Intermediate Macroeconomics Test 1

What are the four components of GDP? Give an example of each

1. Consumption (Household expenditures) 2. Investment (Business fixed investments) 3. Government (Final goods and services of federal, state, and local governments) 4. Net Exports (Goods and services sold to other countries)

List the three categories used by the Bureau of Labor Statistics to classify everyone in the economy

1. Employed 2. Unemployed 3. Not in the Labor Force

3 Macroeconomic issues in the news lately?

1. Monetary policy in the United States 2. The United States is implementing more protectionist policies, restricting international trade and immigration 3. The United States has enacted tax reforms

Describe the two ways the BLS measures total employment

1. Surveys about 60,000 households to obtain an estimate of the share of people who say they are working. 2. Surveys about 160,000 business establishments and asks how many people they employ.

What two things does GDP measure? How does it measure both?

1. Total income earned from production of final goods and services 2. Total expenditure of final goods and services in the company Measures both because total expenditure of buyers must equal the total income of the sellers

How often does the price you pay for a haircut change? What does your answer imply about the usefulness of market-clearing models for analyzing the market for haircuts?

A market-clearing model for analyzing the market for haircuts has the unrealistic assumption of flexible prices. Short run = Unrealistic when we observe prices are inflexible Long run = Prices to tend to adjust, a market clearing model is then appropriate

What is a market clearing model and when is it appropriate to assume and markets clear?

A model in which prices adjust to equilibrate supply and demand

Why do economists build models?

As a means of summarizing the relationships among economic variables

How is Economics a science?

Because economists develop hypotheses and test them

How does the model of supply and demand explain how a fall in the price of frozen yogurt would affect the price of ice cream and the quantity of ice cream sold

Check description in answer key.

Corporate Profits

Corporate Taxes + Dividends + Retained Earnings

Personal Income

Employee Compensation + Dividends

National Income

Equal to NNP

NNP

GNP - Depreciation

Proprietors Income

Income of Owners

What does the consumer price index measure(CPI)? List three ways in which it differs from the GDP deflator.

Measures the overall level of prices in the economy 1. CPI measures only prices of goods and services bought by consumers. 2. CPI includes BOTH domestic and imported goods bought by consumers 3. CPI has a fixed basket of goods over time.

How are Micro and Macro economics similar?

Microeconomics many different variables make up the economy, and macroeconomics deems to study all of those variables as a collective.

GDP Deflator

Nominal GDP/Real GDP

Unemployment Rate

Number of Unemployed/Labor Force x 100

What is the difference between a Paasche index and a Laspeyres Index?

Paasche = Changing basket of goods Laspeyres = Fixed basket of goods

Disposable Personal Income

Personal Income - Taxes

How are the CPI and the PCE deflators similar, and how are they different?

Similar = both only include the prices of goods purchased by consumers, prices of imported/domestic goods Different = CPI measures the change in the price of a fixed basket, whereas the goods measured by the PCE deflator change from year to year

Microeconomics

The study of how individual households and firms make decisions and interact with one another

Macroeconomics

The study of the economy as a whole; such as how total output, total employment, and the overall price level are determined.

Real GDP

The total value of goods and services measured at base year prices (Look at answer key for examples!!!) (P2018 x Q2010) + (P2018 x Q2010)

Nominal GDP

The total value of goods and services measured at current prices (Look at answer key for examples!!!) (P2010 x Q2010) + (P2010 x Q2010)

What is the defining characteristics of a science?

The use of the scientific method of inquiry to establish stable relationships

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. The engineer eats the bread. What is the value added by each person? What is the bread's contribution to GDP?

The value added by each person is equal to the value of the good produced minus the amount paid for the materials needed to make the good. In this case, the value added by the farmer is $1. The value added by the miller is $2 because the wheat is purchased for $1, and the flour is sold for $3. The value added by the baker is $3 because the flour is purchased for $3, and the bread is sold for $6. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread).

GDP

Value of Final Goods and Services produced

Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How do you think it should affect GDP?

When a woman marries her butler, GDP falls by the amount of the butler's salary. This happens because GDP measures total income from market activities and therefore does not include the value of any output produced in the home

Labor Force

number of people employed + number of people unemployed