Macroeconomics Quiz #2

4 %.

After one year, an investment of $1,000 has yielded interest of $100. Over that period, prices have risen by 6 percent. The

100

By denition, the base year price index is

Classical model

Classical economists assumed that economies would operate at full employment because prices and wages are flexible. If unemployment were present, wages and prices would fall until full employment was restored. The classical economists wrote in the 19th century. Empirical evidence shows that prices were indeed flexible during that period. Extreme upward and downward movements in prices took place regularly. This was due to the greater importance of agriculture in the 19th century. Agricultural prices were flexible in both directions.

Capital Market

Composed of investors and creditors, The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

The real wage and full-employment output both rise

Consider the general equilibrium of an economy based on the competitive model. A technological innovation increases the marginal product of labor. As a result

output

Consists of a lot of goods and services- Ex. the sale of a computer

absolute price variability

Deflation costs that aect the whole economy include all but which of the following?

A steady decline of the price level.

Deflation is a. a reduction in the rate of increase of the price level

Disinflation is the decline in inflation

Deflation is the decline in general prices in the economy

Demand Shifts

Demand shifts are defined by more or less of a given product or service being required at a fixed price, resulting in a shift of both price and quantity. As would be assumed, an increase in demand will shift price upwards and volume to the right, increasing the overall value of both metrics relative to the prior equilibrium point . Alternately, a decrease in demand will shift price downwards and volume to the left, decreasing both measurements to realign equilibrium with a reduced demand.

the DVD you rented from NetFlix

Each of the following would be included in GDP under the nal goods approach except

a. New technological innovations b. An increase in the nations labor supply c. An increase in worker productivity d. All of the above.

Each of the following would cause potential GDP to increase.

(Real GDP) Real Gross Domestic Prodoct

Equals Nominal GDP / divided by the price level

When demand equals supply in the aggregate labor market, there is no unemployment in the sense that

Every qualied worker willing to work at the market wage can find a job.

The real wage has fallen from W2 to W1 and employment has risen from L1 to L2.

Figure 6.2 shows the aggregate labor market. The aggregate labor supply curve has shifted to the right (from S to S'), with the result that

The real rate of interest has fallen from r2 to r1 and investment has risen from I1 to I2

Figure 6.8 shows the aggregate capital market. The aggregate saving function has shifted to the right (from SI to SI ), with the result that

wages + interest payments + cost of intermediate goods + indirect taxes + prots

Firms revenues equal

The last alternative method used to calculate GDP is the income approach, which measures the incomes generated by economic activity. Using the income approach,

GDP = wages + interest payments + taxes + profits

Real GDP

GDP adjusted for changes in the general price levels

Economic Data

GDP- Gross Domestic Product Unemployment Rate CPI-Consumer Price Index Important to understand how this data is measured to understand the weaknesses. Helps to judge if the economy is going the right direction or not.

Value added= Firm's revenue+ Cost of intermediate Goods

GDP=Sum of value added of all firms

Value Added=w+I+indirect taxes+Depreciates+Profits

GDP=W+IP+IT+D=Profits

GDP

Gross Domestic Product- is the value of final output produced within an economy's borders is called

Demand Curve (Big Picture) The whole point of a demand curve is to find the relationship between the price of a good and the quantity that consumers wish to purchase (the quantity demanded).

I am going to assume that you have some understanding of the 1st Law of Demand. The 1st Law of Demand states, "ceteris paribus (holding other relevant factors constant), as the price of a good falls, the quantity demand of that good increases." Basically, it states that demand curves are downward sloping.

More than; an increase in

If Nominal GDP rises, in percentage terms > more than the rise in price, this indicates an increase in Real (GDP) Gross Domestic Product

The fiscal deficit

If the federal government spends more in any year than it receives in revenues, the dierence is called

minus 10 percent.

If the nominal rate of interest is 10 percent and the rate of in flation is 20 percent, the real interest rate is

Investment and the federal budget decit

In a closed economy, private savings finance

There are three ways to calculate either nominal or real GDP, each yielding identical results:

The final goods approach - which relies on data from the production of final goods and services The value-added approach - which relies on data from the production of intermediate goods and services The income approach - which looks at incomes of workers and employers.

Potential GDP is

The total money value of goods & services, the residents of a country could produce during a specified period if labor and machines were used to capacity.

. natural

The unemployment rate associated with a zero output gap is called the rate of unemployment

The inflation rate is positive if

There is an increase in the general level of prices, a measure of how quickly prices are increasing or decreasing in a country.

Nominal Gross Domestic Product

Total money value of goods & services produced by residents of a country during a specified period is known as

There are three main types of inflation: Demand-pull inflation Cost-push inflation Hyperinflation

Types of Inflation

1.Direct selling is the marketing and selling of products directly to consumers away from a fixed retail location. 2.An intermediary (or go-between) is a third party that offers intermediation services between two trading parties. 3.Dual distribution describes a wide variety of marketing arrangments by which the manufacturer or wholesalers use more than one channel simultaneously to reach the end user. 4.A reverse channel may go from consumer to intermediary to beneficiary.

Types of Marketing Channels

Nominal GDP

Unadjusted GDP

There are basically 4 types of marketing channels: direct selling; selling through intermediaries; dual distribution; and reverse channels.

Understand the players in each market and what their roles are.

seasonal unemployment.

Unemployment that varies with the seasons is called

d. $2,220 billion

Using the nal goods approach to calculating GDP, if GDP is $13,580 billion in 2007 and we know that consumption is $8,950 billion, government purchases are $2,810 billion, taxes are $2,490 billion, and net exports are $400 billion, what is investment?

GDP= C+I+G+X-M

Value

Lastly, important savings and investment determinants include income, ... These three assumptions imply that the economy can achieve a short-run equilibrium ... do not automatically achieve equilibrium, meaning full employment is not guaranteed. ... The first of three key assumptions underlying Keynesian economics is the Must also know the quantities of capital and labor the economy has. ... good. The marginal revenue product of labor equals the marginal product of labor times ... the wage that clears the market at full employment, labor demand must be lower.

What clears the product market in the general equilibrium (full employment) model? While you are at it, what clears the capital and labor market as well?

frictional unemployment

When college students complete their studies and begin seeking work, the period of short-term unemployment before they nd work is called

Nondiscretionary spending

When the government sets the level of a certain government benet, and then pays the benet to anyone who qualies to receive it under the rules the government has specied for entitlement, the total amount spent on that program represents an example of what is called,

the consumer price index

Which of the following measures changes in the prices of goods and services purchased by the average household?

[As the price rises the quantity demanded by consumers will fall.]

Why does the demand curve slope down and to the right?

[As the price falls the quantity supplied by producers will rise.]

Why does the supply curve slope up and to the right?

M=Imports, G= Government Purchases

X-Export, I=Aggregate Investment, C= Aggregate Consumption

If the quantity demanded exceeds the quantity supplied, then there is a _______ in the market.

[Shortage]

If the quantity supplied exceeds the quantity demanded, then there is a _______ in the market

[Surplus]

Substitution effect —

a higher relative price raises the opportunity cost of buying a good and so people buy less of it.

Income effect —

a higher relative price reduces the amount of goods people can buy. Usually this effect decreases the amount people buy of the product that

Asumptions

i) prices and wages are inflexible (ii) unemployment exists in the labor market.

three market

labor market, Product market, Capital Market

Which of the following groups is most likely to gain from inflation?

owners of property

Another problem caused by unanticipated inflation is for workers on fixed contracts. If a labor union makes a long-term agreement for salary increases based on the projected inflation rate, then the real wage may actually decline if the inflation rate shifts up. The definition of the real wage is:

real wage = nominal wage - inflation rate For an example, assume the nominal wage increases at a 5% rate. If inflation is 3%, the real gain in wages is 2%. But if inflation unexpectedly jumps to 8%, the real wage gain is -3% (the real wage falls by 3%).

In the basic competitive model of an economy, firms_______ in the product market_______, in the labor market, and_____________in the capital market.

sell goods; buy labor; borrow money

The three-sector, three-market circular flow model highlights the role played by the government sector. The government sector buys a portion of gross domestic product flowing through the product markets to pursue its assorted tasks and functions, such as national defense, education, and judicial system. These expenditures are primarily financed from taxes collected from the household sector. However, when tax revenue falls short of expenditures, the government sector is also prone to borrow through the financial markets.

the Government Sector The government sector, as such, adds three key flows to the model--taxes, government purchases, and government borrowing. These flows divert, but do not destroy, a portion of the core flow of production, income, and consumption.

When real wages adjust to clear the labor market

the aggregate supply curve is vertical.

Product Market

the market in which households purchase the goods and services that firms produce

When a firm sells a good, the sales price of the good can be used in the final goods approach to calculating GDP. Also, by selling a final good, the merchant receives revenues. Using the above formula, the revenues can be disbursed in the following ways:

wages - paid to labor; interest payments - are paid on the money the firm borrows to finance capital expenditures. The recipients are individuals or institutions that lend money to the firm; taxes - are paid by firms to the government in the form of corporate income taxes and indirect taxes such as excise taxes. profits - is what is left over after meeting the three above obligations.

. intermediate goods

9. The nal goods approach to determining gross domestic product adds up all of the following except

Increase consumption and investment and lower the real interest rate.

A balanced budget decrease in taxes and government expenditures will, ceteris paribus

marketing channels

A marketing channel is a set of practices or activities necessary to transfer the ownership of goods, and to move goods, from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process.

value added.

The dierence between a rms revenue and what it pays for intermediate goods is called

The domestic economy consists of three markets:

(i) the product market (ii) the money market, and (iii) the external market.

labor Market

, The input/factor market in which households supply work for wages to firms that demand labor.

The real money supply has a positive effect on aggregate demand, as does real ... Thus, as we can see from the diagram, the aggregate demand curve shifts ... The aggregate supply curve may reflect either labor market disequilibrium or labor ... quality of labour and capital affect both long-run and short-run supply curves.

. Understand the assumptions we have made for the labor and capital supply curve

Demand

...

Demand-Pull Inflation

...

The three-sector, three-market circular flow model highlights the key role that the government sector plays in the macroeconomy. It expands the circular flow model by illustrating how taxes are diverted from consumption expenditures to the government sector and then used for government purchases. It illustrates that taxes do not vanish from the economy, but are merely diverted.

...

The World Bank system breaks down national wealth into four major attributes in an attempt to create "an entire portfolio of national assets." The first three of the following four categories are included in the recent World Bank report:

1-Produced capital is the economic value of the machinery, factories, roads, water systems, and other parts of the nation's infrastructure. 2-Natural capital consists of the value of natural resources such as forests, mineral deposits, land, water, and other environmental assets. 3-Human resources considers the educational level of the population and other related factors. 4-Social institutions, such as banking and other lending institutions that provide money for the population to borrow to invest in new businesses. This consideration was not fully developed and was excluded from the report.

The three things we can conclude

1-bank profits fall during periods of rising interest rates (caused by increased inflation); 2-in general,unanticipated jumps in inflation hurt lenders while helping borrowers who pay off their debts with money, the value of which has been eroded by inflation; and 3-if inflation is properly anticipated lenders can raise the interest rates that they charge borrowers in order to maintain a positive rate of return.

Generally speaking, the ceteris paribus conditions for Supply can be classified into a few major groups"

1. Input Prices 2. Prices of Technologically Related Goods (substitutes and complements in production) 3. Expectations of Future Prices 4. Other Stuff

The traditional way of viewing the components of marketing is via the four Ps:

1. Product. Goods and services (creating offerings). 2. Promotion. Communication. 3. Place. Getting the product to a point at which the customer can purchase it (delivering). 4. Price. The monetary amount charged for the product (exchange).

The three macroeconomic sectors included in this model are:

1.Household Sector: This includes everyone, all people, seeking to satisfy unlimited wants and needs. This sector is responsible for consumption expenditures. It also owns all productive resources. 2.Business Sector: This includes the institutions (especially proprietorships, partnerships, and corporations) that undertake the task of combining resources to produce goods and services. This sector does the production. It also buys capital goods with investment expenditures. 3.Government sector: This includes the ruling bodies of the federal, state, and local governments. Regulation is the prime function of the government sector, especially passing laws, collecting taxes, and forcing the other sectors to do what they would not do voluntary. It buys a portion of gross domestic product as government purchases.

The three macroeconomic markets in this version of the circular flow are:

1.Product markets: This is the combination of all markets in the economy that exchange final goods and services. It is the mechanism that exchanges gross domestic product. The full name is aggregate product markets, which is also shortened to the aggregate market. 2.Resource markets: This is the combination of all markets that exchange the services of the economy's resources, or factors of production--including, labor, capital, land, and entrepreneurship. Another name for this is factor markets. 3.Financial Markets: The commodity exchanged through financial markets is legal claims. Legal claims represent ownership of physical assets (capital and other goods). Because the exchange of legal claims involves the counter flow of income, those seeking to save income buy legal claims and those wanting to borrow income sell legal claims.

intermediaries

An intermediary is a third party that offers an intermediation service between two trading parties.

Cyclical unemployment is unemployment that

Increases in a recession and falls in a boom.

Anticipated

Inflation is much more of a problem when it is

...

Know how to graph supply and demand curves for all three markets of course labeling them correctly. Make sure you understand what causes these curves to shift and be able to show the shifts on a graph.

Economists look for the difference between what an economy is producing and what it can produce During economic downturns an economy's output of goods and services declines. When times are good, by contrast, that output—usually measured as GDP—increases (see "Gross Domestic Product:

Know the measures for economic output, inflation, unemployment. Understand the short comings of these measures.

Who suffers from Inflation

Lenders, Taxpayers, Holders of Currency

Classical economics, especially as directed toward macroeconomics, relies on three key assumptions--flexible prices, Say's law, and saving-investment equality. Flexible prices ensure that markets adjust to equilibrium and eliminate shortages and surpluses. Say's law states that supply creates its own demand and means that enough income is generated by production to purchase the resulting production. The saving-investment equality ensures that any income leaked from consumption into saving is replaced by an equal amount of investment. Although of questionable realism, these three assumptions imply that the economy would operate at full employment.

List key assumptions of our full employment model of the economy and why they are important (there are two major ones).

borrowers

Of the following people, who does not worry about inflation?

Principles of Macroeconomics

Output, Unemeployment, and Inflation

...

P* and Q* are the equilibrium price and equilibrium quantity. Equilibrium occurs where the supply curve intersects the demand curve. In other words, at the equilibrium price, quantity supplied equals, quantity demanded. There is neither a shortage, nor a surplus - we say that the market clears.

Nominal GDP in a Yr t=

Pt Good1 Qt Good 1 + Pt Good 2 Qt Good 2+ Pt Good 3 Qt Good 3+...

Income Approach

Revenue=Wages+Interest payment+Cost+Indirect Taxes+Depreciation+ profits.

.Long-term unemployment is most commonly

Structural unemployment.

$8000

Suppose that nominal GDP in 2006 equals $12.000 billion and the price index, which was 100 in 1987, equals 150. Real-GDP in 2006, measured in terms of 1987 prices, equals $8,000 divide 12,000 to 150 and get 80

158 percent

Suppose the base year for the consumer price index is 1991 and the index stands at 258 in 2006. Between 1991 and 2006, consumer prices have increased by

A circular flow model of the macroeconomy containing three sectors (business, household, and government) and three markets (product, factor, and financial) that illustrates the continuous movement of the payments for goods and services between producers and consumers, with particular emphasis on taxes and government purchases. Other circular models are two-sector, two-market circular flow; two-sector, three-market circular flow; and four-sector, three-market circular flow.

THREE-SECTOR, THREE-MARKET CIRCULAR FLOW:

. An economist views unemployment primarily as

a. an underutilization of resources

Capital gains are best described as

b. increases in the nominal value of assets. d. void of increases in real output

3. A recession is said to occur when

b. real gross domestic product declines for two consecutive quarters.

Price Changes

changes in real domestic product through time will deter from changes in nominal GDP by taking account of Price Changes

The labor force is made up of

d. individuals who are employed plus all those individuals who are seeking work.