Econ 204 (CH. 6-9)

Equation: Disposable Income

personal income - personal taxes

What percentage of the U.S. adult population has a college or post-college education (as of 2015)?

33%

What does real GDP statistically eliminate?

price changes

Equation: CPI (consumer price index)

price of the most recent market basket in the particular year/price estimate of the market basket in 1982-1984

Equation: Real GDP per capita

real GDP/population

Equation: Nomial Interest Rate

real interest rate + inflation premium (expected rate of inflation)

For a person to keep his real income steady at a certain level from one year to the next, his nominal income must

rise as fast as the price index

shock

situations where one thing is expected but something else happens

inflexible

slow to change or "sticky"

When the government prints money faster than output is expanding, the inflation that will occur is a form of

taxation

what two reasons make expectations important?

the effect changing expectations has on current behavior, what happens when expectations are unmet

Who is included in the labor force?

those employed and unemployed while actively seeking work

Equation: per unit production cost

total input cost/units of output

T or F: Economic growth can be shown as a movement from a point on one production possibilities curve to a point on a curve located farther from the origin

true

True or False: Gross private domestic investment exceeds depreciation in an economy that experiences expanding production capacity

true

True or False: Price stickiness tends to moderate over time

true

True or False: The statistic called Gross Output (GO) is bigger than GDP, because GO sums up the values in all stages of a productive economy, whereas GDP accounts only for the final stage

true

True or False: Within the circular flow model, the level of total resource income and total spending on output will be approximately equal

true

Equation: Unemployment Rate

unemployed/labor force

One labor market quirk that helps explain why unemployment goes up so much in a recession is that

wages are flexible upward but sticky downward

Before the Industrial Revolution, living standards in the world

were relatively stagnant for long periods of time

Investment

when resources are devoted to increasing future output

When are prices particularly sticky?

when there are widespread macroeconomic and monetary disturbances in the economy

Equation: Percentage Change in Real Income

~= percentage change in nomial income - percentage change in price level

Okun's Law

For every 1 percent by which actual unemployment rate exceeds the natural rate of unemployment, a negative GDP of 2 percent occurs

Equation: NDP

GDP - depreciation (gross domestic product - consumption of fixed capital)

Assume that the size of the underground economy increases both absolutely and relatively over time. As a result

GDP will tend to increasingly understate the level of output through time

Equation: National Income (shorter)

NDP - statistical discrepancy + net factor income

True or False: The term "economic investment" refers only to money spent purchasing newly created capital goods such as factories, tools, and warehouses

True

1. Improvements in technology. 2. Increases in the supply (stock) of capital goods. 3. Purchases of expanding output. 4. Obtaining the optimal combination of goods, each at least-cost production. 5. Increases in the quantity and quality of natural resources. 6. Increases in the quantity and quality of human resources. Use the accompanying list to answer the following question. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are) A) 3 only. B) 4 only. C) 1 and 3 only. D) 1 only.

a

If the real interest rate and the nominal interest rate are both negative and equal to each other, then the

inflation premium is zero

Unlike demand-pull inflation, cost-push inflation

is self-limiting

business cycle

long-run economics and short-run fluctuations in output and employment

What results in a demand shock?

most short-run fluctuations in GDP and the business cycle

Equation: GDP (income approach)

national income - net foreign factor income + consumption of fixed capital +statistical discrepancy

Equation: Personal Income

national income - taxes on production and imports - social security contributions - corporate taxes - undistributed corporate profits + transfer payments

Equation: Price Index (in hundreths)

nomial GDP/Real GDP

Equation: Real GDP

nomial GDP/price index (in hundreths)

Equation: Real Income

nomial income/price index (in hundreths)

The unemployed are those people who

not employed but are seeking work

Proponents of economic growth say that pollution

occurs, not because of growth, but because common resources are treated as free goods

Examples of flexible prices

oil, corn, and natural gas

Modern Economic Growth

output per person rises

Equation: Price Index in a given year

(price of market basket in a specific year/price of same market basket in base year) x 100

Equation: Approx. Number of years required to double Real GDP (Rule of 70)

70/annual percentage rate of growth

Equation: GDP

C+Ig+G+Xn (personal expenditures + gross private domestic investment + gov. purchases + net exports)

Equation: GDP Gap

actual GDP - potential GDP

Inflation is undesirable because it

arbitrarily redistributes real income and wealth

Suppose that inventories are rising. We can expect that, in the future, A) firms will raise prices of their goods and services. B) real GDP will likely decrease. C) real GDP could increase or decrease, as its direction cannot be predicted based on inventories. D) real GDP will likely increase

b

Technological advances that contribute to economic growth include the following, except A) new forms of business organization. B) innovative digital gadgets for consumers. C) new managerial methods. D) innovative production techniques.

b

True or False: Disposable income measures the before-tax income received by resource suppliers

false

Which of the following is not an explanation put forward to explain the recent productivity slowdown? A) Technological progress itself may have stalled, until invention and innovation levels bounce back. B) A massive influx of immigrant labor has caused the labor force to expand much faster than real GDP. C) Consumers and firms are paying down high levels of debt instead of investing in productive projects. D) Overinvestment during the boom that preceded the Great Recession created overcapacity.

b

Why are demand shocks such a big problem?

because prices are inflexible

General sources of shocks that can cause business cycles include the following, except A) political events, either domestic or global. B) irregular occurrence of innovations and productivity changes. C) unemployment jumps and production drops. D) monetary factors and financial instability.

c

Which of the following statistics can turn negative? A) unemployment rate B) CPI C) inflation rate D) GDP

c

Equation: National Income (longer)

compensation of employees + rent + interest + proprietors income + corporate profits + taxes on production and imports

Equation: Direct Income

consumption + saving

Saving

current consumption is less than current output

Historically, the total amount of real capital per worker in the United States has A) been the single most important determinant of economic growth. B) remained relatively constant, although the quality of capital has improved dramatically. C) provided financing for the industrial expansion of business. D) increased significantly and made labor more productive.

d

In the periods 1953-73 and 1973-95, U.S. real GDP grew at the average annual rates of about A) 2.8 percent and 3.6 percent, respectively. B) 7.4 percent and 5.1 percent, respectively. C) 5.1 percent and 7.4 percent, respectively. D) 3.6 percent and 2.8 percent, respectively

d

Which of the following statements is correct? A) Between 1953 and 2015, increases in labor productivity and increases in the quantity of labor contributed equally to the growth in U.S. real GDP. B) Between 1953 and 2015, all growth in U.S. real GDP can be attributed to increases in labor productivity. C) Between 1953 and 2015, increases in the quantity of labor account for more of the growth in U.S. real GDP than do increases in labor productivity. D) Between 1953 and 2015, increases in labor productivity account for more of the growth in U.S. real GDP than do increases in the quantity of labor

d

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would

decline

recession

decline in output and standard of living

When a recession begins and unemployment begins to rise, the demand for goods and services will fall. If the decline in demand is precipitous, what inflation will occur?

deflation

Inflation caused by an increase in aggregate spending is referred to as

demand-pull inflation

Transfer payments are

excluded when calculating GDP because they do not reflect current production

Equation: net exports (Xn)

exports - imports

T or F: In the growth debate, critics of economic growth define "making a better living" as identical to "the good life."

false

What is the difference between financial investment and economic investment?

financial investment refers to the purchase of assets for financial gain and economic investment refers to the purchase of newly created capital goods

Equation: Real GDP (labor)

hours of work x labor productivity

What does price stickiness explain within the business cycle?

how unexpected changes in demand lead to the fluctuations in GDP and employment that occur in the business cycle

A cumulative wage-price spiral that produces very rapid inflation is called

hyperinflation

What does real GDP tell us?

if an economy's output is growing

What is inflation?

increase in the overall levels of prices