Macro EXAM 2

in the real GDP in 2016 using 2015 prices is higher than normal GDP of 2016, then

prices in 2016 are lower than prices in the base year

the balanced budget multiplier is

ratio of the change in the equilibrium level of output to a change in government spending

unemployment rate

ratio of the number of people unemployed to the total number of people in the labor force unemployed/(employed + unemployed)

the president of vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the MPC in vulcan is 0.6. What would be the best advice to give the Vulcan president?

reduce government purchases by $4 million

the structural deficit

remains the same at full employment

what is subracted from national income to get to personal income?

retained earnings

automatic destabilizers

revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destablize GDP

automatic stabilizers

revenue and expenditure items in the federal budgt that automatically change with the state of the economy in such a way as to stablize GDP

gross private domestic investment (Ia)

spending by firms and households on new capital - plant, equipment, inventory, and new residential structures

paradox of thrift

suppose planned investment is fixed and independent of income. If households decide to save more, saving in the aggregate will remain the same but equilibrium income will fall.

indirect taxes minus subsidies

taxes such as sales taxes, customs duties and license fees less subsidies that the government pays for which it receives no goods or services in return

planned investment

the government can affect investment behavior through its tax treatment of depreciation and other tax policies * depends on the interest rate

the balanced budget multiplier is equal to 1 because

the government spending multiplier plus the tax multiplier will equal 1.

fiscal policy

the governments spending and taxing policies

per capita output growth

the growth rate of output per person in the economy

productivity growth

the growth rate of output per worker

output growth

the growth rate of the output of the entire economy

in his 2015 state of the union speech, President Barak Obama urged congress to raise the federal minimum wage from 7.25 to 10.10 per hour and state that future minimum wage increased should be tied to the cost of living. do you suppose the impac would be different if the minimum wage was tied to the chain linked CPI as opposed to the fixed weight CPI

the im[act would be only marginally different, with the minimum wage rising a bit more slowly if the indexed to the chain linked CPI

weight

the importance attached to an item within a group of items

corporate profits

the income of corporations

proprietors income

the income of unincorprated businesses

rental income

the income received by property owners in the form of rent

fiscal drag

the negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion

labor force

the number of people employed plus the number of unemployed employed + unemployed

the informal economy

the part of the economy in which transactons take place and in which income is generated that is unreported and therefore not counted inGDP

personal saving rate

the percentage of disposable personal income that is saved. If the personal saving rate is low, households spending a large amount relative to their incomes; if it is high, households are spending cautiously

structural unemployment

the portion of unemployment that is as a result of changes in the structure of the economy that result in a significant loss of jobs in certain industries

frictional unemployment

the portion of unemployment that is as a result of the normal turnover in the labor market; used to denote short-run job/ skill matching problems

privately held federal debt

the privately held (non government owned)) debt of the US government

Diane lost her job and immidately started looking for another job. As a result, the

unemployment rate increases

cyclical unemployment

unemployment that is above frictional plus structural unemployment

full employment budget

what the federal budget would be if the economy were producing at the full employment level of output

four main categories of expenditure

1) personal consumption 2) gross private domestic investment 3) government consumption and gross investment 4) net exports (EX-IM)

if the number of people classified as unemployed is 20,000 and the number of people classified as employed is 400,000, what is the unemployment rate?

4.8%

if the labor force is 320,000 and the total population 16 years of age or older is 400,000, the labor force participation rate is

80%

gross national income (GNI)

GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation

expenditure approach

a method of computing GDP that measures the total amount spent on all final goods and services during a given period

what is a good or service counted in GDP

a new tire you buy for your personal car

unemployed

a person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.

not in the labor force

a person who is not looking for work because he or she does not want a job or has given up looking

consumer price index (CPI)

a price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represet the "marter basket" purchased monthly by the typical urban consumer

fixed weight procedure

a procedure that uses weights from a given base year

exogenous variable

a variable that is assumed not to depend on the state of the economy- that is, it does not change when the economy changes

gross national product is the total market value of

all final goods and services produced by resources owned by a country, regardless of where production takes place.

a warning

although we have added government, the story told about the multiplier is still incomplete and oversimplified - taxes depend on income

if output is less than planned aggregate expenditure, there will be

an unplanned decrease in inventories

employed

any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay

gross saving in the economy is composed of gross private saving and gross government saving. This latter magnitude reflects the condition of the governments

budget

discretionary fiscal policy

changes in taxes or spending that are the resul of deliberate changes in government policy

increasing taxes is the only way that government saving can be increased. This claim is

false

the recorded level of employment only includes persons employed full time or employed part time by choice

false

three categories of unemployment

frictional structural cyclical

final goods and services

goods and services produced for final use

intermediate goods

goods that are produced by one firm for use in further processing or for resale by another firm

nondurable goods

goods that are used up fairly quickly such as food and clothing

durable goods

goods that last a relatively long time, suchas cars and household appliances

if planned investment increased by $300, the change in equilibrium output will be _________ $300

greater than

if wandas income is reduced to zero after she loses her job, her consumption will be _____ and he saving will be ____

greater than zero, less than zero

nominal GDP

gross domestic product measured in current dollars

net investment equals

gross investment minus depreciation

net national product (NNP)

gross national product minus depreciation; a nations total product minus what is required to maintain the value of its capital stock

personal consumption expenditures (C)

household spending on consumer goods - expenditures by consumers on goods and services

compensation of employees

includes wages, salaries, and various supplements- employer contributions to social insurance and pension funds, for example- paid to households by firms and by the government

surplus of government enterprises

income of government enterprises

if MPC increases, the value of the investment multiplier

increases

during recessions, government spending usually

increases because unemployment payment increases

an increase in planned investment will increase equilibrium income of those working on that investment project, thereby

increasing their consumption and creating more income and more spending multipe times over and over

net interest

interest paid by business

in 2016 final sales equal $200 billion, and the change in business inventories is $50 billion. GDP in 2016

is $250 billion

population

labor force + not in labor force

producer price indexes (PPIs)

measures of prices that producers receive for products at all stages in the production process

net exports(EX-IM)

net spending by the rest of the world, or exports (EX) minus imports (IM)

net business transfer payments

net transfer payments by businessess to others

interest paid by households and by the government is

not counted in GDP because it is not assumed to flow from the production of goods and services

cheryl graduated from college a month ago and is now without work. She accepted a job that will start next month. Today Cheryl is

not in the labor force

equilibrium

occers when there is no tendency for change. In the macroeconomic goods markets, equilibrium occurs when planned aggregate expenditure is equal to aggregate output

how to find the value of GDP from a chat

personal consumption + business investment + government spending +net exports

disposable personal income or after tax income

personal income minus personal income taxes. The amount that households have to spend or save

paradox of thrift will not arise if ___________ increases along with saving. Then a new ewuilbirum can be attained where ________________

planned investment, both income and saving will increase

residential investment

expenditures by households and firms on new houses and apartment buildings.

how to find the value for net exports in billions of dollars

exports-imports 400-250 = 150

if logan received a $2500 bonus and his MPS is 0.20, his consumption rises by $_____ and his saving rises by $_____

$2000, $500

in 2016 the change in business inventories is -$70 billion and GDP is $200 billion. Final sales in 2016 is

$270 billion

if unplanned investment is $20 million and planned investment is $20 million, then the actual investment is

$40 million

level of GDP, price level and level of employment are influced by events in three markets:

- goods and services market - financial market - labor market

how to find gross private domestic investment from a chart

- nonresidential invesment plus residential investment minus -25 in change in business inventories = 425

in his 2015 state of the union speech, President Barak Obama urged congress to raise the federal minimum wage from 7.25 to 10.10 per hour and state that future minimum wage increased should be tied to the cost of living. Explain how tying the minimum wage to an index like the CPI could impact the economy.

-most of the impract would be at the microeconomic level, largely affecting the lower end of the labor market and firms employung significant amounts of unskilled/labor - most economists would expect only a negligiable macroeconomic impact since the proportion of the workforce earning the minimum wage is low

problems of fixed weights

-structural changes in economy over time - doesnt account for the responses in the economy to supply shifts - ignores substituion away from goods whose prices are increasing and toward goods whose prices are decreasing or whose prices are increasing less rapidly

after government is added to the income-expenditure model, the formula for the aggregate consumption function is

C= a + b(Y-T)

over which components of investment do firms have the least amount of control?

a change in inventories

what is an example of a final good or service?

a computer purchased by Federal Express to track shipments

income approach

a method of computing GDP that measures the income-wages, rents, interest, and profits- received by all factors of production in producing final goods and services

administrative costs and inefficiencies

costs associated even with anticipatied inflation, such as the administrative cost associated with simply keeping up - interest rates tend to rise with anticipated inflation. When interest rates are high the oppurtunity costs of holding cash outside banks is high

national income and product amounts

data collected and publishes by the government describing the various components of national income and output in the economy

statistical discrepancy

data measurement error

according to the bureau of economic analysis, during the recession of 2007-2009, household saving as a fraction of disposable personal income increased from a low of just over 1 percent in the first quarter of 2008 to 5 percent in the second quarter of 2009. all else equal, a higher saving rate would

decrease MPC, increase MPS, and decrease the multiplier so that changes in planned investment will have a smaller impact on equilibrium output.

uncertainty about the future is likely to

decrease current spending

The leader of Atlantis hires you as an economic consultant. He is concerned that the output level in Atlantis is too low and that this is causing prices to fall. He feels that is necessary to increase output by $200 billion. He tells you that the MPC in Atlantis is 0.8. What would be the best advice to give to the atlantis president?

decrease taxes by $50 billion

what should be subtraced from GDP to calculate national income?

depreciation

government consumption and gross investment (G)

expenditures by federal, state, and local governments for final goods and services

nonresidential investment

expenditures by firms for machines, tools, plants, and so on

marginal propensity to consume (MPC)

that fraction of a change in income that is consumed or spent change in c/ change in y

marginal propensity to save (MPS)

that fraction of a change in income that is saved MPC+MPS= 1

suppose that planned investment is fixed in an economy. Now if all individuals attempt to save more

the aggregate saving function shifts up, equilibrium income decreases, but aggregate saving reamins the same.

depreciation

the amount by which an asset's value falls in a given period

change in business inventories

the amount by which firms' inventories change during a period. Inventories are the goods that firms produce now but intend to sell late GDP= final sales + change in business inventories

personal saving

the amount of disposable income that is left after total personal spending in a given period

actual investment

the amount of investment that takes place; it includes items such as unplanned changes in invenories

monetary policy

the behavior of the federal reserve concerning the nations money supply

what would be counted in 2016s GDP?

the bonus check of a stockbroker gets from his/her company in 2016

how would a borrow be best off and in which situation would a lender be best off?

the borrower is best off if the nominal interest rate is 16% and the inflation rate is 19% the lender is best off if the real estate rate is 7 % and the inflation rate is 2%

federal budget

the budget of the federal government - the product of a complex interplay of social, political, and economic forces

if no foregin companies produce in a country, but many of the countrys companies produce abroad, then

the country's GNP will tend to exceed its GDP

current dollars

the current prices that we pay for goods and services

discouraged worker effect

the decline in the measured unemployment rate that results when people who want to work but cannot find jobs to grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force

cyclical deficit

the deficit that occurs because of a downturn in the business cycle

structural deficit

the deficit that remains at full employment

net exports (EX- IM)

the difference between exports (sales to foreigners of US produced goods and services) and imports (US purchases of goods and services from abroad). The figure can be positive or negative.

value added

the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage

budget deficit

the difference between what a government spends and what it collects in taxes in a given period G-T *if G<T, government is running a surplus or retiring debt

balanced budget multiplier

the ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit. Equal to 1: the change in Y resulting from the change in G and the equal change in T is exactly the same size as the initial change in G or T

tax multiplier

the ratio of change in the equilibrium level of output to a change in taxes

government spending multiplier

the ratio of the c hange in the quilbrium level of output to a change in government spending 1/MPS = 1/1-MPC

labor force particiaption rate

the ratio of the labor force to the total population 16 years old or older labor force/population

services

the things we buy that do not involve the production of physical things, such as legal and medical services and education

federal debt

the total amount owed by the federal government

national income

the total income earned by factors of production owned by a countrys citizens

personal income

the total income of households

gross domestic product (GDP)

the total market value of all final goods and services (output) produced within a given period by factors of proudction located within a country -

gross national product (GNP)

the total market value of all final goods and services produced within a given perod by factors of production owned by a countrys citizens, regardless of where the output is produced

aggregate output

the total quantity of goods and services produced (or supplied) in an economy in a given period

gross investment

the total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period

natural rate of unemployment

the unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of the frictional unemployment rate and the structural employment rate

what would not be counted in 2016's GDP

the value of a 2008 boat you purchased from a boat dealer in 2016

which of the following is included in both the U.S. GDP and GNP

the value of all cars produced by general motors in the U.S.?

base year

the year chosen for the weights in a fixed-weight procedure

if planned investment exceeds actual investment

there will be a decline in inventories

planned investment (I)

those additions to capital stock and inventory that are planned by firms