Econ Test 1

An economy starts in steady state. A war causes a massive destruction of the capital stock. This shock will cause

the growth rate of output to rise initially as the economy begins to converge to the old steady state.

The percentage change in nominal GDP is ____

the inflation rate plus the percentage change in real GDP.

Imagine a two-good economy where the quantity of the goods produced is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be

the largest number when using the Paasche index.

Recently, the largest share of GDP is

consumption

What are the powers raised to in steady state

investment rate is raised to the power of .5, the labor force to the power of 1, and the productivity parameter to the power of 1.5. Thus, if the magnitudes of the increases are identical, the productivity parameter will have the largest impact on output in steady state.

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes

the growth rate of output to fall temporarily and the level of GDP to fall permanently.

exogenous variable

A component of an economic model that changes over time in an exogenous fashion.

In the labor market model, an endogenous variable is

the wage rate.

Economic profits are only positive if

there is some market power that allows firms to charge price above marginal cost.

Historically, labor's share of GDP has been relatively stable at approximately _____ of GDP.

two-thirds

Consumption accounts for ____ % of GDP

70%

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is

$150,000.

Rule of 70=

70/growth is the doubling

Historically, labor's share of GDP has been relatively stable at approximately ______ of GDP.

2/3

parameter

A part of an economic model that stands for a particular number. Examples include the investment rate in the Solow model and the sensitivity of a central bank's monetary policy rule to inflation. We often study one-time changes in a parameter value to see how the economy responds. (page 9)

Trade balance is ____

Exports minus imports

Expenditure approact to GDP

GDP=Consumption+Investment+Government Purchases+Net Exports

Parameters and exogenous variables are

Inputs

In most rich countries, inflation has ___ relatively since the 1980s.

Low

endogenous variable

One of the "unknowns" or outcomes of a model. Examples include the level of output in the Solow model and the level of inflation in the short-run model. To solve a model is to solve for the endogenous variables as a function of the parameters and exogenous variables.

Exogenous Variables are

Outputs

Nominal GDP

Price Level*real GDP

Which of the following is NOT an example of capital?

Screws and bolts used for making cars at an automobile factory

Which of the following does NOT increase the U.S. GDP?

The U.S. government increases social security payments.

In part, macroeconomists study individual behavior and microeconomic theories to create theories of aggregate economic activity.

True

Which of the following counts as investment?

You buy a new house.

The difference between a parameter and an exogenous variable is that

a parameter is fixed over time, while an exogenous variable is allowed to change over time.

The difference between an exogenous and an endogenous variable is that:

an exogenous variable is an input to the model, while an endogenous variable is an outcome of the model.

Over the last one hundred years, potential output has

been relatively equal to actual output except for the Great Depression era.

the growth rate of per capita GDP is the

growth rate of GDP minus the growth rate of population, which in this example is 0.

When comparing shares of consumption in GDP it is best to use ( ___ ) variables. When comparing real rates of economic growth it is best to use ( ___ ) variables.

nominal; chain-weighted

average annual growth formula

p59

Macroeconomics is the study of

people and firms and how their interactions through markets determine the overall performance of the economy.

Potential output is a measure of

per capita GDP in the future

An increase in the depreciation rate causes the depreciation curve to

pivot upward

national income accounting

production equals expenditure equals income

largest increase in steady-state output?

productivity parameter

The Solow model helps us explain why

some countries are richer than others are (different parameters) and why growth rates differ (transition dynamics). The Solow model does not generate long-run economic growth because the economy rests in steady state

constant growth appears as a

straight line

Value Added GDp

the amount of new value a firm creates in production equal to total revenue less the cost of intermediate foods that are used along the way. For example, the value added by an automobile manufacturer is not the total value pf the cars that are created, but rather this value less the amount paid for steel, tires, and other parts.

If net investment is negative

the economy is above its steady state and growth of output is negative.

Under national income accounting, GDP equals

the goods produced in the economy. the income earned in the economy. the total purchases in the economy.