econ exam 1 mod 1-3

inflation rate=

(CPI this year - CPI last year) / CPI last year x 100

GDP growth rate formula

(GDP year 2 - GDP year 1 / GDP year 1 ) x 100

price index=

(cost of market basket / cost of market basket of the base year) *100

Duration of unemployment

- Less than a quarter of job seekers find work within one month - Approximately another fifth find employment within the next two months - About a sixth (17%) are still unemployed after six months - Average duration is just over 15 weeks throughout the last decade

cost of deflation

- Unemployment - Effect on investment - Cost to debtors

GDP's limitations

-Excludes non-market production -Different countries have different legal vs. illegal activities -Quality of life not measured (value of leisure) -Poorly measures a nation's well being -Does not discuss distribution of income

What are the costs of negative economic growth?

-Lost Output -Possible Higher Unemployment Rates

Between 1982 to 2022, the consumer price index (CPI) increased by 2.82 percent per year (geometric average). During that period, college tuition and fees in the U.S. rose by 5.79 percent annually (geometric average). Which of the following statement is correct? 1. The real cost increases of college tuition and fees was 2.97 percent per year. 2. Average inflation rate was 2.97 percent per year. 3. The general price level in the U.S. is about 9.5 times higher than forty years ago. 4. College tuition and fees in the U.S. is about 3 times greater than forty years ago.

1

The marginally attached are those persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because 1. they had not searched for work in the 4 weeks preceding the survey. 2. they teleworked or worked from home because of the pandemic. 3. they were unable to work because their employers closed or lost business. 4. they account for a small proportion of the total number of persons not in the labor force.

1

. The cost to the government of providing an additional $1 of unemployment insurance ranges from

1.50 to 2.50

Recession length

11 months (not 2 consecutive quarters)

Which one of the following is an argument in favor of expanded unemployment benefits during recessions? 1. Preserving job matches is valuable because workers may accumulate human capital that is specific to their job, and separations risk destroying this valuable source of idiosyncratic productivity. 2. It transfers money to individuals who tend to have higher-than-average marginal propensities to consume, which, in turn, may help trigger positive aggregate demand externalities in a slump. 3. Individuals will search less actively for a new job when they have unemployment insurance and will cash benefits for longer as a result. 4. High risk essential workers during a pandemic doing very socially valuable jobs face greater risk of illness, and hence have greater disutility of work during a pandemic. 5. The cost to the government of providing an additional $1 of unemployment insurance ranges from $1.50 to $2.50.

2

2023 US GDP

23618

Nominal GDP 2022

25.46 Trillion increased 9.6%

If a large number of people were to leave their civilian jobs and join the military, which of the following would increase? 1. the civilian labor force 2. the civilian employment ratio 3. the civilian unemployment rate 4. the civilian labor-force participation rate 5. none of the above

3

Suppose that the price of a newspaper goes from $1 to $2, and during that same year, all costs and wages in the entire economy also rise 80 percent. Which of the following statements is false? 1. There is a 100% increase in the nominal cost of the newspaper to the consumer. 2. There is a 80% inflation. 3. The real cost increase of the newspaper is 80%. 4. Though we are paying more dollars for our newspaper, each of those dollars is worth less than before.

3

Which of the following will cause an increase in the marginal product of capital (MPK)? 1. a decrease in the quantity of labor in use 2. an increase in labor productivity 3. a decrease in the quantity of capital in use 4. all of the above 5. none of the above

3

Which of these represents an example of citizens who would not typically be counted as unemployed? 1. when your economics professor loses his job and gets a new one at McDonald's 2. when your fourteen-year-old cousin loses her summer job in September 3. when your neighbor has been out of work for so long that he decides to stay at home and write a novel 4. all of the above 5. none of the above

4) all of the above

inflation rate 2023

6.4%

Deflation

A downward movement in the average level of prices

depression

A long-term economic state characterized by unemployment and low prices and low levels of trade and investment

National Income Accounting

A measurement system used to estimate national income and its components

expansion

A period of economic growth as measured by a rise in real GDP

real value

A value expressed in units of constant purchasing power.

Expenditure Approach

A way of computing national income by adding up the dollar value at current market prices of all final goods and services

Income Approach

A way of measuring national income by adding up income received by all factors of production

Inflation

An upward movement in the average level of prices

GDP=

C+I+G+NX

How do you measure inflation

CPI (consumer price index)

protections against inflation

Cost-of-living adjustments (COLAs) - Clauses in contracts that allow for increases in specified nominal values to account of changes in the cost of living

Consumption Expenditure (C)

Durables- Life span of more than three years Nondurables- Life span of less than three years Services- Intangible commodities

ERP=

Employed/Non-institutional Adult Pop. x 100

types of business fluctuations

Expansion, Contraction, Recession, Depression

Income Approach to GDP

GDP = Wages + Rent + Interest + Profits + Deb. + IBT

What is the cost of unemployment?

GDP gap lost output personal psychological impact

Net Domestic Product (NDP)

GDP minus depreciation

2 observations on The Economy's Model: Circular Flow

In every economic exchange, the seller receives exactly the same amount that the buyer spends. Goods and services flow in one direction and money payments flow in the other.

Indirect Business Taxes (IBT)

Indirect tax imposed on the products and services made after the subsidy has been deducted

Underemployment

Individuals aged 16 years or older who are either unemployed, part-time workers or marginally attached to the labor force.

labor force

Individuals aged 16 years or older who either have jobs or are looking and available for jobs

LFPR=

Labor Force / Non-Institutionalized Adult Pop. *100

Real GDP=

Nominal GDP/GDP Deflator x 100 Nominal GDP/ Price index x 100

Civilian Non-Institutional Adult Population

Nonmilitary and non-institutionalized individuals aged 16 years or older who are either in the labor force or not

nominal value

Price expressed in today's dollars

What is the cost of inflation?

Purchasing power is the value of money for buying goods and services, varied with prices and income

structural unemployment

Results from a poor match of workers' abilities and skills with current requirements of employers

Cyclial Unemployment

Results from business recessions that occur when aggregate (total) demand is insufficient to create full employment

frictional unemployment

Results from the fact that workers must search for appropriate job offers

Government Expenditures (G)

State, local, and federal (VALUED AT COST)

price index

The cost of today's market basket of goods expressed as a percentage of the cost of the same market basket during a base year

nominal rate of interest

The market rate of interest expressed in today's dollars

Real Rate of Interest

The nominal rate of interest minus the anticipated rate of inflation

Employment-Population Ratio (EPR)

The proportion of the non-institutional working-age individuals who are employed

Labor Force Participation Rate (LFPR)

The proportion of working-age individuals who are employed or seeking employment

Economic Growth Rate

The rate of change in real GDP between two time periods

inflation rate

The rate of change in the price index between two time periods

National Income (NI)

The sum of all income to resource owners—wages (w), interest (i), rent (r), and profits (p)--paid to the four factors of production

GDP

The total market value of all final goods and services produced by factors of production located within a nation's borders

Business Fluctuations

The ups and downs in overall business economic activity - Economic Growth - Employment -price levels

contraction

a period of economic decline marked by falling real GDP

Who are the unemployed?

anyone 16+ who are willing and able to work and who are actively looking for work (prior four weeks) but have not found a job

The marginal product of capital (MPK) measures

by how much output increases for each additional unit of capital

Real values are expressed in

constant dollars

Nominal values are expressed in

current dollars

labor force=

employed + unemployed

The period between the business cycle trough and business cycle peak is called a

expansion

Net Exports (NX)

exports - imports

True or False National defense, police protection, firefighting, and education are not included in GDP, because the goods and services provided by the government are not traded in the market. Some activities, such as the care of one's own children, unpaid volunteer work for charities, and illegal activities, are not included in GDP. The housing services provided by and for persons who own and live in their home is not included in GDP. GDP would increase if a home were rented to a tenant rather than occupied by the homeowner, because home ownership involves no market exchange of housing services for rent. In the Domestic Income and Product Account, intermediate inputs are included in investment.

false true true true? fasle

True or False The shortest US recession on record lasted two months, from February 2020 to April 2020. The definition of a recession adopted by the National Bureau of Economic Research (NBER) is two consecutive quarters of decline in real GDP. The interval between the peak and the trough designates a recession, a period when economic activity is contracting. An expansion is a period when the economy is not in a recession. Expansion is the normal state of the economy; most recessions are brief. The longest expansion in the history of US business cycles (dating back to 1854) lasted 128 months. It began in June 2009 and ended in February 2020.

false, it was 2 months but it ended in june false false, contraction true? true false, 126 months

the natural rate of unemployment should only take into account

frictional and structural unemployment

4 types of unemployment

frictional, structural, cyclical, seasonal

Net Domestic Product

gross domestic product minus depreciation

A 0.5 percent change in the growth rate

has a significant effect on long-run output (real GDP) over time.

What is not included in GDP?

illegal goods, second-hand goods, household goods, final goods, double counting, goods that do not enter a market, transfer payments, inventory etc.

Real GDP 2022

increased 2.1%

constant returns to scale implies that

increasing factor inputs by the same % leads to the same % increase of outputs

LFMA=

labor force + marginally attached

Non inst. adult pop=

labor force + non labor force

Unanticipated positive inflation will create

losses for creditors and gains for debtors

A worker who decides to quit their job and go to law school full time is considered to be

not in the labor force

recession

period of reduced economic activity

per capita real GDP=

real GDP/population

2023 CPI

rose .5%

2023 Jan GDP

rose 0.3%

Which of the following is an important factor affecting positive economic growth? An increase in

tech, productivity, and education

full employment

the level of employment reached when there is no cyclical unemployment An arbitrary level of unemployment that corresponds to "normal" friction in the labor market around 5%

GDP measures

the nominal value of final output

Natural Rate of Unemployment

the normal rate of unemployment around which the unemployment rate fluctuates The unemployment rate that is estimated to prevail in the long run when all workers and employers have fully adjusted to any changes in the economy When seasonally adjusted the natural rate of unemployment should only take into account frictional and structural unemployment

Underemployment=

underemployed/ LFMA *100

Suppose education spending makes up 20 percent of the Consumer Price Index (CPI), and that the prices for education rise faster than the rest spending on all other items in the economy. On average an IU student spends 40 percent of her income on education. For the average IU student, the CPI

understates the inflation rate because of the importance of education for the average IU student.

underemployment=

unemployed+ part-time+ marginally attached

unemployment rate=

unemployed/labor force x 100

seasonal unemployment

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season

marginally attached workers or discouraged

would like to be employed and have looked for a job in the recent past but are not currently looking for work

Are firefighters, police and national defense included in GDP?

yes

Gross Private Domestic Investment (I)

• The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future • Fixed investment • Inventory investment • New residential structures