought.

laissez-faire

GDP Deflator

measures average change in prices for all components in the GDP: (c,i,d,nx) GDP deflator= nominal GDP/real GDP x 100

production function

measures how an economy turns inputs into outputs using existing technology. technology enhances the productive capacity of all other resources improvements in technology & new ideas lead to economic growth

A person just lost his job and decided to take a month-long break to travel to Europe before looking for a new position. Just as he returns home from his trip, he is interviewed by the Department of Labor about his employment status. How would he be classified?

not in the labor force has not been looking for a job in the past 4 weeks

Real GDP per capital

real gpd/population

A production function:

shows the output that is produced using different combinations of inputs combined with existing technology.

What is the primary explanation for the rapid growth of the U.S. economy over the last century?

technological progress

Spending Multiplier

tells us how much spending is needed to boost income/GDP to a specific level multiplier = 1/(1-MPC) a larger MPC, means a higher value for the spending multiplier Ex: Increase in Spending of $400 Total Saving = Total Investment Multiplier = 1/((1-MPC)) = 1/((1-.75)) = 4 $100 x 4 = $400

What does the consumer price index (CPI) measure?

the average prices paid by urban consumers for a market basket of consumer goods & services

South Sudan has achieved greater productivity for each unit of capital invested than developed nations because it has the advantage of using technologies that have already been developed by other countries. This advantage due tp

the catch-up effect

As explained in the lecture: a small difference in the economic growth rate can lead to big differences over time because of ______________________.

the power of compounding