MACRO TEST 2

CPI Deflation

Calculating the CPI The ___calculation has three steps: Find the cost of the CPI basket at base period prices. Find the cost of the CPI basket at current period prices. Calculate the CPI for the base period and the current period. ____is a situation in which the inflation rate is negative.

noneconomic economic

A part-time job is attractive to workers because they Balance family with work Part-time jobs are attractive to employers because Benefits are not paid to part-time workers Less government regulation of part-time workers People who choose part-time jobs are part time for ___ reasons. People who take part-time jobs because they can't find full-time jobs are part time for _____reasons.

long-term short-term

Another component of today's consensus is the view that the____problem of economic growth is more important than the ___problem of recessions. Even a small slowdown in economic growth brings a huge cost in terms of a permanently lower level of income per person. The Road Ahead We follow the new consensus and begin with an explanation of what determines potential GDP and the pace at which it grows.

GDP

Because the ___ price index uses information on current year quantities, it includes new goods and quality improvements and even allows for substitution effects of both commodities and retail outlets. So in principle, the GDP price index is not subject to the biases of the CPI.

CPI

Close to a third of federal government outlays are linked directly to the CPI. The ____is used to adjust: 55 million Social Security benefit payments 45 million food stamp payments 4 million pensions for retired military personnel, federal civil servants, and their surviving spouses The budget for 3 million school lunches

business cycle

Fluctuations in the pace of expansion of real GDP is called the business cycle. The ______is a periodic, but irregular, up- and down-movement of total production and other measures of economic activity. The four stages of a business cycle are expansion, peak, recession, and trough.

Classical

Each of the earlier schools provides insights and ingredients that survive in today's consensus. ___macroeconomics provides the story of the economy at or close to full employment. But the classical approach doesn't explain how the economy performs in the face of a major slump in spending.

Income

Expenditure Equals_____ Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals total income. That is: Y = C + I + G + NX The value of production equals income equals expenditure.

Used Goods Financial Assets

Expenditures Not in GDP _______ Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods. ________ When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services.

increases decreases

The unemployment rate____in recessions ... and ___in expansions.

labor force

The working-age population is divided into those in the ______and those not in the labor force. Labor force is the number of people employed plus the number unemployed. In May 2013, the U.S. labor force was 155.7 million—143.9 million people were employed and 11.8 million people were unemployed.

The unemployment rate(2x)

Two Main Labor Market Indicators _____ The labor force participation rate Unemployment rate = Number of people unemployed/Labor force x 100 ______is the percentage of people in the labor force who are unemployed.

GDP CPI

Two differences between the GDP price index and the CPI result in different estimates of the price level and inflation rate. 1. The ___price index uses the prices of all the goods and services in GDP. The ___uses prices of consumption goods and services. The GDP price index weights each item using information about current as well as past quantities. In contrast, the CPI weights each item using information from a past Consumer Expenditure Survey.

Potential GDP

Two features of our changing standard of living are 1. The growth of potential GDP per person 2. Fluctuations of real GDP per person around ______ is the value of real GDP when all the economy's factors of production —labor, capital, land, and entrepreneurial ability—are fully employed.

Great Depression

___ A period of high unemployment, low incomes, and extreme economic hardship that lasted from 1929 to 1939

Commodity Substitution Bias Outlet Substitution Bias

___ If the price of beef rises faster than the price of chicken, people buy more chicken and less beef. The CPI basket doesn't change to allow for the effects of substitution between goods. _____ If prices rise more rapidly, people use discount stores more frequently. The CPI basket doesn't change to allow for the effects of outlet substitution.

New Goods Bias Quality Change Bias

___ New goods do a better job than the old goods that they replace, but cost more. The arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate. ______ Better cars and televisions cost more than the versions they replace. A price rise that is a payment for improved quality is not inflation but might get measured as inflation

Leisure Time Environment Quality

___ Our working time is valued as part of GDP, but our leisure time is not. _____ Pollution is not subtracted from GDP. We do not count the deteriorating atmosphere as a negative part of GDP. If our standard of living is adversely affected by pollution, our GDP measure does not show this fact.

Potential GDP

___ is the value of real GDP when all the economy's factors of production are fully employed. We produce the goods and services that make up real GDP by using factors of production: labor and human capital, physical capital, land, and entrepreneurship. At any given time, the quantities of human capital, physical capital, land, entrepreneurship, and the state of technology are fixed. But the quantity of labor is not fixed. The quantity of labor employed depends on the choices of people and businesses. So real GDP produced depends on the quantity of labor employed. To describe the relationship between real GDP and the quantity of labor employed, we use a relationship called the production function.

Keynesian

___ macroeconomics takes up the story in a recession or depression. When spending is cut, the demand for most goods and services decreases and the demand for labor decreases. Prices and wage rates don't fall, but the quantity of goods and services sold and the quantity of labor employed do fall and the economy goes into recession. In a recession, an increase in spending by governments, or a tax cut that leaves people with more of their earnings to spend, can help to restore full employment.

Milton Friedman

___ was the most prominent monetarist. The view that monetary contractions are the sole source of recessions is held by few economists today. But the view that the quantity of money plays a role in economic fluctuations is accepted by all economists and is part of today's consensus.

Discouraged worker

____ is a marginally attached worker who has not made specific efforts to find a job within the previous four weeks because previous unsuccessful attempts were discouraging. In May 2013, 753,000 people were discouraged workers and 1,372,000 people were other marginally attached workers. By adding these workers to the number unemployed and the labor force, the unemployment rate becomes 8.8 percent.

Consumption expenditure

____ is the expenditure by households on consumption goods and services. Investment is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories.

Quantity of labor demanded

____ is the total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate.

Consumer Price Index

____(CPI) is a measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services. The BLS calculates the CPI every month. We can use these numbers to compare what a fixed basket of goods costs this month with what it cost in some previous month.

Income

_____ Labor earns wages. Capital earns interest. Land earns rent. Entrepreneurship earns profits. Households receive these incomes.

Classical macroeconomics great depressi9on

_____ fell into disrepute during the 1930s, which was a decade of high unemployment and stagnant production throughout the world. ___is a decade (the 1930s) of high unemployment and stagnant production throughout the world economy. Classical macroeconomics predicted that the Great Depression would end but gave no method for ending it more quickly.

Government expenditure Net exports of goods and services

_____ on goods and services is the expenditure by all levels of government on goods and services. _______is the value of exports of goods and services minus the value of imports of goods and services.

Real GDP

_____ per person grows and fluctuates around potential GDP per person. Potential GDP per person grew at 2.8 percent in the 1960s and slowed to 1.9 percent in the 1970s.

Labor Market Equilibrium

______ A rise in the real wage rate eliminates a shortage of labor by decreasing the quantity demanded and increasing the quantity supplied. A fall in the real wage rate eliminates a surplus of labor by increasing the quantity demanded and decreasing the quantity supplied. If there is neither a shortage nor a surplus, the labor market is in equilibrium.

The Income Approach

______ Measures GDP by summing the incomes that firms pay households for the factors of production they hire. The U.S. National Income and Product Account divide incomes into two big categories: Wage income Interest, rent, and profit income

The Expenditure Approach

______ Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.

Working-age population

______ is the total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care or in the U.S. Armed Forces.

Gross national product

______ or GNP is the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by residents of the country. U.S. GNP = U.S. GDP + Net factor income from abroad

Exports of goods and services Imports of goods and services

_______ are the items that firms in the United States produce and sell to the rest of the world. ________are the items that households, firms, and governments in the United States buy from the rest of the world

Net domestic product at factor cost

_______ is the sum of wages, interest, rent, and profit. Net domestic product at factor cost is not GDP. We need to make two adjustments to arrive at GDP: One from factor cost to market prices One from net product to gross product

Household Production Underground Production

________ Real GDP omits household production and it underestimates the value of the production of many people, most of them women. __________ Economic activity hidden from government to avoid taxes and regulations or production that is illegal. Because underground economic activity is unreported, it is omitted from GDP.

Consumption expenditure Disposable personal income

________is one of the largest components of aggregate expenditure and one of the main influences on it is disposable personal income. ______ is the income received by households minus personal income taxes paid.

The expenditure approach

________values goods at market prices; the income approach values them at factor cost. Indirect taxes (such as sales taxes) make market prices exceed factor cost. Subsidies (payments by government to firms) make factor cost exceed market prices. To convert the value at factor cost to the value at market prices, we must: Add indirect taxes and subtract subsidies.

Income Expenditure

_______includes net profit, so the income approach gives a net measure. ______includes investment. Because some new capital is purchased to replace depreciated capital, the expenditure approach gives a gross measure. To get gross domestic product from the income approach, we must add depreciation to total income. After making these two adjustments the income approach gives almost the same estimate of GDP as the expenditure approach.

Gross domestic product...wages...interest....rent...profits.

_______or GDP The market value of all the final goods and services produced within a country in a given time period. Value Produced Use market prices to value production. Income..... Labor earns __ Capital earns ____ Land earns ____ Entrepreneurship earns ____ Households receive these incomes

Wage income,

______called compensation of employees in the national accounts, is the payment for labor services. It includes net wages and salaries plus fringe benefits paid by employers such health-care insurance, Social Security contributions, and pension fund contributions.

Total expenditure

______is the total amount received by producers of final goods and services. Consumption expenditure: C Investment: I Government expenditure on goods and services: G Net exports: NX Total expenditure = C + I + G + NX

Reference base period

The CPI is defined to equal 100 for a period called the reference base period. ___is a period for which the CPI is defined to equal 100. Currently, the reference base period is 19821984.

CPI

The ___ is used to adjust the income levels at which higher tax rates apply. Tax rates on large incomes are higher than those on small incomes, so as incomes rise the burden of taxes would rise relentlessly if these adjustments were not made. To the extent that the CPI is biased upward, the tax adjustments overcompensate for rising prices and decrease the amount paid in taxes.

GDP price index

The _____is an average of current prices of all the goods and services included in GDP expressed as a percentage of base-year prices. GDP price index = (Nominal GDP Real GDP) 100. The GDP price index is a measure of the price level. The percentage change in the GDP price index is a measure of the inflation rate.

Cost of living index

_____is a measure of changes in the amount of money that people would need to spend to achieve a given standard of living. The CPI does not measure the cost of living because It does not measure all the components of the cost of living Some components are not measured exactly So the CPI is possibly a biased measure.

Full-time workers Part-time workers Part-time for economic reasons

____are people who usually work 35 hours or more a week. _____are people who usually work less than 35 hours a week. ________are people who work 1 to 34 hours per week but are looking for full-time work. (Also called involuntary part-time workers)

Final good or service Intermediate good or service

____is a good or service that is produced for its final user _________ is a good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service. GDP includes only those items that are traded in markets.

Quantity of labor supplied Supply of labor

____is the number of labor hours that all the households in the economy plan to work during a given time period and at a given real wage rate. _______ is the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.

Demand for labor

____is the relationship between the quantity of labor demanded and real wage rate when all other influences on firms' hiring plans remain the same. The lower the real wage rate, the greater is the quantity of labor demanded.

Monetarist

____macroeconomics elaborates the Keynesian story by emphasizing that a contraction in the quantity of money brings higher interest rates and borrowing costs, which are a major source of cuts in spending that bring recession. Increasing the quantity of money and lowering the interest rate in a recession can help to restore full employment. And keeping the quantity of money growing steadily in line with the expansion of the economy's production possibilities can help to keep inflation in check and can also help to moderate the severity of a recession.

Production function

___is a relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same

Labor force participation rate

___is the percentage of the working-age population who are members of the labor force.

statistical discrepancy. Statistical discrepancy

The income approach and the expenditure approach do not deliver exactly the same estimate of GDP—there is a ______is the discrepancy between the expenditure approach and income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.

Depreciation

The income approach measures net product. The expenditure approach measures gross product. Gross profit is a firm's profit before subtracting the depreciation of capital. Net profit is a firm's profit after subtracting the depreciation of capital. ______ is the decrease in the value of capital that results from its use and from obsolescence

Real GDP Nominal GDP

___is the value of the final goods and services produced in a given year expressed in the prices of the base year. ___is the value of the final goods and services produced in a given year expressed in the prices of that same year. The method of calculating real GDP changed in recent years. Here we describe the essence of the calculation. The appendix gives the technical details.

Inflation rate i

___s the percentage change in the price level from one year to the next.

Keynesian

According to ___ macroeconomics, the market economy is inherently unstable and it requires active government intervention to achieve full employment and sustained economic growth. John Maynard Keynes, in his book "The General Theory of Employment, Interest, and Money," began this school of thought. Keynes' theory was that too little consumer spending and investment led to the Great Depression. -Keynes' solution to depression and high unemployment was increased government spending. But Keynes predicted that his policy aimed at curing unemployment in the short term might increase it in the long term. This prediction became reality during the 1960s and 1970s, when inflation exploded, growth slowed, and unemployment increased. The global recession of 2008-2009 and fear of another great depression revived interest in Keynesian ideas

monetarist

According to ___macroeconomics, the classical view of the world is broadly correct, but in addition to fluctuations that arise from the normal functioning of an expanding economy, fluctuations in the quantity of money also generate the business cycle. A slowdown in the growth rate of money brings recession and a large decrease in the quantity of money brought the Great Depression.

classical macroeconomics,

According to ___the market economy works well and delivers the best available macroeconomic performance. Aggregate fluctuations are a natural consequence of an expanding economy with rising living standards. Government intervention can only hinder the ability of the market to allocate resources efficiently.

marginally attached worker

Alternative Measures of Unemployment The official definition of unemployment omits two types of labor: Marginally attached workers Part-time workers A______ is a person who does not have a job, is available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the recent past.

net operating surplus

Interest, rent, and profit income, called ______in the national account, is the sum of the incomes earned by capital, land, and entrepreneurship. Interest is the income households receive on loans they make minus the interest they pay on their borrowing. Rent includes payments for the use of land and other rented inputs. Profit includes the profits of corporations and small businesses.

diminishing returns:

The production function is a boundary between the attainable and the unattainable The production function displays ____ The tendency for each additional hour of labor employed to produce successively smaller additional amounts of real GDP

Hours per person labor force participation rate

The quantity of labor supplied increases as the real wage rate increases for two reasons: ____increase as the real wage rate increases. The ________ increases as the real wage rate increases.

CPI basket

The relative importance of the items in the _____is the same as in the budget of an average urban household. The CPI is calculated each month, but the CPI basket is not updated each month. The CPI basket in 2013 is based on information obtained from the Consumer Expenditure Survey conducted during 2011.

recession

The shaded period shows the recession. A _____ is a period in which real GDP—its growth rate is negative—for at least six months.

unemployed

The survey counts as ____all persons who, during the week before the survey: 1. Had no employment, 2. Were available for work, and either: 1. Had made efforts to find employment during the previous four weeks, or 2. Were waiting to be recalled to a job from which they had been laid off.

employed

The survey counts as ___all persons who, during the week before the survey: 1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business. 2. Were not working but who had jobs from which they were temporarily absent.