Macroeconomics

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What happens during expansion?

- aggregate economic activity is rising - production, income, and employment go up

What is the business cycle?

- alternating periods of economic growth and contraction in real GDP - a period of macroeconomic expansion followed by one of macroeconomic contraction

Believed causes of the Great Depression:

- bank failures could have been prevented with better regulation (poor banking regulation) - with a different approach from the American government and if other countries would have been more independent the depression could have been avoided all together

Actual investment spending includes

- change in inventories - spending on new capital equipment - spending on new houses

What causes seasonal unemployment?

- changes in the seasonal demands of the labor market

What causes structural unemployment?

- changing product demand - changing in technological skills needed

4 phases of the business cycle include:

- contraction (recession) - trough - expansion - peak

4 categories of unemployment:

- cyclical - frictional - structural - seasonal

2 MAIN phases of the business cycle:

- expansion phase - contraction phase

Components of aggregate expenditure?

- government spending - consumption spending - net export spending

What happens during the contraction phase?

- real GDP falls - makes life more difficult - many people have less money to spend - firms hire fewer workers & more go out of business

What is defined as the total amount of goods and services in the economy available at all possible price levels?

aggregate supply

GDP is an imperfect measure of economic well being because it fails to measure what types of production?

Household production and the underground economy

What has occurred when real GDP is greater than 0 (positive)?

expansion

One major component of GDP that can be negative is

net exports

If inflation in the US is higher than inflation in other countries, what will be the effect on net exports for the US

net exports will decrease as US exports decrease

Investment is defined as the purchase of

new capital goods and additions to inventories

- GDP measured in current prices - use current years prices to calculate value of current years output but increase in process appears to make GDP rise

nominal GDP

What type of spending is the following: A family pays $75,000 for a house built three years ago.

not counted

What is the equation for unemployment rate?

# unemployed / labor force

What is the Xnet equation?

(exports - imports) * (foreign sector)

What is GDP?

(gross domestic product) the total dollar value of all final goods and services produced within the country's borders in a given year.

What is inflation?

- a general increase in prices - a rise in the general prices of goods and services in a particular country over a period of time, resulting in a fall in the value of money

What causes frictional unemployment?

- a mismatch of workers with employers - personal conflict between employer/employee - unsuitability of worker for the demands of the position

What happens during a recession?

- aggregate economic activity is falling - production, employment, and income go down

What happens during the expansion phase?

- real GDP rises - firms hire more employees, which makes it easier for people to find jobs - income levels rise

What is NOT included/counted in GDP?

- transfer payments (ex. social security) - used/secondhand goods - self-provided services (unpaid work) - underground economic activity (ex. legal = babysitting, illegal = drugs) - intermediate goods - financial transactions (sale of stocks and bonds)

The circular flow shows that GDP measures 1. total income. 2. total expenditures. 3. price changes.

1 and 2

Which of the following is included as investment in GDP? 1. cars produced during the year but unsold at the end of the year 2. new capital equipment produced and purchased during the year 3. purchases of a company's stocks and bonds

1 and 2

How does real GDP deal with the problem inflation causes with nominal GDP?

1. Real GDP separates price changes from quantity changes 2. Real GDP uses the prices of goods and services in the base year to calculate 3. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced

Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?

1. Value or leisure not measured 2. GDP is not adjusted for pollution and it does not account for unequal income distribution 3. GDP is not adjusted for crime or other social problems

Which of the following is classified as an intermediate good? 1. the purchase of a Big Mac by a college student 2. McDonald's purchase of pickles 3. a McDonald's restaurant owner's interest payment for the loan on her building. 2

2

Which of the following is classified as a final good or service? 1. tires bought by GM to put on new Tahoes 2. mustard bought by Subway to put on its sub sandwiches 3. your purchase of online access to the Wall Street Journal

3

Investment includes A) GM's purchase of robotic machinery. B) student purchases of laptops. C) Wal-Mart's purchase of health insurance for its workers. D) the New York City Library's purchase of new books. E) wages paid to military personnel.

A

If firms find that consumers are purchasing more than expected, then?

Aggregate expenditure will likely be greater than GDP

Which of the following is a final good or service? A) the grilled chicken purchased by Taco Bell for use in their burritos B) a new replacement muffler installed by Midas Mufflers C) the fertilizer purchased by Royal Lawn and Landscape D) the computers purchased by Office Depot for sale to its customers E) the CPUs purchased by Dell to be used in their computers

B

Which of the following is a final good or service? A) tires purchased by Ford for use on one of their SUVs B) the new economics textbook you are using C) the hair gels used by a hair stylist at the local hair salon D) the butter used by a chef to make butter cream frosting E) the taco shells purchased by Taco Bell for use in their tacos

B

Define nominal GDP

GDP measured in current prices

A restaurant buys fish to offer as a daily menu special. The purchase of the fish by the restaurant is A) a consumption expenditure. B) an investment. C) an intermediate good. D) an example of government expenditures on goods and services. E) part of net exports if the fish was caught beyond the U.S. border.

C

An increase in nominal GDP could result from an increase in i. production. ii. prices. iii. subsidies. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii

C

Nominal GDP increases A) only if total production increases. B) only if prices increase. C) if either prices and/or total production increase. D) only if the productivity of resources increase. E) only if depreciation decreases.

C

How does the size of a country's GDP affect the quality of life of the country's people?

Generally, the more goods and services people have, the better off they are

Define real GDP.

GDP expressed in constant, or unchanging, prices

Suppose a house is built and sold in the year 2000. If the house is resold in the year 2013, is the value of the house included in Gross Domestic Product for 2013?

No. GDP for 2013 includes only production that occurs during 2013

What economic activities are not included in GDP?

Non-market activities such as things people make or do themselves (childcare, lawn-mowing).

What is the difference between the value of a firm's final product and the value added by the firm to the final product?

The value of a firm's final product is the sale price; value added is the difference between the sale price and the price of intermediate goods.

If aggregate demand rises, what happens to real GDP and what happens to the price level?

They are all directly proportional. When aggregate demand rises, so does real GDP and the price level.

The circular flow diagram shows that _____ should equal _______

Total expenditure; Total income

Transfer payments are not included in GDP calculations because:

Transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service

What are the four categories of income?

Wages Interest Rent and Profit

What are the 4 categories of income?

Wages, Interest, Rent, and Profit

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?

When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities

Which equation represents the relationship between GDP and the four major expenditure components?

Y=C+I+G+NX

Would the service of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2013?

Yes. GDP for 2013 includes the market value of final goods and services. This includes real estate services.

A decrease in consumer confidence can put your job at risk if

aggregate expenditures fall

Define recession.

a contraction severe enough to to last several months or longer and have widespread effects on production, real income, employment, and sales across the country.

What causes cyclical unemployment?

a decreased demand for labor during a downturn of the business cycle (recession)

Definition of depression

a downturn that last more than a year or two

Definition of recession

a downturn that lasts more than 6 months

What is the definition of a discouraged worker?

a person who has a job but has given up looking

What can happen during the contraction phase?

a recession

What has occured when real GDP growth is less than 0 (negative)?

a recession

What is deflation?

a reduction in the amount of money in a country's economy so that prices fall or remain the same

Define economic growth

a steady, long-term increase in real GDP

Not a component of aggregate expenditure?

actual investment spending

In calculating GDP, we must

add the market value of exports and subtract the market value of exports

What is defined as the amount of goods and services in the economy that will be purchased at all possible price levels?

aggregate demand

GDP is

an imperfect measure of the standard of living

________ is most likely to contribute to an improvement in our living standard.

an increase in real GDP

How are final goods and services valued when measuring nominal GDP?

at current market prices

Why does total expenditure equal total income

because firms pay out everything they receive as income to the factors of production

Investment spending will increase when

business cash flow increases

Consumption expenditure includes spending

by households

What type of spending is the following: You buy a new Toyota that was made in Japan.

net exports

What in the income approach?

calculates GDP by adding all incomes in economy

Economists define investment to include purchases of

capital goods and inventories

What type of spending is the following: An accountant pays a tailor $175 to sew a suit for her.

consumption

What type of spending is the following: You pay $800 a month to rent an apartment.

consumption

What type of spending is the following: You spend $10 to see a movie.

consumption

4 categories of spending:

consumption investment government purchases Xnet (net exports)

Expenditures on U.S. produced steaks, shoes, and doctor visits are most likely classified as

consumption expenditure

Household spending on goods and services is known as

consumption spending

A period of economic decline marked by falling real GDP

contraction

The phase in the business cycle that follows the peak by going downwards is called __________

contraction

What type of unemployment is the following: A computer programmer is laid off because of a recession.

cyclical

What type of unemployment is the following: Slumping sales lead to the cashier being laid off.

cyclical

What type of unemployment is the following: Workers are laid off when the local manufacturing plant closes because the product made there isn't selling during a recession.

cyclical

When individuals lose jobs due to a fall in aggregate demand, often during an economic recession.

cyclical unemployment

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

expansion

The phase in the business cycle that follows the trough by going upwards is called __________

expansion

Investment spending ____ during a recession, and _____ during an expansion

declines; increases

Increases real GDP

decrease in interest rates

A recession that is especially long and severe

depression

A recession that is especially long and severe; high unemployment/ low factory input

depression

Important features of GDP:

dollar value goods and services final products, within a country's borders, and in a given year

Real GDP goes up during ________ and goes down during _________

economic growth (expansionary phase); recession (2 consecutive quarters, aka contraction phase)

What is the Expenditure Approach?

economics estimate annual expenditure on 4 categories of final goods and services, then add total expenditures on all categories

During a(n) ____ many firms experience increased profits, which increases ____ and investment spending

expansion; cash flow

Net exports of goods and services is equal to the value of

exports minus the value of imports

Investment is the expenditure done by

firms

Consumer spending ___ and investment spending ____

follows a smooth trend; is more volatile and subject to fluctuations

All labor markets have this type of unemployment.

frictional

What type of unemployment is the following: A literary editor leaves his job in NYC to look for a new job in San Francisco.

frictional

What type of unemployment is the following: An unemployed college graduate is looking for his first job.

frictional

this type of unemployment will always exist to some degree

frictional

When an individual is unemployed because they are looking for a new job.

frictional unemployment

What type of spending is the following: The government increases its defense expenditures by $1,000,000,000.

government

____ usually increase(s) when the US economy is in recession and decrease(s) when the US economy is expanding

net exports

The circular flow diagram shows that all sources of income are owned by

households

Determine wether or not the following be included in the calculation of GDP: A new building for Tony Hawk Industries.

included

Determine wether or not the following be included in the calculation of GDP: A new skateboard that you buy for your niece.

included

What type of spending is the following: A family pays a contractor a $150,000 for a house he built for them this year.

investment

What type of spending is the following: Consumer electronics corporation Apple Inc. builds a new factory in the United States.

investment

What type of spending is the following: Ford Motor Company buys new auto-making robots.

investment

Determine wether or not the following be included in the calculation of GDP: A ticket for the X Games bought from a person on a street corner.

not included

Determine wether or not the following be included in the calculation of GDP: A used copy of the Tony Hawk video game.

not included

Determine wether or not the following be included in the calculation of GDP: Wheels for a skateboard that will be sold new.

not included

If you make dinner for yourself, what would be included in the GDP?

only the market value of the ingredients

The height of an economic expansion, when real GDP stops rising

peak

What is the highest point of the business cycle called?

peak

What phase of the business cycle is described as the end of expansion and beginning of recession (contraction)?

peak

P.C.T.E

peak, contraction, trough, expansion

The business cycle exists because:

production experience periods of increases and periods of decrease

Define intermediate goods

products used in the production of final goods

A prolonged economic contraction, marked by 10% unemployment and declared when GDP falls for 2 quarters

recession

Higher unemployment causes a __________

recession

What is cyclical unemployment almost always associated with?

recession

income not used for consumption

savings

When individuals are unemployed due to a change in season, e.g. Santa Claus after christmas.

seasonal unemployment

What phase of the business cycle is described as the end of recession (contraction) and beginning of expansion?

trough

Give an example of someone who is seasonally unemployed.

ski instructors during the winter

What type of unemployment is the following: A high school graduate lacks the skills necessary for a particular job.

structural

What type of unemployment is the following: A skilled glass blower becomes unemployed when a new machine does her job faster.

structural

What type of unemployment is the following: Advances in technology make the assembly-line worker's job obsolete.

structural

Which type of unemployment occurs when technology can replace your job?

structural

Individuals are unemployed due to a lack in skills that modern industries need, change in technology.

structural unemployment

What is gross national product?

the annual income earned by a nation's firms and citizens

US net export spending rises when

the growth rate of US GDP is slower than the growth rate of GDP in other countries

Define depreciation

the loss of the value of capital equipment that results from normal wear and tear

The difference between nominal GDP and real GDP is

the prices used in their calculations

Define nondurable goods

those goods that last a short period of time, such as food, light bulbs, and sneakers

Define durable goods

those goods that last for a relatively long time, such as refrigerators, cars, and DVD players

The lowest point in an economic contraction

trough

The lowest point of an economic contraction, when real GDP stops falling

trough

What is the lowest point of the business cycle called?

trough

Expenditures in GDP do not include ________.

used goods or financial assets

Net exports of goods and service are defined as the

value of exports minus the value of imports

Consumption goods and services include

washing machines and tickets to football games

When would a recession occur?

when an economy experiences a period in which there is a decrease in total production

Who are the types of people that face frictional unemployment?

workers in between jobs, workers who haven't started work yet (college grad.)


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