Unit 2 Macro

Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to personal consumption expenditures and thus to GDP during the year?

$160,000 =retailer's income + grower's income (160,000-70,000)+70,000 = 160,000

How long would it take for the price level to double if inflation persisted at the following percentages?

(Use the rule of 70) 7 percent per year: 70/7=10 14 percent per year: 70/14=5 2.5 percent per year: 70/2.5=28

Suppose that an economy has 9 million people working full-time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this economy's unemployment rate?

10%

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Who is in the labor force?

Above 16 years old Able and willing to work Not institutionalized (jails, hospitals) Not in military, in school full time, or retired

What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run aggregate supply curve relatively flat to the left of the full-employment output and relatively steep to the right? LO3

Answer: The immediate short-run supply curve is horizontal because of contractual agreements. These 'contracts' for both input and output prices imply that prices do not change along the immediate short-run aggregate supply curve. The long-run aggregate supply curve is vertical (at the full-employment or potential output) because the economy's potential output is determined by the availability and productivity of real resources, not by the price level. The availability and productivity of real resources is reflected in the prices of inputs, and in the long run these input prices (including wages) adjust to match changes in the price level. Firms have no incentive to increase production to take advantage of higher prices if they simultaneously face equally higher resource prices. The shape of the short-run supply curve is upsloping. Wages and other input prices adjust more slowly than the price level, leaving room for firms to take advantage of these higher prices (temporarily) by increasing output. Firms face increasing per unit production costs as they increase output, making higher prices necessary to induce them to produce more. To the left of full-employment output the curve is relatively flat because of the large amounts of unused capacity and idle human resources. Under such conditions, per-unit production costs rise slowly because of the relative abundance of available inputs. Additional resources are easily brought into production, as the suppliers of these resources (especially labor) are anxious to employ them and are happy to accept current prices. To the right of full-employment output the curve is relatively steep because most resources are already employed. Those resources that are not yet in production require higher prices to induce them, or generate higher per-unit production costs because they are less productive than currently employed inputs. Firms trying to increase production bid up input prices as they attempt to attract resources away from other firms. Even if the firm succeeds in pulling resources from another firm, the aggregate increase in output is minimal at best, as resources are merely shifted from one productive process to another.

. Last year, while an economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have been $555 billion and government revenue would have been $550 billion. Which of the following statements about this government's fiscal situation are true? LO3 a. The government has a non-cyclically adjusted budget deficit of $595 billion. b. The government has a non-cyclically adjusted budget deficit of $90 billion. c. The government has a non-cyclically adjusted budget surplus of $90 billion. d. The government has a cyclically adjusted budget deficit of $555 billion. e. The government has a cyclically adjusted budget deficit of $5 billion. f. The government has a cyclically adjusted budget surplus of $5 billion.

Answer: c. The government has a non-cyclically adjusted budget deficit of $90 billion; e. The government has a cyclically adjusted budget deficit of $5 billion Feedback: The two correct answers are that the government has a non-cyclically adjusted budget deficit of $90 billion (= last year's actual spending of $595 billion - last year's actual revenue of $505 billion) and that the government has a cyclically adjusted budget deficit of $5 billion (= last year's estimated full-employment spending of $555 billion - last year's estimated full-employment revenue of $550 billion).

Why are changes in inventories included as part of investment spending? Suppose inventories declined by R10 million during 2009. How would this affect the size of gross private domestic investment and gross domestic product in 2009? Explain.

Anything produced by business that has not been sold during the accounting period is something in which business has invested—even if the "investment" is involuntary, as often is the case with inventories. But all inventories in the hands of business are expected eventually to be used by business—for instance, a pile of bricks for extending a factory building—or to be sold—for instance, a can of beans on the supermarket shelf. In the hands of business both the bricks and the beans are equally assets to the business, something in which business has invested.If inventories declined by R1 billion in 2006, R1 billion would be subtracted from both gross private domestic investment and gross domestic product. A decline in inventories indicates that goods produced in a previous year have been used up in this year's production. If R1 billion is not subtracted as stated, then R1 billion of goods produced in a previous year would be counted as having been produced in 2006, leading to an overstatement of 2006's production.

Calculating GDP

C+I+G+(X-M)

Distinguish between demand-pull inflation and cost-push inflation. What of the two types is most likely to be associate with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP? What is core inflation? Why is it calculated?

Demand-pull inflation is when the demand for the available supply is too high and forces suppliers to raise their prices. It is associated with positive GDP gap because people have more money to spend on products. Cost-push inflation describes prices rising because of increases in per-unit costs of production. It is associated with negative GDP gap because producers have less products. Core inflation measures the prices of market basket goods that are more stable in price (excluding food and energy). It is calculated because the more volatile food and energy prices can lead to misinterpretations of economic performance, so policymakers prefer to examine core inflation to make economic policy decisions.

Economic goals

Economic growth, Limit Unemployment, Keep prices stable (limit Inflation)

Explain why an economy's output, in essence, is also its income.

Everything that is produced, is sold. Since buyers pay the same amount of money that sellers receive as income, "an economy's output, is also its income.

True or false? The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

False: There are two ways of measuring the public debt: (1) measure its absolute dollar size and (2) measure its relative size as a percentage of GDP. The distinction is important because the absolute size doesn't tell us about an economy's capacity to repay the debt. The United States has the largest public debt of any country, but as a percentage of GDP has a smaller debt than some other nations. This means the United States has a greater ability (more income) to service that debt than those countries whose debt is a higher percentage of GDP.

Why is it difficult to distinguish between frictional, structural, and cyclical unemployment? Why is unemployment an economic problem? What are the consequences of a negative GDP gap? What are the non economic effects of unemployment?

Frictional unemployment is caused by people being between jobs, either voluntarily, involuntarily after being, or being young and seeking their first job. Structural unemployment is caused by people not having the skills necessary to fulfill the current demand of occupations and require more training in order to join. Cyclical unemployment is caused by recessions where business lay off workers while they contract in response to the lower demand.

What is growth accounting? To what extent have increases in U.S. real GDP result from more labor inputs? From greater labor productivity? List the contributors to the growth of productivity in order of their quantitative importance.

Growth accounting is how the Council of Economic Advisers asses the importance of the supply side elements that contribute toe changes in real GDP. Focusing on increases on hours of work or labor productivity. Productivity tends to be a major contributor to increases in GDP. Technological advance Quantity of capital Education and Training Economies of scale Improved resource allocation

What's not included in GDP?

Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments

Explain how an increase in our nominal income and decrease in your real income might occur simultaneously. Who loses from inflation? Who gains?

Most people lose because they can no longer afford their previous lifestyle. Creditors and savers also lose. The winners are borrowers who must repay borrowed funds with dollars that are worth less than the value of the dollars borrowed.

In what ways are national income statistics useful?

National Income Statistics are useful in that they allow for economists and policymakers to: - Asses the health of the economy by comparing levels of production at regular intervals - Track the long-run course of the economy to see whether it has grown, been constant, or declined. - Formulate policies that will safeguard and improve the economy's health

Consumer Price Index (CPI)

Price of market basket / Price of market basket in base year X 100

The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data

Real GDP 1968 = $4133.58 (inflating) Real GDP 1978 = $5677.72 (inflating) Real GDP 1988 = $7614.81 (inflating) Real GDP 1998 = $10,283.59 (inflating) Real GDP 2008 = $13,312.50 (deflating) Real GDP can be found by dividing nominal GDP by the price index (decimal form) for that year. If the price index is below 100 you inflating GDP and if the price level is above 100 you are deflating GDP Real GDP 1968 = $909.8/(22.01/100) = $4133.58 (inflating) Real GDP 1978 = $2293.8/(40.40/100) = $5677.72 (inflating) Real GDP 1988 = $5100.4/(66.98/100) = $7614.81 (inflating) Real GDP 1998 = $8793.5/(85.51/100) = $10,283.59 (inflating) Real GDP 2008 = $14,441.4/(108.48/100) = $13,312.50 (deflating)

Which of the following are usually intermediate goods and which are usually final goods? Running shoes Cotton fibers Watches Textbooks Coal Sunscreen lotion Lumber

Running shoes - Final Cotton fibers - Intermediate Watches - Final Textbooks - Final Coal - Intermediate Sunscreen lotion - Final Lumber - Intermediate

What are the four supply factors of economic growth? What is the demand factor? What is the efficiency factor? Illustrate these factors in terms of the production possibilities curve.

Supply Factors expand the production possibilities curve as changes in the physical and technical agents of productions. They are increases in -quantity & quality of human resources -quantity & quality of natural resources -increases in the supply (or stock) of capital goods -improvements in technology Demand Factor and Efficiency factors allow the economy to realize full economic growth by ensuring that all inventories and resources will remain fully employed -The expanding production must have equally expanding demand to ensure everything is consumed. -Economic efficiency and full employment must be achieved

Suppose the CPI was 110 last year and is 132 this year.

Suppose the CPI was 110 last year and is 132 this year. (132-110/110*100) do individually on calculator as: 132-100=22 22/110=.02 .02*100=20

Why is the aggregate demand downsloping? Specify how your explanation differs from the explanation for the demand curve from a single product. What role does the multiplier play in the shifts of the aggregate demand curve?

The AD curve is down sloping because of the real balances effect, interest-rate effect, and foreign purchases effect. Individual demand is centered on price level. The multiplier effect produces a greater shift.

What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation?

The Consumer Price Index is the market basket of goods that is used by the Bureau of Labor to calculator the rate of inflation, using the price of the basket from the current year divided by the base year, then multiplied by 100. Inflation lowers the purchasing power of the dollar and occurs when the market basket of goods is priced positively in terms of the rate of inflation. Deflation occurs when the rate of inflation is negative

Define the cyclically adjusted budget, explain its significance, and state why it may differ from the actual budget.

The cyclically adjusted budget measures what the Federal deficit or surplus would be if the economy reached the full-employment level of GDP with existing tax and spending policies. If the cyclically adjusted budget is balanced, then the government is not engaging in either expansionary or contractionary policy, even if, for example, a deficit automatically results when GDP declines. The "actual" budget is the deficit or surplus that results when revenues and expenditures occur over a year if the economy is not operating at full employment.

Why do economists include only final goods in measuring GDP for a particular year? Why don't they include the value of the used furniture bought and sold?

The finals goods are only counted in measuring GDP for a particular year because if intermediate goods were counted, overcounting would occur, making the GDP higher than it actually is. The value of used furniture bought and sold is not included into the GDP because the ownership of the items are only changing. The money is not paying for the production of the furniture, but for the change in ownership.

What are government's fiscal policy options for ending severe demand-pull inflation? Which of these fiscal options do you think might be favored by a person who wants to preserve the size of government? A person who thinks the public sector is too large? How does the "ratchet effect" affect anti-inflationary fiscal policy

The government fiscal options for ending severe demand-pull inflation are decreases ion government spending and increase in tax. Both options could achieve the goal of price stability but their impacts on the size the government are different.

How is the labor force defined and who measures? How is the unemployment rate calculated? Does an increase in the unemployment rate necessarily mean a decline in the size of the labor force? Why is a positive unemployment rate- one more than zero percent- one fully compatible with full employment?

The labor force is defined as the majority of the population who are able and willing to work. The U.S. Bureau of Labor Statistics (BLS) determines this. Unemployment rate is calculated by (unemployed)/(labor force) x 100. There is a certain amount of unemployment generated by frictional and structural unemployment within a dynamic economy, but the percentage in relation to this is the minimum allowed, void of cyclical unemployment.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. b. A decrease in aggregate supply, with no change in aggregate demand. c. Equal increases in aggregate demand and aggregate supply d. A decrease in aggregate demand. e. An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level rises rapidly and there is little change in real output. The price level rises and real output decreases The price level does not change, but real output increases The price level does not change, but real output declines The price level increases somewhat, with a relatively large change in output

Distinguish between "real-balances effect" and "wealth effect," as the terms are used in this chapter. How does each relate to the aggregate demand curve?

The real-balance effect moves the point along the curve while the wealth-effect shifts the curve.

True or false? The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt.

True or false? The Federal Reserve and Federal government agencies hold more than three-fourths of the public debt.

True or false: An internally held public debt is like a debt of the left hand owed to the right hand.

True, but this does not mean a large debt is entirely problem free.

True or false? The portion of the U.S. debt held by the public (and not by government entities) was larger as a percentage of GDP in 2012 than it was in 2000

True: The portion of the U.S. debt held by the public was about 30 percent in 2000, but was much higher in 2012.

Deflation

a decrease in the general level of prices

Disinflation

a situation in which price increases are slowing (the inflation rate is declining)

Suppose that in 1984 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets were produced a) What is the GDP price index for 1984, using 2005 as the base year? b) By what percentage did the price level, as measured by this index, rise between 1984 and 2005? c) What were the amounts of real GDP in 1984 and 2005?

a) 62.5 (($10/$16)x100) b) 60% ((100-62.5)/62.5)x100 or ((16-10)/10)x100 c) In 1984, real GDP = $112,000 In 2005, real GDP = $352,000 Method 1: 2005=(22,000*$16)/1.0 1984=(7,000*$10)/0.625 Method 2: 2005= 22,000*$16 1984= 7,000*$16

What annual growth rate is needed for a country to double its output in each of the following cases? Instructions: Round your answers to 2 decimal places. a. In 4 years: ___ percent. b. In 25 years: ___ percent. c. In 100 years: ___ percent. d. In 200 years: ___ percent.

a. 17.5 percent b. 2.8 percent c. 0.7 percent d. 0.35 percent 70 / approximate number of years required to double real GDP = annual percentage rate of growth - or - approximate number of years required to double real GDP = 70 / annual percentage rate of growth

Which of the following are included or excluded in this year's GDP?

a. Excluded: the services of a commercial painter in painting the family home is not included. b. Included: an auto dealer's sale of a new car to a nonbusiness customer is a final good sale. c. Excluded: the money received by Smith when she sells her biology textbook to a used-book buyer is a second-hand sale. d. Included: the publication and sale of a new economics textbook is a final good sale. e. Included: a $2 billion increase in business inventories is part of GDP. f. Included: government purchases of newly produced aircraft is a final good sale.

Which of the following are included or excluded in this year's GDP? a. Interest received on an AT&T corporate bond b. Social security payments received by a retired factory worker c. The unpaid services of a family member in painting the family home d. Income of a dentist from the dental services provided e. A monthly allowance a college student receives from home f. Money received by Josh when he resells his nearly brand-new Honda automobile to Kim g. The publication and sale of a new college textbook h. An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no reduction in pay i. A $2 billion increase in business inventories j. The purchase of 100 shares of Google common stock

a. Included b. Excluded c. Excluded d. Included e. Excluded f. Excluded g. Included h. Excluded i. Included j. Excluded

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? a. A widespread fear by consumers of an impending economic depression b. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output. c. A reduction in interest rates at each price level d. A major increase in spending for health care by the Federal government. e. The general expectation of coming rapid inflation. f. The complete disintegration of OPEC, causing oil prices to fall by one-half. g. A 10 percent across-the-board reduction in personal income tax rates. h. A sizable increase in labor productivity (with no change in nominal wages). i. A 12 percent increase in nominal wages (with no change in productivity). j. An increase in exports that exceeds an increase in imports (not due to tariffs).

aggregate demand will decrease Aggregate supply will decrease Aggregate demand will increase Aggregate demand will increase Aggregate demand will increase Aggregate supply will increase Aggregate demand will increase Aggregate supply will decrease Aggregate supply will decrease Aggregate demand will increase

Causes of inflation

government prints too much money, demand-pull inflation, cost-push inflation

price indices

index numbers assigned to each year that show how prices have changed relative to a specific base year

Inflation

rising general level of prices and it reduce the "purchasing power" of money

GDP

the dollar value of all final goods and services produced annually in an economy

natural rate of unemployment

the normal rate of unemployment, consisting of frictional unemployment and structural unemployment

Unemployment

the number of people who are actively looking for work but aren't currently employed

the inflation rate

the percentage changes in the price level from one year to the next

The Unemployment rate

the percentage of the labor force that is unemployed

full employment output

the real GDP created when there is no cyclical unemployment

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Calculating unemployment rate

unemployed/labor force x 100

cyclical unemployment

unemployment caused by a recession

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

real wage

wage adjusted for inflation

nominal wages

wage measured by dollars rather than purchasing power