Econ final

net exports of goods and services

-2.8%. the value of exports of goods and services minus the value of imports of goods and services

quality change bias

-better cars and televisions cost more than the versions they replace -a price rise that is a payment for improved quality is not inflation but might get measured as inflation

the magnitude of the bias

-boskin commission estimated the bias to be 1.1 percentage points per year -to reduce the bias, the BLS has decided to increase the frequency of its consumer expenditure survey and revise the CPI basket every two years

fiscal policy

-changes in government spending -changes in transfer payments -changes in taxes -to influence the real GDP (AD= C+ I+ G+XN) in the economy

two main consequences of the bias in the CPI are

-distortion of private agreements -increases in government outlays

current population survey

-every month -1,600 interviewers working on a joint project of the Bureau of Labor Statistics and the Bureau of the Census survey 60,000 households to establish the age and job market status of each member of the household -30 cities

outlet substitution bias

-if prices rise more rapidly, people use discount stores more frequently

frictional unemployment

-in-between jobs -new graduates

the Keynesian view/demand side

-increase role of government in the economy -consumers and investors need regulations and laws to protect them -minimum wages, unemployment benefits and welfare benefit support economy from further sliding into recession -economy is not self-adjusting -wages and prices are sticky -*the Keynesian view is that fiscal stimulus-an increase in government outlays or a decrease in tax revenues- boosts real GDP and creates or saves jobs -fiscal stimulus boots real GDP and employment by increasing aggregate demand and the fiscal stimulus has a multiplier effect -government expenditure multiplier is greater than tax multiplier

CPI does not measure the cost of living because

-it does not measure all the components of the cost of living -some components are not measured exactly *CPI is possibly a biased measure

labor market trends and fluctuations

-labor force participation rate of women has increased -labor force participation rate of men has decreased

sources of bias in the CPI

-new goods bias -quality change bias -commodity substitution bias -outlet substitution bias

new goods bias

-new goods do a better job than the old goods that they replace, but cost more -the arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate

GDP goals

-to get more than 3% GDP -to get unemployment under 6% -to get inflation under 3%

budget deficit: problems faced when borrowed

1. debt deferred to the younger generation 2. $21,000 per household 3. higher taxes in the future 4. cut in government investment and government services in the future 5. crowding out effect of private consumption and investments 6. wage wedge (lower) due to higher taxes in the future 7. mortgaging our future to foreign countries 8. weaker dollar 9. lower standard on living in future

limitations to calculating GDP

1. household production: working on your house 2.underground production: unreported wages, tips 3.illegal activity 4.lesiure time 5.enviornment quality: air you breathe, water you drink 6.costs due to economic development: stress, crime, travel, family time

constructing the CPI

1. selecting the CPI basket 2. conducting the monthly price survey 3. calculating the CPI

if the nominal interest rate is 10 percent the inflation rate is 6 percent and the tax rate on interest income is 25 percent what is the after-tax real interest rate

1.5 percent

what percentage of U.S. economy is integrated with the world economy

11-12%

unemployed is

16+ years old, able and willing to work, actively making effort to work/look for work, even waiting to be called into work

government expenditure on goods and services

18.7%. the expenditure by all levels of government on goods and services, federal and state government

when did they start calculating unemployment and GDP

1946

if the income tax rate is 20% and the tax rate on consumption expenditure is 15 percent, than the tax wedge is

35 percent

economy can be at three different equilibriums

A: recession, real GDP below potential GDP, unemployment >6% C: at potential, real GDP equal potential GDP, no recession, no inflation, fully employed economy E: inflation, real GDP above GDP, price level CPI 120, inflation >3%

how to find out inflation rate

CPI in current year - CPI in previous (base) year divided by CPI in previous (base) year times 100

net domestic product

NDP= GDP minus depreciation

what is deflation

a decrease in the general (Average) price level of goods and services a typical urban American household buys each months

intermediate good or service

a good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service

final good or service

a good or service that is produced for its final user and not as a component of another good or service

cost of living index

a measure of changes in the amount of money that people would need to spend to achieve a given standard of living

if the economy is in equilibrium with real GDP less than potential GDP, there is ___ gap and a fiscal policy that _____ is appropriate

a recessionary; increase aggregate demand

employed is

all persons who worked at least one hour paid or unpaid, 16+ years old

the government expenditure multiplier is used to determine the

amount aggregate demanded is affected by a change in the government expenditure

inflation is

an increase in the general (average) price level of goods and services a typical American urban household buys each month

discouraged worker

are not counting in unemployed category -teenagers, low skills, hs dropouts, older workers

exports of goods and services

are the items that firms in the United States produce and sell to the rest of the world

imports of goods and services

are the items that households, firms and governments in the United States buy from the rest of the world

what is inflation

average price increases on all goods and servies

looking at the supply-side effects on aggregate supply shows that a tax hike on labor income

both answers weakens the incentive to work and decreases potential GDP are correct

the annual statement of the outlays, tax revenues and surplus or deficit of the government of the United States is the federal

budget

when the fed _______, the U.S. foreign exchange rate falls

buys government securities

in order to lower the federal funds rate, the Fed ______ government securities in open market operations, so that banks' reserves _____ and the quantity of money _______.

buys; increase; increases

CPI is

consumer price index: a measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services

circular flows in the U.S. economy

consumption expenditures by household -the expenditure by households on consumption goods and services -durable goods -non-durable goods -services and intangible goods and services

how to find out CPI

cost of CPI basket at current period prices divided by cost of CPI basket at base period prices times 100

an example of a discretionary fiscal stimulus policy is

cutting taxes

which of the following is an example of a fiscal stimulus

decrease in taxes

in the market for bank reserves, if the federal funds rate target is higher than the federal funds rate, the Fed will take action to ______ reserves

decrease the supply of

when there is a cut in payroll taxes, there is a ___ in the tax wedge that lowers the cost of labor. This tax cut will ___ the quantity of labor demanded and _______ the quantity of labor employed

decrease, increase, increase

need-based spending ___ during an expansion and _____ during a recession, which leads to larger budget deficits during the ____ phase of the business cycle

decreases, increases, recession

an increase in income taxes ____ employment and _______ potential GDP

decreases; decreases

gnoring any supply-side effects, if government expenditure on goods and services decrease by $10 billion and taxes decrease by $10 billion, then real GDP ________ and the price level ________.

decreases; falls

when government outlays exceed tax revenues, the situation is called a budget

deficit

the k-percent rule, an example of a money targeting rule, relies on a relatively stable

demand for money

the government expenditure multiplier and the tax multiplier are

different in size and the government expenditure multiplier is larger

labor force is the

employed and unemployed

during a recession, the unemployment rate

exceeds the natural unemployment rate in part and the output gap in part is negative

an example of automatic fiscal policy is

expenditure for unemployment benefices increasing as economic growth slows

How GDP is measured

expenditure or income approach

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market purchase of government securities that changes the quantity of reserves by $25 billion, then the federal funds rate will

fall to 4% a year

the Fed raises the interest rate when it

fears inflation

which of the following is a potential monetary policy instrument for the Fed?

federal funds rate

difference between GDP and GNP

for GNP, citizenship/ownership is very important/ where it is produced is important GDP: where income is generated is the most important part

When comparing a $100 billion increase in government expenditure to a $100 billion decrease in tax revenue, the effect of the increase in government expenditure on aggregate demand is

greater than the effect of the tax decrease

the balanced budget multiplier is

greater than zero and less than the government expenditure multiplier

GDP

gross domestic product, the market value of all the final goods and services produced within the boundary of a country in a given time period

quality of life measures

health expectancy, political freedom

what is productivity

how much is produced in one hour (how to produce more capital)

The figure above shows an economy aggregate demand curve and aggregate supply curves. Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. Which of the policies below could lead to these shifts?

i and ii only

once supply side effects are taken into account, tax cuts for labor income can change

i.the supply of labor ii. the growth rate of potential GDP

commodity substitution bias

if the price of beef rises faster than the price of chicken, people buy more chicken and less beef

if an economy is at the short-run equilibrium illustrated by the figure above, a discretionary fiscal policy to adjust the economy to full employment is to

increase taxes and decrease government spending simultaneously

if federal taxes are cut by $10 billion, aggregate demand

increases by $10 billion multiplied by the tax multiplier

if a charge in the tax laws leads to a $100 billion decrease in ta revenue, then aggregate demand

increases by more than $100 billon

if government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand

increases no matter what happens to aggregate supply

the supply-side effects show that a tax cut on labor income _____ employment and _____ potential GDP

increases, increases

aggregate demand changes the government expenditure on national defense increases by $100 billion. Aggregate demand ___ by ___ than $100 billion because government expenditure _____ induced expenditure

increases, more, decreases

Ignoring any supply-side effects, if government expenditure on goods and services increase by $10 billion and taxes increase by $10 billion, then real GDP ________ and the price level ________.

increases; rises

nominal interest rate

is the dollar amount of interest expressed as a percentage of the amount loaned

real interest rate

is the goods and services forgone in interest expressed as a percentage of the amount loaned

which monetary policy rule needs a stable demand for money to work well

k-percent rule

income approach

labor earns wages, capital earns interests labor earns rent, entrepreneurs earns profits

labor force participation rate equals

labor force divided by working age population times 100

GDP 4 important components

land, labor, capital, entrepreneurship

if we compare the United States to France, we see that potential GDP per person in France is ____ than the United States because the French tax wedge is ___ the us tax wedge

less than; larger than

subsidies (payments by government to firms)

make factor cost exceed market prices

indirect taxes (sales taxes, gasoline, etc)

make market prices exceed factor cost

what is current price

market price or nominal price

if the fed increases the quantity of reserves, a new equilibrium is reached by a

movement down the demand for reserves curve

the income approach

net domestic product at factor cost the sum of wages, interest, rent and profit -net domestic product at factor cost Is not GDP

what is real GDP

nominal GDP minus inflation (price increases)

the national debt is the amount

of debt outstanding that arises from past budget deficits

what items does GDP include

only those items that are traded in markets

the output gap is the

percentage deviation of real GDP from potential GDP

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland lowers the target federal funds rate by 1 percentage point, the central bank will conduct an open market ________ of government securities of ________ to ________ the supply of reserves.

purchase; 25 billion; increase

in order to reduce inflationary pressure on the economy, what fiscal policy can the government use

raise taxes

economic goals

real GDP >3% job and unemployment <6% CPI and inflation <3%

how to calculate real wage rate

real wage rate=nominal wage rate divided by CPI times 100

the figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP in the figure above, the ____ gap is one trillion dollars. To close the gap, government __ government expenditure and/or _____ taxes

recessionary, increase, decrease

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, the ________ gap is equal to ________.

recessionary; $1 trillion

the magnitude of the tax multiplier is _____ the magnitude of the government expenditure multiplier

smaller than

the figure above shows an economy aggregate demand curve and aggregate supply curves. Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on aggregate supply was larger than the figure above shows, as a result the price level would be ________ 110 and real GDP would be ________ $17 trillion.

smaller than; larger than

budget balance=

tax revenues-outlays

why measure GDP?

tells information about economy

the structural deficit is the deficit

that would occur at full employment

federal budget deficit

the amount of debt in a given year when government spending exceeds government revenue from taxes. budget deficit for fiscal year 2017 is -612billion

nominal wage rate

the average hourly wage rate measured in current dollars

real wage rate

the average hourly wage rate measured in the dollars of a given reference base year

Keynesian view versus classical view

the classical view/supply side -supply created its own demand -limited role of government -consumer and investors rational expectations -economy is self-adjusting -wages and prices are flexible -minimum wages and welfare benefits and employment benefits are impediments to economy self adjusting quickly

depreciation

the decrease in the value of capital that results from its use and from obsolesce -also called capital consumption

statistical discrepancy

the discrepancy between the expenditure approach and income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total

the national debt can only be reduced if

the federal budget is in a surplus

cyclical unemployment

the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion

unemployment rate

the percentage of population of the labor force who are unemployed

if the fed lowers the federal funds rate, which of the following will NOT happen

the price level falls

what are inventory investments

the purchase of new capital goods and additions to inventories (tools, instruments, machines, buildings and other constructions)

seasonal unemployment

the unemployment that arises because of seasonal weather patterns

frictional unemployment

the unemployment that arises from normal labor turnover- from people entering and leaving the labor force and from the ongoing creation and destruction of jobs

structural unemployment

the unemployment that arises when changes in technology, international and domestic competition changes in job skills needed to perform jobs or change the location of jobs

potential GDP

the value of real GDP when all the economy's facets of production are fully employed

expenditure approach

total expenditure is the total amount received by producers of final goods and services C= consumption; I=investment G= government NX= Net Export=export-import total expenditure= C+ I+ G+ NX

working age population

total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care or in the U.S. Armed Forces

number of people unemployed divided by labor force equals

unemployment rate

application of CPI

used to adjust government obligations. increases in government outlays and decrease in taxes -inflation rate -standard on living -retirement planning/pension plans -purchasing power of your income -pay negotiation/private agreements/union contacts

GDP does not include ______ goods and financial assets

used. when households buy financial assets such as stocks and bonds they are making loans

the expenditure approach measures GDP by

using data on consumption expenditure, investment, government expenditure on goods and services and net exports

when calculating real GDP

we are interested in the quantity of goods and services produced. As a result, we have to adjust for inflation

budget deficit

when outlays exceed tax revenues (budget balance is negative)

above potential GDP

when some factors of production are over-employed and working hard, real GDP EXCEEDS potential GDP

below potential GDP

when some factors of production are unemployed, real GDP is LESS than potential GDP

balanced budget

when tax revenues equal outlays (budget balance is zero)

budget surplus

when tax revenues exceed outlays (budget balance is positive)