Econ Exam Two
The employment-to-population ratio
(Employed/ Potential Workers) x 100%
The Labor Force Participation Rate
(Labor Force/Potential Workers) x 100%
GDP Deflator =
(Nominal GDP/Real GDP) x 100
The unemployment rate
(Unemployed/labor force) x 100%
CPI =
(expenditures in the current year/expenditures in the base year) x 100
Which of the following statements about the GDP deflator and the CPI are true? (Check all that apply.) A. A higher ratio of both the CPI and the GDP deflator implies a greater price increase from the base year to the target year. B. The GDP deflator uses target year prices in the numerator and base-year prices in the denominator, while the CPI uses target year prices in the numerator and base-year prices in the denominator. C. Empirical evidence shows that the GDP deflator and the CPI tell very different stories about the evolution of prices in the overall economy. D. Both their formulas contain a ratio that compares what it would cost to buy a particular set of goods in the target year to what it would have cost to buy the same set of goods using base-year prices.
A and D
A business cycle is a
A periodic but irregular up-and down movement of total production and other measures of economic activity
Deflation
A persistently falling price level
Inflation
A persistently rising price level
Trough
A recession ends at a through, when real GDP reaches a temporary low point and from which the next expansion begins
A unit of account is
A universal yardstick that is used to express relative prices of goods and services
Frictional unemployment can result when ____________. (Check all that apply.) A. firms and workers have imperfect information about the state of the economy B. it takes time for firms to find applicants with the right skills and experience C. firms and workers have imperfect information about each other D. government regulations may limit the number of people that a firm can hire
A, B, and C
According to the aggregate production function, GDP increases when a nation ____________. (Check all that apply.) A. improves its technology, A. B. increases its consumption, C. C. increases its stock of physical capital, K. D. increases the human capital of its workers, H.
A, C, and D
The aggregate production function describes the relationship between the
Aggregate GDP of a nation and its factors of production
A medium of exchange is
An asset that can be traded for goods and services
A store of value is
An asset that enables people to transfer purchasing power into the future
Fiat Money
An asset that is used as legal today tender by government decree and is not backed by a physical commodity like gold
Peak
An expansion ends and recession begins at a business cycle peak, which is the highest level that real GDP has attained up to that time
Structural Unemployment
Arises when the quantity of labor supplied persistently exceeds the quantity of labor demand. It can be caused by minimum wage, often brought about by technological changes that make the job skills of many workers obsolete
Price Level
Average level of prices
Which of the following is not an example of someone who is frictionally unemployed? A. Jo, who is looking for a seasonal job gift wrapping for a department store. B. Carl, who is currently taking classes full time in order to qualify for a management position C. Al, who got laid off from his programming job and is looking at other available programming positions in his area. D. Bill, who quit his job in Michigan to visit his brother in Florida and is looking for work there.
B
Which of the following statements regarding cyclical unemployment are not true? (Check all that apply.) A. It is positive in recessions and negative in economic booms. B. It is negative in recessions and positive in economic booms. C. It is the difference between the long-term average rate of unemployment and the natural rate of unemployment. D. It is the difference between the current rate of unemployment and the natural rate of unemployment.
B and C
Which of the following statements regarding the natural rate of unemployment are true? (Check all that apply.) A. It is the rate which fluctuates around the actual rate of unemployment. B. It is the rate around which the actual rate of unemployment fluctuates. C. It is the rate of unemployment that is socially optimal or desirable. D. It is the long-term average rate of unemployment
B and D
Suppose that in 2018, all prices in the economy double and that all wages and salaries also double. In 2018 you A. are worse off than you were in 2017 as you can no longer afford to buy as many goods and services. B. are no better off or worse off than you were in 2017 as the purchasing power of your salary has remained the same. C. are better off than you were in 2017 as your salary is higher than it was in 2017 and you can now buy more goods and services. D. cannot determine whether you are better off or worse off than you were in 2017, because the purchasing power of your salary cannot be determined.
B. are no better off or worse off than you were in 2017 as the purchasing power of your salary has remained the same
What is the key difference between the Consumer Price Index (CPI) and the GDP deflator? A. The CPI is broader in coverage than is the GDP deflator. B. The GDP deflator includes imports, while the CPI only includes domestically produced goods and services. C. The two indexes measure price changes for different "baskets" of products. D. The formulas used to construct the indexes bear little resemblance to each other.
C. The two indexes measure price changes for different "baskets" of products.
Potential Workers are everyone in the general population except
Children under 16 Active military personnel Institutionalized persons
The velocity of money is always assumed to be ________ in the long run
Constant
CPI
Consumer Price Index
Value of marginal product of labor (VMPL is a.k.a MB) is the
Contribution of an additional worker to a firm's revenue
Which of the following can generate sustained growth? A. Accumulating physical capital B. Increasing the number of workers in the economy C. Raising the efficiency units of labor D. Advancing the technological knowledge used in production
D
The value of marginal product of labor (VMPL) is ____________. A. given by the marginal product of labor times the price of the firm's output. B. the firm's additional profit from hiring another worker. C. the contribution of an additional worker to a firm's revenues. D. A and C only.
D. A and C only
When there are changes that improve the quality and value of leisure time, the supply of labor will
Decrease and shift to the left
A persistently increase in the purchasing power of money is
Deflation
An aggregate production function is used to
Demonstrate how the factors of production are combined to produce GDP
Structural unemployment can be caused by ____________. A. labor unions B. efficiency wages C. time minus consuming job search effort D. all of the above. E. A and B only.
E
Labor Force
Employed people and Unemployed people (those w/o a job that are actively looking for one)
The intersection of the supply and demand curves gives the labor market equilibrium, which determines both the
Equilibrium wage and Quantity of labor
The demand for labor is determined by
Firms that want to maximize profits
An economy's natural rate of unemployment reflects the combined effect of ________ and _______ unemployment.
Frictional Structural
What type of unemployment does job search lead to?
Frictional Unemployment
The natural rate of unemployment =
Frictional unemployment + structural unemployment
When the price level is rising rapidly, the inflation rate is
High
Law of diminishing marginal product of labor
Holding everything else (including A, K and F()) constant, MPL will decrease eventually as more labor inputs are used for production
Aggregate production function shows
How much real output of a country (Y) can be produced given the number of labor inputs (H) and capital inputs (K)
An increase in the average worker's level of human capital will ____________ the total efficiency units of labor in an economy
Increase
Downward wage rigidity can _______ structural unemployment when labor demand decreases. In times of recession, ______ workers are laid off so that continuing workers keep their ______ market-clearing wage.
Increase More Above
When there is an increase in population, the supply of labor will
Increase and shift to the right
Total efficiency units of labor in an economy can be increased by
Increasing workers' skills through training
A persistently decrease in the purchasing power of money is
Inflation
The real wage is the
Inflation-adjusted wage
Factors of production are the
Inputs used to produce other goods and services in an economy
The interest rate on a financial asset is the
Interest received expressed as a percentage of the price of the asset
Recession
Is a period during which real GDP decreases and two turning points
Expansion
Is a period during which real GDP increases
If a significant tax reduction was offered to families that homeschool their children, we would most likely see a ____________ shift in the labor _____________ curve
Leftward Supply
Inflation that is less than what is expected benefits ________ and hurts ________
Lenders Borrowers
When the price level is rising slowly, the inflation rate is
Low
Consists of currency and traveler's checks and checking deposits owned by individuals and businesses.
M1
Consists of M1 plus time deposits, saving deposits, money market mutual funds, and other deposits
M2
VMPL =
Marginal Product of Labor x Output Price
The value of the marginal product of labor is the
Market value of a worker's additional output for a firm
When the price level is falling, the inflation rate is
Negative
Real Interest =
Nominal interest rate - inflation rate
Frictional Unemployment increases the
Number of people entering and reentering the labor force
Not in the labor force
People without a job who are not actively searching for one
According to the aggregate production function, which inputs drive production?
Physical Capital Total Efficiency units of labor Level of technology
The nominal interest rate equals the real interest rate ________ the inflation rate
Plus
What makes the shifts of the labor supply curve
Population changes Changes in worker preferences and tastes Opportunity costs of working
What makes the shifts of the labor demand curve
Price of the good the firm produces Technology used in production
If the population in an area were to increase, it is likely that the supply of labor curve would shift ___________ causing wages to ___________ This would likely result in _______ available jobs.
Rightward Decrease More
Cyclical unemployment _______ in recessions and _____ in economic booms
Rises Falls
Frictional unemployment
Short-term unemployment that arises from the process of matching workers with jobs (job search)
What is the significance of the real wage as it relates to inflation?
Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
Economic growth is the
Sustained expansion of production possibilities measured as the increase in real GDP and/or real GDP per capita over a given period
Natural rate of unemployment
The "normal" (if there is no recession or expansion) unemployment rate
Cyclical Unemployment
The deviation of the actual unemployment rate from its natural rate
What is the percentage change in the price level from in a period of time
The inflation rate
Law of diminishing returns
The marginal product of labor diminishes as the quantity of labor increases
The number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent
The nominal interest rate
The labor force equation =
The number employed + the number unemployed
What is the purchasing power of money in a country?
The price level
What measures the inflation/deflation rate
The price level
The total efficiency units of labor are
The product of the total number of workers and the average human capital of each worker
A competitive labor market is in equilibrium when
The quantity of labor demanded and the quantity of labor supplied are equivalent
The nominal interest rate will be less than the real interest rate when
The rate of inflation is negative
GDP Deflator
The ratio of nominal GDP to real GDP (measures how prices of goods and services produced in a country have risen)
The nominal interest rate adjusted to remove the effects of inflation on the buying power of money
The real interest rate
A profit-maximizing firm will continue to hire workers until
The revenue from the marginal worker equals the wage rate
Fiat money has no intrinsic value. True or False?
True
Firm maximizes profits by optimally choosing its labor by expanding its workforce until the
VMPL = money wage
How do increases in technology affect the aggregate production function?
With increases in technology, the aggregate production function shifts up, indicating more output is produced from the same amount of inputs
The supply of labor is determined by
Workers who want to maximize utility
Aggregate production function
Y = A x F(K,H)
Law of diminishing marginal product of capital
holding everything else (including A, H = h × L and F ()) constant, MPK will decrease eventually as more capital inputs are used for production
