EC 102 Midterm 1 Review

Inflation calculation between two years

(Later CPI - Earlier CPI / Earlier CPI) * 100

Consumer Price Index (CPI)

(Price basket in current period/ price basket in base period) * 100 (Cost/ Base year cost) * 100

% change in Real GDP

(RGDP (later) - RGDP (earlier)/ RGDP (earlier)) * 100

Human capital

** GET INFO***

Knowledge capital

*** GET INFO ***

Factors that influence natural rate of unemployment: Labor Unions

*** GET MORE INFO***

Labor force participation rate calculation

Labor force participation rate = (labor force/ adult population) * 100

In his​ article, "Unlocking Growth in​ Africa," Ken Rogoff names four things he sees as essential to the African development process. Which of the following is not one of​ them?

Large infusions of foreign development assistance

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods

What about diminishing marginal product of capital?

Low K stock --> High MP(k) --> High returns to investment --> Higher domestic saving and higher investment by foreigners

Which of the following best describes the idea of convergence?

Low-income countries will grow faster than rich countries and inevitably catch up

BLS Employment Survey: Not in Labor Force

Didn't work in the last week or actively looked for job in the last month

BLS Employment Survey: Unemployed means.....

Didn't work in the last week, but did look for a jobo ver the last month

Consider the per-worker production function. Equal increases in the quantity of capital per hour worked lead to ___ increases in output per hour worked (Image is graph of Y/L and K/L - PS 3 Q3)

Diminishing

Three sources of technological change: Increases in human capital

EX: Education, training, experience

What is the labor force?

Employed + Unemployed

Three sources of technological change: Better machinery and equipment

Ex: Computers, software, machine tools, electronics

Based on his​ article, 'Institutions​ Matter, but Not for​ Everything," which of the following is not one of the alternatives mentioned for a​ poor, isolated​ region?

Exploitation of the region's natural resources

What makes up the natural rate of unemployment?

Frictional + Structural unemployment

GDP Deflator

GDP Deflator = (Nominal GDP / Real GDP) * 100

Which of the following is an example of cyclical unemployment?

In an economic downturn, a manufacturing plant reduces production and temporarily lays off worker

Suppose you were borrowing money to buy a car. Consider the following situations. Situation​ 1: Suppose the interest rate on your car loan is 17.00 percent and the inflation rate is 16.00 percent. Calculate the real interest rate. Situation​ 2: Suppose the interest rate on your car loan is 7.00 percent and the inflation rate is 4.00 percent. Calculate the real interest rate. 1) Situation 1 will be .... Situation 2 because the ..... is lower 2) Now suppose you are JPMorgan​ Chase, and you are making car loans. Which situation above would you now​ prefer? JPMorgan Chase would prefer...

Situation 1: 1.00% ( r = i - pi) Situation 2: 3.00% (r = i - pi) 1) Better than; real interest rate 2) Situation 2

Types of unemployment: Structural

Skills don't match the skills in demand by employers in a particular region

What do returns from these investments from abroad do?

Some of the returns flow back to the foreign countries that supplies the funds

Costs of Inflation: Distributional effects

Some workers' incomes will not keep up with inflation

As discussed in the chapter​ "Why Poor Countries are​ Poor" from​ Harford's book, The Undercover Economist​, which of the following is a good summary of Mancur​ Olson's theory of dictatorships in poor​ countries?

Stable dictatorships cause less economic harm than unstable dictatorships

​"Foreign aid is vital to enable poor countries to overcome the natural handicaps of​ geography, climate and disease that they​ face." This statement is most consistent with which approach to economic​ development?

The Environmental Approach

Suppose that a simple economy produces only the following four goods and​ services: shoes,​ hamburgers, shirts, and cotton. ​ Further, assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate Nominal Gross Domestic Product ​(Nominal GDP) for 2021. Product Quantity Price --------- --------- ------ Shoes. 100. $60.00 Burgers. 100. $2.00 Shirts. 50. $25.00 Cotton. 1800. $0.60

The Nominal GDP for the year 2021 is $7,450 ( P * Q --> cotton not included since it''s used in shirts)

Three sources of technological change: Better organization and management of production

"Just-in-time" system

In​ 2013, the population of Great Britain was around 64 million. According to the World​ Bank, the​ country's GDP​ (expressed in US​ dollars) in 2013 was about​ $2.5 trillion. This implies that​ Britain's 2013 per capita GDP was about...

$39,000 (GDP/ population)

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104?

$70,288 (( $ amount ) * (later CPI / earlier CPI))

What are some main ideas in "The poor and the rich"?

- Adam Smith reckoned that the way to grow was by accumulating capital and also having technological progress - Economy obeys law of diminishing returns: each new bit of capital (with a fixed labor supply) brings a lower return than the one before it - As stock of capital expands, growth slows, and eventually halts - To keep growing, the economy has to benefit from continual infusions of technological progress - Poorer countries should grow faster than rich ones because of diminishing returns --> since poor countries start with less capital, they should reap higher returns from each slice of new investment - If each extra bit of capital doesn't have a lower return than before, growth can continue indefinitely even without technological change - New growth model says that competition is imperfect - Absolute convergence doesn't hold since not all factors are held constant - Higher growth may encourage higher saving and investment - Poor countries can catch up and this is maximized by policies - Correct government policies can permanently raise growth rates - "The world's fastest-growing economies are a small subgroup of exceptional performers among the poor countries" - Problem isn't a lack of resources, but the inability to use existing resources well

When the economy is at full employment...

- All remaining unemployment is either frictional or structural - The unemployment rate is greater than zero - The natural rate of unemployment prevails

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?

- Borrowers gain from a lower real interest rate - Lenders lose from a lower real interest rate

What are some main ideas in "Why Poor Countries Are Poor"?

- Cameroon is one of the most corrupt countries in the world - It's poor and it's getting poorer - Education, factories, infrastructure, and technical know-how are abundant in rich countries, and severely lacking in poor ones - Poor countries shoes catch up quickly - Rich countries don't gain much from further investment --> called diminishing returns - Many poor countries are not growing faster than rich ones, instead growing slower, so new theory that takes into account "increasing returns" says that sometimes the more you have, the faster you grow - "In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education" - Should be possible for poor countries to grow richer as long as they can make a number of complementary investments all at once like factories, roads, electricity, and ports, to allow goods to be manufactured and exported - Much of government activity appears to be designed expressly to steal money from the people of Cameroon - "A dictator who lays claim to a land is a preferable leader than one who moves around constantly in search of new victims to plunder" - In Cameroon, the corruption is not only unfair, it is also hugely wasteful, and the costs are enormous - Governments in rich countries usually perform basic bureaucratic tasks quickly and cheaply, but governments in poor countries draw out the processes in hopes of pocketing some extra cash themselves - Cameroon's tragedy is that there is nothing to hold self-interest in check - "Development is thwarted because the rules and laws of the society do not encourage projects or businesses, which would be to the common good" - "The small amount of education and technology and infrastructure that Cameroon does not have could be much better used if the society was organized to reward good, productive ideas. But it is not"

What determines productivity and its growth rate?

- Capital - Technological change

Indicate which of the following is an explanation for the productivity slowdown of​ 1974-1995.

- Deterioration of the U.S. educational system - Premature obsolescence of capital due to high energy prices - A shift from a goods-based economy to a service-based economy

What are the three approaches to development?

- Environmental Approach (Jeff Sachs) - International Trade Approach - Institutional Approach

Use the data in the following table to calculate the GDP deflator for each year ​(values are in billions of​ dollars, enter your response rounded to two decimal places​ -- remember to multiply by 100​). Year NGDP. RGDP GDP Def. ----- ------- ------ ---------- 2017 $19480. $18079. 107.75 2018 $20527. $18607 110.32 2019 $21373. $19033. 112.29 2020 $20894. $18385. 113.65 2021 $22996. $19427. 118.37 Which span of years saw the largest percentage increase in the price​ level, as measured by change in the GDP​ deflator?

- For calculation it's ((NGDP/RGDP) * 100) - 2020 to 2021

Investment from Abroad: How can we raise K/L, and hence productivity, wage, and living standard (what can the government encourage)?

- Foreign direct investment - Foreign portfolio investment

What about the environmental approach?

- Geography - Climate - Endemic disease - Inaccessibility of trade routes (landlocked countries) - Lack of natural resources - Policy implications

Why do economic growth rates​ matter?

- High growth rates coincide with improved living standards - When country sustains high growth rates, life expectancy at birth increases - High levels of sustained economic growth reduce infant mortality

The Per Worker production function and Diminishing returns

- If workers have little K, giving them more increases their productivity by a lot - If workers already have a lot of K, giving them more increases productivity fairly little - Technological change helps economies overcome diminishing marginal returns of capital (per-workre production function shifts up with the change) --> only sustainable way to foster economic growth

Factors that influence natural rate of unemployment: Efficiency Wages

- Increases productivity of workers ****GET MORE INFO**

What about the institutional approach?

- Legal system - Political system - Monetary stability - Corruption

The following table gives nominal and real GDP for an economy for two years. Year 1. Year 2 ------- ------- Nominal GDP 1210.0 1540.0 Real GDP 1100.0 1320.0 1. Based on the table, in Year 2, the value of the GDP deflator is... 2. The inflation rate between Year 1 and Year 2 is...

1) 116.7 (NGDP / RGDP * 100) 2) 6.1% ( (= GDP Deflator later year - GDP Deflator earlier year / earlier year ) * 100)

An economy that does not experience increases in technological progress....

Can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow

What are some main ideas in "China's Economic Woes....."?

- Major economies face pressure from inflation and the impact of the Ukraine War - A resurgence of Covid-19 cases in the past month (written Aug 2022) has triggered fresh lockdowns in Chinese cities - The property market is still trying to find a bottom, with home sales tumbling for the 14th consecutive month - "Many economists expect business investment and consumer spending to remain depressed, as China's stimulus is largely focused around infrastructure spending and the country remains reluctant to budge from its zero-Covid policy, which has amplified uncertainties for companies and hurt consumer confidence" - The country's strategy of resorting to sudden lockdowns to contain Covid-29 continues to hinder growth - Unlike in the past, exports will provide less of a lifeline during a weaker economy since decades-high inflation and tightened monetary policy in the U.S. and other developed economies have crimped consumer spending - China's faltering real-estate market continues to drag on its economy as average home prices in dozens of cities have fallen since September of last year with no clear sign of recovery - A prolonged property slowdown raises the risk that the weakness in the sector may spill over the broader economy, hurting job growth and denting household consumption

Key terms for GDP: - Market - Final - Within a country

- Market: bought and sold in a market - Final: last time it will be sold; intermediate- a good that will be incorporated into some other good before sold (so NOT the last time it will be sold) - Within a country: don't care about nationality of producer so long as it's produced in that specific country to be counted in GDP

Government policy can help increase the accumulation of knowledge capital in three ways:

- Protecting intellectual property with patents and copyrights - Subsidizing research and development - Subsidizing education

How does real GDP deal with the problem inflation causes with nominal​ GDP?

- Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. - Real GDP separates price changes from quantity changes. -By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced.

The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic​ growth, the economic growth model focuses on the causes of increases in​ long-run labor productivity. What are the key factors that determine labor​ productivity?

- Technological change - Quantity of capital per hour worked

How does convergence work?

- Technology transfer - Poorer countries attract more capital

Factors that influence natural rate of unemployment: Government policies

- Training programs - Unemployment compensation - Labor Market Policies Minimum Wage Laws

What about the international trade approach?

- Two dimensions of integration into the world economy - Trade in goods and services (import-substituting industrialization) - Capital inflows (financial capital, GDI) - In favor of globalization

What are some main ideas in "Unlocking Growth in Africa"?

- UN's Millennium Development Goals (MDGs) --> benchmarks for core human welfare --> span issues ranging from health and education to the welfare of women - "Growth will come mainly from improving institutions and governance and from reducing corruption and conflict" - Most Africans want to know that future generations are moving toward achieving the living standards enjoyed by other industrial countries - Important that aid is in the form of grants and not loans because the later will hurt more than it will help - Accelerating growth is a much more complex process than simply accumulating physical capital --> institutions and governance matter just as much if not more - Even if the loans weren't squandered through government consumption and corruption, the growth that was anticipated never materialized because of war, disease, and famine, and more factors under the government's control - Progress towards some of the MDGs is hard to measure, and it's hard to see the MDGs providing a framework for long-term growth - Since domestic debt markets are ill developed throughout most of Africa, governments tend to finance large depicts by ramming debts into banks, which have no option to accept it because of financial repression - African countries need more flexible exchange rate and price systems - IMF --> World Bank program for the heavily indebted poor countries (most of which are in Africa) - It's important for African countries to improve the flexibility of their product and labor markets - Macroeconomic problems will be far less if aid comes in the form of grants - In the long run, growth is needed to raise standards of living in Africa

Why is productivity so important?

- When a nation's workers are very productive, real GDP is large and incomes are high - When productivity grows rapidly, so do living standards

The Per Worker production function

- Y/L (production) is on the y axis --> output per hour worked - K/L (capital) is on the x axis --> Capital per hour worked - Curve is concave down (increasing at a decreasing rate

The Great Depression was the worst economic disaster in U.S. history in terms of declines in real GDP and increases in the unemployment rate. Use the data in the following table to calculate the percentage decline in real GDP between 1929 and 1933. For GDP Deflator 2012 = 100. Year NGDP (B of $) GDP Def. ----- ---------------- ---------- 1929. $104.6. 9.4 1933 $57.2 7.0 Real GDP Changed by __% over the 4 year period between 1929 and 1933. Include a minus sign if necessary.

-26.6% ( First get real GDP by diving NGDP by GDP deflator, then take those numbers and do (RGDP later - RGDP earlier / RGDP earlier) * 100)

The monthly market basket for consumers consists of​ pizza, t-shirts, and rent. The table below shows market basket quantities and prices for the base year​ (Year 1) and in the following year. Product Base Yr Q $ in Y1 $ in Y2 --------- ----------- ------ ------ Pizza. 10. $2.50 $3.13 T-Shirts. 2. $20.00 $18.00 Rent. 1. $400.00 $440.00 In Year​ 1, the CPI for the economy is _______ In Year​ 2, the CPI for this economy is______

1) 100.0 ( P * Q, sum them up, then divide by the total, and multiply by 100) 2) 109.1 ( P * Q, sum them up, then divide by total of the BASE YEAR then multiply by 100)

Calculate the growth rate of real GDP for each year from 2017 to 2021​: Year RGDP (B$) Growth rate ----- ------------ ------------- 2017. 18079. 2018. 18607. --1-- 2019. 19033 --2-- 2020. 18385 --3-- 2021. 19427 --4-- Solve for --

1) 2.92% 2) 2.29% 3) -3.40% 4) 5.67% Calculate by doing (RGDP later - RGDP earlier/ RGDP earlier) * 100

Calculate the missing values in the table below by using the provided data collected in the household survey for August 2022. Category. Value ----------- ------- Working- age pop. -1- Employed 158732 Unemployed. -2- Unemployment rate. 3.7% Labor force -3- Labor force partic. rate​ 62.4% Solve for --

1) 264152 2) 6099 3) 164831

Complete the following table (GO TO PS 1 Q 19!!!!!)

1) The CPI in 2014 equals 140.43 2) The CPI in 2016 equals 128.72

GO TO PS 1 Q 21 TO LOOK AT TABLE !!!!!!

1) The inflation rate between Year 1 and Year 2 is 8.78.7​% 2) The inflation rate between Year 2 and Year 3 is 7.3

Consider the per-worker production function graph. (image is PS 3 Q16) (1) If there is an increase in capital per hour worked, holding technology constant, then.... (2) If there is an increase in technology, holding constant the quantity of capital per hour worked, then....

1) There is a movement from A to B 2) There is a movement from A to C

Calculate the annual rate of inflation for 2020 as measured by the CPI ( GO TO PS1 Q 10!!!!!)

1) Using the information in the​ table, the CPI for​ 2019, with 2010 as the base​ year, is 104.7 2) The inflation rate for 2020 as measured by the consumer price index​ (CPI) is 4.49%

1) What advice for finding a job would you give someone who lost his or her job because of machine​ learning? 2) According to the​ BLS, in what category of unemployment would that person​ belong? If someone lost his or her job because of machine​ learning, that person would be considered.....

1) You should tell the worker that he or she needs to learn new skills or move to another city to find a job. 2) structurally unemployed

An article in the Wall Street Journal contained the following​ observation: "Every​ month, millions of workers leave the job market because of​ retirement, to care for children or aging​ parents, to pursue more​ education, or out of discouragement. Millions of others jump in after​ graduating." ​Source: Josh​ Zumbrun, "Labor-Market Dropouts Stay on the​ Sidelines," Wall Street Journal​, December​ 28, 2014. The millions of workers leaving the job market for the reasons given are.....(1) Even if they​ don't find a job right​ away, people entering the job market after graduating from high school or college will....(2)

1) not counted as unemployed in the BLS data because they are no longer actively looking for work. 2) be counted as part of the labor force by the BLS if they are actively looking for work.

1) The natural rate of unemployment is... 2) When the economy is at full employment, unemployment is equal to.....

1) the sum of structural unemployment and frictional unemployment 2) the natural rate of unemployment.

What is the rule of 70? 1) The rule of 70... 2) If real GDP per capita grows at a rate of 4.4% per year, it will take __ years to double

1).. is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double. 2) 15.9 years

Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of ​$1,908 in 1989 and that the CPI index was 119 in 1989. 1. If the CPI index was 211 in​ 2009, then the cost of tuition in​ 2009, as the result of​ inflation, would equal.... Suppose that the actual average cost of tuition in 2009 was ​$6,368. 2. Relative to the expected cost computed​ above, the cost of tuition increased by ..... the amount of inflation.

1. $3383 (($ amount) * (late CPI/ earlier CPI)) 2. More than

Indicate whether each of the following is a final good, an intermediate good, or neither. 1. Coffee beans purchased by a coffee shop 2. One share of Google stock 3. A new pick-up truck purchased by a consumer 4. A new home purchased by a family

1. Intermediate good 2. Neither 3. Final good 4. Final good

Indicate whether each of the following transactions represents the purchase of a final good. 1. The purchase of wheat from a wheat farmer by a bakery. 2. The purchase of a new fleet of police cars by the local government. 3. The purchase of French win by a U.S. consumer. 4. The purchase of a new plane by American Airlines.

1. Is not the purchase of a final good 2. Is the purchase of a final good 3. Is the purchase of a final good 4. Is the purchase of a final good

Suppose the​ economy's consumer price index​ (CPI) in 2008 was 184 and the CPI in 2009 was 196. The inflation rate over the period from​ 2008-2009 was equal to... (Part 2)

6.5% (CPI later - CPI earlier / CPI earlier)

Growth rate calculation

= % change in Y = (Real GDP(later year) - Real GDP (Earlier year) / Real GDP (Earlier year)

What is foreign direct investment?

A capital investment (ex: factory) that is owned and operated by a foreign entity

What is foreign portfolio investment?

A capital investment financed with foreign money, but operated by domestic resident

New growth theory

A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

Nominal GDP

A year's GDP measured at the prices in that year

Real GDP

A year's GDP measured at the prices in the base year

Key to economic growth

Accumulation of knowledge capital

"If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline." (Part 1)

Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall

​"If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined." (Part 2)

Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined

An efficiency wage is...

An above-market wage paid by a firm to maximize worker productivity

Other costs of Inflation:

Arbitrary redistributions and tax distoritons

Unexpectedly high inflation....

Benefits borrowers, hurts creditors

What are the four major components of expenditures in GDP?

Consumption, Investment, Government Purchases, and Net Exports

Suppose that the economy enters into a recession and​ that, as a​ result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy​ recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck​ mechanic?

Cyclically unemployed

Physical capital is subject to...

Decreasing returns

Growth rate of per capita GDP calculation

Growth rate of per capita GDP = % change Y - % change in population

Which of the following is not a factor in why we would expect convergence to​ occur?

High marginal product of capital in rich countries

Unexpectedly low inflation....

Hurts borrowers, benefits creditors

According to the Economist article​ "The poor and the​ rich," which of the following are implications of the neoclassical growth​ model? I. Growth ultimately depends on technological progress II. Exports are the key to growth III. Rich countries will grow more slowly than poor countries IV. Technological innovation can depend on imperfect competition

I and III

Which of the following is not a source of technological change?

Increases in the labor force

Knowledge capital is subject to...

Increasing returns

Inflation calculation

Inflation = (P in later year - P in earlier year / P in earlier year) * 100

The experience of​ Cameroon, discussed in the chapter​ "Why Poor Countries are​ Poor," in the Harford​ book, tends to support which of the approaches to growth and​ development?

Institutional approach

The graph shows the relationship between​ country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per​ capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are​ true: (image is PS 3 Q 14)

Korea, Taiwan, and Hong Kong had the lowest incomes in 1960 and grew the fastest between 1960 and 2017

What caused the productivity slowdown from 1973 - 1994?

No universally agreed answer: - Rising oil prices and new environmental requirements made existing machines prematurely obsolete - Deterioration of the U.S. educational system - Productivity didn't really slows down. It only appeared to slow down due to measurement problems

According to Ray Fisman of Boston University and Michael Luca of the Harvard Business​ School, Amazon's voluntary decision to raise its minimum hourly wage to​ $15 per hour when the federal minimum wage is​ $7.25 may be good for​ "both Amazon's employees and its bottom​ line." ​Source: Ray Fisman and Michael​ Luca, "How Amazonss Higher Wages Could Increase​ Productivity," Harvard Business Review​, October​ 10, 2018. ​Wouldn't paying higher wages to its employees reduce​ Amazon's profits? Why would they have adopted such a​ policy?

No, the higher wage would not decrease profits if it motivates workers to work harder and be more productive

The following appeared in a newspaper​ article: ​"Inflation in the Lehigh Valley during the first quarter of​ [the year] was less than half the national​ rate...So, unlike much of the​ nation, the fear here is​ deflation-when prices sink so low that the CPI drops below​ zero." ​Source: Dan​ Shope, "Valley's Inflation Rate​ Slides," (Allentown,​ PA) Morning Call​, July​ 9, 1996. Part 2. Do you agree with the​ reporter's definition of deflation​?

No. Deflation is defined as a negative inflation rate

The following appeared in a newspaper​ article: ​"Inflation in the Lehigh Valley during the first quarter of​ [the year] was less than half the national​ rate...So, unlike much of the​ nation, the fear here is​ deflation-when prices sink so low that the CPI drops below​ zero." ​Source: Dan​ Shope, "Valley's Inflation Rate​ Slides," (Allentown,​ PA) Morning Call​, July​ 9, 1996. - Do you agree with the​ reporter's definition of deflation​? (Duplicate)

No. Deflation is defined as a negative inflation rate.

Suppose a house is built and sold in the year 2010. If the house is resold in the year 2021, is the value of the house included in Gross Domestic Product (GDP) for 2021? (Part 1)

No. GDP for 2021 includes only production that occurs during 2021

Types of unemployment: Frictional

People between jobs / left their jobs

Labor force participation rate

Percentage of adult population that is in the labor force

Unemployment rate

Percentage of labor force that is unemployed

Convergence

Poor countries will grow faster than rich countries, and eventually catch up in terms of per capita GDP

Refer to the graph on the right. According to the concept of convergence, which of the following is CORRECT? (Image is from PS 3 Q17)

Poorer countries should grow more quickly and will be at point A (top left part of the graph where the straight line is sloping down)

Many poor countries may experience slow growth due to any of the following reasons except....

Rapid inflow of capital from abroad

Consider the following simple economy that produces only three goods: 2009 (Base Year) Product. Quantity. Price ---------- ---------- -------- Denim Pants. 80 $40 Wine 90. $11 Textbooks. 15 $90 2017 Product. Quantity. Price ---------- ---------- -------- Denim Pants. 100 $50 Wine 80 $10 Textbooks. 20 $100

Real GDP in 2017 equals $6680 (RGDP = P(1,2009) * Q(1,2017) + P(2,2009) * Q(2,2017).......

Which of the following is the best measure of the standard of living of the typical person in a​ country?

Real GDP per person

Table 24-1 Year Peaches Pecans 2005 $11 per bushel - Peaches $6 per bushel - Pecans 2006 $9 per bushel - Peaches $10 per bushel - Pecans

Refer to this for the next following questions

Growth rate

The annual percentage change in real GDP

Costs of inflation: Menu costs

The costs of changing prices for menus (reduced with more internet usage)

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a year

Costs of inflation: "Shoe-leather costs"

The resources wasted when inflation encourages people to reduce their money holding - includes the time and transactions costs of more frequent bank withdrawls

Currently, the Bureau of Labor Statistics does not include homemakers in its employment and labor force totals. What would happen to the unemployment rate and the labor force participation rate if homemakers were included in these​ numbers?

The unemployment rate would decrease and the labor force participation rate would increase.

Shortly before the fall of the Soviet​ Union, the economist Gur Ofer of the Hebrew University of​ Jerusalem, wrote​ this: ​"The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of​ investment, leading to a rapid growth rate of​ [the] capital​ stock." ​Source: Gur​ Ofer, "Soviet Economic​ Growth, 1928-1985," Journal of Economic Literature​, December​ 1987, p.​ 1,784. This turned out to be a very poor growth strategy because...

There were diminishing returns to capital

Unemployment rate calculation

Unemployment rate = (Number of unemployed / labor force) * 100

Types of unemployment: Cyclical

Unemployment that varies with the business cycle (it's involuntary) - higher during recessions - lower during expansions

Value of past amount of money in a later year calculation

Value in later year dollars = (Value in earlier year dollars ( CPI later/ CPI Earlier)

Potential GDP

What GDP would be if all factors of production are utilized at normal rates (40 hour weeks)

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next?

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities

BLS Employment Survey: Employed means...

Worked, even part time, in the last week

Which equation represents the relationship between GDP and the four major expenditure components?

Y = C + I + G + NX

Rule of 70

Years it takes for an economy to double --> 70/ yearly growth rate

Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2021? (Part 2)

Yes. GDP for 2021 includes the market value of final goods and services. This includes real estate services

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

Consider the effect of each of the following on the unemployment​ rate: a. The minimum wage law... b. The effect of labor unions on overall unemployment is ___ since only a ____ percentage of the labor force outside the government is unionized c. An efficiency wage...

a) Has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage b) small ; small c) Increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied

Refer to the diagram to answer the​ following: (image is from PS 3 Q7 and depicts per worker production function with capital and technological changes) a) The movement from point A to point B represents​: b) The movement from point B to point C represents: c) The movement from point A to point C represents:

a) More capital per hour worked b) Technological change c) Technological change and more capital per hour work

Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, what was the inflation rate from 2005 to 2006? a. 20 percent b. 16.7 percent c. 10 percent d. 8 percent

a. 20 percent

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from a. 23.3 years to 17.5 years. b. 23.3 years to 20.6 years. c. 11.2 years to 10.8 years. d. 28.0 years to 21.0 years.

a. 23.3 years to 17.5 years.

If GDP is growing at 5%, and population is growing at 2%, what is the (approximate) growth rate of per capita GDP? a. 3% b. 5% c. 7% d. 2.5%

a. 3%

Which of the following does not help explain why low-income countries might be expected to converge to the levels of per capita GDP enjoyed by richer countries? a. Increasing returns to scale. b. Technology transfer. c. Diminishing returns to capital. d. Higher returns to investment in poor countries.

a. Increasing returns to scale

Which of the following statements about GDP is correct? a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. b. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP is always higher than real GDP.

a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices.

Economists have proposed which of the following as a possible explanation for the productivity slowdown of the mid-1970s? a. a deterioration of the educational system b. large increases in research and development c. excessive use of fiscal policy d. diminishing marginal returns

a. a deterioration of the educational system

A U.S. publisher purchases new computers that were manufactured in the U.S. This purchase by itself makes a. a positive contribution both to investment and to GDP. b. a positive contribution both to consumption and to GDP. c. a positive contribution to GDP, but it does not affect investment or consumption. d. a positive contribution to investment, but it does not affect GDP.

a. a positive contribution both to investment and to GDP.

In the country of Mainia, only cranberries and maple syrup are produced. In 2006, 50 units of cranberries are sold at $20 per unit, and 100 units of maple syrup are sold at $10 per unit. The price of cranberries was $10 per unit and the price of maple syrup was $15 per unit in 2005, which is the base year. For 2006, a. nominal GDP is $2,000, real GDP is $2,000, and the GDP deflator is 100. b. nominal GDP is $2,000, real GDP is $2,500, and the GDP deflator is 125. c. nominal GDP is $2,500, real GDP is $2,000, and the GDP deflator is 83.3. d. None of the above is correct.

a. nominal GDP is $2,000, real GDP is $2,000, and the GDP deflator is 100.

Potential GDP is defined as a. the level of GDP produced when all factors of production are utilized at "normal" rates. b. the amount of GDP produced if there is no frictional unemployment. c. the amount of GDP produced if there is no structural unemployment. d. the maximum of GDP that the economy can produce.

a. the level of GDP produced when all factors of production are utilized at "normal" rates.

Indicate which component of GDP will be affected by each of the following transactions involving General Motors. a. You purchase a new Chevrolet Silverado pickup from a GM dealer. b. You purchase a 2017​ (preowned) Chevrolet Silverado from a friend. c. GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana. d. GM produces​ 1,000 Silverados in a factory in​ Flint, Michigan, and ships them to a car dealer in​ Shanghai, China. e. GM purchases new machine tools to use in its Flint factory. f. The state of Michigan builds a new highway to help improve access to​ GM's Flint plant.

a.) Consumption Expenditure b.) Not included in GDP calculation c.) Not included in GDP calculation d.) Net Export Expenditure e.) Investment Expenditure f.) Government Expenditure

A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to produce a bicycle, which it sells for $200. Taken together, these two transactions contribute a. $100 to GDP. b. $200 to GDP. c. between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle. d. $300 to GDP.

b. $200 to GDP

Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is a. 100. b. 120. c. 200. d. 240.

b. 120

Suppose that in the small country of Sociopolis there are 6 million people in the working age population, that the labor-force participation rate is 70 percent, and that there are 3.8 million people employed. To the nearest tenth, what is the unemployment rate? a. 10.5% b. 9.5% c. 6.7% d. None of the above

b. 9.5%

Refer to Figure 10-1. Technological improvement is illustrated in the per-worker production function in the figure above by a movement from a. C to B b. B to C c. A to C d. D to C

b. B to C

Assuming the real interest rate stays constant, inflation a. decreases the nominal interest rate. b. increases the nominal interest rate. c. redistributes wealth from borrowers to lenders. d. makes real income grow faster than nominal income.

b. increases the nominal interest rate.

By offering more generous unemployment insurance programs, European countries can expect a. to collect less in taxes than in the United States b. longer periods of unemployment for their workers c. shorter periods of unemployment for their workers d. workers to gain new skills quickly in response to fluctuations in the labor market

b. longer periods of unemployment for their workers

According to new growth theory, a. growth in real GDP per capita occurs only if there are increasing returns. b. technological change is influenced by economic incentives. c. economic growth is determined by forces outside the control of the market system. d. centrally-planned economies are the most efficient.

b. technological change is influenced by economic incentives.

What basket of goods is used to construct the CPI? a. a random sample of all goods and services produced in the economy b. the goods and services that are typically bought by consumers as determined by government surveys c. only food, clothing, transportation, entertainment, and education d. the least expensive and the most expensive goods and services in each major category of consumer expenditures

b. the goods and services that are typically bought by consumers as determined by government surveys

When an economy faces diminishing marginal product of capital, a. the slope of the per-worker production function becomes steeper as capital per hour worked increases. b. the slope of the per-worker production function becomes flatter as capital per hour worked increases. c. the per-worker production function shifts to the right. d. the per-worker production function shifts to the left.

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

Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job, a. the unemployment rate decreased. b. the unemployment rate increased. c. the working-age population increased. d. the labor force participation rate decreased.

b. the unemployment rate increased.

The country of Aquolina imports $20B worth of goods from other countries. It exports $15B worth of goods. Its GDP is $250B. Its government purchases $30B worth of goods and services each year, and distributes $20B in transfer payments. Aquolina's consumers buy $150B worth of goods and services each year. What is investment in Aquolina? a. $35B b. $55B c. $75B d. Cannot be determined with the information given

c. $75B

The GDP deflator is 320 in one year and 360 in the next year. What was the inflation rate? a. 6.7 percent b. 8 percent c. 12.5 percent d. 40 percent

c. 12.5 percent

Which types of unemployment make up the natural rate of unemployment? a.Frictional and cyclical b.Structural and cyclical c.Frictional and structural d.None of the above

c. Frictional and structural

Which of the following could cause nominal GDP to decrease, but real GDP to increase? a. The price level rises and the quantity of final goods and services produced falls. b. The price level falls and the quantity of final goods and services produced falls. c. The price level falls and the quantity of final goods and services produced rises. d. The price level rises and the quantity of final goods and services produced rises.

c. The price level falls and the quantity of final goods and services produced rises.

Suppose that homemakers are classified as "employed" in the labor force statistics, rather than being counted as "out of the labor force." This would a. decrease the number of persons in the labor force. b. decrease the number of persons in the working-age population. c. increase the measured labor force participation rate. d. increase the measured unemployment rate.

c. increase the measured labor force participation rate.

If the per-worker production function shifts down, a. positive technological change has occurred in the economy b. the per-worker production function becomes steeper c. it now takes more capital per hour worked to get the same amount of real GDP per hour worked d. an economy can increase its real GDP per hour worked without changing the level of capital per hour worked

c. it now takes more capital per hour worked to get the same amount of real GDP per hour worked

Transfer payments are a. included in GDP because they represent income to individuals. b. included in GDP because the income eventually will be spent on consumption. c. not included in GDP because they are not expenditures on currently produced goods or services. d. not included in GDP because taxes will have to be raised to pay for them.

c. not included in GDP because they are not expenditures on currently produced goods or services.

When a firm sells a good or a service, the sale contributes to U.S. GDP, as measured by the expenditure method a. only if the buyer of the good or service is a household. b. only if the buyer of the good or service is a household or another firm. c. only if the good or service was produced within the U.S. d. only if the good or service was sold within the U.S.

c. only if the good or service was produced within the U.S.

GDP is defined as a. the market value of all goods and services produced within a country in a given period of time. b. the market value of all goods and services produced by the citizens of a country, regardless of where they are living in a given period of time. c. the market value of all final goods and services produced within a country in a given period of time. d. the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

c. the market value of all final goods and services produced within a country in a given period of time.

What index is used to measure the average prices paid by a typical​ family? An average of the prices of the goods and services purchased by a typical family is​ the: (Part 1)

consumer price index (CPI)

Refer to Figure 10-1. Diminishing marginal product of capital is illustrated in the per-worker production function in the figure above by a movement from a. D to C b. B to C c. C to D d. A to C

d. A to C

Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. If absolute convergence holds, what would you predict about the growth rates in real GDP per capita across these two countries? a. The growth rate of real GDP per capita will be lower in Alpha than it is in Beta. b. The economic growth model makes no predictions regarding differences in growth rates of real GDP per capita across the two countries. c. The growth rate of real GDP per capita in Alpha and Beta will be the same. d. The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.

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

Potential GDP... (Part 2)

grows over time

Real interest rate calculation

r = i - pi

Nominal interest rate

i

Nominal rate calculation

i = r + pi

The real interest rate... - Suppose an economy has an inflation rate of 3.2​% and a bank makes a loan with an interest rate of 5.5​%. In this​ case, the real interest rate is ...%

is equal to the nominal interest rate minus the inflation rate - 2.3%

At the macro-economy level...

knowledge capital exhibits increasing returns and physical capital exhibits decreasing returns

If prices rise over time, then real GDP will be

larger than nominal GDP in years before the base year

Per capita GDP

per Capita GDP = GDP/ Population

Inflation rate

pi

Real interest rate

r

Menu costs are... The internet has ... the size of menu costs

the costs to firms of changing prices - reduced

Potential GDP is.. (Part 1)

the level of GDP produced when all factors of production are utilized at​ "normal" rates

If the economy is experiencing deflation....

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

If inflation is expected to increase...

the nominal interest rate will increase