Macro 10-1/2/3
Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if
there is technological change.
If inflation is positive and is perfectly anticipated,
those that hold paper money lose.
If real GDP grows by 3% in 2016, 3.2% in 2017, and 2.5% in 2018, what is the average annual growth rate of real GDP?
2.9%
Using the table, what is the approximate growth rate of real GDP from 2017 to 2018? 2015- $8,700 2016- $8,875 2017- $9,000 2018- $9,280
3%
Business cycles are
alternating periods of expanding and contracting economic activity, which are usually illustrated using movements in real GDP
An increase in the demand for loanable funds will occur if there is
an increase in expected profits from firm investment projects.
Which of the following goods would see the largest decline in demand during a recession?
automobiles
The rapid growth of the Chinese economy should
benefit U.S. consumers as they have access to less-expensive consumer goods.
Financial securities that represent promises to repay a fixed amount of funds are known as
bonds.
Inflation can affect the distribution of income because
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.
The tax benefits for saving, such as 401(k) retirement accounts, which increase the incentive to save increase
-supply of loanable funds curve to the right -causing real interest rate to decrease and investment to increase
Which of the following are examples of inflation causing a redistribution of income because the inflation was unanticipated?
-A bank collects a lower amount of interest from a loan because inflation was under -A worker receives a raise in salary that is less than the rate of inflation, because management under predicted inflation -a bond holder pays a higher tax and has less after tax income because of inflation
High Inflation created cost
-Inflation causes the real interest rate to change which can make it more difficult to borrow and lend money. -Inflation changes firms' prices which causes firms to have to use resources to physically change the marked prices, often referred to as menu costs. -Inflationary impacts are not distributed evenly across the population, therefore, inflation causes the economy to redistribute income across households.
Why might the unemployment rate continue to rise during the early stages of a recovery?
-Some firms continue to operate well below their capacity even after a recession has ended. -Employment growth may be slow relative to the growth in the labor force.
Even perfectly anticipated inflation imposes costs. Why?
-Some people's incomes will inevitably fall behind even an anticipated level of inflation. -Anyone holding paper money will find its purchasing power falling each year by the rate of inflation. This includes firms and consumers who have to hold at least some paper money to facilitate buying and selling. -Some firms experience menu costs. Menu costs are the costs to firms of changing prices on products, store shelves, or in printed catalogs.
The corporate taxes increase
-demand of loanable funds curve to the left -causing real interest rate and the level of investment to decrease
The expected future profits increase
-demand of loanable funds curve to the right -causing real interest rate and the level of investment to increase
During the expansion phase of the business cycle, which of the following eventually increases?
-income -production -employment
Which of the following are the three sources of technological change?
-increases in human capital -better machinery and equipment -better means of organizing and managing production
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation? (Mark all that apply.)
-lenders lose. borrowers gain made and received in nominal dollars: rate of inflation is important -if inflation unexpectedly low, real interest rate paid or received will be higher than expected real=nominal MINUS inflation
The desire of households to consume today increase
-supply of loanable funds curve to the left -causing real interest rate to increase and investment to decrease
The government's budget deficit increase
-supply of loanable funds curve to the left -causing real interest rate to increase and investment to decrease
Use the graph to help determine which one of the following statements regarding inflation and business cycles is true.
An important fact about the business cycle is that during economic expansions, the inflation rate usually increases, particularly near the end of the expansion, and during recessions, the inflation rate usually decreases. -Toward the end of the 1991-2001 expansion, the inflation rate began to rise.
The Bureau of Economic Analysis (BEA), part of the federal government, might not want to take on this responsibility. Which one of the following is the most appropriate reason for the BEA's refusal?
Because it is part of the government, the BEA could be pulled into politics with the dating of recessions.
If the actual inflation rate is less than expected:
Borrowers lose because the real rate at which they repay the loan is greater than expected. Lenders win because the real rate they receive as interest on the loan is greater than expected.
If the actual inflation rate is greater than expected
Borrowers win because the real rate at which they repay the loan is less than expected. Lenders lose because the real rate they receive as interest on the loan is less than expected.
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
Expansion
During the expansion phase of the business cycle, production, employment, and income are increasing. The expansionary period ends with a business cycle peak. -During a business cycle expansion, spending by firms and households is strong. As sales increase, firms increase production and hire more workers. With spending strong, firms find it easier to raise prices.
If income rises more slowly than the rate of inflation, purchasing power will rise.
False
There are no costs to inflation if it is fully anticipated.
False
Which of the following explains why employment only rises at a slow pace at the end of a recession?
Firms are hesitant to rehire laid off workers as they continue to operate below capacity.
Recession
Following the business cycle peak, production, employment, and income decrease as the economy enters the recessionary phase of the business cycle. The recession comes to an end with a business cycle trough, after which another period of expansion begins. -will often begin with a decline in spending by firms on capital goods or by households on consumer durables. As spending declines, firms find their sales declining. As sales decline, firms cut back on production and lay off workers. Rising unemployment and falling profits reduce income, which leads to further declines in spending. As spending declines during a recession, firms find it more difficult to sell their goods and services and are less likely to raise prices.
Suppose James and Frank both retire this year. For income from retirement, James will rely on a pension from his company that pays him a fixed $2,500 per month for as long as he lives. James hasn't saved anything for retirement. Frank has no pension but has saved a considerable amount, which he has invested in certificates of deposit (CDs) at his bank. Currently, Frank's CDs pay him interest of $2,300 per month. Ten years from now
Frank will have a higher real income although he has a lower nominal income because his interest income is likely to increase with inflation.
During an expansion, how do inflation and unemployment typically change?
Inflation rises and unemployment falls.
Suppose that Apple and the investors buying the firm's bonds both expect a 3 percent inflation rate for the year. Further, suppose the nominal interest rate on bonds is 7 percent and the expected real interest rate is 4 percent Now suppose that a year after the investors purchase the bonds, the inflation rate turns out to be 2 percent, rather than the 3 percent that had been expected.
Investors WIN Borrowers Loose
Based on the table to the right, which country has a higher standard of living and why?
Ireland has a higher standard of living because their GDP per capita is higher. -Sweden: $3.85/9.05 million people -Ireland: $2.23/4.21 million people
In the early 1900s, Henry Ford revolutionized the automotive manufacturing industry by instituting the assembly line. What impact did the assembly line method for producing automobiles have on the per worker production function for Ford?
It shifted up.
Now suppose that instead of being a constant amount, James's pension increases each year by the same percentage as the CPI. For example, if the CPI increases by 5 percent in the first year after James retires, then his pension in the second year equals $2,500 + ($2,500 × 0.05) = $2,625. In this case, 10 years from now,
James will have a higher real income because he has a higher nominal income and his income is indexed with the CPI.
Real interest rate
Provides a better measure of the true cost of borrowing and the true return on lending than does the nominal interest rate. If the inflation rate turns out to be higher than either party expected, borrowers pay and lenders receive a lower interest rate than either of the expected.
real income equation
Real Income=Nominal Income/CPI(current year X 100
There is a government budget surplus if
T − Tr >G
Refer to the diagram to the right. Which of the following is consistent with the diagram?
Technological change increases the profitability of new investment.
Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate?
The unemployment rate increases and the inflation rate falls during recessions.
If inflation is unexpectedly high, borrowers will benefit and lenders will be harmed.
True
In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
Y − C − G
In a closed economy, private saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
Y − C − T + TR
In a closed economy, public saving is equal to which of the following? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
Y − G - TR
All of the following are problems caused by deflation except
YES: -borrowers face an increased burden of debt. -consumers postpone purchases in the hope of lower prices in the future. -the real interest rate becomes higher than the nominal interest rate. NO: firms make higher profits as consumers buy more goods and services.
When tax revenue equals government spending there is
a balanced budget
Suppose that the inflation rate turns out to be much lower than most people expected. In that case,
a borrower will lose from the situation while a lender will gain
When tax revenue is less than government spending there is
a budget deficit
When tax revenue exceeds government spending (government purchases and transfer payments) there is
a budget surplus
Which of the following is most liquid?
a dollar bill
Which of the following describes situations in which the person is hurt by inflation?
a person paid a fixed income during an inflationary period
If consumers decide to be more frugal and save more out of their income, then this will cause
a shift in the supply for loanable funds to the right.
An economic growth model explains
changes in real GDP per capita in the long run.
The response of investment spending to an increase in the government budget deficit is called
crowding out.
Lower prices usually cause consumers to buy more, not less. However, in this case, consumers may
delay buying until prices fall further, so current lower prices would not have the usual effect.
When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing
diminishing returns
Industries that produce
durable goods are more affected by recessions than is the economy as a whole.
Suppose that in 2018 real GDP grew in Estonia by 3% and that the population increased by 5%. Therefore in 2018, Estonia experienced
economic growth, but not an increase in living standards.
Since nominal incomes increase with inflation,
expected inflation does not affect the purchasing power of the average consumer.
Actual real GDP will be above potential GDP if
firms are producing above capacity.
If inflation is completely anticipated,
firms lose because they incur menu costs.
An economy can improve its standard of living by
increasing the amount of capital available per hour worked.
In a closed economy, public saving plus private saving is equal to
investment.
The cost to firms of changing prices
is called a menu cost.
If the per-worker production function shifts down,
it now takes more capital per hour worked to get the same amount of real GDP per hour worked.
The deflation of the 1930s impacted the U.S. economy because it led some consumers to ________ and because it ________.
postpone purchases while they waited for prices to fall even lower; increased the burden on borrowers
Consumers could see deflation as a "signal to defer purchases" because if deflation is expected to continue,
prices would be lower in the future.
The only way the standard of living of the average person in a country can increase is if ________ increases faster than ________.
production; population
A good measure of the standard of living is
real GDP per capita.
The best measure of a country's standard of living is
real GDP per capita.
The Internet has BLANK the size of menu costs.
reduced
Typically, toward the end of an expansion, both households and firms will have
substantially increased their debts -result of the borrowing that firms and households undertake to help finance their spending during the expansion.
Under the Soviet system of communism
technological progress was slow because managers had little incentive to develop new technologies.
A period of expansion in the business cycle ends when
the business cycle reaches its peak.
Menu costs are
the costs to firms of changing prices.
One reason that Mexico has experienced relatively low rates of economic growth is that
the country has problems with organized crime and corruption.
Liquidity refers to
the ease with which a financial security can be traded for cash.
There is a federal budget deficit when
the government spends more that it collects in taxes.
Which of the following would you expect to result in faster economic growth?
the invention of new computers that increase labor productivity
Potential GDP refers to
the level of GDP attained when all firms are producing at capacity.
When an economy faces diminishing returns
the slope of the per-worker production function becomes flatter as capital per hour worked increases.
The type of inflation that is a greater problem to society is
unanticipated inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future.
During recessions, the inflation rate
usually decreases.
Nominal incomes generally increase with inflation because
when inflation is anticipated, average nominal incomes also increase by the same percentage as the rate of inflation
If an economy experiences deflation, the real interest rate
will be greater than the nominal interest rate.
According to the World Bank, in 2016, China's GDP was approximately $11.2 trillion (or $11,200 billion). That same year, India's GDP was approximately $2.3 trillion (or $2,300 billion). With which of the following populations would India's standard of living have been considered higher than China's that year?
China's population = 8.3 billion; India's population = 1.1 billion
Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.
demanders; suppliers
Recessions typically cause the unemployment rate to ________ and the inflation rate to ________.
rise; fall
