Econ 102 Final
Inflation rate equation
(CPI this year - CPI last year)/CPI last year * 100 (Price of year 2 - Price of year 1)/Price of year 1 * 100
The labor force participation rate is calculated as
(Labor force/working age population)*100
What is the employment to population ratio?
(Number employed/working age population) * 100
Unemployment rate equation
(Number unemployed/labor force)* 100
What determines potential GDP
- Aggregate production function - Aggregate labor market
What makes potential GDP grow
- Growth of the supply of labor - Growth of labor productivity
Inflation is a problem when
- It causes resources to be diverted from productive uses - It causes the value of money to vary unpredictably - It is unpredictable
Currency outside of banks increases from $100 million to $200 million. This change is considered
A currency drain
Common definition of a recession is a time with
A decrease in real GDP for two or more successive quarters
What does not shift the long-run aggregate supply curve
A fall in the price level
Discouraged worker
A person who is not working and has stopped looking for a job because of repeated failure
The best definition for economic growth is
A sustained expansion of production possibilities measured as the increase in real GDP over a given period
____ increases households saving
A tax cut that increases disposable income
Cyclical unemployment example
A worker who is laid off because of economic reasons
The use of purchasing power parity prices
Accounts for differences in the prices of same goods in different countries when measuring real GDP
GDP equals
Aggregate expenditure and equals aggregate income
In the circular flow of economic activity
Aggregate expenditure measures the dollar value of purchases of final goods and services
Working age population
Anyone over 16 years old and are not in jail or the hospital
Natural unemployment
Arises from fractional and structural change when there is no cyclical unemployment
Frictional inemployment
Arises from the normal turnover on jobs
Structural unemployment
Arises when changes in technology or international competition change the skills needed
In the short run, when the fed decreases the quantity of money
Bond prices fall and the interest rate rises
In the short run, when the fed increases the quantity of money
Bond prices rise and the interest rate falls
When the fed wants to undertake open market operations kt
Buys or sells securities
How does a country maintain a fixed exchange rate
By intervening in the foreign exchange markets and buying or selling currency as needed to achieve the desired exchange rate
What is part of a commercial banks reserve
Cash in the bank vaults
Economic growth is measured by
Changes in real GDP
Which theory of economic growth concludes that in the long run real GDP per person will be at its subsistence level
Classical theory
Commodity substitution bias
Consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price fell
GDP equation
Consumption+Investment+Government Purchases+Exports-Imports
The unemployment rate is at the natural unemployment rate when
Cyclical unemployment equals zero
If the economy enters a recession
Cyclical unemployment increases
If the desired reserve ratio rises, the money multiplier
Decreases
A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from
Decreases in the expected profit
If the world real interest rate falls, then a country that is a net foreign lender
Decreases the amount of its lending
A decrease in the government budget deficit decreases the ____ loanable funds and an increase in the government budget surplus increases the ____ loanable funds.
Demand for; supply of
If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, then the dollar has ___ and the yen has ___.
Depreciated; appreciated
The demand for labor curve is
Downward sloping because productivity diminishes as more workers are employed
Size of labor force equation
Employed + unemployed
A country will achieve faster growth by
Encouraging free trade
The Rule of 70 is used to
Estimate how long it will take the level of any variable to double
In the foreign exchange market, a change in what results in a movement along the demand curve
Exchange rate
The law of demand in the foreign exchange market refers to the relationship between the
Exchange rate and the quantity of U.S. dollars demanded
If the inflation rate is negative, the price level in an economy is
Falling
If the fed sells U.S. dollars the exchange rate
Falls
Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the equilibrium real interest rate ___ and the quantity of loanable funds ____.
Falls; decreases
GDP is defined as the market value of all
Final goods and services produced in a country in a given time period
Cyclical unemployment
Fluctuates over the business cycle
According to the neoclassical growth theory,
Forces other than GDP growth determine population growth
Unemployment caused by people voluntarily leaving their jobs is classified as
Frictional
Unemployment caused by the normal labor turnover is called
Frictional
In the global funds market
Funds flow into countries with the highest risk adjusted interest rates and out of countries with the lowest risk adjusted interest rates.
GDP per person is found by
GDP/Population
The crowding out effect refers to
Government spending crowding out private investment
Net investment equals
Gross investment minus depreciation
Net investment is
Gross investment minus depreciation
If labor and capital grow more quickly, then real GDP will
Grow more quickly
When the government has a budget surplus, the surplus
Helps finance investment
A workers stock of knowledge is known as
Human capital
The biases in the CPI are
Important since they effect nearly 1/3 of federal government spending
If the fed wants to depreciate the dollar against the yen, the fed will
Increase the supply of dollars by buying yen.
If the price level rises relative to the money wage rate, firms ____ the quantity of labor they demand and workers ____ the quantity of labor they supply.
Increase; decrease
What does NOT increase labor productivity
Increases in aggregate hours
A higher savings rate that leads to an increase in capital stock leads to
Increases in labor productivity
Technological change
Increases potential GDP and generates economic growth
If the U.S. interest rate rises while interest rates in the rest of the world do not change, then the high U.S. interest rate
Increases the demand for dollars
During a economic expansion, real GDP ____ and unemployment ____.
Increases; decreases
The presence of ____ creates a difference in the value between the market price and the factor cost of a product
Indirect taxes and subsidies
The quantity theory of money states that
Inflation increases when the money growth rate increases
On the job training is an example of
Investment in human capital
The natural unemployment rate
Is the unemployment rate that occurs when the economy is at full employment
Savings is an important factor influencing economic growth because
It can influence new investment and capital formation
What is an example of using money as a store value
Keeping $200 on hand for an emergency
New growth theory assumes that
Knowledge does not experience diminishing returns
The ____ equals the number of ___.
Labor force; unemployed and employed persons
If the quantity of capital per worker increases
Labor productivity increases
The more education workers have, the ____ is their human capital and the ____ their productivity.
Larger; higher
According to the Ricardo-Barro effect, government deficits
Lead to simultaneous increases in private saving and no effect the equilibrium real interest rate and investment.
What is the riskiest assets held by commercial banks
Loans
When you buy a hamburger for lunch you are using money as a
Medium of exchange
The real wage rate equals
Money wage rate/price level
As labor increases, there is a
Movement along the aggregate production function and real GDP will increase less with each additional increase in labor
An increase in the opportunity cost of holding money creates a ____ the money demand curve and an increase in real GDP creates a ____ the money demand curve.
Movement up along; rightward shift of
Investment is financed by
National saving and borrowing from the rest of the world
The capital stock increases whenever
Net investment is positive
Gross Investment Equals
Net investment plus depreciation
Frictional unemployment comes about because of
Normal labor market turnover
The working age population can be divided into two groups
People in the labor force and people who are not in the labor force
The unemployment rate is the ___ who are unemployed
Percentage of people in the labor force
The largest component of GDP is
Personal consumption expenditures
Factors that influence labor productivity include
Physical capital, human capital, and technology
If both the supply of labor and the demand for labor increase, then
Potential GDP increases
To prevent frictional unemployment, we would have to
Prevent people from leaving their jobs
The short-run aggregate supply curve is upward sloping because in the short run the
Price level changes but the money wage rate does not
National saving is defined as the amount of
Private saving and government saving
What is included in the supply of loanable funds
Private saving, government budget surplus and international borrowing
Neoclassical growth theory
Proposition that real GDP per person grows because of technological change
The real wage rate measures the
Quantity of goods and services that an hour of work will buy
If the fed buys $100 in securities from a commercial bank the
Quantity of reserves will increase
The quantity of money people want to hold increases if
Real GDP increases
New growth theory
Real GDP per person grows because of the choices people make
Which of the following is used to calculate the standard of living
Real GDP/Population
The demand for loanable funds is the relationship between loanable funds and the ____ other things remaining the same.
Real interest rate
Nominal interest rate equals
Real interest rate + the inflation rate
When the inflation rate is zero
Real interest rate equals the nominal interest rate
The major role of a commercial bank is to
Receive deposits and make loans
Four parts of the business cycle occur in what order
Recession, trough, expansion, peak
Federal reserve policy tools include what
Required reserve ratio, last resort loans and open market operations
Along the aggregate production function, as the quantity of labor rises, real GDP
Rises
An indirect tax is exemplified by
Sales tax
What is the equation for private sector balance
Savings - Investment
An increase in real GDP
Shifts the demand for money curve rightward
The short-run aggregate supply curve
Shows the impact changes in the price level have on the quantity of real GDP when resource prices are constant
Human capital is
Skill and knowledge accumulated by humans
When calculating the consumption of the employees part of GDP
Social security contributions must be included
The best example of a cyclically unemployed individual is
Someone loses their job in real estate when the housing market went soft because of a recession
In the neoclassical theory of growth, growth in ____ is the result of luck
Technology
Circular flow of income shows
That governments purchase goods and services
A fall in the money wage rate shifts
The SAS curve rightward but leaves the LAS curve unchanged
The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if
The U.S. interest rate differential decreases
The term business cycle most clearly refers to
The alternating periods of expansions and recessions
The velocity of circulation is
The average number of times per year a dollar is spent on goods and services in GDP.
For a commercial bank, the term reserves refers to
The cash in its vaults and its deposits at the federal reserve.
Because of the choices people make in the pursuit of profit, new growth theory argues that
The economy can enjoy persisting economic growth
If prices in the U.S. rise faster than those in other countries
The exchange rate falls
Output gap
The gap between real GDP and potential GDP
Regarding the circular flow diagram
The government, households and firms all have transactions in the goods market
The smaller the currency drain
The larger the increase in the quantity of money from an increase in reserves
Potential GDP is
The maximum amount of production that can be produced while avoiding shortages of labor, capital, land and entrepreneurship that would bring rising inflation
Assume the inflation rate falls from 4 percent to 2 percent. This means that
The price level is increasing more slowly
The quantity of loanable funds demanded increases so there is a movement downward along the demand for loanable funds curve when
The real interest rate falls
A decrease in the quantity of reserves supplied to commercial banks could be the result of
The sale of government securities by the federal reserve
What is not important in the growth of labor productivity
The speed in which prices fall
An economy is at full employment when
The unemployment rate equals the natural unemployment rate
Real GDP is
The value of total production of all the nation's farms, factories, shops and offices measured in the prices of a single year
Classical growth
The view that the growth of GDP per person is temporary
Intermediate goods are excluded from GDP because
Their inclusion would involve double counting
If the real interest rate increases from 3% to 5%
There will be a movement up along the demand for loanable funds curve
Lower GDP growth rate percentage shifts the PPF
To the right
Real gross domestic product is the value of ____ linked back to the prices of a single year
Total production
What is an example of something that creates a demand for U.S. dollars
Toyota, a Japanese firm, buying land in Texas.
What is not part of the monetary base
U.S. government securities owned by the fed
Frictional unemployment is
Unemployment associated with the changing of jobs in a changing economy
Full employment
Unemployment rate equals the natural unemployment rate
A major characteristic of structural unemployment that differentiates it from frictional unemployment is that structural unemployment
Usually lasts longer than frictional
Marginally attached workers
Want to work but are no longer looking for a job