Macroeconomics Test 1 Review
Formula for a Basic Price Index
(cost of market basket today / cost of market basket in base year) x 100
Top Three Categories of Goods and Services in the CPI basket
Housing, Food and Beverages, Transportation
Which of these statements about interest rates and inflation is true? If there is zero inflation, the nominal interest rate is equal to the real interest rate. The real interest rate is equal to the nominal interest rate plus the inflation rate. The real interest rate is equal to the nominal interest rate divided by the inflation rate.
If there is zero inflation, the nominal interest rate is equal to the real interest rate.
Which of these is not a shortcoming of GDP as a measure of welfare? It only counts final goods and services and not intermediate goods. It does not include the value of leisure. It is not adjusted for crime and other problems.
It only counts final goods and services and not intermediate goods.
Over the course of the year business inventories increased. How is this change reflected in the GDP?
It will increase gross private domestic investment.
GDP Deflator
Measures the price level for all produced goods and services in an economy.
How to calculate National Income
National Income = Compensation of Employees + Proprietors' Income + Rental Income + Corporate Profits + Net Interest + Indirect Taxes minus Subsidies + Net Business Transfer Payments - Surplus of Government Enterprises
Of the value of stocks, the value of bonds, and the value of used goods, which are included when calculating GDP?
None of them
Disposable Personal Income (DPI)
Personal income minus personal income taxes. The amount that households have to spend or save
Categories of Gross Private Domestic Investment
Residential Investment, Nonresidential Investment, Changes in Business Inventories
Monetary Policy
The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives
Which market basket specifically targets intermediate goods?
The basket used by the producer price index
One reason why unemployment exists is because labor market adjustments generally take time.
True
The two main policy instruments of the government are fiscal policy and monetary policy.
True
The unemployment rate is usually closely related to the economy's aggregate output.
True
Everyone's expenditure is someone else's receipt.
True
The capacity for long-run economic growth for an economy is determined
by the size of its labor force, its capital stock, and productivity of labor and capital.
One disadvantage of using the fixed weight approach to calculate real GDP is that, it
cannot capture the changes in relative prices and quantities of different goods produced in the economy.
At full employment, __________.
cyclical unemployment is zero
Macroeconomics
deals with the economy as a whole; focuses on the determinants of total national income, aggregates such as aggregate consumption and investment, and the overall level of prices instead of individual prices
GDP is different from final sales since
final sales ignores changes in inventory, which are included in GDP calculation.
The application of macroeconomic models to economy-wide problems began ____
in the 1930s
Prior to the 1970s, high inflation was always associated with periods of:
low unemployment and economic prosperity
If the total dollar value of U.S. imports exceeds U.S. exports it will result in a:
lower GDP
Disposable personal income is equal to personal income minus:
personal tax payments
Sticky Prices
prices that don't always adjust rapidly to maintain equality between quantity supplied and quantity demanded
Human Capital
the accumulated knowledge and skills workers acquire from education and training, or with life experiences
aggregate behavior
the behavior of all households and firms together
Consumer Price Index (CPI)
•A price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the "market basket" purchased monthly by the typical urban consumer.
Employed vs. Unemployed
•Employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay. •Unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.
Things excluded from GDP
•GDP is concerned only with new, or current, production. Old output is not counted in current GDP because it was already counted when it was produced. •GDP does not count transactions in which money or goods change hands but in which no new goods and services are produced. •Government pays welfare money to the poor! This is not included in GDP; nothing is produced. It is just a transfer of money from one pocket to another •GDP excludes output produced abroad by domestically owned factors of production
Since inflation erodes the purchasing power of those persons on fixed incomes, the government makes an annual inflation adjustment to Social Security. These types of adjustments are known as __________.
COLAs
Which is the largest component of GDP?
Consumption
What do we subtract from GNP to obtain NNP?
Depreciation
_______ is the amount an asset falls in value for a given year.
Depreciation
____ is the percentage of theworking-age population in the labor force.
The labor force participation rate
Personal Saving Rate
The percentage of disposable personal income that is saved.
Which of the following is included in the economist's definition of investment? The purchase of new machines, factories, or houses The purchase of a share of stock The purchase of a rare coin or a deposit in a savings account
The purchase of new machines, factories, or houses
Which of these is a macroeconomic study? The study of how fast prices in general are rising. The study of how households and businesses make choices. The study of how households and businesses interact in the market.
The study of how fast prices in general are rising.
gross national product (GNP)
The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.
Business cycles were more extreme before World War II than they have been since then.
True
Counting the sales of used goods when calculating GDP would be an example of double counting.
True
What is the impact of unanticipated inflation?
Unanticipated inflation creates arbitrary redistributions of income.
Stagflation
a situation characterized by high inflation, slow or negative output growth, and high unemployment
Wages, interest, and dividends flow out of ________ and into ________.
firms; households
Classical economists believed that unemployment would not persist because prices and wages are _____ while Keynesians believe that they are _____ therefore unemployment will persist without government intervention to spur aggregate demand.
flexible; sticky
The flow of funds from __________ into the financial system makes it possible for government and firms to borrow.
households
In the labor market, ________ supply labor and ________ demand labor.
households; firms and governments
Transfer payments are not included in GDP calculation because these are
income received, but not as payments for providing current goods and services.
According to John Maynard Keynes fiscal policymakers can combat the impact of recessions by:
increasing government spending
The only way that the standard of living of the average person in a country can increase is by:
increasing production faster than population growth
The percentage rate of change in the price level is the definition of the:
inflation rate
If inflation is anticipated, __________.
it costs less to society than if unanticipated
The highest point on a business cycle is called a ____, and the lowest point is called a _____. The transition from the highest point to the lowest point is called a _____.
peak; trough; recession
The defining characteristic of long-run economic growth is:
rising productivity
The total national income actually received by a country's residents is:
smaller than the value of GDP
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and job requirements is called __________.
structural unemployment
Personal Saving (S)
the amount of disposable income that is left after total personal spending in a given period
If there is an inflation rate of 5% and nominal wages increase by 2%,
the purchasing power is redistributed from wage earners to producers-sellers
Gross Domestic Product (GDP)
the total market value of all final goods and services produced within a given period by factors of production locate within a country
The natural rate of unemployment is the __________.
unemployment rate that results when the economy produces the potential level of real GDP
Imports are subtracted in the expenditure approach to calculating GDP, because
consumption, investment, and government spending are overstated as these include expenditures on both domestic and foreign goods.
Deflation
•A drop/fall in the general/average price level); or a drop/fall in the price index.
Inflation
•A rise in the general/average price level; or a rise in the price index.
Who does Inflation benefit?
•Actual inflation that is higher (lower) than anticipated benefits debtors (creditors). •If falling prices are unanticipated, borrowers will gain at the expense of lenders, and those on fixed pensions will gain at the expense of governments and firms paying those pensions.
Because the consumer price index (CPI) is a fixed-weight index, it has a tendency to underestimate the rate of inflation.
False
The Circular Flow of Payments
•Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). •Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households andtaxes to the government. •The government receives taxes from firms and households, pays firms and households for goods and services—including wages to government workers—and pays interest and transfers to households. •Finally, people in other countries purchase goods and services produced domestically (exports).
Labor Force Participation (LFP) Rate
•Labor Force Participation (LFP) rate The ratio of the labor force to the total (civilian, non-institutionalized) population 16 years old or older. •LFP rate = (#LF / # qualified Population) *100%
Producer Price Indexes (PPIs)
•Measures of prices that producers receive for products at all stages in the production process (finished goods, intermediate materials, and crude materials).
Difference Between Nominal and Real GDP
•Nominal GDP uses the current prices. •Changes in nominal GDP can be due to changes in quantities or changes in prices •However, to measure real GDP, we need to fix the prices, so all changes in GDP are due to changed in quantities (real changes). How to convert nominal GDP to real GDP: -instead of using the current prices, we use the prices of a chosen year (called the base year) and multiply them by the current Q of each year.
Not in the Labor Force vs. Labor Force (LF)
•Not in the labor force A person who is not looking for work because he or she does not want a job or has given up looking. •Labor force (LF) The number of people employed plus the number of unemployed.
Per-Capita Output Growth
•The growth rate of output per person in the economy.
The Three Market Arenas
1. The goods-and-services market: Aggregate demand and Aggregate supply 2. The labor market: Labor demand and Labor Supply 3. The money (financial) market: money demand and money supply
Since 1970, the highest unemployment rate in the United States occurred during the recession that began in ____
1980
Since 1970, the longest recession in the United States began in ____
1980
All of the following are ways to calculate GDP except A. adding up the value of total sales of newly produced goods and services in an economy. B. adding up the value of final sales of newly produced goods and services in the economy. C. adding up the value added at each stage of production for newly produced goods and services in the economy. D. All of the above are ways to calculate GDP.
A
Which of the following goods and services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics? A new house A haircut Education
A new house
Which of these factors will cause the quantity of goods and services that can be produced by one worker, or in one hour of work, to increase? A technological change An increase in the number of workers An increase in the hours worked
A technological change
In order to pursue the macroeconomic goal of stability, policy makers want to avoid prolonged periods of inflation and instead push for prolonged periods of deflation.
False
Like real GDP, the GDP deflator is a quantity measure.
False
The value of intermediate goods is directly counted in GDP.
False
Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?
Real GDP
Value Added
The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
If inflation is higher than anticipated, ________ benefit(s) and if inflation is lower than anticipated, ________ benefit(s).
debtors; creditors
The best measure of the income households actually have available to spend is:
disposable personal income
Three Major concerns of Macroeconomics
- Output Growth: the percentage rate of real GDP growth - Unemployment: Unemployment rate (u) - Inflation and Deflation: Inflation rate (pi)
The Four Categories of Expenditures
-Personal consumption expenditures (C): household spending on consumer goods -Gross private domestic investment (Ia): spending by firms and households on new capital—that is, plant, equipment, inventory, and new residential structures -Government consumption and gross investment (G) -Net exports (EX − IM): net spending by the rest of the world, or exports (EX) minus imports (IM)
The Components of the Macroeconomy
1. Households -> C expenditures 2. Firms -> I expenditures 3. The government -> G expenditures 4. The rest of the world -> NX = X - Im (Net exports - Imports)
To calculate personal income from national income, which of the following must be done by the BEA?
Add government transfer payments
Which of these fiscal policy actions will increase real GDP in the short run? An increase in government expenditures An increase in the individual income tax An increase in the Social Security tax
An increase in government expenditures
How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP?
By adding the value in dollar terms of all the final goods and services produced domestically.
Dividends
Cash payments made by firms to stockholders
The relationship between net investment and GDP is given by,
Net Investment = GDP minus consumption minus government purchases minus exports plus imports minus depreciationGDP − consumption − government purchases − exports + imports − depreciation.
Households supply funds and demand funds in the money market.
True
Depression
a prolonged and deep recession
GDP calculated by the expenditure approach will be ____ to the GDP calculated by the income approach, because
equal; the dollar value of the expenditure on new goods and services in a year must be equal to the dollar value of the income generated in that year.
During the 1960s, many economists believed the government could do a good job regulating the level of inflation and unemployment. These policies were referred to as:
fine-tuning the economy
The ratio of the labor force to the adult population is known as the:
labor force participation rate
The classical model is based on the critical assumption that
markets always clear
The labor demand curve shows the
number of workers that the firms want to hire at each wage rate
The federal government borrows money by:
selling Treasury bonds, notes, or bills
To fund its budget deficit, the government can borrow by
selling treasury bills to the public
In a diagram of labor supply and labor demand curves, we measure _______ along the horizontal axis and ___________ along the vertical axis.
units of labor; the wage rate
The difference between the value of production inputs and outputs is known as:
value added
Qualified Population
•Qualified population: civilian, non-institutionalized (incarcerated, or disable), 16 years and older
National Income
•national income (NI) The total income earned by the factors of production owned by a country's citizens. -National Income (NI) = Personal income + Corporates' income + Government income
Causes of Changes in the CPI to overstate the true inflation rate
- Substitution Bias - Increase in Quality Bias - New Product Bias
Ways Output can increase in a simple economy
- The length of the workweek is extended - More machines are added - More workers are added
Which of the following accurately describe the financial flows into and out of households? (Check all that apply.) A. Interest flows into households as payment on corporate and government bonds and dividends from firms. B. Taxes flow out of households and to the government. C. Transfer payments flow out of households and into firms. D. Wages flow into households as payment for their labor services.
A, B, and D
4 Reasons why the unemployment rate, as measured by the Bureau of Labor Statistics, is an imperfect measure of the extent of joblessness in the economy
A. It fails to account for illegal activities. B. Discouraged workers are not considered unemployed. C. It does not account for inaccurate responses to the Current Population Survey. D. Underemployed people are considered employed.
When using fixed-quantity weights to compute price indexes, the fixed-weight procedure includes the substitution away from goods whose prices are increasing and toward goods whose prices are decreasing or increasing less rapidly.
False
How to get from GDP to National Income
GDP + Receipts of Factor Income from the Rest of the World - Payments of Factor Income to the Rest of the World = GNP GNP - Depreciation = NNP NNP - Statistical Discrepancy = National Income
When a significant fraction of the domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP
Income Approach to GDP
Specific tabulation and conversion: Gross Domestic Product (GDP): the market value of all final goods and services produced in the country in a given year. Gross National Product (DNP): The market value of all final good and services produced by the citizens of the country in a given year. GDP + Income receipts from the rest of the world - income payments to the rest of the world. = GNP GNP - capital depreciation = Net National Product (NNP) Net National Product (NNP) - statistical discrepancy. = National Income (NI) NI - Government income - Corporate income = Personal Income (PI) (Note that NI = Personal income + Government income + corporate in come) PI - Personal Income tax = Disposable Personal Income ( DPI or Yd) (Note that Personal Income Tax = paid income Taxes - received transfers) DPI (or Yd) = Consumption expenditures (C) + Saving (S) DPI (or Yd) = C + S
Microeconomics
The study of how households and businesses make choices, how they interact in markets, and how government influences their choices.
Frictional unemployment is generally a short-run condition in the labor market and structural unemployment is generally a long-run condition.
True
If prices fall and the fall is unanticipated, borrowers will gain at the expense of lenders.
True
Keynesian Theory of Consumption
We can use the following equation to describe a straight-line consumption curve: C = a + by where "a" is the level of consumption at Y = 0. It represent the level of consumption that in autonomous or independent of Y. And "b" is the marginal propensity to consume (MPC): the change in consumption as income changes by 1. b = MPC = △C/△Y
The portion of unemployment that is due to the normal turnover in the labor market is called ____
frictional unemployment
The unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees, is called:
frictional unemployment
At the time Keynes was writing, the economy in the U.S. was
going through a prolonged and deep depression
If the economy has just left a trough, it will be ________ and its level of output will be ________.
growing; low
Macroeconomists use microeconomic theory to guide them in their work since
macroeconomics studies the aggregate versions of microeconomic topics therefore the conclusion from microeconomic theory serves as an important reference for macroeconomists.
Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are __________ variables.
nominal; real
The labor supply curve shows the:
number of workers that want to work at each wage rate
Recession
occurs if GDP decreases for two consecutive quarters at least
Many economists believe the CPI __________ inflation because it fails to consider quality improvements in products.
overstates
Per capita output is _______ output per worker or productivity.
smaller than
Business Cycle
the cycle of short-term ups and downs in the economy
The U.S. Bureau of Economic Analysis (BEA) has recently adopted a new approach to calculate real GDP and real GDP growth to correct the problems of the fixed weights approach. One of the features of the new approach is that, now BEA uses
the geometric average of fixed weights indexes and uses two base years to calculate the growth rate of real GDP between two consecutive years.
Contraction, Recession, or Slump
the period in the business cycle from a peak down to a trough during which output and employment fall (GDP and employment decrease, unemployment rises, and price levels decrease)
Expansion or Boom
the period in the business cycle from a trough up to a peak during which output and employment grow (GDP and employment rise, unemployment drops, and price levels rise)
Informal Economy
the portion of the economy that should be counted in the GDP but is not
Aggregate Output
the total number of goods and services produced in an economy in a given period (GDP)
Types of Unemployment
•Frictional unemployment The portion of unemployment that is as a result of the normal turnover in the labor market; used to denote short-run job/skill-matching problems. (A normal part of life. Always exists. Not a real macroeconomic problem) •Structural unemployment The portion of unemployment that is as a result of changes in the structure of the economy that result in a significant loss of jobs in certain industries. (Not a real problem. Response, retraining, gaining new skills, more to other industries) -Main causes: outsourcing, mergers and acquisitions, automation •Cyclical unemployment Unemployment that is above frictional plus structural unemployment. It is due to the fluctuations (ups and downs) in the aggregate economic activities. Cyclical unemployment rises during recession and decreases during economic expansion. This is the big most significant macroeconomic unemployment problem. •Natural rate of unemployment The unemployment rate that occurs as a normal part of the functioning of the economy. Natural rate of unemployment = frictional unemployment rate + the structural unemployment rate. It is approximately 5% ( or 4 - 6 %) Cyclical unemployment = actual unemployment rate - natural rate of unemployment
Duration of Unemployment and Changes in the Cycle
•The average length of time of being unemployed • During slow growth or recessionary periods, the average duration of unemployment rises. •During economics boom, the average duration of unemployment drops.
Discouraged-Worker Effect
•The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.
Real Interest Rate
•The difference between the interest rate on a loan and the inflation rate. •Real r = nominal r - inflation rate
Productivity Growth
•The growth rate of output per worker.
Output Growth
•The growth rate of the output of the entire economy.
Gross Investment and Net Investment
•depreciation The amount by which an asset's value falls in a given period. •gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. •net investment Gross investment minus depreciation. Net investment = Gross investment - capital depreciation Capital end of period = capital beginning of period + net investment during the period
Durable vs. Nondurable Goods
•durable goods Goods that last a relatively long time, such as cars and household appliances. •nondurable goods Goods that are used up fairly quickly, such as food and clothing.
The Two Ways of Calculating GDP
•expenditure approach A method of computing GDP that measures the total amount spent on all final goods and services during a given period. -GDP = C + I + G + NX •income approach A method of computing GDP that measures the income—wages, rents, interest, and profits—received by all factors of production in producing final goods and services. We will explain this later.
Unemployment Rate
•unemployment rate (u) The ratio of the number of people unemployed to the total number of people in the labor force. •u = (#unemployed / #LF) *100%
