ECON- ch. 13-14
What are 3 major price indices?
1. Consumer Price Index 2. Producer Price Index 3. Implicit GDP Price Deflator
What are the causes of inflation? (5 causes)
1. Demand-pull 2. Deficit spending 3. cost-push 4. wage-price spiral 5. Excessive monetary growth
What are the five reasons for income inequality?
1. Education 2. Wealth 3. Discrimination 4. Ability 5. Monopoly power
What are the two phases of a business cycle?
1. Recession 2. Expansion
What are the three degrees of inflation?
1. creeping inflation 2. galloping inflation 3. hyperinflation
What are the three factors most likely to affect the population growth?
1. fertility rate 2. life expectancy 3. net immigration
the total of the prices of the goods in the market basket in the base year is assigned a percentage value of _____ percent. The same market basket of goods is viewed the next year and look at the percentage change. Greater than 100% is inflation, and less than 100% is deflation.
100%
What causes aggregate demand to increase and decrease?
Anything that causes a change in consumption, investment, government spendings or net exports
What causes the aggregate demand curve to shift?
Anything that causes consumption, investment, government spending or net exports to change will shift the aggregate demand curve
What is an example of structural unemployment?
Assembly lines being replaced with machines
What are the causes of the business cycles and how do they affect it?
Capital expenditures, inventory adjustments, innovation and imitation, monetary factors, external shocks
What causes aggregate supply to increase and decrease?
Changes in the cost of production for all firms
What is the largest sector of the macroeconomy?
Consumer sector
the output-expenditure model formula
Consumption (consumer consumption spending) + Investment (business investment spending) + Government (government spending) + (eXports-iMports)(net exports) = GDP
How are standard of living, government spending, domestic problems, and other nations benefiting from economic growth?
Economic growth causes standard living to increase, a larger tax base to fund government spending, alleviates domestic problems like poverty, and allows the United States to create jobs and incomes in other countries.
Why are nonmarket transactions excluded from GDP?
Excluded because it is impossible to estimate
What are the different types of unemployment?
Frictional, structural, cyclical, seasonal, and technological
What economic indicators are used to judge economic performance?
GDP unemployment Inflation
What were the economic indicators during the Great Depression? (Include GDP, unemployment, and wages)
GDP decline from $103 billion to $55 billion (about 50%), the unemployment rate was 25% and wages went from 55 cents and hour in 1929 to 5 cents an hour in 1933
What is the most important measure of economic performance?
Gross Domestic Product (GDP)
What do the variables mean in the output-expenditure model?
Gross Domestic Product= consumption + investments + government + net imports(exports-imports)
What changes when you compare GDP over the long term?
In the short-run, population changes are relatively small, but in the long-run, increases in real GDP are being distributed over larger population. It becomes necessary to adjust GDP for changes in population and the price level
What is not included in GDP?
Intermediate products Secondhand sales Nonmarket transactions
What is not included in the calculation of GDP?
Intermediate products, secondhand sales, nonmarket transactions
How often is the census taken?
every 10 years, first census was 1790
What happens to the buying power of the dollar because of inflation?
It decreases
How is it expected the change in the next couple of decades? What effect will this have on the economy?
It is expected to continue to increase until 2040. This will again place an extra burden on the working age population and the government
What is the baby boom? What impact will the baby boomers' retirement have on the economy?
It is the high birth rate from 1946 to 1964 that makes up a large portion of the current population. It will place a large burden on the younger and smaller working population when they begin to collect pensions, social security, and Medicare
What is full employment? What do economics estimate the full employment rate to be?
It is the lowest possible unemployment rate, with the economy growing and all the factors of production being used as efficiently as possible. It is estimated at about 4.5%
What was considered "poverty" for a family of four in 2003?
Less than $18,400 for a family of four
Why is the aggregate demand curve downward sloping?
The economy can only have one money supply at a time. At a lower price level the purchasing power of that money supply is greater than at a higher price level and vise versa
What has characterized the business cycle since World War II?
The economy has experience short recessions followed by longer recoveries since WWII
What causes the aggregate supply curve to shift?
Most shifts are caused by changes in the cost of production for all firms
What are the characteristics of the economy at an economic peak, in a recession, at the trough, and during expansion?
Peak- real GDP stops increasing and starts decreasing Recession- GDP declines of at least 6 months Trough- real GDP stops decreasing and starts increasing Expansion- economic recovery from a recession
Who is most hurt by inflation?
People who have lent money
What is PPI?
Producer Price index- family of indexes that measures the average change in selling price received by domestic producers (measures price change)
The formula for converting GDP to real GDP is:
Real GDP = current GDP/implicit GDP Price Deflator x 100
How is Real GDP calculated?
Real GDP= current GDP/implicit GDP Price deflator x100
What is a example of frictional unemployment?
Recent college grad looking for work
What type of unemployment is caused by changes in consumer tastes?
Structural unemployment
When was the first census taken? When was the Census Bureau permanently established?
The census was first taken in 1790 and the Congress permanently established the Census Bureau in 1902
What is the center of population? What does it indicate about the change in the geographic regions in the country?
The point where the country would balance if it could be laid flat and all the people weighted the same. It has moved farther west each time the census has been taken. In 2000, it was in Missouri.
What are the consequences of inflation? Who is most hurt by it?
The purchasing power of the dollar falls. This hurts those living on fixed income. People who have lent money are hurt and the borrowers are helped by unexpected inflation. Once inflation occurs it makes it harder for people to take out loans to buy durable goods
What are the limitations of the unemployment rate?
The unemployment rate does not count people who have become too frustrated or discouraged to look for work. Also, people are considered employed even when they hold part-time jobs. This is called "underemployment"
Why are intermediate products excluded from GDP?
They are excluded to prevent double counting when the final sale product is sold
What has happened to the growth rate of population since the colonial era? What is the rate of population growth now? Why do you think it has decreased?
U.S. population has grown considerably since the colonial era but has steadily declined. It was approx 3% a year until the Civil War but has fallen to approx 0.9% a year.
What caused the Great Depression?
Unequal distribution of income Easy credit U.S. Trade policy
According to the book, what were the causes of the Great Depression?
Unequal distribution of income, easy credit, and U.S. trade policy
What are the social costs of economic instability?
Wasted resources (unemployment), political instability (the political party in power usually changes during period of recession and instability), and crime.
How does labor productivity impact economic growth?
When labor productivity grows in encourages economic growth. An increase in productivity encourages domestic production because it keeps prices stable.
Lorenz Curve
a curve that shows how much the actual distribution of income varies from equal distribution of income. It has the percent of households on the x-axis and percent of total income on the y-axis
economic model
a macroeconomic model that uses algebraic equations to describe how the economy behaves
index of leading indicators
a monthly statistical index that predicts future changes in real GDP
recession
a period during which real GDP declines for at least two consecutive quarters, or six months
expansion
a period of economic recovery from a recession. Real GDP is expanding
stagflation
a period of stagnant growth (negative change in real GDP) and inflation
dependency ratio
a ratio of the number to children and elderly for every 100 persons in the working age bracket to 18 to 64 years-old
When does a recession begin? When does a recession end?
a recession begins at a peak and ends at a trough
market basket
a representative collection of goods and services used to compile a price index. Used to see how the prices of identical products change over time.
inflation
a rise in the general level of prices (the prices of most goods and services in an economy are increasing)
price index
a statistical series used to measure changes in the price level over time
base year
a year serving as point of comparison for other years in a price index
Demand-pull
all sectors of the economy are trying to buy more than the economy can produce
census
an official count of all the people and their place of residence that is taken every 10 years
You need to select a _________ and then you select a market basket to compare
base year
What is a base year?
base year is a year serving as point of comparison for other years in a price index
A shift in either the aggregate supply or aggregate demand curve will cause price level or real GDP to ________. Economic policies will try to achieve economic growth (higher real GDP) without causing an increase in price level.
change
What is creeping inflation?
creeping inflation is a term used to describe a gradual rather than drastic increase in prices, inflation between 1 and 3 percent a year
What is unemployment that is directly related to swings in the business cycles called?
cyclical unemployment
the total of the prices of the goods in the market basket in the base year is assigned a percentage value of 100%. The same market basket of goods is viewed the next year and look at the percentage change. Greater than 100% is inflation, and less than 100% is ________.
deflation
How does economic growth benefit the government?
economic growth causes standard living to increase larger tax base to fund government spendings, allieviates domestic problems like poverty, and allows us to create jobs and incomes
trend line
eliminates the peaks and troughs of recessions and expansions and shows the general upward trend of real GDP over time
tax base
incomes or properties that may be taxed. When economic growth occurs, people earn more income and acquire more property.
wage-price spiral
increasing wages cause prices to rise which causes wages to increase further
the total of the prices of the goods in the market basket in the base year is assigned a percentage value of 100% percent. The same market basket of goods is viewed the next year and look at the percentage change. Greater than 100% is ________, and less than 100% is deflation.
inflation
hyperinflation
inflation 500 percent or greater a year
creeping inflation
inflation between 1 and 3 percent a year
galloping inflation
inflation between 100 and 300 percent a year
Recession, unemployment and high inflation are all examples of economic ________.
instability
Implicit GDP Price Deflator
is an index of the average level of prices for all goods and services in the economy. It is computed quarterly with a base year of 2005
What is the study of macroeconomics?
is the field of economics that studies the behavior of aggregated economy, examines economy wide phenomena such as a change in economy
Why is real GDP per capita the single most important measure of long-term economic growth?
it adjusts for changes in both price level and population
business cycles
largely systematic ups and downs for real GDP
the output-expenditure model
macroeconomic model that uses the aggregate demand by consumers, businesses, the government and the foreign sector to calculate GDP
What is the consumer price index?
major price indices- consumer price index measures the price changes for about 80,000 items in 85 geographic areas around the country
you need to select a base year and then you select a ________ to compare
market basket
Producer Price Index
measures price changes paid by producers for their inputs. It is a sample of approx. 100,000 commodities. It is also compiled by the BLS. 1982 is used as the base year
Consumer Price Index
measuring the price changes of approx. 80,000 items in 85 geographic areas around the country. It is complied by the Bureau of Labor Statics and they use 1982-1984 as their base year
How is the unemployment rate calculated?
number of unemployed individuals divided by the total number of persons in the civilian labor force
unemployed
people available for work who made a specific effort to find a job during the past month but worked less than one hour/week for pay
Urban Population
people living in incorporated villages, towns or cities of 2,500 inhabitants or more
demographers
people who study growth, density, and other characteristics of the population
What is the definition of a recession?
period which real GDP declines for a least two consecutive quarters (at least 6 months)
What is GDP designed to measure?
production
nonmarket transactions
production that does not take place in market. Excluded because it is impossible to estimate
intermediate products
products that are inputs into the production of another final product. They are excluded to prevent double counting when the final sale product is sold
Price level
relative magnitude of prices at a given point in time as measure by price index. Economists use changes in the price level to determine if we are experiencing inflation/deflation
renewable resources
resources that can be replenished for future use
business flactuations
rise and fall of real GDP in a nonsystematic manner
cost-push
rising input costs drive up the costs of production and prices
What is the most serious type of unemployment?
structural unemployment
How do you measure GDP?
the PRICES of all final goods and services x the QUANTITY of all final goods and services = GDP
labor productivity
the amount of output produced per unit of labor
life expectancy
the average remaining life span of people who reach a given age. The life expectancy in 2007 was 77.9 years. for females it was 80.4 years and for males it was 75.4
GDP Gap
the difference between actual GDP and potential GDP that could be achieved if the economy was at full employment
real GDP per capita
the dollar amount of GDP, adjusted for inflation, on a per person basis
Deficit spending
the federal government spending too much money drives up prices
Macroeconomic equilibrium
the level of real GDP consistent with the current price level. It is where aggregate supply and aggregate demand intersect.
net immigration
the net change in population from people moving into and out of the country
fertility rate
the number of births that 1,000 women are expected to undergo in their lifetime. It is estimated at 2,119 births per 1,000 women
unemployment rate
the number of unemployed individuals divided by the total number of person in the civilian labor forace
standard of living
the quality of life based on the possession of necessities and luxuries that make life easier
What factors influence economic growth? How do the resources influence economic growth?
the quantity and quality of the factors of production (land, labor, capital, entrepreneurship) has he greatest influence on economic growth. It is also important how efficiently the resources are used.
price level
the relative magnitude of prices
Rural Population
the remainder of the population, including those who live in areas along the fringes of cities
secondhand sales
the resale of used pr pre-owned products. They are excluded to prevent double counting because the product was counted when it was initially produced. GDP is designed to measure production, and nothing new was produced.
What marked the beginning of the Great Depression?
the stock market of October 1929 led to increase of unemployment
Misery Index
the sum of the inflation rate and the unemployment rate
capital-to-labor ratio
the total capital stock divided by the number of workers in the labor force. A high capital-to-labor ratio encourages economic growth
Gross Domestic Product (GDP)
the total dollar value of all final goods and services produced within a country's national boarder's in a year. It is the most important measure of economic performance
Aggregate Demand
the total quantity of goods and services demanded at different price levels. It is the sum of all consumption, investment, government spending and net exports
Aggregate Supply
the total value of goods and services that all firms would produce in a specific period of time at various price levels
Real GDP
the value of GDP when it has been adjusted for changes in the price level. This represents what the value of GDP would have been at base year prices
Current GDP
the value of GDP when it has not been adjusted for changed in the price level
Why are secondhand sales excluded from GDP?
they are excluded to prevent double counting because the product was counted when it was initially produced.
frictional unemployment
unemployment caused by workers who are between jobs for one reason or another. This is short-term unempolyment
technological unemployment
unemployment caused when workers are replaced by machines or other equipment. (a type of structural unemployment)
cyclical unemployment
unemployment directly related to swings in the business cycle (recessions)
structural unemployment
unemployment that occurs when a fundamental change in the operations of the economy reduce the demand for workers and their skills. This is the most serious type of unemployment
trough
when real GDP stops decreasing and starts increasing. Ends a recession and begins an expansion
peak
when real GDP stops increasing and starts decreasing. Ends an expansion and begins a recession
Excessive monetary growth
when the money supply grows at a faster rate than GDP. "Too many dollars chasing too few goods"
What is an example of seasonal unemployment?
working as Santa Clause in the mall or working at six flags
