Macroeconomics Exam 2

When using the expenditure approach, GDP is:

GDP = C + I + G + (X − M)

Promoting free and competitive markets:

International trade allows for specialization and gains from trade, and competitive markets ensure firms do not exploit market power, their ability to set prices for goods and services in a market

compounding

The ability of growth to build on previous growth. It allows variables such as income and GDP (as well as debt) to increase significantly over time.

price level

The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).

double-dip recession

recession that begins after only a short period of economic recovery from the previous recession.

Output per person adjusts

the production function for changes in population growth in a country.

The labor force is

the sum of the employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force.

People are unemployed if

they do not have a job, but are available for work and have been actively seeking work for the previous four weeks.

The official unemployment rate statistics do not account for

underemployed, discouraged, and other marginally attached workers.

inflation

A general rise in prices throughout the economy. It is a measure of changes in the cost of living.

informal economy negative:

Taxes are rarely paid on income in the informal economy, putting a greater tax burden on others. Also, the informal economy is less regulated, which can lead to unsafe products or risky job conditions.

Infrastructure is

a country's public capital, including dams, roads, transportation networks, power-generating plants, and public schools.

Rocky Gap Furniture hires ten employees working eight hours each to produce 100 rocking chairs. What is the productivity of these workers? 50 chairs 1.25 chairs per hour 2.5 chairs per hour 100 chairs

1.25 chairs per hour

CPI =

100 x (cost of basket in current year/cost of basket in base year)

(Table) According to the table, the number of people in the labor force is: Employed 85 Unemployed seeking work 25 Discourage workers 15 Retired 10 120. 110. 115. 130.

110

(Table) Suppose the Bureau of Labor Statistics collects the data presented in the following table: Year Cost of Basket 2010 $200 2011 $230 2012 $250 If 2010 is the base year, then the consumer price index for 2012 is: 100. 125. 115. 114.

125

(Table) According to the table, what is the unemployment rate of this economy? Population 500 Number employed 300 Number unemployed 50 25% 16.67% 14.3% 10%

14.3%

If the growth rate in an economy is 2%, its GDP will double in about: 28 years. 35 years. 70 years. 140 years.

35 years

If output equals A × (5K + 2L), what is output if A equals 2,000, capital equals 10, and labor equals 100? 12,000 50,000 120,000 500,000

500000

Rule of 70

70/growth rate

disinflation

A reduction in the rate of inflation. An economy experiencing disinflation still faces inflation, but at a declining rate.

Enforcement of contracts:

A strong legal system

GDP provides

a simple and consistent way of measuring the overall economic activity in an economy.

Escalator clauses

adjust payments (wages, rents, and other payments such as Social Security) to account for inflation.

The largest component of GDP is: consumption expenditure. gross private domestic investment. net exports. government spending.

consumption expenditure

Macroeconomic policies have the most effect on which type of unemployment.

cyclical

The four phases of the business cycle

include the peak, recession (or contraction), trough, and recovery (or expansion).

Investment in human capital is important because: it increases labor productivity. it improves morale. humans need capital. it lowers the total wage bill.

it increases labor productivity

Short-run growth

occurs from using resources that have been sitting idle or underutilized, and is represented in a PPF diagram as a movement from a point within the PPF toward the PPF.

Unemployed =

those that are actively looking for work

national income

All income, including wages, salaries and benefits, profits (for sole proprietors, partnerships, and corporations), rental income, and interest.

The recent global financial instability: All of the answers are correct. harmed standards of living. slowed down economic growth. caused severe credit crunches.

All the answers are correct

business cycles

Alternating increases and decreases in economic activity that are typically punctuated by periods of recession and recovery.

Inflation rate =

CPI current year - CPI previous year / CPI previous year x 100

calculating gdp using income approach

Compensation of Employees Proprietors' Income Corporate Profits Rental Income Net Interest Other/Adjustments

Protection of property rights:

Ensuring that monetary rewards are provided to innovators

Net Exports is equal to: Imports Exports Exports plus Imports Exports minus Imports

Exports minus imports

Net Domestic Product

GDP - depreciation

informal economy (the underground or black market)

Includes all transactions that are conducted but are not licensed and/or generate income that is not reported to the government (for tax collection).

Real Interest Rate =

Nominal interest rate - Inflation

Real wage =

Nominal wage - Inflation

informal economy positive:

Transactions in an informal economy create jobs and contribute to overall economic activity.

structural unemployment

Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed.

The Index of Economic Freedom measures

a country's infrastructure, which supports economic growth.

Physical capital is subjected to

diminishing returns, which allows countries with less starting capital to experience a catch-up effect as they acquire more capital.

Productivity is the key driver for

economic growth, and rises when labor is able to produce greater quantities and higher values of output.

Jennifer did not work during college. She just obtained a bachelor's degree in marketing, and she is now looking for a marketing job in the retail industry. Jennifer is considered: not in the labor force. cyclically unemployed. frictionally unemployed. structurally unemployed.

frictionally unemployed

Other less tangible infrastructure elements include

protection of property rights, enforcement of contracts, and a stable financial system.

Which of the following is NOT an investment in human capital? launching an employee physical fitness campaign putting more money into the education system researching automated production techniques starting a job-training program

researching automated production techniques

circular flow diagram

shows how households and firms interact through product and resource markets.

Which of the following two things can people do with money received as disposable personal income? pay taxes or save money spend money or put it into savings pay taxes or spend money pay taxes or buy government bonds

spend money or put it into savings

Last year, the consumer price index (CPI) was 115 while the consumer price index for this year is 125. The rate of inflation is: 9.2%. 10.8%. 8%. 8.7%.

8.7

GDP deflator

An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA).

The consumer price index (CPI)

An index of the average prices paid by urban consumers for a typical market basket of consumer goods and services.

producer price index (PPI)

An index of the average prices received by domestic producers for their output.

net exports

Exports minus imports for the current period. Exports include all goods and services we sell abroad, while imports include all goods and services we buy from other countries.

personal consumption expenditures

Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.

government spending

Includes the wages and salaries of government employees (federal, state, and local); the purchase of products and services from private businesses and the rest of the world; and government purchases of new structures and equipment.

Ways to Increase Productivity

Increasing access to natural resources Improving quality of labor (human capital) Increasing the capital-to-labor ratio Promoting innovation and technology ALL OF THE ABOVE

Jennifer received news that she is getting a 5% raise. However, the Bureau of Labor Statistics just reported that prices are rising by 7%. Based on the given information, which of the following is true? Jennifer's purchasing power will rise by 2%. Jennifer's purchasing power will rise by 7%. Inflation has no impact on purchasing power. Jennifer is losing purchasing power by 2%.

Jennifer is losing purchasing power by 2%

Jordan Meadows lost his job as an airline pilot and has not been able to find another job as a pilot. Since he is old enough to be eligible for his pension, he decides to retire and devote himself to caring for his elderly parents. According to the Bureau of Labor Statistics, Jordan is: employed. unemployed. a discouraged worker. not in the labor force.

Not in the labor force

Value added =

Sales Price - cost of intermediate goods

natural rate of unemployment

The level of unemployment at which price and wage decisions are consistent; a level at which the actual inflation rate is equal to people's inflationary expectations and where cyclical unemployment is zero.

real GDP

The total value of final goods and services produced in a country in a year measured using prices in a base year.

frictional unemployment

Unemployment resulting from workers who voluntarily quit their jobs to search for better positions, or are moving to new jobs but may still take several days or weeks before they can report to their new employers.

cyclical unemployment

Unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low-inflationary, solid growth path.

economic growth

Usually measured by the annual percentage change in real GDP, reflecting an improvement in the standard of living.

underemployed workers

Workers who are forced to take jobs that do not fully utilize their education, background, or skills. Underemployed workers often hold part-time jobs.

marginally attached workers

Workers who were available for work and actively looked for it during the last 12 months, but not in the last 4 weeks.

Which of the following resources is an example of infrastructure? a coal mine a computer manufacturing plant an elementary school a newly drained swamp

an elementary school

1. Alternating periods of macroeconomic expansion and contraction are known as: trade surpluses and deficits. hyperinflations. business cycles. budget surpluses and deficits.

business cycles

Labor Force =

employed + unemployed

When the government enforces contracts between two parties, it is acting in its role to promote economic growth by: promoting free and competitive markets. providing physical and human capital. ensuring a stable legal system. ensuring a stable and secure financial system.

ensuring a stable legal system

Business cycles vary in

intensity, duration, and speed.

One important reason economists track business investment is that: it helps them decide which stocks to purchase. it shows where the economy has been. it is a leading indicator of the business cycle. business investment is an excellent proxy for government investment.

it is a leading indicator of the business cycle.

In the absence of copyright and patent laws: a. the quality of goods and services consumed by purchasers improves. b. innovators can invent more, because they do not have to spend resources navigating the legal system. c. it is difficult for innovators to profit from their efforts. d. the profits of writers and inventors rise.

it is difficult for innovators to profit from their efforts

Small differences in growth rates translate into

large differences in output and income over time. Just a 1% difference in growth over time can make one country appear rich and another country appear poor.

gross domestic product (GDP)

measure of the economy's total output; it is the most widely reported value in the national income and product accounts (NIPA) and is equal to the total market value of all final goods and services produced by resources in a given year.

GDP does not include

most of the benefits and costs from environmental and natural resources. also, nonmarket activities or the informal economy.

hyperinflation

n extremely high rate of inflation; above 100% per year.

During the 1970s, when handheld calculators became popular and replaced slide rules in performing computations, workers in the slide rule industry lost their jobs. These workers' unemployment status is: frictional. natural. structural. cyclical.

structural

What is real GDP in 2014 dollars using 2013 prices? A price P Price Apples Quantity Pears Quantity 2013 $1.00 $1.00 100 120 2014 $0.80 $2.00 150 100 $320 $250 $220 $350

$250

Company DEF produces gizmos. One particular batch cost $50,000 to produce. Because market conditions were bad at the time of sale, they were sold at a loss for $40,000. The value of the gizmos included in the GDP is: $50,000. impossible to compute because there is negative profit. $10,000. $40,000.

$40,000

Nominal GDP =

(Price 1 x Quantity 1) + (Price 2 x Quantity 2)

GDP Growth =

(Real GDP Current year - Real GDP previous yr / Real GDP previous yr) x 100

Unemployment Rate =

(unemployed/labor force) x 100

GDP per capita

A country's GDP divided by its population. GDP per capita provides a useful measure of a country's relative standard of living.

deflation

A decline in overall prices throughout the economy. This is the opposite of inflation.

Stable financial system:

A functioning and stable monetary system ensures investment is undertaken when the opportunity arises

discouraged workers

Discouraged workers are the portion of marginally attached workers who have given up actively looking for work and, as a result, are not counted as unemployed.

GDP per capita divides

GDP by population, providing a useful measure of a country's relative standard of living.

gross private domestic investment (GPDI)

Investments in such things as structures (residential and nonresidential), equipment, and software, and changes in private inventories.

production function

Measures the output that is produced using various combinations of inputs and a fixed level of technology.

Rule of 70

Provides an estimate of the number of years for a value to double, and is calculated as 70 divided by the annual growth rate.

real GDP per capita

Real GDP divided by population. Provides a rough estimate of a country's standard of living.

yield curve

Shows the relationship between the interest rate earned on a bond (measured on the vertical axis) and the length of time until the bond's maturity date (shown on the horizontal axis).

labor force

The total number of those employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force, expressed as a percent.

When the economy is operating at the natural rate of unemployment: frictional unemployment is zero. the sum of frictional and structural unemployment is zero. structural unemployment is zero. cyclical unemployment is zero.

cyclical unemployment is zero

In a simple circular flow diagram, total spending on goods and services in the product market: is done by the government. equals the total income earned in the resource market. is less than the total income earned in the resource market. is greater than the total income earned in the resource market.

equals the total income earned in the resource market.

Economists have developed different methods to predict movements in the business cycle

including the use of the National Activity Index, the Leading Economic Index, and the yield curve.

Increased productivity of labor can come from

increases in land and natural resources, the quality of the labor force, the capital-to-labor ratio, and technology.

labor force participation rate =

labor force/adult population x 100

The primary factors of production are

land and natural resources, labor (and human capital), physical capital, and technology (entrepreneurial ability and ideas).

Nominal GDP uses current year prices, while real GDP

measures output using prices from a base year. GDP-PPP takes into account the cost of living in a country.

Long-run growth

occurs when the productive capacity of an economy is expanded through more resources or better uses of existing resources (i.e., technological advancements), and is shown in a PPF diagram as an outward shift of the PPF.

Total factor productivity measures the

portion of output that is not explained by the amount of inputs placed in use. It captures the external effects that influence the productivity of all inputs.

Government has an important role in promoting economic growth by

providing physical and human capital, ensuring a stable legal system and financial markets, and promoting free and competitive markets.

Which of the following items is NOT included in gross private domestic investment? increases in business inventories purchases of common stock new equipment purchased by businesses residential housing

purchases of common stock

Governments provide capital and technology by

purchasing public capital and providing incentives for private investment, supporting education through subsidies and financial aid, and supporting research with grants.

Economic growth is most commonly measured by: real GDP per capita. GDP. GDP per capita. Genuine Progress Indicator per capita.

real GDP per capita

Which of the following occurrences is the key explanation for the high economic growth in the United States in the past century? technology improvements increasing the amount of imports investment in the stock market an increase in population

technology improvements

A production function measures

the amount of output that can be produced using different combinations of inputs. Production functions vary by firms, industries, and countries.

People are counted as employed if

they are at least 16 years old, not institutionalized, and have worked for pay or profit during the survey week.