Econ Exam II

Most economists believe the CPI overstates inflation by

0.5-1%

Total working age population = 350 million; employed = 210 million; discouraged workers = 7 million; full-time students = 25 million; actively seeking work, but not employed = 9 million What is the labor force participation rate?

62.6% 219 million / 350 million X 100

Deflation

A decline in overall prices throughout the economy

Cyclical unemployment

A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise

What is not a consumption expenditure?

Construction of a police station

The largest component of GDP in the U.S. is

Consumption(C)

What is the difference between headline and core inflation?

Core inflation excludes food and energy prices

What is incorrect concerning cyclical unemployment?

Cyclical unemployment comes about because of changes in technology

In relation to the loanable funds market: Google releases a new data processing system that increases the efficiency of storing and searching for data. What would happen to demand?

Demand would increase

Refer to the Loanable Funds Market. Suppose Congress begins to work more efficiently and gets things done. As a result, business owners become more optimistic about the future economic environment. What would happen to the graph?

Demand would increase

Which type of unemployment is natural for our economy and can be considered beneficial because it allows for searching?

Frictional unemployment

Suppose a new bridge is built on TN Hwy 111. Which category of U.S. GDP does this fall into?

Government

Jim has been out of work for over a year and has given up trying to get a new job until the economy gets better. Jim is considered to be

a discouraged worker and not a member of the labor force

How do you obtain the market basket value for CPI calculations?

base year quantity X current year price

What activity would the Census Bureau not count as an indication that a person is actively seeking work?

browsing through job listings on Monster.com

The ______ shows that spending equals income

circular flow diagram

GDP calculations only count final goods and services because

counting intermediate goods and services would lead to double-counting of many activities

How to calculate rate of inflation

current value - previous value / previous value X 100

Auto workers in Kentucky laid off as a result of a recession are considered to be

cyclically unemployed

A decline in overall prices throughout the economy is called

deflation

Using the value added approach ensures that there is no _______ in our GDP figures

double-counting

Suppose that there is a new technology which increases efficiency and makes firms more competitive. Using the Loanable Funds model, what is the effect on interest rates (i) and the quantity of loanable funds (Q)?

Increase i and increase Q

Southwest airlines builds a new hangar at the Nashville International Airport. This transaction is included in which category of GDP

Investment

Suppose Delmonaco Winery puts 500 bottles of Muscadine wine into inventory. Which category of GDP is affected?

Investment

Suppose Target (American company) builds a new store in Cookeville, TN. Which category of U.S. GDP does this fall into?

Investment

Which category of GDP would Honda (Japanese company) expanding its factory in Ohio fall into?

Investment

Which category of GDP would be affected by Facebook building a server farm in Kearney, NE

Investment

Many people have an issue with the regular (i.e. Headline) unemployment rate that is reported. What is the issue?

It does not measure discouraged workers or the underemployed.

What is false about structural unemployment?

It occurs when a person leaves one job for another job but cannot report to the new employer for several weeks

Using the Loanable Funds model, what is the impact on interest rates (i) and the quantity of loanable funds (Q) when income and wealth decline?

Lower i and lower Q

Suppose that Korean Air (Korean company) purchases a new 787 jet from Boeing (American company). Which category of U.S. GDP does this purchase fall into?

NX

Last week, Mark Cuban bought a 1971 Plymouth Barracuda. This transaction is included in which category of GDP?

Not included

Suppose Sweet Sallie's purchases 20 bags of flour from a mill in MN which it will use to bake cupcakes. This transaction is included in which category of GDP?

Not included

Suppose that Chevy (American company) purchases 500,000 tires for its Malibu cars from Goodyear (American company). Which category of U.S. GDP does this purchase fall into?

Not included

What is not included in current calculations of GDP

Patrick buys a home which was built in 2003

Which phase of the business cycle follows immediately after the recovery?

Peak

What is the escalator clause?

Price in today's dollars = Price in earlier time X (Index value today / Index value in earlier time)

How does real GDP differ from nominal GDP?

Real GDP controls for price changes, while nominal GDP does not

Hector voluntarily left his job to search for a job in accounting, the field in which he received his BA. Hector is considered

frictionally unemployed

Steve recently graduated with his Ph.D. in Mechanical Engineering from Virginia Tech University, and is applying for positions across the country. Steve is considered to be

frictionally unemployed

Fishers Equation

i = r + pie r = real interest rate i = nominal interest rate pie = inflation rate

GDP deflator

nominal GDP / real GDP X 100

For the purpose of GDP accounting, consumption expenditures include

non-durable goods, durable goods, and services

Joelle quit her job at the bank 8 weeks ago because she didn't like her co-workers, and is now applying for graduate school. According to the Bureau of Labor Statistics, Joelle is

not in the labor force

Vladimir quit his job at the gym 6 weeks ago and is now planning on traveling across Europe for the next year. According to the Bureau of Labor Statistics, Vladimir is currently

not in the labor force

Issues with how the CPI is measured

outlet bias, new product bias, substitution bias, and increase in quality bias

What is not an investment expenditure?

purchases by firms of used machinery

Nominal GDP

quantity X price

Real GDP

quantity X price of base year

The part of the business cycle immediately following the peak is called

recession

The supply of loanable funds comes from

saving

The circular flow diagram is used to make the point that

spending equals income.

Customer service representatives who have lost their jobs as a result of call centers being outsourced to India are an example of

structural unemployment

Jenny worked for Nissan Motor company in Smynra, TN until she was laid off because operations were moved to the Czech Republic because of lower costs abroad. This is an example of

structural unemployment

Roger worked in a coal mine until it went out of business because fewer utility companies were using coal to generate electricity. Now he is unable to find a new job because he is not qualified for any of the jobs that are available. This is an example of

structural unemployment

In relation to the loanable funds market what would happen if the baby boomer generation retires?

supply would decrease

The demand for loanable funds comes from people who want to

take out a loan

Suppose that the equilibrium interest rate and the equilibrium quantity of loanable funds in 1995 was 6.5% and $875 million, respectively. In 1996, the equilibrium interest rate and quantity of loanable funds was 7.8% and $950 million, respectively. What explains this situation?

the proliferation of computers and the internet allows for more efficient work

Examples of consumption expenditures

the purchase of a ticket to a Nashville Predators game, the purchase of a hot dog at a Tennessee Titans game

For the purpose of GDP accounting, government purchases include

the purchase of new military equipment

At the natural rate of unemployment, the unemployment rate equals

the structural unemployment plus the frictional unemployment rate

The Bureau of Labor Statistics (BLS) defines the labor force as

the total number of people who are either employed or unemployed

The CPI is meant to measure the cost-of-living for who

typical urban family of four

Sabrina has a Master's degree in art history but only works part-time at a daycare because she cannot find work in her field. According the the BLS, Sabrina is categorized as

underemployed

If there are 450,000 people in the population, 300,000 people in the labor force, and 267,000 are classified as being employed, then what is the unemployment rate?

unemployed/labor force X 100 33000/300000X100 = 11%

Structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. Caused by technological advances, it is usually associated with extended periods of unemployment, and it often necessitates extensive retraining.

When calculating GDP government expenditures include

wages and salaries and the purchase of goods and services, but not welfare or unemployment benefits

Assume that tuition and fees per semester at Tech in 2006 were $2,862 and in 2010 were $3,701. Also, assume that the CPI in 2006 was 202 and in 2010 was 218. How much did tuition and fees increase by in real terms?

Turn $2,862 into 2010 money. [2862(218/202)=3089] 3701-3089 / 3089 = 19.8% inflation in real terms.

Suppose that in 2013 you were earning $65,000 as an economic researcher for the BLS. As part of your contract, you are awarded a cost-of-living adjustment annually. Assume the GDP Deflator was 187.4 in 2013 and is 188.9 in 2014. What will your salary be for 2014?

$65,520

Consider a pair of snow skis, manufactured by Atomic, that sell for $750. In addition, assume Atomic paid $100 for the plastic to make the skis and $225 for the bindings. How much does GDP increase by when you purchase a pair of Atomic skis?

$750

Suppose that consumption is $500, investment is $100, exports are $100, government purchases are $260, and imports are $180. What is GDP equal to?

$780

Suppose that in 1972, the real interest rate was 8% and the rate of inflation was 3%. What was the nominal interest rate during 1972?

11%

If the real interest rate is 2% and the inflation rate is 10%, what is the nominal interest rate?

12%

You have just been awarded a cost-of-living increase tied to the CPI. The CPI has gone from 114 to 117. If your salary is $33,000 per year before the increase, what will it be after the CPI increase is factored in?

33,000(117/114)=$33,869

The natural rate of unemployment in the U.S. is

5-7%

Suppose that in a country GDP is $520, consumption(C) is $300, net exports(NX) is -$40, government purchases(G) is $100. How much is investment(I)?

520-300+40-100=160= Investment

Refer to the Loanable Funds Market. Suppose that after getting a lecture from their grandparents, individuals and households begin to save more. What would the graph look like?

Supply increases

Suppose that the equilibrium interest rate and the equilibrium quantity of loanable funds in 2012 was 5% and $250 billion, respectively. In 2013, the equilibrium interest rate and quantity of loanable funds was 4% and $300 billion, respectively. What would explain this situation?

The average retirement age increases from 65 to 75 (Savings increase)

Which group do we think is hurt the most by inflation?

The elderly/retirees