Macroeconomics exam 1

How to calculate real GDP Growth rate

Chapter 6 Question 6

When nations desire a healthy macroeconomy, they typically focus on several goals. List the goals of a healthy macroeconomy.

Growth in the standard of living A low level of unemployment Low inflation (price stability) A sustainable balance of trade between countries

Explain how scarcity in resources or inputs of production affects the production of goods and services

With only a limited number of supplies, demand may increase causing an increase in pricing, making consumers choose between different goods. A great example we saw was the pandemic. A large increase in demand made certain products skyrocket and left consumers putting larger values on things like toilet paper. One second it's a common good found everywhere and a week later everyone is sent into a panic. More labor is devoted to different industries to keep up with demand at various times.

Economic growth is best defined as an increase in

either real GDP or real GDP per capita.

The benefits of economic growth, particularly as measured by real GDP per capita, include

higher living standards for the vast majority of people

Draw a business cycle

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How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Adam Smith offered three reasons. List them and briefly describe the rationale behind each.

1. Specialization in smaller groups allows for workers to master their trade or profession. 2. Workers who have been doing the same job for years tend to do the work more efficiently and often find ways to effectively cut more time off a certain job while still getting the same result. 3. Specialization allows businesses to take advantage of economies and reduce the price of goods and services. specialization only occurs when people don't have to produce what they want and need.

Suppose an economy's real GDP is $30,000 in year 1 and $31,200 in year 2, what is the growth rate of its real GDP?

4

Using the rule of 72, if the real GDP grows at 9 percent per year, then real GDP will double in approximately ____ years.

8

What is the difference between a change in demand and a change in quantity demanded?

A change in quantity demanded is caused by a change in the price of the product and is represented as a movement along a stationary demand curve. A change in demand is caused by a change in tastes, income, price of a related good, number of consumers or expectations and is illustrated as a horizontal shift of the entire demand curve.

Describe the characteristics you would expect to find in a mixed economy which is mostly market oriented.

A mixed economy that is mostly market-oriented is run primarily by the people and private sectors, rather than the government. The supply of goods and services is dependent on what the demands are. are. A person's income is based on his or her ability to convert resources (especially labor) into something that society values. The more society values the person's output, the higher the income.

What is the difference between GDP and GDP per capita? Which is a better measurement of standard of living?

GDP per capita is equal to GDP divided by the population. GDP per capita is a better measurement of standard of living because it provides an average income for the entire population versus just the total income. For example, if country A has a GDP of $3 million and 1 million people and country B has a GDP of $1 million but only 10 people, then the average income is $3 in country A and it is $100,000 in country B. On average, the people in country B are much better off even though Country A has a higher GDP.

Real GDP refers to:

GDP data that have been adjusted for changes in the price level.

A general orientation toward markets doesn't rule out some important roles for government in aiding a country's economic growth. Some significant contributions a government can make toward a country's economic growth are: Setting up and funding the education system (especially primary and secondary education). Regulations and tax policy that encourage investment (not discourage investment) Pass laws and administer laws that protect individual property rights and are administered fairly (including patent laws) Protection of contractual rights Promoting scientific or technological research.

In the United States, the government taxes gains from private investments. Low capital gains taxes encourage investment and also economic growth. Promoting scientific or technological research. The National Science Foundation has helped promote scientific research outside of the medical field.

Draw a production possibility that demonstrates increasing opportunity costs. Label the following points: Point M - Maximum Output (Efficiency) Point U - Unattainable Output Point I - Inefficient Output

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How does microeconomics relate to macroeconomics?

Microeconomics primarily examines the behavior of individual households and firms, whereas macroeconomics concentrates on the behaviour of consumers and firms in the aggregate. Macroeconomics studies economic problems as they influence the whole of society.

Nominal GDP calculation- Real GDP equation- Real GDP Growth Rate-

Nominal GDP= C+I+G+(x-m) consumption, Investment, Government Expenditure, Exports, Imports Real GDP= Nominal GDP/Deflator (100) Real GDP growth rate= (GDP present-GDP past)/ GDP past (*100)

When most people want to know the cost of an item or a service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example.

Opportunity cost is whatever must be given up to obtain something that is desired. After the terrorist plane hijackings on September 11, 2001, many steps were proposed to improve air travel safety. For example, the federal government could provide armed "sky marshals" who would travel inconspicuously with the rest of the passengers. The cost of having a sky marshal on every flight would be roughly $3 billion per year. Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million. Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face recognition software, could cost another $2 billion. But the single biggest cost of greater airline security doesn't involve spending money. It's the opportunity cost of additional waiting time at the airport.

Define the term "sunk costs" and provide an example of a sunk cost.

Sunk costs, which are costs that were incurred in the past and cannot be recovered. Consider the case of Edgar who pays $8 to see a movie, but after watching the film for 30 minutes he knows that it's truly terrible. Should he stay and watch the rest of the movie because he paid $8, or should he leave? The money he spent is a sunk cost and unless the theater manager is feeling kindly, Edgar won't get a refund. But staying in the movie still means paying an opportunity cost in time. Thus, Edgar's choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something— anything—else. The lesson of sunk costs is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

Explain the Law of Diminishing Returns and provide a relevant example.

The law of diminishing returns holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. Example: When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.

A country that invests substantially in human and physical capital will be able to produce a greater quantity of goods and services in future periods, experiencing a higher standard of living as a result. What is the opportuntiy cost of this investment?

The opportunity cost is current consumption of goods and services. Countries that tend to grow most rapidly are those that devote a larger share of available resources to producing capital goods instead of consumption goods.

The two main tools of macroeconomic policy include monetary policy and fiscal policy. Briefly describe the main components of each. Selected Answer: Central banking (monetary policy)- manages the money supply and interest rates in the economy.

The two main tools of macroeconomic policy include monetary policy, which involves policies that affect bank lending, interest rates and financial capital markets, and fiscal policy, which involves government spending and taxes.

Although GDP is often used as a measurement of standard living, GDP does not include some factors that impact our quality of life.

actual standards of living are defined as all elements that affect people's happiness and well-being, whether they are bought and sold in the market, or not. actual levels of environmental cleanliness are not included such as how much carbon is emitted into the atmosphere from creating all of these new buildings and products. Another good example would be the wage inequality between men and women in recent years.

Various factors cause a demand curve to shift. List five different factors.

changes in income changes in population changes in tastes & preferences changes in prices of related goods (substitutes or complements) changes in expectations of future prices.

(GRAPH) Several factors are causing police shortages across the nation. A June 2021 national survey found a 45% increase in retirements and an 18% jump in resignations compared to the previous year. Draw a supply and demand graph for police officers. Be sure to label all axis, curves, and original equilibrium quantity and price (salary). Now show the impact that the increased retirments and resignations has on market for police officers. Finally, show the new equilibrium price and quantity.

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Several factors are causing police shortages across the nation. "We're getting more calls for service" explains a Philadelphia Police spokesperson. This isn't just an issue in Philadelphia. Departments all over getting more requests for assistance. Draw a supply and demand graph for police officers. Be sure to label all axis, curves, and original equilibrium quantity and price (salary). Now show the impact that the increased service requests has on market for police officers. Finally, show the new equilibrium price and quantity.

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A pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes is called

convergence