Macro Exam 2

Consider the following data for a CLOSED economy: Y = $12 trillion C = $8 trillion I = $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion What is the level of private saving in the economy?

$3 trillion

Current population survey

(or household survey) collects data needed to compute the unemployment rate

examples of a transfer payment (2)

1. Social security payments 2. unemployment insurance

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?

3.5%

If real GDP per capita measured in 2009 dollars was $6000 in 1950 and $48000 in 2018, we would say that in 2018, the average American could buy ______ times as many goods and services as the average American in 1950.

8

frictional unemployment

short-term unemployment that arises from the process of matching workers with jobs

Government consumption and gross investment or "Government purchases"

spending by federal, state, and local governments on goods and services

business fixed investment

spending by firms on new factories, office buildings, and machinery used to produce other goods

investment

spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses

Residential investment

spending by households and firms on new single-family and multi-unit houses

consumption

spending by households on goods and services, not including spending on new houses

Nominal GDP is calculated by

summing the current values of final goods and services

depreciation is called

the consumption of fixed capital

the long-run aggregate supply curve will shift to the right if

the economy experiences technological change

if cyclical unemployment is eliminated in the economy, then

the economy is considered to be at full employment

According to Joseph Schumpeter, which of the factors of production is central to economic growth?

the entrepreneur

Value added

the market value a firm adds to a product

Gross domestic product (GDP)

the market value of all final goods and services produced in a country during a period of time, typically one year

real interest rate

the nominal interest rate minus the inflation rate

natural rate of unemployment

the normal rate of unemployment, consisting of frictional unemployment and structural unemployment

inflation rate

the percentage increase in the price level from one year to the next

unemployment rate

the percentage of the labor force that is unemployed

labor force participation rate

the percentage of the working-age population in the labor force

employment-population ratio

the percentage of the working-age population that is employed

When an economy faces diminishing returns

the slope of the per-worker production function becomes flatter as capital per hour worked increases

nominal interest rate

the stated interest rate on a loan

labor force

the sum of employed and unemployed workers in the economy

What is outlet bias?

the tendency for households to spend their money at discount stores as prices rise

Real GDP

the value of final goods and services evaluated at base-year prices

Nominal GDP

the value of final goods and services evaluated at current-year prices

Gross National Product (GNP)

the value of final goods and services produced by residents of the US, even if the production takes place outside of the US

An alternative way of calculating GDP is

the value-added method

Which of the following is NOT an assumption made by the dynamic model of aggregate demand and aggregate supply? A. The short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages B. The aggregate demand curve shifts to the right during most periods C. Aggregate demand and potential real GDP decrease continuously D. Potential real GDP increases continuously

C; Aggregate demand and potential real GDP decrease continuously

Which of the following price indices comes closest to measuring the cost of living of the typical household? A. producer price index B. GDP deflator C. consumer price index D. household price index

C; consumer price index

exports are

goods and services produced in the US and purchased by foreign firms, households, and governments

The output of U.S citizens who work in Canada would be included in the

gross domestic product of Canada

Gross domestic product understates the total production of final goods and services because of the omission of

household production

Suppose in 2018, you purchase a house built in 2003. Which of the following would be included in the gross domestic product for 2018? A. the value of the house in 2003 B. the value of the services of the real estate agent C. the value of the house in 2018 D. the value of the house in 2018 minus depreciation

B; the value of the services of the real estate agent

Gross Private Domestic Investment or "investment" is divided into 3 categories:

Business fixed investment, residential investment, and changes in business inventories

A simple equation sums up the components of GDP:

Y = C + I +G + NX GDP = consumption + investment + government purchases + net exports

employed

in government statistics, someone who currently has a job or who is temporarily away from his or her job

unemployed

in government statistics, someone who is not currently at work but who is available for work and who has actively looked for work during the previous month

personal income

income received by households

a decrease in the real interest rate will

increase in consumption and investment

the "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP than demanded

Final good or service

a good or service purchased by a final user

Intermediate good or service

a good or service that is an input into another good or service, such as a tire on a truck

Consumer Price Index (CPI)

a measure of the average of the prices a typical urban family of four pays for the goods and services they purchase

price level

a measure of the average prices of goods and services in the economy.

GDP deflator

a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

efficiency wage

an above-market wage that a firm pays to increase workers' productivity

if full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?

it is a vertical line at $4.2 trillion of GDP

GDP includes only the ...

market value of final goods

GDP is measured using ...

market values, not quantities

examples of consumption expenditures on durable goods:

automobiles and furniture

financial system is made up of

banks and stock and bond markets

the real interest rate provides a ...

better measure of the true cost of borrowing and the true return from lending than does the nominal interest rate

Examples of consumption expenditures on services:

medical care, education, and hair cuts

underground economy

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal

a decrease in the price level will

move the economy down along a stationary short-run aggregate supply curve

The demand for loanable funds has a ________ slope because the lower the interest rate, the ______ number of investment projects are profitable, and the ______ the quantity of loanable funds demanded.

negative; greater; greater

real interest rate =

nominal interest rate - inflation rate

The value of worn-out machinery, equipment, and buildings is called

depreciation

Real GDP is calculated by

designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years

The Bureau of Labor Statistics would categorize a person as _____ if they were temporarily away from their job because they were ill

employed

disposable personal income

equal to personal income minus personal tax payments, such as the federal personal income tax

Real GDP will increase

only if the quantity of final goods and services produced rises

Consumption expenditures are made by households are divided into 3 categories:

expenditures on services, expenditures on nondurable goods, and expenditures on durable goods

Net exports of goods and services, or "Net exports"

exports minus imports

examples of consumption expenditures on nondurable goods:

food and clothing

The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment?

frictional unemployment

seasonal unemployment refers to

frictional unemployment due to factors such as weather or variations in tourism and other calendar-related events

3 types of unemployment

frictional, structural, and cyclical unemployment

when the only remaining unemployment is structural and frictional unemployment, the economy is said to be at

full employment

transfer payments

payments by the government to households for which the government does not receive a new good or service in return

discouraged workers

people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them

GDP includes only current ...

production; takes place during the indicated time period

potential GDP refers to the level of

real GDP in the long run

recession

A slowdown in a nation's economy

which of the following statements is TRUE? A. GDP accounting rules do not adjust for production that pollutes the economy B. Household production is counted in GDP as it amounts to real production C. A decrease in the crime rate increases GDP as people will spend more on security D. GDP growth distributes income equally to people in the economy

A; GDP accounting rules do not adjust for production that pollutes the economy

Purchases of which of the following goods would be dramatically reduced during a recession? A. refrigerators B. ink pens C. tomatoes D. gasoline

A; refrigerators

Which of the following transactions represents the purchase of a final good? A. your father buys a new John Deere riding lawn mower B. Delta buys a new European-made jetliner C. Apple computer buys computer processors from Intel D. Starbucks purchases coffee beans

A; your father buys a new John Deere riding lawn mower

Under which of the following circumstances would private saving be positive in a closed economy? A. Y = $6 trillion C = $2 trillion TR = $8 million G = $3 trillion public saving = $1 trillion B. Y = $8 trillion C = $2 trillion TR = $4 trillion G = $2 trillion public saving = $4 trillion C. Y = $9 trillion C = $5 trillion TR = $1 trillion G = $1 trillion public saving = $3 trillion D. Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion public saving = $1 trillion

D

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does NOT rise? A. AD shifted to the right by more than SRAS B. AD shifted to the right by less than SRAS C. SRAS shifted to the right by more than LRAS D. SRAS and AD do not shift

D; SRAS and AD do not shift

If property rights are NOT enforced in a country, then

Entrepreneurs are unlikely to risk their own funds investing in such an economy

transfer payments are not included in

GDP because they are not received in exchange for production of a new good or service

the invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do to the short-run supply curve?

It shifted the short-run aggregate supply curve to the right

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-tun aggregate supply will shift to the right

Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6000. In Beta, real GDP per capita is $9000. Based on the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries?

The growth rate of real GDP per capita will be higher in Alpha than it is in Beta

changes in business inventories (investment)

changes in the stocks of goods that have been produced but not yet sold

Real GDP holds prices ...

constant, which makes it a better measure than nominal GDP of changes in the production of goods and services from one year to the next.

4 major components of GDP:

consumption, investment, government purchases, and net exports

interest rate is the

cost of borrowing funds, expressed as a percentage of the amount borrowed.

if the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would

decrease

factors of production

labor, capital, natural resources, and entrepreneurial ability - to produce goods and services

the sum of wages, interest, rent, and profit is

total income in the economy

cyclical unemployment

unemployment caused by a business cycle recession

structural unemployment

unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs

Real GDP is GDP in a given year

valued in the prices of the base year