ECON test 2

You open an investment account that earns a nominal interest rate of 4.2% a year. The current consumer price index is 108. In one year, the consumer price index is expected to go to 106. What is your expected real rate of return?

6.05% - why?

GDP deflator:

A price index that tracks the price of all goods and services produced domestically.

producer price index (PPI):

A price index that tracks the price of inputs into the production process.

The permanent income hypothesis implies that retired consumers with savings but no income will fund excess permanent consumption by:

dissaving

Cyclical: Unemployment that is

due to a temporary downturn in the economy.

Frictional: Unemployment that is

due to the time it takes for employers to search for workers and for workers to search for jobs.

Dissaving is

excess amount you consume above your income in a given period that you therefore must pay for either by withdrawing money from your savings or by borrowing money.

how to find net exports?

exports - imports

efficiency wage is a

higher wage paid to encourage greater worker productivity.

dependency ratiois

the number of people too young or too old to work per 100 people of working age.

marginal principle

reminds you that it is simpler to break the decision of how many dollars should you spend today into increments.

Thomas Malthus's predictions about the earth did not come true because:

technological advances in agriculture outpaced population growth rates.

how to find unemployment rate?

# of unemployed/labor force x 100

In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?

$8,746. ((1,410*251.1)/ 40.28)

Labor force participation rate =

((employed + unemployed)/ (working age- age population))*100

how to find nominal GDP?

...

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is:

0.62 (why?)

Nominal GDP grew by 4%, and the growth rate of real GDP was 2.5%. What was the rate of inflation?

1.5%

You purchase a certificate of deposit that pays an advertised rate of 2.25% interest per year. What is your nominal rate of return if the actual inflation rate is 1.65%?

2.25% (why?)

If an economy is a closed economy, then the equation for total spending is:

C + I + G.

Inflation rate =

CPI this year - CPI last year / CPI last year x 100

MPC permanent =

Change in consumption/Permanent change in income

MPC temporary =

Change in consumption/Temporary change in income

steps in calculating the inflation rate from one period to the next?

Find the total value of the basket of goods and services. Collect the prices from the stores where people shop. Find out what people typically buy.

You just bought two used textbooks for $25 each. How much does GDP change because of your purchase?

GDP does not change

You purchase a new car (produced this year) for $38,000. After six months, you sell the car for $31,500. How much does GDP rise because of these two transactions?

GDP rises by $38,000. (resell does not count towards GDP)

Josue is between jobs right now. He worked for 10 years as an editor of a small magazine but left his job due to dissatisfaction with his salary. He is looking for a new job as a magazine editor, but he finds that these jobs now require the use of software programs and editing technology that he is not familiar with, so he is unable to secure employment. What is Josue's labor market status?

He is frictionally unemployed.

Hysteresis occurs when a period of

High unemployment leads to a higher equilibrium unemployment rate.

Saving =

Income − Consumption

Rapid growth in poorer countries leads to:

convergence in real GDP per person between poorer countries and richer countries.

Real rate =

Nominal rate - Inflation rate

what shifts consumption?

Real interest rates Expectations Taxes Wealth

Underemployed:

Someone who is working but wants more hours or whose job isn't adequately using their skills.

Learning about a future income change leads to

a change in consumption.

If there is news of a future rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a large increase; no change

If Derek is a consumption smoother and has just signed a contract for a new job that will increase his salary by 14%, we can expect Derek to exhibit:

a small change in consumption

If Marios is a consumption smoother and has just won a prize of $12,000, we can expect Marios to exhibit:

a small change in consumption.

If there is a temporary rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a small increase; a large increase

If there is _____ rise in income, a consumption smoother will exhibit a small change in consumption.

a temporary

The law of diminishing returns means that:

additional investments in physical capital do not boost output in wealthier countries with already existing large capital stocks.

Disposable income is your

after-tax income

Labor unions can lead to:

an increase in structural unemployment.

David is looking for a full-time job in the insurance industry. He is able to find only a 10-hour per week job as a fill-in insurance agent. Davis can be described as:

an involuntary part-time worker.

The inflation rate is the

annual percentage increase in the average price level.

The consumer price index is an index that tracks the:

average price that consumers pay over time for a representative basket of goods and services.

Maintaining a steady or smooth path for your consumption spending over time is called

consumption smoothing.

variable that has been adjusted to account for inflation is a

real variable

Following a significant recessionary period in which there were periodic wage freezes, workers negotiate higher wages. However, the higher wages lead to a decrease in the number of new workers getting hired, so unemployment persists in the region. The scenario described here is an example of:

hysteresis.

Automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation is called

indexation.

The real interest rate is the:

interest rate in terms of changes in purchasing power.

consumption function

is a curve plotting the level of consumption associated with each level of income.

unemployment rate

is the share of the labor force who are unemployed.

A marginally attached person is one who:

is unemployed, has looked for a job within the past year, but has now stopped looking.

When inflation is higher than expected, there is redistribution from:

leaders to borrowers.

The rational rule of consumption is to consume more today if the:

marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

The opportunity cost of an extra dollar of consumption today is the:

marginal benefit of consuming a dollar-plus-interest in the future.

The slope of the consumption function is the:

marginal propensity to consume.

GDP is defined as the:

market value of all final goods and services produced within a country in a given year.

The aggregate production function Y = f(L, H, K) shows that economic growth can occur if:

more labor is employed.

An anticipated change in income leads to

no change in consumption

If there is an anticipated rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

no change; a large increase

When real interest rates rise, consumption will shift:

upward if the income effect outweighs the substitution effect.

Human capital refers to:

worker skills and knowledge.

Rational Rule for Consumers says that

you should consume more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

Permanent income is

your best estimate of your long-term average income.

Involuntarily part time:

Someone who is working part-time but wants full-time work.

cost-benefit principle

The answer to each increment should be yes if the marginal benefit exceeds the marginal cost.

Substitution bias:

The overstating of inflation occurs because people substitute toward goods whose prices rise by less.

inflation Adjustment forumula

Today's dollars = Another time's dollars × (price level today/ price level overtime)

Limits on how much you can borrow are called

credit constraints. --- Consumption smoothing is not possible with credit constraints.

variable measured in dollars is a

nominal variable

Unexpected changes in income are

not included in your current permanent income estimate. An unexpected change increases that estimate.

unemployment rate formula

number of unemployed/labor force x 100

Structural: Unemployment that

occurs because wages don't fall to bring labor demand and supply into equilibrium.

Consumption smoothers spend

permanent income.

Inflation is a:

rise in the overall level of prices.

interdependence principle

says that choices available to you in the future depend on the decisions that you make today.

The catch-up effect would be largest in an economy where:

the initial level of capital is low.

Hand-to-mouth consumers spend

their current income.

GDP per person is calculated as:

total GDP divided by the population

aggregate production function relates

total output (GDP) to the quantity of inputs employed.