Econ 102 Exam 1

To calculate GDP, we need ? prices output of ? goods, exclude ? goods focus on goods newly produced, exclude ? economic activity time frame physical location- GDP vs GNP

market, final, intermediate, past

3 functions of money

medium of exchange, unit of account, store of value

the marginal cost of adjusting prices

menu costs

any asset regularly used in transactions

money

% change in real value =

% change in nominal GDP - % change in prices

% change in real value =

% change in nominal value - % change in price

% change in nominal GDP =

% change in real GDP + % change in prices

growth rate of prices =

%change nominal GDP - %change real GDP

average annual growth rate

((present/past)^1/n) - 1 or At=A0(1+r)^t

velocity of money=

(price level x real GDP)/amount of money = nominal GDP/amount of money

years it takes something to double =

70/annual growth rate

Suppose that banks are issuing personal loans at 9%. If expected inflation is 3%, then the nominal interest rate is _____, and the real interest rate is _____.

9,6

in base year, nominal gdp is ? to real gdp

=

consumer price index- an index that tracks the average price consumers pay over time for a representative "basket" of goods and services

CPI

Jane spends $800 on a computer to use in her editing business. She got last year's model on sale for a great price from a local manufacturer. Impact on GDP =

0

Sarah spends $1200 on a new laptop to use in her publishing business. The laptop was built in China. Impact on American GDP is =

0 (investment increases by 1200, net exports decreases by 1200)

Refer to the diagram of the circular flow of income. The key lessons from this diagram are that: 1) all flows of resources are matched by flows of money. 2) the market value of total output must be equal to total spending. 3) total spending must equal total income. 4) all inputs are provided by businesses.

1,2,3

In a given economy, N= 160 E=81 U=19 What is the labor force participation rate?

19+81/160

In a given economy, N= 160 E=81 U=19 What is the unemployment rate?

19/19+81

Suppose there are 100 people currently working, 50 people currently not working but searching for work, and 20 people who are not working and have decided to not search for work. What is the unemployment rate in this economy?

50/150

General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them. The GDP increases by =

500 million (470 goes into consumption, 30 goes to inventory investment)

how to calculate inflation

GDP t+1 deflator - GDP t deflator/ GDP t deflator

Which of the following are true about CPI? I. Quality improvements make CPI seem higher than it is II. Substitution bias results in CPI being lower than it should be III. The CPI is a measure of price levels of goods and services across the entire economy IV. The CPI doesn't fully take into account the benefits of brand new products

I and IV

Which of the following would be included in the GDP Deflator but not CPI? I. The price of lumber increases leading to increases in the price of furniture II. The price of steel increases raising the price of constructing new office buildings III. New trade tariffs increase the price of jeans made in Japan IV. The price of computers increases throughout the economy, for both personal computers and cloud servers

II

1. property rights 2. government stability 3. efficiency of regulation 4. government policy to encourage innovation

Institutions that promote economic growth

capital accumulation equation

Kt+1 = It + (1-d)Kt

solow growth model

Kt+1 = Kt - Skt + It

GDP deflator =

Nominal GDP/Real GDP x 100

nominal GDP =

Price x Quantity

unemployment due to the time it takes for employers to search for workers and for workers to search for jobs

frictional unemployment

macroeconomics

The study of the economy as a whole

how to adjust for price level

Vt/Pt

GDP equation

Y = C + I + G + NX

rate of growth of Yt

Yt+1 - Yt/Yt

A "final" good or service is one that is: a) finished and ready for the final user. b) intermediate and ready to be used as an input. c) not for sale. d) not being produced for the market.

a

Assume the real interest rate exceeds the nominal interest rate all throughout the year 2020. Compare the expected value of goods and services you can buy with a twenty-dollar bill in 2020 and 2021. a)You can buy more goods and services in 2021 than in 2020. b)You can buy more goods and services in 2020 than in 2021. c)You can buy the same value of goods and services in both years. d)These interest rates tell us nothing about our real ability to buy goods and services.

a

Consider the typical Solow growth model. Assume country A and B have the same production function Yt=sqrtKt . It is well known that country A has a higher rate of savings. Assume the population in country A and country B are the same. Which of the following is true? A)Country A will reach a steady state with higher equilibrium output B)Country B will reach a steady state with higher equilibrium output C)Two countries will reach the same steady state equilibrium output level D)We cannot compare the level of steady state outcomes

a

a generalized rise in the overall level of prices

inflation

Cyclical unemployment is unemployment: a)Due to a temporary downturn in the economy b)Due to the time it takes for employers to search for workers and for workers to search for jobs. c)That occurs because wages don't fall to bring labor demand and labor supply into equilibrium. d)That occurs because of seasonal changes.

a

Suppose that you are in an economy with a negative inflation rate, and you are looking to purchase a home. Also assume that your income remains the same and you are trying to decide whether you should purchase a home today or next year. Which of the following makes economic sense? a)You should purchase the house next year as your purchasing power will increase b)You should purchase the house today as your purchasing power will decrease c)You would need the nominal interest rate to decide d)You would need the real interest rate to decide

a

The government begins to provide free secondary school education. Which input in the production function changes, and what is the effect on economic growth in the country? a)Human capital is enhanced, and economic growth is positively affected. b)The capital stock decreases, and economic growth is negatively affected. c)The capital stock increases, and economic growth is positively affected. d) Technological advance occurs, and economic growth occurs.

a

The government decides to implement a new investment tax credit. Which input in the production function changes, and what is the effect on economic growth in the country? a)The capital stock increases, and economic growth is positively affected. b)The capital stock decreases, and economic growth is negatively affected. c)Human capital is enhanced, and economic growth is positively affected. d)Technological advance occurs, but there is no effect on economic growth.

a

The inflation or deflation rate is: a)The change in a price index divided by the initial value of the index b)The change in a price index divided by the new index number. c)The difference between the initial price index number and the new price index number. d)Computed by dividing the old price index number by the new price index number.

a

Which of the following individuals would be considered unemployed? a)A 24 year old woman who is searching for a new position after the 2008 financial crises left her unemployed b)A 60 year old man who lost his job and decided to retire early c)A 45 year old parent who has decided to start looking for part time work next year after their child leaves for college d)All of the above

a

Which of the following is not a function of money? a)To hold as an asset to appreciate for future use b)To use to purchase goods and services c)To hold value in a savings account d)To relate the value of a new car to a new pet

a

Which of the following situations correspond to frictional unemployment? a) Sara is looking for a job but she believes she has not yet found one that matches her skills, or that pays her adequately for her skills. b) Barth cannot find a job because the minimum wage is too high. c)Michael was fired because the company reduced production due to the current recession. d)None of the above.

a

Which of the following statements is inconsistent with the Solow Model? a) The capital stock in an economy will always grow as long as the country invests in more capital. b)Capital per worker will eventually stop growing when the economy is at steady state. c)Sustainable growth in the long run depends on technology advancement. d)Holding everything else unchanged, higher savings rate will lead to higher capital per worker in the long run.

a

Which of the following statements regarding GDP is correct? a)GDP excludes the production of most illegal goods and services. b)GDP includes the market value of rental housing, but not the market value of owner-occupied housing services. c)Home productions such as making meals and crafts are included in GDP. d)The value of a computer and the value of the materials used to produce the computer are all included in GDP.

a

Which of the following would lead to a slowdown in economic growth? a) a reduction in the birth rate coupled with an increase in the retirement rate of a population b) an increase in innovation in the economy c) an increase in capital accumulation coupled with technological advancement d) the institution of a savings tax credit

a

A binding minimum wage in a labor market is set _____ the equilibrium wage and causes a _____ of job-seekers.

above, surplus

the sum of different markets with different products and services with different units of measure refers to the collection of various different items ex) cars, computers, eggs, etc

aggregate

the (mistaken) belief that inflation destroys purchasing power

inflation fallacy

real GDP =

average price x quantity

Assume the velocity of money is relatively stable, and the total money supply in the economy increase by 3% and the real GDP increase by 2%. Which of the following statement is true? a)The price level decrease by 1% b)The nominal GDP increase by 3% c)The inflation rate is 2% d)The nominal GDP remains unchanged.

b

During the Great Recession, the United States Congress increased the length of time that unemployment benefits could be received from 52 weeks to 99 weeks. This change caused: a)A decrease in unemployment b)An increase in the costs for the government. c)An increase in the number of employed people in the economy. d)An increase in the labor force participation rate.

b

GDP is defined as the: a) market value of all consumer goods purchased within an economy. b) market value of all final goods and services produced within a country in a given year. c) value of all intermediate goods produced within a country in a given year. d) value of all output produced by businesses within a country in a given year.

b

If a local company buys an industrial 3D printer produced in the U.S. and plans to use it in production, this expenditure is: a)Consumption b)Investment c)Government Expenditure d)Imports

b

Many payments made by the U.S. government—such as Social Security payments—are tied to the consumer price index. To the extent that the index is biased upward, use of the CPI: a)Leads to lower benefits. b)Raises government expenditures. c)Lowers government expenditures. d)Prevents benefit recipients from profiting unfairly from these programs.

b

Suppose the capital stock of country A is $100 million at the end of last year. The country decides to invest $10 million into the economy this year. The depreciation rate is 0.1. What will be the capital stock of country A at the end of this year? a)$110 million b)$100 million c)$99 million d)$90 million

b

The CPI changes from 100 to 125. This means that: a)Consumers are now able to purchase 25% more goods and services. b)Overall prices are now 25% higher than they used to be. c)The base year index has changed from 100 to 125. d)The GDP deflator has also risen from 100 to 125.

b

The labor supply curve is positively sloped because: a)More people are willing to work at low wages than at high wages. b)More people are willing to work at high wages than at low wages. c)Employers are willing to hire more people at low wages than at high wages. d)Employers are willing to hire more people at high wages than at low wages.

b

To be counted as unemployed, one must: a)Have had a job previously b)Be currently not working, actively searching for work and able to accept a job if it were offered. c)Have had a job before and be actively seeking work. d)Be actively looking for a job and have at least a high-school diploma or its equivalent.

b

Which of the following events would not affect labor in the production function? a) people retire at a later age on average b)changes to the copyright law c)increases in the birth rate d)changes to the immigration law

b

Which of the following is NOT a step in calculating the inflation rate from one period to the next? a)Find the total value of the basket of goods and services b)Measure the change in quality of the products from one period to the other. c)Collect the prices from the stores where people shop d)Find out what people typically buy.

b

Which of the following policies would be most likely to decrease cyclical unemployment? a)An increase in the federal minimum wage b)Giving companies zero interest loans during the Covid-19 pandemic to help stay open c)A bill to help retrain workers that have lost their jobs to companies outsourcing production d)An increase in taxes on companies during a market downturn to make up for lost revenue on income taxes

b

Which of the following scenarios represents a macroeconomic decision? a)Eva is trying to decide whether to buy one more slice of cake. b)The Ugandan government is contemplating raising interest rates in the economy. c)The economics department is making a decision on whether to hire a new professor. d)You are deciding whether to buy a used textbook or rent a textbook for the semester

b

Which of the following statements regarding GDP is correct? a)If GDP deflator is higher than 100, then prices in the economy increased in the past year. b)If prices increase and output increases, we expect nominal GDP to be higher than real GDP. c)Stimulus checks and unemployment benefits are part of government spending. d)Output from an American company that operates in Canada is part of the U.S. GDP.

b

Which of the following would you leave you to believe that there is inflation in the economy? a)Gas prices have increased in your area due to a short term disruption in an oil pipeline that services your town and neighboring towns b)Food at the grocery store is more expensive than it was last month c)Your favorite sweaters from Ireland are more expensive while the company is searching for a new wool supplier d)The quality of coffee has decreased at the local coffee shop

b

Following a significant recessionary period in which there were periodic wage freezes, workers negotiate higher wages. However, the higher wages lead to a decrease in the number of new workers getting hired, so unemployment persists in the region. The scenario described here is an example of: a)Efficiency wages. b)Frictional unemployment c)Hysteresis. d)A government mandated minimum wage.

c

If a bakery buys a second oven, hires a second baker, buys double the number of ingredients, doubles the size of the bakery, and then produces double the number of cakes, then the bakery is experiencing: a)technological advancement. b)an increase in labor productivity. c)constant returns to scale. d)increasing returns to scale.

c

In 2019, the real U.S. GDP grew 2.3% and the nominal U.S. GDP grew 4.1%. What was the inflation rate in 2020? a)2.3% b)4.1% c)1.8% d)-1.8%

c

In the absence of a minimum wage, efficiency wages, or labor unions, a decline in the demand for labor will likely result in _____ if wages are flexible. a)Higher levels of employment b)No changes in employment c)A lower level of employment but likely no change in the unemployment rate d)A lower level of employment and a higher unemployment rate

c

Last year, the unemployment rate declined. Then which of the following statement must be true? a)If the number of unemployed people declined, then the labor force shrank b)If the number of unemployed people declined, then the labor force grew c)If the labor force grew, then the number of workers with jobs grew. d)If the number of workers with jobs grew, then the labor force shrank.

c

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's nominal interest rate on her GIC? a)3% b)-1% c)1% d)2%

c

Structural unemployment is unemployment: a)Due to a temporary downturn in the economy. b)Due to the time it takes for employers to search for workers and for workers to search for jobs. c)That occurs because wages don't fall to bring labor demand and labor supply into equilibrium. d)That occurs because of seasonal changes.

c

Suppose that a CPI basket includes avocadoes, pineapples and oranges. Avocadoes become very expensive, and consumers substitute away from avocadoes and buy hummus instead. If the CPI basket does not change to reflect the move away from avocados, the result is: a)Understated inflation b)The failure to capture real variables versus nominal variables c)Substitution bias d)Quality bias

c

Suppose your salary was $40,000 last year. You were worried that inflation may be high, and negotiated a raise of $5,000. Inflation turned out to be even higher than you expected, coming in at 10%. Which of the following is true regarding your purchasing power this year compared to your purchasing power last year? a)Your purchasing power has decreased due to the unexpectedly high inflation b)Your purchasing power remains the same c) Your purchasing power has increased d)The real interest rate is positive

c

The U.S. Department of Education sponsors the i3 program (Investing in Innovation), which provides grants to educational institutions and schools that have a proven track record of high student achievement. This is an example of a government program designed to build: a)physical capital. b)labor resources. c)human capital. d)physical factories and plants.

c

The law of diminishing returns means that the production function (hint: think about the change in the slope): a)is negative b)is positive c) increases at a decreasing rate d0increases at an increasing rate

c

There are multiple ways of measuring GDP. Which of the following statements is correct? a)GDP is the total wage of workers and total revenue received by owners of capital. b)Total spending equals the sum of household consumption, investment, and government spending for an open economy. c)Measuring GDP by summing up a country's total output is the same as summing up the country's total income. d)We can sum up the value added of all final products to find GDP.

c

Which of the following statements is FALSE? a)The unemployment rate is the probability that some random person who wants to work (and is not a discouraged worker) has not found a job. b)Cyclical unemployment is positive in recessions. c) Unexpected deflation helps borrowers but hurts lenders. d)If unemployed workers leave the labor force and employed workers stay, the unemployment rate decreases.

c

Which of the following statements is not a shortcoming of GDP? a)It does not measure non-market activities. b)It does not measure pollution caused by production activities. c) It double counts the production of used goods. d)It does not measure the happiness of people who live in this country.

c

Which of the following statements regarding the production function F(K,L)= sqrt (K,L) is incorrect? a)The production function describes the methods by which inputs are transformed into outputs. b)The aggregate production function relates GDP to the quantity of inputs employed. c)The production function exhibits constant returns to capital. d)The production function exhibits constant returns to scale.

c

the total quantity of physical capital used in the production of goods and services

capital stock

the rapid growth that occurs when a relatively poor country invests in its physical capital

catch up growth

The steady state occurs when the level of capital per worker does not ?

change

Eric is let go as a GSI and begins searching for work. There are many other university students looking to teach and not enough universities, so it takes Eric some time before he finds another group of 102 students to teach. Which of the following would best describe this type of unemployment?

frictional

calculate real GDP using ? prices

constant

if you double inputs, output will double y= F (K,L,H) 2y= F(2K,2L,2H)

constant returns to scale

increasing all inputs by some proportion will cause output to rise by the same proportion

constant returns to scale

C

consumption

calculate nominal GDP using ? prices

current

due to a temporary down turn in the economy

cyclical unemployment

A coffee roaster in Ann Arbor doubles in size, buys a second roaster machine, hires a second employee, buys double the raw coffee beans, and as a result roasts 90% more coffee beans than it did before. The coffee roaster is experiencing: a)technological advancement b)constant returns to scale c)increasing returns to scale d)decreasing returns to scale

d

Along the same aggregate production function, the level of _____ is the same. a) economic growth b) capital c) labor d) technology

d

Ann Arbor Technical Solutions, an innovative tech startup, comes out with a brand new smartwatch that drastically increases the number of health monitoring services. This would result in: a)Understated inflation b) Substitution bias c)Quality bias d) Overstated inflation

d

From 2020 to 2021, the real GDP for an economy grew 4.1% and the nominal GDP grew 2.3%. What approximately was the percentage change of prices for this economy in 2021? a) 2.3% b) 4.1% c) 1.8% d) -1.8%

d

GM announces that they will open a large, new electronic vehicle factory in Ann Arbor, and will need to hire a large number of high skilled engineers. At the same, engineers around the country hear the news and also find the city lovely to live in, and there is an influx of engineers into the Ann Arbor labor market. Using the supply and demand framework of labor, what will happen to equilibrium wages in this scenario? a)Equilibrium wages will increase b)Equilibrium wages will decrease c)Equilibrium wages will stay the same d)We do not have enough information

d

How does money illusion cause nominal wage rigidity? a)Wages fall only when money illusion is present b)Since workers focus on nominal wages, employers focus on matching the rate of wage increase with the rate of inflation c)Money illusion leads to workers asking for fixed wage increases (and decreases) adjusted to the rate of inflation (or deflation). d)Since workers focus on nominal earnings and thus resent wage cuts, employers often choose to hold nominal wages constant rather than lower them.

d

Kia Motors announces a plan to produce Kia automobiles in Pakistan. How does this change economic growth in Pakistan? a) Economic growth is negatively affected. b) Economic growth increases due to an investment in education. c) Economic growth increases due to an increase in labor. d) Economic growth increases due to capital accumulation.

d

The following events can lead to technological improvement except for: a)The government provides tax credit for innovations in the manufacturing sector. b)The government strengthens the protection of intellectual property rights. c)The average level of education increases in the labor force. d) Excessive regulatory oversight of the government on industrial sectors.

d

The initial inflation rate in an economy is zero. All else equal, what will happen if all people in this economy agree that they will have a 2% inflation rate in next year? a)Borrowers will benefit from the change. b)Lenders will benefit from the change. c)The nominal interest rate will decrease. d)The real interest rate will remain the same.

d

The moral of the story of the Solow growth model is that: a)human capital growth does not lead to economic growth. b)capital accumulation is the key to sustained economic growth. c)technological advance cannot sustain continuous economic growth. d)capital accumulation alone cannot lead to sustainable economic growth.

d

The nominal interest rate is 3%. If you were to invest your money in an account that paid the nominal interest rate, which of the following is true? a)Your purchasing power next year relative to this will increase b)Your purchasing power next year relative to this will decrease c)Your purchasing power next year relative to this will stay the same d)We do not have enough information to tell

d

Which of the following is NOT a shortcoming of GDP? a) GDP does not take into account non-market activities. b) Many aspects of our civilization, such as cultural achievements, are not included in GDP. c) The value of goods and services are based on prices which can be mis-measured. d) GDP positively correlates with many welfare measures.

d

Which of the following statements regarding the steady state in the Solow Model is correct? a)Depreciation rate equals zero in the steady state. b)Capital accumulation equation does not hold in the steady state. c)The amount of savings is larger than depreciated capital in the steady state. d)The steady state occurs when the level of capital per worker does not change.

d

Which of the following things cannot encourage economic growth on per capita basis? a)Provide and subsidize education. b)Invest in research and development. c)Encourage Savings. d)Control the population.

d

Which of the following would be considered structural unemployment? a)The Federal Reserve increases interest rates too fast and induces a recession, causing many to lose their jobs b)The largest employer in a small town goes out of business and it takes a long time for the workers to relocate and find new work c)A new child is born, and one parent decides to leave their job to raise the child for two years d)Ann Arbor raises the minimum wage to $25 per hour, and NiaoNiao is let go from her job at the grocery store as labor is too expensive

d

You make some new friends at a party. Which of your new friends described here is unemployed? a)Kevin, who is a lifeguard in the summer but does not work the rest of the year b)Jason, who is a full-time student c)Jacinta, who is a full-time student on an unpaid internship d)Melinda, who was recently laid off

d

Once again assume the following chart shows the supply and demand for food service workers in Ann Arbor. A union representing food service workers negotiates a minimum wage at $11. Assume the economy was previously as equilibrium. What is the change in total employment?

decrease of 2,000

if production function decreases by more than a factor of z, this is ? returns to scale

decreasing

a generalized decrease in the overall level of prices can be bad because some people stop buying goods and services in order to wait for them to get cheaper

deflation

the economy will keep growing as long as investment exceeds ?

depreciation

a lessening in value over time

depreciation (delta)

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

efficiency wage

working age population who are working

employed

labor force participation rate =

employed + unemployed/working age population x 100

the circular flow of income shows that total spending is ? to total income

equal

the long run unemployment rate to which the economy tends to return

equilibrium employment rate

Y=

f(L,H,K)

T/F: Stimulus checks and unemployment benefits are part of government spending.

false

Last week, Saanvi quit her job as a copywriter at an advertising agency. She has spent the past few days browsing the help-wanted ads but hasn't found anything that matches her skills. Saanvi is BEST classified as ? unemployed

frictionally

G government purchases of goods and services ex) local gov spending on schools, etc

government purchases

If prices increase and output increases, we expect nominal GDP to be ? than real GDP.

higher

1. Find out what people buy 2. Collect prices (from the stores where people do their shopping) 3. Tally up the cost of the basket 4. Calculate inflation as the percentage change in the price of the basket

how to measure inflation

H- the skills that workers bring to the job

human capital

extremely high rates of inflation

hyperinflation

occurs when a period of high unemployment leads to a higher equilibrium unemployment rate

hysteresis

Based on the aggregate production function Y=F(K,L,H) with regular assumptions for a production function, the output grows if: i) more labor is employed. ii) human capital is reduced. iii) the dependency ratio rises. iv) physical capital stays constant.

i

The aggregate production function Y = f(L, H, K) shows that economic growth can occur if: (i) more labor is employed. (ii) human capital is reduced. (iii) the dependency ratio rises. (iv) the capital stock stays constant.

i

Which of the following is (are) included in investment? (i) military spending (ii) the purchase of an aircraft by a domestic airline (iii) the purchase of $45,000 worth of bonds (iv) the purchase of $32,000 worth of stock (v) social security payments (vi) the construction of a highway by the federal government

ii

Which of the following goods and services are included in the U.S. GDP? i) Revenue from selling a used car in Detroit ii) Stimulus checks issued by the government to a public worker in Chicago iii) New building renovations in Ann Arbor iv) Wages of a U.S. citizen who works in Canada v) Ford cars exported to Canada

iii and v

total ? approach Split income into three categories: Labor income (wages) Rental income (rents) Profit

income

Once again assume the following chart shows the supply and demand for food service workers in Ann Arbor. Suddenly, workers begin to leave their positions in search of higher wages due to the global pandemic. The demand for takeout and dine in is unchanged, but there is less labor looking to work in food service positions. What do we expect to happen to the equilibrium wage?

increase

The government in an economy realizes that they have no unemployment insurance and decides to act. The government establishes unemployment insurance guaranteeing income for up to 6 months for those that lose their job and are looking for new work. Frictional unemployment will ?

increase

Once again assume the following chart shows the supply and demand for food service workers in Ann Arbor and that a union representing food service workers negotiates a minimum wage at $11. Assume the economy was previously as equilibrium. What is the change in structural unemployment?

increase of 4000

Starbucks raises the price of it's frappucinos leading to an ? in CPI and a ? in GDP deflator

increase, increase

Armani raises the price of the Italian jeans it sells in the U.S, leading to an ? in CPI and a ? in GDP deflator

increase, no change (imported good)

if production function increases by more than a factor of z, this is ? returns to scale

increasing

automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation

indexation

I spending on new capital asses that increase the economy's productive capacity business purchases new inventories research and development ex) building a factory, computers, office furniture, equipment

investment

The steady state in the Solow growth model occurs when:

investment = depreciation

someone who wants full time work and is working part time because they haven't found a full time job

involuntarily part time

Suppose that in an economy there are 10 million people working and 1 million people that are not employed but are searching. The economy is stagnant, and after some time, 500,000 of those people that were searching for work become discouraged and stop their pursuit. What happens to the unemployment rate?

it goes down

L

labor

employed + unemployed

labor force

the quantity of goods and services that each person produces per hour of work

labor productivity

when one input is held constant, increases in the other inputs will, at some point, begin to yield smaller and smaller increases in output

law of diminishing returns

When inflation is higher than expected, there is redistribution from:

lenders to borrowers

unexpected deflation helps ? and hurts ?

lenders, borrowers

people who have been unemployed for 6 consecutive months or longer

long term unemployed

refers to one variable with an incremental increase of a variable, specifically by one additional unit

marginal

MPk= (Y1-Y0)/(K1-K0) a concept that helps us understand the relationship between changes in capital and changes in production

marginal production of capital

someone who wants a job, and has looked for a job within the past year, but isn't counted as unemployed because they aren't currently searching for a job

marginally attached

the mistaken tendency to focus on nominal dollar illusion amounts instead of inflation-adjusted amounts ex the press advertising "the force awakens" as the most successful movie ever made, but not true

money illusion

NX

net exports (exports-imports)

Suppose that an economy is operating flawlessly, with all 1 million people working. A shock occurs, and some older workers are let go. Convinced it is not worth it to search given the economic outlook, they immediately become discouraged and never look for a new job. What happens to the unemployment rate?

no change

You just bought two used textbooks for $25 each. How much does GDP change because of your purchase?

no change

Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory leading to a ? in CPI and an ? in GDP deflator

no change (investment), increase

GDP measured in today's prices not useful for making comparisons over time

nominal GDP

the stated interest rate without a correction for the effects of inflation

nominal interest rate

real interest rate =

nominal interest rate - inflation rate

a variable measured in dollars (whose value may fluctuate over time) can rise or fall due to either changing quantities or inflation

nominal variable

reluctance to cut nominal wages

nominal wage rigidity

those in the working age population who are neither employed nor unemployed ex) retired, students, sick, etc

not in the labor force

K- tools, machinery, structures

physical capital

inflation rate =

price level yr2 - price level yr1/price level yr1 x100

the deflator uses the base year ? while the CPI uses the base year ?

prices, quantities

a price index that tracks the prices of inputs into the production process

producer price index (PPI)

the methods by which inputs are transformed into output which determines the total production that's possible with a given set of ingredients

production function

measures GDP in constant prices when economists talk about GDP they are referring to this use this when trying to evaluate changes over time in economic activity

real GDP

the interest rate in terms of changes in your purchasing power

real interest rate

nominal interest rate =

real interest rate + inflation rate

has been adjusted to account for the influence of inflation

real variable

Suppose the production function for an economy is F(K)= 2sqrtK, savings rate s is 0.2, and depreciation rate is 0.05. Then what is the steady state level of output for this economy? How would you solve this?

set Sy=dK

the costs incurred trying to avoid holding cash

shoe leather costs

GDP ? approach Bennet Lumber company chops trees into lumber. Some of this lumber is used by a furniture company, MM, to make couches. $400 worth of wood to produce a couch is needed. The couches are sold to crate and barrel who markets them to customers for $1500. They need to pay $1000 to acquire a single couch at the wholesale market. What is the GDP?

spending, 1500

To find the value of GDP- 3 different approaches Sum up all ? in the economy Sum up all ? earned Sum up ? of all output produced

spending, income, value

The GDP reflects total

spending, output, and income

in the long run, the level of capital (and other variables) remains constant or steady

steady state

unemployment that occurs because wages don't fall to bring labor demand and supply into equilibrium ex high wages lead to more workers wanting to work and employers offering fewer jobs

structural unemployment

the overstating of inflation that occurs because people substitute toward goods whose prices rise by less

substitution bias

the key to sustained economic growth

technology

inflation adjustment formula

today's dollars = another time's dollars x (price level today/price level in another time)

Suppose that Akemi has an accounting degree, but she lost her job two months ago when her company merged with another firm. Akemi hasn't been able to find another accounting job, so she has taken a part-time job as

underemployed

someone who works but wants more hours or who isn't adequately using their skills

underemployed

working age people without jobs who are trying to get jobs

unemployed

unemployment rate=

unemployed/labor force x 100

technological progress shifts the production function ?

up

? approach Sum up values added at all stages of production

value added

a country will produce more if it employs more ? its workers become more highly ? is has accumulated more physical ?

workers, skilled, capital

those age 16 or older who are not in the military or institutionalized

working age population