Macroeconomics Midterm 1 Study Guide

GDP is not a perfect measure of well-being because...

GDP is not adjusted for pollution

When a significant fraction of domestic production takes place in a foreign owned facility, the difference between GDP and GNP is...

GDP will be much higher than GNP

How do you increase output?

Increase capital per hour worked or increase technology

Which of the following are not counted as final goods and used in the GDP calculation?

Intermediate goods

What does not lead to long run economic growth?

increase in average wages

The unemployment rate

is the percentage of the labor force that is unemployed

What are two functions of the financial system that provides for savers and borrowers?

matching savers and borrowers, providing increased liquidity for savers

If real GDP increases we know for sure that....

output has increased

What is potential GDP?

full employment GDP

What is C?

household consumption (durable goods, nondurable goods, and services)

Economic growth is important because it...

promotes a higher standard of living in the country's population

The GDP per capita is computed by dividing a countries

real GDP by its population

Standard living is measured as

real GDP per capita

An increase in government purchases will...

reduce investments

The total national income actually received by a country's residents is

smaller than the value of GDP

What are the financial markets?

stock, bonds, commodities, money market, and futures

The consumer price index is

the measure of costs of an unchanging basket of goods and services

If the inflation is anticipated...

then the effect would be minimal

The buying and selling of goods and services that is hidden from the government in order to avoid taxes is called then

underground economy

Labor Force =

unemployed + employed

Where do we want to produce at?

want to produce ate full employment (at maximum sustainable rate)

If real GDP increases from one year to the next...

we know that production of goods and services must have also increased

What happens when S public is negative? positive?

when it is negative then there is a deficit, when is ti positive there is a surplus

When is there economic growth?

when potential GDP increases

Discouraged workers are...

workers who have stopped looking for a job because they believe that there are no jobs for them

What is the formula for the Rule of 70?

70 / (percent increase)

What is CPI?

Consumer Price Index (helps determine inflation)

Nominal GDP =

(GDP Deflator x Real GDP)/100

Real GDP =

(Nominal GDP/GDP Deflator) x 100

GDP Deflator =

(Nominal GDP/Real GDP) x 100

Labor Force Participation Rate =

(labor force/working age population) x 100

How is national income calculated?

GDP - depreciation

When general motors increases the production of cars in Mexico, what happens?

GNP in the US rises

What would result in GDP for an economy equal to $12 trillion?

If... C=$7, I=$2, G=$4, and NX=$-1

The _________ is a measure of the price level and is calculated by dividing _______ by _______ and multiplying by 100.

PPI, Real GDP, Nominal GDP

What is PPI?

Producer Price Index

S total =

S private + S public OR Y - C - G

How do you calculate Public Savings?

T - G - TR

We are at full employment when...

UA = UN (OR UA = UF + US) and UC=0

How do you calculate Private Savings (S private)?

Y + TR - C - T

The sum of Public and Private Savings in an economy is...

Y -G -C

What is I?

business investment (new capital, residential consistency, changes in business inventories)

The best measure of the income households actually have available to spend is

disposable personal income

The short term unemployment that arises from workers that are in the process of changing jobs is

frictional unemployment

In the circular flow model, who supplies factors of production in exchange for income?

households

The flow of funds from ______ to the financial system makes it possible for governments and firms to borrow.

households

An increase in the demand for loanable funds will..

increase the real interest rate

The only way that the standard of living of the average person in a country can increase is by

increasing production faster than population growth

What is the rule of 70?

it refers to the number of years it will take for real GDP per capital to double in value

If inflation increases unexpectedly then...

lenders receive a lower real interest rate than expected

What are three benefits to the financial system?

liquidity, information, and risk sharing

What is the relationship between investment and real interest rate, all other things being equal?

lower interest rates stimulate investment

How is total personal income calculated?

national income - corporate retained earnings + transfer payments

Economic variables that are calculated in current year prices are referred to as ______ and variables that have been corrected to account for effects of inflation are ______.

nominal and real

What are the two categories that make up people not in the workforce?

people not available for work and people available for work but that are not currently working

Disposable personal income is equal to personal income minus

personal taxes

What is inflation?

prices going up (an increase in weighted average of prices)

Which government policy can help economic growth?

promoting the existence of an efficient financial system

Which is included in the economists definition of investment?

purchase of new machines, factories and houses

Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?

real GDP

The defining characteristic of long run economic growth is

rising productivity

What are two things you can do with disposable personal income?

save is or spend (consumption)

High interest rates will cause household to...

save more money and focus on purchasing few durable goods

National Income is derived from gross domestic product by...

subtracting the depreciation and indirect sales tax from GDP

What will ensure that an economy experiences sustained economic growth?

technological change

The broadest measure of price level that includes all final goods and services is...

the GDP deflator

What is GDP Deflator?

the broadest measurement of inflation

Household production refers to

the goods and services people produce for themselves

When calculating the CPI...

the market basket does not include large equipment purchased by firms

When price rises...

the real interest rate will be lower than the nominal interest rate

Potential GDP is estimated to grow at 3.5% in the US. Actual GDP in the US is..

the same as potential GDP is all firms in the economy were working at capacity

Define nominal GDP.

the sum of current values of final goods and services

Jerry has been unemployed for over a year. He hasn't looked for a job in the last three months but he just started looking again. Because he started looking for a job...

the unemployment rate will increase

Real GDP is

the value of goods and services evaluated at base year prices

The circular flow diagram shows that

the value of total income is equal to the total value of expenditures on final goods and services

How are intermediate goods treated in the calculation of GDP?

their value is not counted separately but if included as part of the value of the final goods for which they are inputs

How is disposable personal income calculated?

total personal income - personal taxes

What is cyclical unemployment?

unemployment that is tied to the business cycle and economy; production increase, more workers are vice versa

Define real GDP.

using a base year and prices of goods and services to calculate value of goods and services in the wanted year

CPI =

(price of market basket in current year/price of market basket in base year) x 100

Unemployment Rate

(unemployed/labor force) x 100

How does the BEA measure GDP?

by adding the value in dollar terms of all the final goods and services produced domestically

As the value of a country's GDP increase, the country is likely to experience...

devote more time to resources to pollution reduction

When the economy is at full employment what unemployment still remains?

frictional and structural

The natural rate of unemployment is made up of

frictional and structural unemployment

Jack told his boss that he thinks his boss is stupid. It is likely that Jack will be experiencing....

frictional unemployment

What is G?

government purchases (expenditures on goods and services at al levels of government)

Which of these is not a shortcoming of GDP as a measure of welfare?

is only counts final goods not intermediate goods

When the price of gad rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behavior is called...

substitution bias

To calculate personal income from national income..

subtract corporate retained earnings and add transfer payments

If technological changes increase the profitability of new investment to firms, which of theses will occur?

the demand for loanable funds will increase

GDP is best defined as...

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

You agree to lend $1000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be over 4% that year. If inflation is instead 3% over that year what is true?

the person who borrowed the $1000 is worse off as a result of the anticipated decrease in inflation

If you spend more of your income on consumption goods then...

the production of investments goods will fall

How do you calculate the inflation rate?

((PI2 - PI1)/PI2) * 100

A federal government budget deficit will

decrease the supply of loanable funds and increase the equilibrium interest rate

Which of these do we subtract from GDP to obtain national income?

depreciation

An alternating period of economic contraction and economic expansion measured over time with real GDP is known as the...

business cycle

What are the two ways to measure GDP?

expenditure approach and the value added approach

Efficiency wages cause unemployment because..

firms pay wages that are above the market wage causing labor demand to be less than labor supply

What does the actual unemployment rate (UA) equal?

UF + US + UC

Which is the largest component of GDP?

consumption

What are the financial intermediaries?

Banks, Brokerages, and Insurance Companies

Government spending _______________ is included in GDP.

at federal, state, and local levels of government

What best represents the demand for factors of production in this circular flow model?

Between firms and factor market

GDP =

C + I + G - NX

Which of the following goods and services would be excluded from personal consumption expenditures in the BEA statistics?

a new house

What is the establishment survey?

a report on employment (uses payroll data)

What is the household survey?

a report on unemployment

What is frictional unemployment?

a worker has a desired skill set that the market needs but is simply in between jobs (unemployed by choice)

What is structural unemployment?

a worker that posses a set of skills that is no longer needed by the market

The producer price index tracks the prices firms receive for goods and services at

all stages of production

What is NX?

all the foreign things (next exports - net imports)

An increase in the interest rate will cause a movement

along the demand curve for loanable funds

Which will result in an increase in labor productivity?

an increase in technology