ECON Test #3

New Growth Theory

- Holds that real GDP per person grows because of choices that people make in the pursuit of profit and that growth can persist indefinitely - The theory begins with two facts about market economies: discoveries result from choices; discoveries bring profit and competition destroys profit

Cyclical Unemployment

-The higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak - A worker who is laid off because the economy is in a recession and is then rehired when the expansion begins experiences cyclical unemployment

If the CPI was 132.5 at the end of last year and 140.2 at the end of this year, the inflation rate over these two years was

140.2-132.5= 7.7 7.7/132.5= 5.8

An increase in the price level is defined as

Inflation

Aside from being a means of payment, the other functions of money are

Medium of exchange, unit of account, and store value

In any year, real GDP

Might by greater or less than potential GDP

The term capital, as used in macroeconomics, refers to

Physical capital

GDP does not directly include intermediate goods because

That would count the intermediate goods twice

Monetary policy is conducted

only by the Federal Reserve

Major role of commercial banks is to

receive deposits and make loans

Definition of Barter

the exchange of goods and services directly for other goods and services

What is classified as unemployed

- No job - Has looked for a job within 4 weeks, waiting to be called back, or killing time until new job starts in 30 days

What is classified as the working age population

- People older than 16 - Not in jail - Not in the hospital - Not in the military

Neoclassical Growth Theory

- The proposition that real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labor grow - Growth ends only if technological change stops because of diminishing marginal returns to both labor and capital

Classical Growth Theory

- The view that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level - Malthusian population trap

Frictional Unemployment

- Unemployment that arises from normal labor market turnover -The creation and destruction of jobs requires that unemployed workers search for new jobs -Increases in the number of people entering and re-entering the labor force and increases in unemployment benefits raise frictional unemployment -Permanent and healthy (growing economy)

If Nike, an American corporation, produces sneakers in Thailand this would

Add to Thailand's GDP but not to U.S. GDP

What does Velocity mean

Amount of time money is changing hands

Economic growth is measured by

Changes in real GDP

The view that population growth occurs when real GDP per person exceeds the amount necessary to sustain life is part of the

Classical Growth Theory

All of the following would increase the growth rate of the economy EXCEPT

Discouraging international trade

The monetary policy making body of the Federal Reserve is the

Federal Open Market Committee

In the United States, the central bank is the

Federal Reserve System

The interest rate banks change other banks for overnight loans is

Federal funds rate

Gross domestic product is a measure of the total value of all

Final goods and services produced in an economy over a period of time

The funds to buy and operate physical capital are

Financial capital

The business cycle refers to

Fluctuations in the level of real GDP around potential GDP

The three types of unemployment are

Frictional, structural, and cyclical

How to calculate the value of GDP

GDP= C+I+G+NX

If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate

I= r + ∏ 8= r + 3 r= 5%

If a banks net worth is negative, then the bank definitely is

Insolvent

U.S. currency

Is composed of the bills and coins held by individual and businesses

What is a description of someone that is considered to be apart of the labor force

Labor Force= employed + unemployed

A bank creates money by

Lending its excess reserves

What is M2

M1 + time deposits + money market + certificates of deposits + savings M2 is always larger than M1 because it includes M1

Comparing M1 and M2 we know that

M2 is larger because it contains M1 and other assets

What is M1

MO + travelers checks + demand deposit + checking deposits

What equation represents the equation of exchange

MV PY

What is this an example of: this person was laid off last year when new equipment was installed at the plant, reducing the number of workers needed. Shortly after being laid off, this person looked for a new job, was unable to find one and then stopped looking, even though this person still wants a job and is available for work

Marginally Attached Workers

The labor force participation rate shows the percentage of

Non- institutionalized working age people who are actually working or seeking employment

In the above figure, the letters A, B, C represent which positions in the business cycle

Peak, recession, expansion

Cigarettes served as money in some POW camps during World War II. Given this fact, we would expect to observe

Prices of other goods expressed in terms of cigarettes Cigs= money in this situation

The major role of a commercial bank is to

Receive deposits and make loans

Which of the following items is NOT part of government expenditure on goods and services in the GDP accounts

Social security expenditures

When the automobile replaced horse-drawn carriages as the principal means of transportation firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing

Structural unemployment

Potential GDP is

The max amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation

Real Gross Domestic Product is

The value of total production linked back to the prices of a single year

Frictional unemployment includes

Unemployment caused by normal labor turnover associated with people leaving and entering the labor force

The interest rate banks charge other banks for overnight loans is..

federal funds rate

Which of the following is using money as a store of value

keeping $200 on hand for an emergency

When you buy a hamburger for lunch, you are using money as a...

medium of exchange

The double coincidence of wants problem is

resolved by the use of money

Which of the following is NOT included in the M1 measure of money

savings deposits

Who is considered officially unemployed

unemployment rate= unemployment/ employed + unemployed