Macro Final Exam
UR equation
# of unemployed/labor force x100
Which of the following is an example of an explicit cost?
$100 paid for txtbook
A real estate agent sells 10 houses during the course of a year. All of the houses were built more than 5 years ago, and all of the houses are sold from one family to another family. The 10 houses are sold for a total value of $3 million and the real estate agent earns a 5% commission. What is the contribution to this year's GDP?
$150,000 towards consumption spending
How do we measure each of the terms listed? Econ growth C of L S of L
% change in RGDP inflation rate % change in RGDP per capita
Reserve Ratio
% of deposits banks keep on reserve
If the price index increases from 122 to 130, what does this tell you?
((185-189)/189)*100 or (-4/189)*100 or -0.0211*100
If total spending rises from one year to the next, at least one of two things must be true:
(1) the economy is producing a larger output of goods and services, or (2) goods and services are being sold at higher prices.
How do you calculate the inflation rate between two years?
(CPI in yr 2 - cpi in yr 1)/cpi in yr 1 x100
Eq for inflation rate in yr 2
(GDP deflator in yr 2-GDP deflator in yr 1)/(GDP deflator in year 1) x 100
How to calculate real GDP
(current output) x (base year price)
How do we calculate the growth rate of real GDP?
(new-old)/old x 100
How do you calculate the CPI for a given year?
(price of basket of goods and services in current yr)/(price of basket in base yr) x 100
Salary in yr current yr dollars equation
(salary in earlier yr dollars)x (price level in current yr/price lvl in earlier yr)
What are the two groups of people
-Households *own/supply factors of productions *receive income *demand/buy goods/services -Firms *hire/demand FofP *pay income *supply/sell g and s
For each given change in the market for chicken, determine whether this causes a shift in demand, a shift in supply, or neither. -New regulations increase the cost of producing chicken -The price of beef increases by 25% -More people become vegetarians - The price of chicken falls
-supply shifts left -demand shifts right -demand shifts left -neither curve shifts
What are the two markets
-the market for goods and services -the market for "factors of production"
billion to million
1 billion = 1000 million
to convert trillion to million
1 trillion = 1000000 million
What's the difference between the CPI and the GDP deflator?
1. Produced domestically -gdp deflator -cpi reflects the prices of all g and s bought by consumers. 2. Various prices are weighted to yield a single # for the overall lvl pf prices -cpi compares FIXED baskets of g+s to the price of the basket in base yr. -gdp compares the price of CURRENTLY PRODUCED g+s used to compute the gdp deflator changes automatically over time.
What can gov do to raise productivity and living standards?
1. education-to build human capital. 2.health and nutrition-to make people more productive. 3.Property Rights-to encourage entrepreneurship. 4.Political Stability-to maintain confidence and encourage entrepreneurship. 5. Free Trade-follow you comp. advantage by sharing ideals and expanding markets, and empirically (countries who encourage free trade grow faster). 6. Saving and Investment
When the Fed buys bonds from banks/the public will each of the following variables increase or decrease? Watch the videos to find out. -The supply of bonds in circulation _____________________ -The price of bonds _decrease and excess reserves incr_____ - Interest rates _____________________ - Reserves in the banking system ___increase_____ - Loans ___increase and excess reserves decrease_____ - Deposits __increase____ -The money supply _____________________ - Spending in the economy _____________________ - Output in the economy _____________________
1. money supply= currency + checking deposits 2. reserves great or equal to :reserve ratio x deposits
Identify the four determinants of productivity
1. physical capital per worker 2. human capital per worker(education, experience, training). 3.natural resources per worker. 4. technological knowledge-society's understanding of the best ways to produce g+s
If real GDP grows at an annual rate of 2.7% and the population grows at an annual rate of 1.5%, then at what rate is real GDP per capita growing? Round to one decimal place.
1.2
In an eight-hour day Nicolas can catch 24 pounds of fish or he can repair 15 cars. In an eight-hour day Alejandro can catch 27 pounds of fish or he can repair 18 cars. Nicolas's opportunity cost of repairing one car is _____ pounds of fish. Alejandro's opportunity cost of repairing one car is _____ pounds of fish. Please enter a number, rounded to 2 decimal places as necessary and do not use fractions.
1.60 1.50
How do we measure a country's: • Economic growth • Standard of living • Cost of living
1.The most common way to measure the economy is real gross domestic product, or real GDP. GDP is the total value of everything - goods and services - produced in our economy. 2. The generally accepted measure of the standard of living is GDP per capita. This is a nation's gross domestic product divided by its population. 3.through the CPI
What is the value of the CPI in the base year?
100 (always will be 100)
In a given year, nominal GDP is $432 and real GDP is $370. Find the GDP deflator. Enter a number rounded to two decimal places.
116.76
How many regional Fed banks are there? __
12
John B. Retired owns a house on a 10-acre lot filled with peach trees. Each year he hires a few workers to pick the peaches and he sells them to Betty's Pies for $6,000. Betty uses the peaches to makes pies that she sells for $10,000 to local restaurants. The local restaurants sell the pies (by the slice) to consumers for $12,000. As a result of these transactions GDP increases by $______- The value added by John is $____ The value added by Betty is $____ The value added by the local restaurants is $_______-
12000 6000 4000 2000
A farmer grows wheat and sells it to the miller for $41. The miller turns the wheat into flour and sells it to the baker for $81. The baker turns the flour into bread and sells it to consumers for $127. As a result of these transactions, GDP will increase by how much? Enter a whole number with no other characters.
127
John gives up a shift at work so he can go to Universal with a friend. He spends $150 at Universal. He would have earned $220 during the shift at work. John's explicit cost of going to Universal is $________ His implicit cost of going to Universal is $________ His opportunity cost of going to Universal is $________ If John had decided NOT to go to Universal, and instead went to work, then at the end of the work day he would have $____________
150 220 370 370
The inflation rate between the years 2000 and 2001 was 7.08%. Based on this information, a basket of goods that cost $166 in the year 2000 would now cost how much in the year 2001? Enter a number rounded to two decimal places.
177.75
Firm B produces 300 bicycles at a cost of $500 each. Firm B sells 280 bicycles to consumers for $600 each. They do not sell the remaining bicycles in this time period. What is the contribution to GDP? Enter a whole number.
178000 . Equation: C + I
In 1998 a dozen eggs sold for $1.20 and the price index was 162. In 2018 a dozen eggs sold for $1.77 and the price index was 247. Based on this information, the nominal price of the eggs was lower in _____ and the real price of the eggs was lower in _____.
1998 : 2018
At an annual growth rate of 3.5% it will take ____years for a country's GDP to double. Over the next 60 years, how many times will GDP double, assuming the growth rate does not change?______ If GDP starts at a value of $10 million, then in 60 years the value of GDP will be $_______ million. In 60 years the value of GDP will be ______ times larger than it is today.
20 3 80 8
In 2015, the Bureau of Labor Statistics (BLS) announced that of all adult Americans, 149.62 million were employed, 17.18 million were unemployed, and 35.67 million were not in the labor force. The adult population is how many million? Enter a number rounded to two decimal places.
202.47
Jane earned $48,000 at her job 10 years ago and today she earns $60,000. If the inflation rate across the 10 year period was higher than _____ then Jane's purchasing power fell.
25
A Chinese restaurant buys 100 cups of rice for a total of $10; they buy soy, fish and oyster sauces for a total of $20; they buy assorted vegetables for $40. They create 50 meals with these ingredients and sell each one for $5. How much does this process contribute to GDP?
250
What is the value of M1? ______________________ What is the value of M2? _______________ (I am looking for dollar values)
3,342.2 billion ; 12,976.3
John's total cost of producing 12 units is $105 and his total cost of producing 13 units is $143. What is the marginal cost of producing the last unit, in other words the marginal cost of producing unit 13? Enter a whole number with no other characters.
38
GDP increased from $16.37 trillion to $17.18 trillion. What was the growth rate of GDP? Enter a number rounded to two decimal places. Do not enter any other characters.
4.95
In 1988 the value of RGDP was $8604.59 billion and the population was 203.41 million. What was the value of real GDP per capita? Round to the nearest whole number. Do not enter a dollar sign.
42302
Suppose that in a week an American worker can produce 90 shirts or 2 computers and a Chinese worker can produce 90 shirts or 1 computers. The country that specializes in computers will trade 1 computer in exchange for at least______ shirts. The country that buys the computer will pay not more than_______shirts.
45 90
There are 10 unemployed people and 190 employed people. Find the unemployment rate (UR).
5%
The farmer produces 103 bushels of wheat at a total cost of $2 per bushel. He sells all of the wheat to Firm F for $4 per bushel. Firm F produces 50 pounds of flour from the wheat at a total cost of $11 per pound (including the amount paid to the farmer for the wheat). Firm F sells 35 pounds of flour to consumers for $15 per pound. There are no other firms in this simple economy. What is the value of consumption spending? Enter a whole number with no dollar sign.
525
If GDP has a value of $18.16 trillion and the population is 329.79 million then what is the value of GDP per capita. Round your answer to two decimal places.
55065.34
If the consumer price index increases from 139 to 148 then in percentage terms you would like to have a cost of living adjustment equal to how much? Enter a number rounded to two decimal places.
6.47
In a given amount of time John can produce either 60 pounds of vegetables or 20 pounds of chicken. If John wants to produce 20 pounds of chicken then he must give up ________ pounds of vegetables. If John wants to produce 1 pound of chicken then he must give up _________ pounds of vegetables. If John wants to produce 5 pounds of chicken then he must give up ________ pounds of vegetables.
60 3 15
If real GDP grows at an annual rate of 1.02% then we can expect real GDP to double in how many years? Enter a number rounded to two decimal places.
68.63
The Fed's board of governors is made up of how many people?
7 people, 14 yr terms
A country aims to double real GDP per capita in the next 10 years. This means that on average real GDP per capita must grow at ____ per year.
7%
There are 113 unemployed people, 1189 employed people, and the adult population is 1758. What is the labor force participation rate? Enter a number (measured in percentage terms) rounded to two decimal places. Do not enter a % sign.
74.06
Bob makes $80,000 per year. If the price index changes from 132 to 142.56 then the inflation rate is equal to ____ and his employer should give him a raise equal to ____ in order to keep his real wage constant.
8%; 6,400
A farmer grows wheat and sells it to the miller for $70. The miller turns the wheat into flour and sells it to the baker for $106. The baker turns the flour into bread and sells it to consumers for $191. What is the value added by the baker? Enter a whole number with no other characters.
85
Suppose chips and salsa are complements. An increase in the price of salsa will cause: A. An upward movement along the demand curve for salsa. B. A leftward shift of the demand curve for salsa. C. A leftward shift of the demand curve for chips. D. An downward movement along the demand curve for chips.
A and C are correct
Why does the basket of goods/services used to calculate the CPI contain more of some goods (percentage wise) than other goods?
A basket of goods refers to a fixed set of consumer products and services valued on an annual basis. The basket is used to track inflation in a specific market or country. The goods in the basket are often adjusted periodically to account for changes in consumer habits. The basket of goods is used primarily to calculate the consumer price index (CPI).------------------------due to inflation
Cost-of-living adjustment (COLA)
A cost-of-living adjustment is made to Social Security and Supplemental Security Income to counteract the effects of inflation. Cost-of-living adjustments (COLAs) are typically equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.
How do we know the value of production is equal to the value of spending on new final goods/services?
A model called the circular flow diagram illustrates how the expenditures approach and the income approach must equal each other, with goods and services flowing in one direction and income flowing in the opposite direction, in a closed loop.
The LFPR is 70%. The LF is 140. Find the adult population (AP)
AP-200
Which of the following would shift the demand curve for laptop computers to the right?
All college students are now required to own a laptop computer.
In a closed economy, how does an increase in government spending impact the equilibrium interest rate? Hint: assume this increases the deficit.
An increase in government spending will reduce government (public) saving. The government will need to borrow more. This will reduce national saving - funds will be diverted from the private financial market to the government and interest rates will rise.
A technological breakthrough occurs and many firms feel they need to upgrade their computer systems. How does this affect the equilibrium interest rate?
An increase in investment spending will increase the demand for funds. The interest rate will increase.
Mariana buys three goods: A, B, and C. When her income rises she buys less of good A and more of goods B and C. When the price of good A rises she buys more of good C and less of good B. Which goods are normal?
B and C
CPI equation
CPI= Price of g and s in current year/price of basket in base year x 100
Calculate for a closed economy: GDP = $1,000 Taxes (T) = $50 Consumption (C) = $850 Government spending (G) = $100 Investment = Private saving = Budget balance = National saving =
Calculate for a closed economy: Investment = GDP - C - G = 50 Private saving = GDP - tax - C = 100 Budget balance (government saving) = T - G = -50 National saving = I = GDP - C - G = 50
Consider the bank balance sheet. Identify these items as assets or liabilities: bank reserves(assests), deposits(liabilities), loans made by the bank(assests), government bonds owned by the bank(assests). Recall the two principles of t-accounts: every transaction has two entries and both sides of the account always balance. How is the bank balance sheet affected when: 1. People withdraw funds from their checking accounts 2. People deposit funds into their checking accounts (money supply increased due to loan process) 3. The bank makes a loan(assest) 4. The bank buys government bonds (assest)
Change in deposit=change in reserve x (1/reserve ratio)
England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 15 scones per hour or 5 sweater per hour. Suppose that a Scottish worker can produce 24 scones per hour or 6 sweaters per hour. Who will produce sweaters?
England
With its given resources and technology, an economy can produce either 50 units of good Y or 100 units of good X. For each of the following combinations of goods indicate whether the combination is NF (not feasible), FE (feasible and efficient), or FI (feasible but inefficient). Enter the two letters only. 20 units of good Y and 60 units of good X 25 units of good Y and 40 units of good X 30 units of good Y and 80 units of good X
FE FI NF
T/F You stand in line for 30 minutes to receive a free ice cream cone. The opportunity cost of acquiring the ice cream cone is zero dollars.
False
In a given amount of time John can produce either 40 pounds of vegetables or 10 pounds of chicken. a. Illustrate John's PPF. b. If John wants to produce 10 pounds of chicken then he must give up ____ pounds of vegetables. c. If John wants to produce 1 pound of chicken then he must give up ____ pounds of vegetables. d. If John wants to produce 2 pounds of chicken then he must give up ____ pounds of vegetables.
If John wants to produce 10 pounds of chicken then he must give up __40__ pounds of vegetables. If John wants to produce 1 pound of chicken then he must give up __4__ pounds of vegetables. If John wants to produce 2 pounds of chicken then he must give up __8__ pounds of vegetables.
keep in mind
If input prices rise substantially, a firm might shut down and supply no ice cream at all.
If inventory investment is negative, what does this tell you about spending compared to production?
If inventory investment is negative, what does this tell you about spending compared to production? you have too little inventory due to, for example, sales went faster than expected
How does the Fed increase the money supply?
If the Fed buys back issued securities (such as Treasury bills) from large banks and securities dealers, it increases the money supply in the hands of the public. Conversely, the money supply decreases when the Fed sells a security.
Would you like to have a cost of living adjustment each year? Why? How much of an adjustment would you like?
In general, employers use COLAs to attract and keep valuable employees. A company that does not offer salary adjustments to offset inflation might find itself at a competitive disadvantage to companies that do offer this type of benefit to employees.
What is inventory investment?
Inventory investment is a component of gross domestic product (GDP). ... The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment. The concept can be applied to the economy as a whole or to an individual firm.
Suppose you are given the following information about a closed economy (all figures are in billions): GDP $5,000 Taxes $300 Government spending $500 Consumption $3,500 Find the value of investment, private saving, public saving, and national saving.
Investment = national saving = $1,000; private saving = $1,200; public saving = -$200
Consider two farms that can grow either corn or soy beans. Farm A has a comparative advantage in the production of corn. Farm A's constant opportunity cost of producing a bushel of corn is 3 bushels of soy beans. What can we conclude about Farm B's opportunity cost of producing corn?
It is more than 3 bushels of soy beans.
Leslie can produce 2 pairs of pants in an hour and Jane can produce 3 pairs of pants in an hour. It must be the case that
Jane has an absolute advantage in producing pants.
Under which of the following circumstances is inflation most costly to an individual?
Joe is a minimum wage earner and the minimum wage has not changed for the last five years.
A BLS survey taker comes up with the following: there were 65 people in the houses I visited, 10 of them children under 16 and 10 of them retired; 25 people had full time jobs and 5 had part time jobs. There were 5 full time homemakers, 5 full time students over the age of 16 with no jobs, and 2 disabled people who cannot work. The remaining people did not have jobs but all said they would like one. One of these people had not looked actively for work in the last three months. Find the number of people in the labor force, the unemployment rate, and the labor force participation rate. Hint: first classify people into the following categories: WAP or not WAP. You are not in the WAP if you are less than 16, in jail, enlisted in the military, or are disabled and therefore not capable of work. Now classify the WAP people as either in the labor force or not in the labor force. You are not in the labor force if you are capable of work but are choosing not to work. Based on what you have learned so far do the following people count as unemployed? Why or why not? -Mary is a homemaker -Bill works 5 hours per week at Burger King -Joe has no job but is looking for a job -Jane is a full time student -George would like a job but he gave up looking for one
LF-32 UR-6.25% LFPR-60.38%
Suppose you have the following data on the labor market: unemployment rate = 5% labor force participation rate = 62.5% number of people not in the labor force = 60 million. Find the number of people in the labor force, the adult population, the number of employed workers, and the number of unemployed workers. Hint: LFPR = LF/AP and we know AP = LF + not in LF = LF + 60
LF: 100 AP: 160 EW: 95 UW: 5
What counts in the Consumption Spending category?
Largest portion of GDP. spending by households on goods and services, with the exception of purchases of new housing.
Which is more liquid, M1 or M2?
M1 is most liquid
What three items are in M2 but not in M1?
M1+........saving deposits + small time deposits +money market accts
What is the dual mandate?
Maintain low and stable inflation (2% target) and Maintain low and stable unemployment (target is natural rate)
Martin and Pam need to repair a fence that runs around their 10-acre farm and one of them will be reducing their weekly work hours in order to complete the project. Martin can repair ½ of a foot of fence per hour. Pam can repair 2 feet of fence in two hours. Martin makes $10 per hour at work. Pam makes $25 per hour at work. In this case _____ has the lower opportunity cost of repairing fence and therefore _____ should take the time off and complete the project.
Martin:martin
What are the three functions of money?
Money serves as a medium of exchange, as a store of value, and as a unit of account. (most important fxn is medium of exchange to facilitate transactions)
How do you calculate the cost of living adjusted income (how much you should be paid to keep up with inflation)?
New Salary = (Old Salary X Raise %) + Old Salary; First, multiply the percentage by the employee's current annual wages, Next, add the employee's current annual salary to the raise amount, Take the employee's new annual salary and divide it by time of paycheck (ex weekly or biweek); Subtract the employee's previous biweekly paycheck amount from their new biweekly paycheck amount
Is real GDP per capita a good measure of wellbeing? Does it reflect the wellbeing/happiness of the average person? Why or why not?
No it's not, it is better for measuring changes in an economy's SofL. It doesn't reflect the wellbeing of the average person since: GDP counts "bads" as well as "goods.", GDP makes no adjustment for leisure time, GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity, GDP doesn't adjust for the distribution of goods, and finally GDP isn't adjusted for pollution costs
GDP Deflator Eq
Nominal GDP/Real GDP x 100
Real Interest rate equation
Nominal interest rate - inflation rate
LF eq
Number of employed+ number of unemployed
Please enter N if the statement is normative and P if the statement is positive: If the federal government increases the tax on gasoline, then it will cost people more money to fill up their gas tanks. The federal government should increase the tax on gasoline so they can use the extra revenue to pay for road maintenance.
P N
The difference between potential GDP and real GDP
Potential GDP is the level of production of goods and services that the economy is capable of if its workforce is fully employed and its capital stock is fully utilized. Real GDP is the actual output of goods and services
How do we calculate the firm's profit?
Profit = TR - TC TR - TC = q(AR - AC) = q(P - AC) Profit = q(P - AC); To maximize profits, firms will choose to sell the quantity at which the marginal cost is equal to the marginal revenue.
Avg real income per person calculation
RGDP/Population
To assess the level of production across time, should we use real GDP or nominal GDP? Why?
Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes. ... Real GDP is not influenced by price changes, but nominal GDP is
Sustained economic growth
Sustainable economic growth is economic development that attempts to satisfy the needs of humans but in a manner that sustains natural resources and the environment for future generations. An economy functions in the ecosystem.
A landscaper performs yard work for people and earns a total of $40,000 during a given year. Regarding the following statements, which is correct:
The $40,000 counts if the landscaper declares it as income on his taxes.
At the end of the year, Ford realizes it has overproduced Fiestas because 2,500 of them are left unsold. How do we account for the 2,500 leftover cars?
The cars are considered inventory and their value will increase the investment spending category of GDP this year.
If the price index has a value of 122 in a given year, what does this tell you?
The consumer price index is obtained by dividing the expenditure on a set of consumer goods in one year (the current year) by the expenditure on that same set of goods in the base year. For example, let's assume that consumer expenditure on a specific set of goods in the base year (1996) was $20,500 and, in 2004, consumer expenditure on that same set of goods was $25,000. We put these numbers together as $25,000/$20,500, which is 1.22. It is common to then multiply this result by 100, giving us a CPI of 122. Other CPI values are calculated in exactly the same manner, always dividing a given year's expenditure by that of the base year. Note that we'll always be dividing the current year expenditure for any given year (or period) by the same number. This implies that if we calculate the CPI for the base year we divide base year expenditure by base year expenditure, making the base year CPI always equal to 100.
statistical discrepancy
The difference between the two calculations of GDP
Example of a normative statement?
The government should decrease income tax rates so people will have more disposable income.
Under what circumstances will a country with a lower per capita GDP be able to catch up to a country with a higher per capita GDP?
The lower income country must grow at a faster rate than the higher income country.
What are demand deposits?
The money supply includes currency and demand deposits! The behavior of banks influences demand deposits in the economy. A deposit of money that can be withdrawn without prior notice.
How do you calculate the purchasing power value of your income (how much it feels like you are making given there has been inflation)?
To calculate the purchasing power, collect the CPI information from the Bureau of Labor Statistics. In January 1975, the CPI was 38.8 and in January 2018, was 247.9. Divide the earlier year by the later year and multiply by 100 to derive the CPI change during that period: (38.8 / 247.9) x 100 = 15.7 percent.
How do you calculate the real interest rate?
To find the real interest rate, we take the nominal interest rate and subtract the inflation rate. For example, if a loan has a 12 percent interest rate and the inflation rate is 8 percent, then the real return on that loan is 4 percent.
What can trade do to a society?
Trade can benefit everyone in a society bc it allows people to specialize in activities in which they have a comparative advantage.
T/F Economics is best defined as the study of how society manages its scarce resources.
True
T/F When a firm produces another unit of output the total benefit rises from $1,000 to $1,100 and the total cost rises from $700 to $760. It was a good decision to produce this unit.
True
There are 150 employed people and the labor force (LF) is 160. Find the number unemployed (U) and UR.
U-10 UR-6.25%
There are 150 employed people and the labor force is 160. Now suppose 2 discouraged workers start looking for work. Find U, LF, and UR.
U-12 LF-162 UR-7.41%
How do we calculate the firm's value added?
Value added is the value of output produced - value of material inputs
Do credit cards count as money? ____________ because:
When calculating the money supply, the Federal Reserve includes financial assets like currency and deposits. In contrast, credit card debts are liabilities. Each credit card transaction creates a new loan from the credit card issuer. Eventually the loan needs to be repaid with a financial asset—money. so no, bc it is technically a loan by the issuer.
GDP Equation
Y = C + I + G + NX (NX: E-I)
bond
a certificate of indebtedness
The four variables below affect the amount of a good people choose to buy. Changes in all of these variables cause the demand curve to shift EXCEPT -changes in the prices of related goods -a change in the price of the good - a change in consumer income -a change in consumer preferences
a change in the price of the good
stock
a claim to partial ownership in a firm
A decrease in the demand for a good can be expected to cause ____ in the equilibrium price of the good and ____ in the equilibrium quantity of the good bought and sold, all else the same.
a decrease : a decrease
A decrease in the demand for a good can be expected to cause _____ in the equilibrium price of the good and _____ in the equilibrium quantity of the good bought and sold, all else the same.
a decrease : a decrease
crowding out
a decrease in investment that results from government borrowing
Two goods (A and B) are complements if an increase in the price of good A causes:
a decrease the demand for good B.
inferior good
a good for which, other things being equal, an increase in income leads to a decrease in demand
normal good
a good for which, other things being equal, an increase in income leads to an increase in demand
unemployment insurance
a government program that partially protects workers' incomes when they become unemployed
capital requirement
a government regulation specifying a minimum amount of bank capital
supply curve
a graph of the relationship between the price of a good and the quantity supplied
PPF
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
market
a group of buyers and sellers of a particular good or service
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
The Rule of 70
a mathematical approximation that measures the # of years it takes a variable to double ---> to calculate this: 70/(growth rate in % terms)
PPI
a measure of the cost of a basket of goods and services bought by firms
core cpi
a measure of the overall cost of consumer goods and services excluding food and energy
CPI
a measure of the overall cost of the goods and services bought by a typical consumer
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
GDP Deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
GDP deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100; Nom/Real x 100
What does the GDP deflator measure?
a measure of the price level calculated as the ratio of nominal gdp to real gdp times 100.
Suppose you observe that the price of ice cream has gone up. Which of the following would not be a valid explanation of the increase in the price of ice cream?
a popular new diet claims ice cream is bad for you
An increase in supply is represented by
a rightward shift of the supply curve.
budget deficit
a shortfall of tax revenue from government spending
market failure
a situation in which a market left on its own fails to allocate resources efficiently
shortage
a situation in which quantity demanded is greater than quantity supplied
surplus
a situation in which quantity supplied is greater than quantity demanded
equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Marginal Change
a small incremental adjustment to a plan of action
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
CFD
a visual model of the economy that shows how dollars flow through markets among households and firms
union
a worker association that bargains with employers over wages, benefits, and working conditions
How would each of the following affect the current levels of full-employment output, employment, and the real wage? a. As the population ages, the size of the labor force declines b. New teaching techniques improve the educational performance of high school seniors c. Both changes happen at the same time
a. As the population ages, the size of the labor force declines - labor supply shifts left b. New teaching techniques improve the educational performance of high school seniors - labor demand shifts right c. Both changes happen at the same time - the wage will increase and the effect on employment could go either way
Suppose there is no change in income (Y). This fixed amount of income is allocated between consumption, saving, and taxes. Explain how each of the following would impact consumption and saving (up or down) and then explain how the supply of loanable funds would be affected, and what would happen to the equilibrium interest rate. a. Consumers are feeling wealthier b. Consumers are feeling less confident about the economy and are worried about losing their jobs c. Consumers believe that their expected future income will increase d. The government increases income taxes e. Consumers increase the percentage of income they want to consume from each paycheck
a. consumption will increase and saving will decrease - the supply of loanable funds will decrease (shift left) and the interest rate will increase. b. consumption will decrease and saving will increase - the supply of loanable funds will increase (shift right) and the interest rate will decrease. c. consumption will increase and saving will decrease - the supply of loanable funds will decrease and the interest rate will increase. d. there are two effects: disposable income will fall and this will reduce private saving. The increase in taxes will increase government (public) saving. The increase in public saving is likely to dominate the increase in private saving but this is beyond the scope of this class J e. People will save less and interest rates will rise.
efficency wages
above-equilibrium wages paid by firms to increase worker productivity
The government spending category (G) of GDP includes
all government expenditures on new final goods and services.
Equation to calculate dollar figures from different times.
amount in today's dollars=amount in year T dollars x price level today/ price level in year T
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
budget surplus
an excess of tax revenue over government spending
Bad weather in Central and South America decreases the supply of coffee beans by 25%. This can be expected to cause _______ in the price of coffee due to a shift of the _____ curve.
an increase : supply
You observe the price of a good rises and the quantity sold increases. This is the result of
an increase in demand
Assume apples and oranges are substitutes for consumers. A winter freeze destroys half the orange crop. In the market for apples, we can expect
an increase in the demand for apples.
A new study claims organic corn-fed chicken is much healthier than non-organic corn-fed chicken. If numerous people believe this study then in the short term we can expect there to be
an increase in the demand for organic corn-fed chicken.
Which of the following shifts the supply curve rightward?
an increase in the number of companies producing this good
Inflation
an increase in the overall level of prices in the economy
The law of demand states that, all else the same,
an increase in the price of a good causes a decrease in the quantity demanded of the good.
Congress passes legislation that increases the federal minimum wage from $7.25 to $9.00. For firms that hire large quantities of unskilled labor this can be expected to cause ____ in the price of the goods and services they sell due to a shift of the __________ curve.
an increase: supply
central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
mutual fund
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
Twenty pounds of fish purchased by Bob's Fish Shack (a local restaurant) to make fish and chips is best described as
an intermediate good.
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
store of value
an item that people can use to transfer purchasing power from the present to the future
An increase in the price of coffee will cause
an upward movement along the demand curve for coffee.
The consumer price index (CPI) in a given year is 145. This is a measure of the
average level of current prices relative to base year prices.
demand deposits
balances in bank accounts that depositors can access on demand by writing a check
Suppose that in two months time the minimum wage is set to increase by $1 per hour. This is likely to:
benefit some workers who are presently earning the minimum wage.
Jonas can produce 50 pounds of meat or 100 pounds of potatoes in a given amount of time. Amelia can produce 60 pounds of meat or 240 pounds of potatoes in the same given amount of time. Amelia has an absolute advantage in producing:
both goods
What are the three categories of investment spending?
business capital, residential capital, and inventories
According to the circular flow diagram, households are _____ in the market for goods and services and are _____ in the market for factors of production.
buyers : sellers
Positive Statements
claims that attempt to describe the world as it is
Normative Statements
claims that attempt to prescribe how the world should be
A decline in the price of good A causes the demand curve for good B to shift to the right. We can conclude goods A and B are:
complements
The government pays social security benefits to your grandfather every month. When your grandfather spends his entire social security check on groceries at the supermarket this counts as:
consumption spending
What two items make up most of M1?
currency+demand deposits+travelers checks
In the market for two bedroom apartments, the price of houses (a substitute for apartments) has gone down. You would expect the equilibrium price of apartments to _____ and the equilibrium quantity sold to ____.
d:d
During a recession (downturn) in the economy firms lay off workers and the unemployment rate rises. During these times we can expect the demand for normal goods to ___ and the demand for inferior goods to ____.
decrease : increase
Congress passes a law that requires employers to provide health benefits to workers. Suppose this law results in a $3 per hour increase in the cost of hiring workers. The law is likely to ____ the demand for labor and _____ the equilibrium wage paid to workers.
decrease: decrease
An inferior good is a good for which demand
decreases when income increases.
The equilibrium price and quantity of a good have both increased. Which of the following is a valid explanation?
demand increased
Why do we subtract imports (C + I + G + EX - IM)?
do not want to double count things
Downsides of the "invisible hand"
does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare.
Nominal GDP increased from $12.5 trillion in 2005 to $14 trillion in 2009. This means that:
either: the prices of all goods and services were higher in 2009 than in 2005. people in the U.S. produced more goods and services in 2009 than in 2005.
Provide an example of fiat money: _______________________________
established by government decree
When we add up the value of consumption, investment, government purchases, and net exports this is known as the
expenditure approach.
Maria needs to buy a new computer. Store A has the computer advertised for $1,000 while Store B has the computer advertised for $900. It takes twice as long to get to store B as it does to get to Store A. Maria should
factor in the cost of his time when making the decision about which store to buy from.
T/F A country should specialize in producing the goods for which it has the highest opportunity cost.
false
T/F According to United States data: over the past 20 years real GDP has been increasing steadily at a rate of about 2% each year.
false
T/F According to the Bureau of Labor Statistics, you are considered to be unemployed if you have no job.
false
T/F According to the efficiency wage theory, firms will never pay above-equilibrium wages.
false
T/F All else the same, when the supply of a good or service rises, then equilibrium price will also tend to rise.
false
T/F Having a large endowment of natural resources is necessary for a country to be highly productive in producing goods and services.
false
T/F If a country has a comparative advantage in producing cars, then they must also have an absolute advantage in producing cars.
false
T/F If the average wage paid to the worker was $20 in the year 1990 and $30 in the year 2000, then the average worker in the year 2000 must have been better off in terms of purchasing power.
false
T/F If the price of a good is currently below its equilibrium price, there is a surplus of the good on the market and we can expect the price of the good to increase.
false
T/F In a given year, if we sell 100 pounds of apples and 100 pounds of oranges, then the contribution to GDP from selling the oranges will be the same as the contribution to GDP from selling the apples.
false
T/F In the T-Account, assets (credits) are recorded on the right side and liabilities (debits) are recorded on the left side.
false
T/F In the circular flow model, the money people spend on new goods and services becomes profit for the firm.
false
T/F Net export spending will have a negative value when the country exports more goods than it imports from other countries.
false
T/F The consumer price index for the year 2010 will always be calculated as: (the cost of the basket of goods in the year 2010/the cost of the basket of goods in 2009) x 100.
false
T/F The consumer price index increased from 120 to 132. If you received a raise equal to 10% during this time period then your real income has decreased.
false
T/F The four categories of expenditure (spending) in the economy are wages, rent, interest, and profit.
false
T/F The labor force is made up of all people who are at least 16 years old and are capable of working.
false
T/F The largest expenditure category of GDP is government spending.
false
T/F The purchasing power of the $20 bill increases over time due to inflation.
false
T/F When a business such as CarMax sells a used car to an individual for $9,000 then no part of this transaction counts in GDP because the car is used.
false
T/F When people become more productive, the production possibilities frontier shifts inwards because it takes less time to produce each unit.
false
T/F Workers in an industry successfully form a union. Wages in the industry are likely to decrease over time.
false
T/F Your checking account balance is an example of a liability.
false
Financial markets
financial institutions through which savers can directly provide funds to borrowers
Financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
In the market for a particular good there is an excess supply at the current price. Which of the following is likely to occur?
firms will have an incentive to lower the price of the good
Business Cycle
fluctuations in economic activity, such as employment and production
Provide an example of commodity money: ________________________
gold or cigarettes during WWII
Imports
goods produced abroad and sold domestically
Exports
goods produced domestically and sold abroad
GDP
gross domestic product, which measures the total income of a nation; the market value of all final goods and services produced within a country in a given period of time
Limitations of GDP
home production, illegal activities, unreported activities, pollution, crime rates, leisure hours, infant mortality, literacy rates, life expectancy
Which counts in the consumption category of GDP? i. Jane goes to Old Navy and buys a t-shirt produced in Vietnam ii. John visits the doctor and pays $100 iii. Bill buys a textbook from a friend who took the class the previous semester iv. Bob saves $100 from his last paycheck
i and ii
Which counts in the investment category of GDP? i. Firm X buys a new computer for the office ii. John buys a newly constructed house iii. A restaurant buys some fish to create a special menu item iv. Bill takes $5,000 from his savings account and buys stock in Firm B
i and ii
Which counts in the government spending category of GDP? i. City J pays $2 million for garbage service ii. The federal government pays $2 million in social security payments iii. A state government pays $2 million to unemployed workers iv. The federal government paid $2 million to build a new road
i and iv
To measure the inflation rate, we calculate the percentage change in i. the consumer price index ii. the GDP deflator iii. real GDP iv. nominal GDP
i or ii
Suppose the number of workers who are allowed to legally immigrate into the country to perform seasonal work has been cut in half. Wages in the affected industries are likely to _____ due to a shift of the labor ______ curve.
increase: supply
When discouraged workers begin looking for work the labor force participation rate will increase/decrease and the adult population will increase/decrease/no change.
increase; not change
A number of countries in the world have achieved sustained economic growth. In all of these countries, what is the source of this growth?
increases in productivity
discouraged workers
individuals who would like to work but have given up looking for a job
The GDP deflator can be used to calculate:
inflation rate
Farmer X produces oranges and sells then to Company Y for a total of $10,000. Company Y uses the oranges to make juice and then sells the juice to consumers for a total of $12,000. In this example, oranges are __________ and the orange juice is ___________.
intermediate good; final good
Each month you spend $500 buying coffee. If the price of coffee increases from $2 to $3, what happens to your purchasing power?
it decreases
LF PR eq
labor force/adult pop. x100
What are the two main factors of production?
land, labor, capital, and entrepreneurship.
What does the Federal Reserve do? Identify a few roles/responsibilities. (4)
maintaining an effective, reliable payment system; supervising and regulating bank operations; and establishing monetary policies. The only interest rate they set is the DISCOUNT RATE; pay interest on reserves, change reserve ratio, change discount rate, open market opps, and quantitative easing
real variables
measured in constant dollars
nominal variables
measured in current year dollars
commodity money
money that takes the form of a commodity with intrinsic value
fiat money
money without intrinsic value that is used as money by government decree
All else the same, the law of demand defines a
negative relationship between price and quantity demanded.
inflation rate equ
new-old / old x100
How do we calculate the GDP deflator?
nominal gdp/real gdp x100
Example of COLA
nominal wage: 10$ per hr Inflation rate is 5% . 5% raise is 0.50$ per hr, and new nominal wage is $10.50
how to calculate nominal GDP
note: nominal changes due to shifts in quantity and price. (current output x current price)
opportunity cost
of an item is what you give up to get that item.
If a country engages in trade with other countries then they are able to choose any production point:
on or inside the production possibilities frontier.
What are government transfer payments?
payment of SS or unemployment checks. not counted as gov. purchases. Others include food stamps
Rational People
people who systematically and purposefully do the best they can to achieve their objectives
CPI equation
price of basket of g and s in current yr/price of basket in base yr x100
How do we calculate real GDP per capita?
real gdp/population
When bond prices increase, what happens to interest rates?
reduce
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
structural unemployment
s. unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
Tech Knowledge
society's understanding of the best ways to produce goods and services
Incentive
something that induces a person to act
consumption
spending by households on goods and services, with the exception of purchases of new housing
Investment
spending on business capital, residential capital, and inventories
investment
spending on business capital, residential capital, and inventories
Net Exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Gov purchases
spending on goods and services by local, state, and federal governments
gov purchases
spending on goods and services by local, state, and federal governments
Suppose people buy less of good 1 when the price of good 2 falls. These goods are
substitutes
John has a restaurant. Pick the best example of physical capital and the best example of technical knowledge. physical capital tech knowledge
tables and chairs recipes used to cook
Market Power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Property Rights
the ability of an individual to own and exercise control over scarce resources
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Absolute Advantage
the ability to produce a good using fewer inputs than another producer
The scarcity principle applies to
the allocation of all resources.
quantity demanded
the amount of a good that buyers are willing and able to purchase
quantity supplied
the amount of a good that sellers are willing and able to sell
money multiplier
the amount of money the banking system generates with each dollar of reserves
indexed
the automatic correction by law or contract of a dollar amount for the effects of inflation
Federal Reserve
the central bank of the United States
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Law of Demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
law of supply
the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
seasonal adjustment
the data after they have been modified by a statistical procedure
cyclical unemployment
the deviation of unemployment from its natural rate
A production possibilities frontier illustrates
the different quantities of two goods that can be produced with given resources.
liquidity
the ease with which an asset can be converted into the economy's medium of exchange
reserve ratio
the fraction of deposits that banks hold as reserves
financial system
the group of institutions in the economy that help to match one person's saving with another person's investment
Externality
the impact of one person's actions on the well-being of a bystander
private saving
the income that households have left after paying for taxes and consumption
natural resources
the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
real interest rate
the interest rate corrected for the effects of inflation
discount rate
the interest rate on the loans that the Fed makes to banks
Human capital
the knowledge and skills that workers acquire through education, training, and experience
Assume the growth rate of real GDP falls from 4% to 2%. This means that
the level of production is growing more slowly
Each point on the supply curve represents
the lowest price for which sellers can profitably sell another unit of the good.
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
GDP is best defined as
the market value of all final goods and services produced during a given year.
Gross domestic product (GDP)
the market value of all final goods and services produced within a country in a given period of time
Opportunity cost is best measured as
the monetary and nonmonetary costs of acquiring a good.
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
strike
the organized withdrawal of labor from a firm by a union
A GDP deflator of 112 means:
the overall price level is 12 percent higher than in the base year.
currency
the paper bills and coins in the hands of the public
inflation rate
the percentage change in some measure of the price level from one period to the next.
Inflation rate
the percentage change in the price index from the preceding period
labor-force participation rate
the percentage of the adult population that is in the labor forces
unemployment rate
the percentage of the labor force that is unemployed
Suppose the quantity demanded of a good is larger than the quantity supplied of a good. We can expect:
the price of the good to increase.
Corn tortilla chips and tomato based salsa are complements. The equilibrium price of salsa has risen and the equilibrium price of tortilla chips has fallen. Which of the following is the best explanation?
the price of tomatoes went up
equilibrium price
the price that balances quantity supplied and quantity demanded
collective bargaining
the process by which unions and firms agree on the terms of employment
job search
the process by which workers find appropriate jobs given their tastes and skills
real GDP
the production of goods and services valued at constant prices
Real GDP
the production of goods and services valued at constant prices; Real GDP uses constant base-year prices to place a value on the economy's production of goods and services. NOT AFFECTED BY CHANGES IN PRICES, ONLY REFLECT CHANGES IN THE AMOUNTS BEING PRODUCED.
Nominal GDP
the production of goods and services valued at current prices
Nom GDP
the production of goods and services valued at current prices; Nominal GDP uses current prices to place a value on the economy's production of goods and services.
Equality
the property of distributing economic prosperity uniformly among the members of society
Efficiency
the property of society getting the most it can from its scarce resources
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
open-market operations
the purchase and sale of U.S. government bonds by the Fed
Productivity
the quantity of goods and services produced from each unit of labor input
Unemployment results when
the quantity of labor demanded is less than the quantity of labor supplied at the going wage rate.
money supply
the quantity of money available in the economy
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
leverage ratio
the ratio of assets to bank capital
bank capital
the resources a bank's owners have put into the institution
Your savings account balance increases by $10 because the bank paid you interest. Which categories on your balance sheet affected?
the savings account and wealth (net worth)
money
the set of assets in an economy that people regularly use to buy goods and services from other people
monetary policy
the setting of the money supply by policymakers in the central bank
physical capital
the stock of equipment and structures that are used to produce goods and services
macroecon
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
the study of how households and firms make decisions and how they interact in markets
public saving
the tax revenue that the government has left after paying for its spending
national saving
the total income in the economy that remains after paying for consumption and government purchases
labor force
the total number of workers, including both the employed and the unemployed
leverage
the use of borrowed money to supplement existing funds for purposes of investment
Net exports is defined as
the value of exports minus the value of imports
unit of account
the yardstick people use to post prices and record debts
Suppose people believe the price of gas will decrease next week. This is most likely to cause
today's demand for gas to decrease.
When the government pays social security to elderly people, this counts as:
transfer payment
T/F A T-Account is used to visually represent a person's assets and liabilities.
true
T/F A production possibilities frontier identifies combinations of two goods that can be produced with given resources and technology.
true
T/F All else the same, as the baby boom generation (born 1946 - 1964) enters retirement age, the natural rate of unemployment will decline.
true
T/F All else the same, when the demand for a good or service rises, then equilibrium price will tend to also rise.
true
T/F An increase in the cost of producing a good or service will cause a leftward shift of the supply curve.
true
T/F An increase in the minimum wage is likely to increase production cost for firms who hire entry level, unskilled workers.
true
T/F Capital goods are goods that will be used in the future to produce more goods and services.
true
T/F Countries with unemployment insurance programs are likely to have higher levels of frictional unemployment.
true
T/F Having the ability to write computer programs is an example of human capital.
true
T/F If supply and demand both increase then equilibrium quantity will also increase.
true
T/F If there are unemployed resources, then we are producing at a point inside the production possibilities frontier.
true
T/F If your employer gives you a raise that is less than the inflation rate, then your real salary will have declined.
true
T/F In the economy, income earned when producing new final goods and services must equal expenditure on the new final goods and services.
true
T/F Labor and land are both examples of factors of production.
true
T/F Retired people who are still capable of working are part of the adult population but not part of the labor force.
true
T/F The inflation rate is measured by calculating the percentage change in the consumer price index.
true
T/F The official unemployment rate does not include discouraged workers.
true
T/F The recipe used to make Coca Cola is an example of technological knowledge.
true
T/F When entering transactions on the T-Account balance sheet, there will always be at least two entries for each transaction.
true
t/F When Toyota produces cars in the United States this does count in GDP even though Toyota is not an American company.
true
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
The income approach to computing GDP calculates
wages + interest + rent + profits.
What are the four categories of income?
wages, interest, rental income, profit
Opportunity Cost
whatever must be given up to obtain some item
How do banks create money? Explain the process.
when banks make loans....Banks create money during their normal operations of accepting deposits and making loans. In this example we'll use M1 as our definition of money. (M1 = currency in our pockets and balances in our checking accounts.) When a bank makes a loan it creates money
Transfer Payments
when the government pays a Social Security benefit to a person who is elderly or an unemployment insurance benefit to a worker who was recently laid off