Macroeconomics Quiz 2

Deflation

- Decline in prices of goods and services - Increase in unemployment - Bad b/c it means unhealthy economy

Overheated Economy

After a prolonged period of economic growth, there is a spike in inflation leading to poor economic growth: - below average unemployment rate - increase in interest rate

Seasonal (good and bad)

Demand for labor is dependent on the time of year

Increase

Does an increase or decrease in unemployment move the production point further from the PPC (towards the origin) representing less output of goods and services

NC

Parents work hard caring for their two children CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

Unemployment

People who are out of work, but actively looking for a job

Bust

Period of economic recession (falling GDP, increase in unemployment, people are scared to spend money)

Cost push

Producers raise prices to cover higher resource costs

Real

Purchasing power of nominal wages

- Leads to competitiveness in work - Increase wages and benefits to avoid structural unemployment

Reasons why unemployment is good

Boom and Bust

Rise in an economy, followed by a downturn as the economy falls due to items losing value

TNI

Sales taxes + depreciation + NFFI

A (increase by $5,000.)

Suppose a factory added $5,000 worth of output this year. Incidentally, the waste from this factory caused $1,000 worth of loss to the neighboring waterways.As a result, gross domestic product will: A) increase by $5,000. B) increase by $4,000. C) increase by $1,000. D) decrease by $4,000. E) decrease by $1,000.

Demand pull

Consumers' demand changes prices

Double spending

Counting output more than once as it travels through production stages (DO NOT DO IT)

63%

Current US LFPR

They are equal (because USD is used as a benchmark)

How much is the PPP compared to GDP in the US?

Nominal GDP

How much of an internationally traded good a person can buy in their country

GDP, stock market, unemployment rate

How to measure business in the US

B (42.)

If 2000 were made the base year for the GDP price deflator index, the value of the index number for 1990 (rounded to the nearest whole number) would be: A) zero. B) 42. C) 142. D) 212. E) 256.

A (explanation: The nominal GDP is expressed in current price, not adjusted for inflation. Nominal GDP will increase if price level increases and/or real GDP increases.) [http://www.youtube.com/watch?v=p0Nhvlbw3Zg]

If a country's nominal percent change in GDP is positive, which of the following must be true? A) the real GDP and/or the price level has increased B) The inflation rate was negative C) The real GDP increased D) The price level increased E) Both the price level and real GDP increased

Nominal

actual money workers receive

[employed and unemployed]/[working age population]

LFPR equation

Labor Force Participation Rate (LFPR)

Measures an economy's active workforce

Consumer Price Index

What does CPI stand for?

Measures the size of the overall economy

What does GDP do?

Net foreign factor income

What does NFFI stand for?

Natural Rate of Unemployment

What does NRU stand for?

Gross Domestic Product

GDP stands for

Intermediate goods

Goods used in the production of final goods

Frictional (very good)

Workers leave to find new jobs

GDP deflator

- a measure of the price level changes between years - calculated by dividing nominal GDP by real GDP and multiplying by 100

Cyclical, frictional, structural, seasonal

4 types of unemployment

NC

A family pays $75,000 for a house built three years ago CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

CS

A family pays a contractor $150,000 for a house he built for them this year CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

Boom

A period of rapid economic growth and inflation (spending more because things are cheap)

A (explanation: Real GDP is adjusted for inflation and does account for changes in price.)

All of the following are criticisms of how the government measures the economy except: A) Real GDP overstates economic growth since it doesn't account for changes in price level B) CPI doesn't included the newest, up-to-date, consumer goods C) CPI overstates inflation since consumers will buy lower priced substitute goods D) The official unemployment rate numbers don't include people that stopped looking for work E) Real GDP is a poor measure of standard of living because it doesn't show how income is distributed

CS

An accountant pays a tailor $175 to sew a suit for her CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

IS

At the end of the year, a flour-milling firm finds that its inventories of grain and flour are $10,000 higher than its inventories at the beginning of the year CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

IS

Consumer electronics corporation Apple Inc. builds a new factory in the US CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

3.6%

Current unemployment rate in the US

Cyclical (bad)

Demand falls and businesses lay off workers (follows business cycle)

Recession

Economic decline: - occurs when GDP falls for 2 quarters of the year - causes a reduction in spending

Inflation benefits borrowers

Ex: borrower owes $10, but as inflation increases his salary, he still only owes $10, making it easier for him to pay back what he borrowed

Income approach

Expenditures should = total income from goods and services

Depression

Extreme recession that lasts 3+ years OR leads to a decline in real GDP > or = 10%

IS

Ford Motor Company buys new auto-making robots CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

C + I + G + (X - M)

GDP equation

C (explanation: The nominal wage increased by 50% but inflation rate increased by 100%. The real wage of this worker, adjusted for inflation, decreased by 50%. To have the real wage stay the same with 100% inflation, the worker's nominal wage needed to increase from $10 to $20 per hour.) [http://www.youtube.com/watch?v=nPHZ_h2xbe8]

If a worker receives a raise in their nominal wage from $10 to $15 per hour and the inflation rate increases from 2% to 4%, the worker's real wage has approximately: A) increased by 50% B) increased by 100% C) decreased by 50% D) decreased by 33% E) stayed the same

B (explanation: If the number of workers entering the labor force increased and the unemployment rate stayed the same then there must be more jobs. Answer A is incorrect because it changing part-time workers to full-time workers doesn't affect the unemployment rate and answer E is incorrect because nominal GDP would not increase if prices decreased for some reason.)

If the labor force participation rate increased at the same time that the unemployment rate stayed the same, which of the following must be true? A) Less workers were classified as part-time workers B) The total number of jobs in the economy increased C) The total number of jobs in the economy decreased D) The total number of jobs in the economy stayed the same E) The nominal GDP will increase

D (explanation: A GDP deflator of 125 means that prices have increased 25% since the base year. Therefore, this question is essentially asking "what is $500 billion, before prices increase 25%?" The answer is $400 billion. A nominal GDP of $500 billion is really only $400 billion after you adjust for the 25% increase in prices.) [http://www.youtube.com/watch?v=lTQi4Q2SiYo]

If the nominal GDP in a given year is $500 billion and the GDP deflator for that year is 125, how much is the real GDP? A) $1,125 billion B) $625 billion C) $500 billion D) $400 billion E) $375 billion

C (about $400 billion.)

If the price index in a country were 100 for the year 2000 and 120 for 2003 and nominal gross domestic product in 2003 were $480 billion, then real gross domestic product for 2003 in 2000 dollars would be: A) about $360 billion. B) about $380 billion. C) about $400 billion. D) about $600 billion. E) indeterminate with the given information.

C (explanation: The equation for CPI is: (the price of the current market basket/value of the market basket in the base year) x 100. (300/240) X 100 = 125. The index number of 125 shows that prices have increased 25% between 2008 and 2013.) [http://www.youtube.com/watch?v=ugPB7BMu26Y]

If the price of a specific market basket in the year 2008 was $240 and the price of the same market basket in the year 2013 was $300. What is the Consumer Price Index (CPI)of the year 2013 based on base year 2008 prices? A) 80 B) 120 C) 125 D) 150 E) 200

C (Households sell resources to business firms.)

In the circular flow diagram, which of the following is true in resource or factor markets? A) Households buy resources from business firms. B) Households sell products to business firms. C) Households sell resources to business firms. D) Business firms sell goods and services to households. E) Business firms sell resources to households

D (Business firms sell goods and services to households.)

In the circular flow diagram, which of the following is true in the product market? A) Households sell goods and services to business firms. B) Households sell resources to business firms. C) Business firms sell resources to households. D) Business firms sell goods and services to households. E) Households buy resources from business firms

A (consumer spending.)

In the gross domestic product, the largest dollar amount is: A) consumer spending. B) rental payments. C) net exports of goods and services. D) gross private domestic investment. E) government purchases of goods and services.

GS

The government increases its defense expenditures by $1,000,000,000 CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

D (A steel worker who is replaced by a robot)

Of the following, which is the best example of structural unemployment? A) A computer programmer who quits her job to move to a warmer climate B) A construction worker who loses his job in the winter C) An auto worker who loses her job during a recession D) A steel worker who is replaced by a robot E) A toy maker who worked for a company that closed because consumers did not buy its toys

Inflation

Ongoing rise in price levels and decrease in value of money

NC

R.J. Reynolds buys control of Nabisco CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

Disinflation

Slowing of the rate of inflation

Structural (good and bad)

Technological advancements leading to unemployment

D (I, II and IV only)

The CPI tends to overstate true changes in the cost of living for which of the following reasons? I. The index does not take into account a change in quality. II. Consumers change purchase patterns as prices change. III. The CPI includes only domestically produced goods. IV. Consumers often buy at discount rather than retail: A) I only B) I and II only C) I, II and III only D) I, II and IV only E) I, II, III and IV

NC

The government makes a $300 Social Security payment to a retired person CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

E (wages and salaries to employees.)

The largest dollar amount of gross domestic product is: A) rental payments. B) government expenditures on goods and services. C) profit. D) net interest. E) wages and salaries to employees.

D (gross domestic product.)

The market value of all final goods and services produced in the economy in a given year is: A) net national product. B) national income. C) personal income. D) gross domestic product. E) producer price index

C (explanation: The GDP deflator is an index number that shows how prices have changed for all goods and services. The equation for the GDP deflator is: (nominal GDP/real GDP) x 100. In this case, ($240/$200) x 100 equals $120. A deflator of 120 means that prices increased 20% since the base year. The nominal GDP of 2010 was not needed to answer the question.) [http://www.youtube.com/watch?v=QPhXOFfssnE]

The nominal GDP for the year 2010 is $120 billion and the nominal GDP for the year 2012 is $240 billion. Assuming that the year 2010 is the base year and that the real GDP of the year 2012 is $200, what is the GDP deflator in 2012? A) 50 B) 100 C) 120 D) 150 E) 200

NRU

The rate of unemployment expected in a healthy economy

A ($600.)

The value of the gross domestic product in 2000, in terms of 1990 prices, was: A) $600. B) $700. C) $1,000. D) $1,200. E) $1,300.

C (explanation: Wages are counted in GDP under the income approach. Bonuses to investment bankers are a form a wages. The only wages that are not included are ones that are given for illegal or "under the table" work. The transfer of financial assets, the government issuing transfer payments (like social security), and the change in the value of assets don't count in GDP since no good or service is provided.) [http://www.youtube.com/watch?v=kkr2udvXYYE]

The value of which of the following is counted in the U.S. GDP? A) Foreign countries buying US treasury bills B) Transfer payments to the elderly C) Salary bonuses given to investment bankers D) Undeclared wages paid to illegal aliens E) The change in the value of real estate in the US

Intermediate goods, transfer payments and non-market activities, and illegal (black market) and used goods

What 3 things are NOT counted in GDP?

Consumption, investment, government spending, net exports

What 4 things does GDP measure?

Difference between real and nominal

What do CPI and PPI together measure?

Change in sale price (businesses)

What does PPI measure?

Producer Price Index

What does PPI stand for?

- How much of a local good you can buy in your country - Developing country's usually higher than normal despite their low incomes, goods are cheaper

What does PPP measure?

Purchasing Power Parity

What does PPP stand for?

Total national income

What does TNI stand for?

Expenditures (individuals)

What does the CPI measure?

Boom and Bust Cycle

What does this graph represent?

2%

What is the target rate of inflation for the US

68 % of total GDP

What percentage of our GDP comes from consumption?

A (explanation: The definition of investment in economics is very specific. It is business spending on capital equipment (like tools, factories, and machinery) and changes in inventories. Investment is spending is one of the four components of GDP.)

When calculating GDP, investment is best defined as: A) spending on stocks, bonds, and financial assets B) spending by the central bank on government securities C) changes in private and business savings D) business spending on capital goods E) policies that lead to long run economic growth

A (Those who lend at a fixed interest rate)

When the actual inflation rate is greater than the anticipated inflation rate, which of the following is most likely to suffer? A) Those who lend at a fixed interest rate B) Those who borrow at a fixed interest rate C) Retired persons with cost-of-living adjustment in their benefits D) Employers who hire workers with long-term labor contracts E) Those who lend with flexible interest rates

A (explanation: To be considered unemployed, someone must be part of the labor force (16 years old or older, not institutionalized, or retired) and actively looking for a job. Part-time workers are considered fully employed. Individuals that are no longer looking for work are not part of the labor force. Only members of the labor force are considered unemployed.)

Which of the following individuals is clearly considered unemployed? A) A lawyer that sold his firm and is now looking for a job as a teacher B) An electrician that is working part-time and is looking for a full-time job. C) A retired school teacher D) A 15 year-old who is looking for odd jobs to pay for summer camp. E) An auto worker who has given up looking for a job

E (explanation: US exports are counted in GDP. Answer A and B are incorrect because opportunity costs and implicit benefits are not counted in GDP. C is incorrect because used goods are not counted. D is incorrect because GDP measures the final goods produced within a country's borders.)

Which of the following is included in the calculation of the U.S. GDP? A) The money that consumers save when using coupons B) The benefit society receives from a cleaner environment C) Online purchases of used products D) A computer produced in China by a U.S. owned company E) A plane produced in the U.S but sold in Mexico

C (explanation: Structural unemployment is a specific type of unemployment where worker lose their jobs because their skills are obsolete. A good example is blacksmiths or VCR repairmen. To get the right skills, these workers must usually get new training.)

Which of the following is the best example of structural unemployment? A) New immigrants have a hard time finding jobs B) Workers are laid off due to a recession C) Workers quit their current job to go back to school to get better training D) Workers are fired because they do not have the specific skills employers value E) Workers enter the labor force because wages are increasing

C (Gross domestic product)

Which of the following is the best measure of the production or output of an economy? A) Consumer price index B) Unemployment rate C) Gross domestic product D) Prime rate E) Index of leading indicators

A (It can vary over time.)

Which of the following is true about the natural rate of unemployment? A) It can vary over time. B) It is 2 percent orless of the civilian laborforce. C) It is equal to the structural unemployment rate. D) It allows for some frictional and cyclical unemployment. E) It is the full-employment rate minus the cyclical unemployment rate.

A (Output has increased by 4 percent.)

Which of the following is true if real GDP in Year 1 is $5,000 and in Year 2 is $5,200? A) Output has increased by 4 percent. B) Output has declined by 4 percent. C) Output change is uncertain. D) The economy is experiencing 4 percent inflation. E) The economy is experiencing a recession.

D (explanation: GDP is the dollar value of all final goods produced in a country's border in one year. It does not include intermediate goods, household production, or transfer payments such as welfare or unemployment benefits. It does include government expenditures and imports from foreign countries.)

Which of the following is true regarding Gross Domestic Product (GDP)? A) Intermediate goods are not counted because GDP does not include imports from foreign countries B) Household production, like home auto repair, is counted in GDP C) Transfer payments are not included in GDP because government expenditures are not counted D) GDP includes the purchase and sale of all goods and services in a country in one year E) GDP, adjusted for inflation, measures economic growth over time

C (exlpanation: Frictional and structural unemployment are unavoidable and will always occur in an economy. Full employment is when there are only these two types of unemployment and there is no cyclical unemployment. In the U.S., full employment is generally 4-6% unemployment. This is called the Natural Rate of Unemployment (NRU).) [http://www.youtube.com/watch?v=lgn4auz1wPE]

Which of the following is true regarding full employment? A) An economy is at full employment when the unemployment rate is 0% B) An economy can never been at full employment since there are always leakages like taxes, savings, and imports C) Full employment occurs when cyclical unemployment is zero D) Full employment occurs when there is only frictional unemployment E) Full employment is shown as a rightward shift in the production possibilities curve.

B (explanation: Inflation decreases the purchasing power of a currency so less products can be purchased with the same number of dollars. Answer A is incorrect because the CPI shows changes in the price of a specific market basket, not all consumer goods. Answer D is incorrect since inflation and nominal interest rates are directly related. When inflation occurs, banks charge higher nominal interest rates. E is incorrect since unanticipated inflation benefits borrowers, not lenders.)

Which of the following is true regarding inflation? A) The Consumer Price Index (CPI) shows the change in price of all consumer products in a country B) Inflation decreases the purchasing power of a country's currency C) Inflation causes unemployment D) When inflation increases, nominal interest rates decrease E) Unanticipated inflation benefits lenders

D (explanation: The quantity theory of money is an identity (equation) that shows how an increase in the money supply will result in a proportional increase in prices. The equation is M x V = P x Q. M is the money supply. V is the velocity of money (the average time money is spent and re-spent in a given time). P is price level. Q is real output. Notice that P x Q equals the nominal output and that an increase in M or V will cause nominal output to increase.) [http://www.youtube.com/watch?v=XSilTPId7-o]

Which of the following is true regarding the quantity theory of money? A) An increase in price level will lead to an increase in interest rates B) If the velocity of money is negative then unemployment will increase C) An increase in the velocity of money will increase real output D) An increase in money supply or the velocity of money will increase nominal output E) A decrease in the money supply will decrease the velocity of money

B (A person who stayed home to raise his children and now starts looking for a job)

Which of the following people would be considered unemployed? A) A person who quits work to care for aging parents B) A person who stayed home to raise his children and now starts looking for a job C) A person who quits a job to return to school full time D) A person who is qualified to teach but is driving a bus until a teaching job is available E) A person who works two part-time jobs but is looking for a full-time job

B (New harvesting equipment for the farm)

Which of the following purchases is included in the calculation of gross domestic product? A) A used economics textbook from the bookstore B) New harvesting equipment for the farm C) 1,000 shares of stock in a computer firm D) A car produced in a foreign country E) Government bonds issued by a foreign firm

E (explanation: A decrease in unemployment benefits would cause frictional unemployment to decrease. Workers would get less government assistance while out of work and have less of an incentive to stay unemployed.)

Which of the following will most likely decrease a country's Natural Rate of Unemployment (NRU)? A) An short run increase in domestic output B) An increase in structural unemployment C) An increase in the labor force D) A decrease in cyclical unemployment E) A decrease in unemployment benefits paid by the government

B (Gasoline purchased by an insurance agent to visit clients at their homes)

Which of the following would be an example of an intermediate good or service? A) A calculator purchased by a college student for taking exams B) Gasoline purchased by an insurance agent to visit clients at their homes C) A house purchased by a family with four children D) A car purchased by a student's parents and given to the student E) Tuition paid by a student at a state university

C (The construction of a new house)

Which of the following would be counted as investment when calculating gross domestic product? A) The purchase of a used computer by an auto manufacturer B) The purchase of a share of IBM stock by an employee C) The construction of a new house D) The construction of roads by the government E) The profit earned when selling shares of stock

A (Government purchase of a new submarine)

Which of the following would be included in the calculation of gross domestic product? A) Government purchase of a new submarine B) Social Security payment to a retired military officer C) The purchase of a home built 10 years ago D) Contributions to a charity organization E) Work performed by a barber who cuts the hair of his or her own children

A (explanation: Cyclical unemployment is unemployment caused by a recession. Although the other types could occur, a large decrease in consumer spending would most likely result in a recession and cyclical unemployment.) [http://www.youtube.com/watch?v=iUeIHvncYkM]

Which type of unemployment would most likely increase if workers are laid off due to a large decrease in consumer spending? A) Cyclical B) Seasonal C) Structural D) Frictional E) Technological

NC

You buy McDonald's stock for $1,000 in the stock market CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

Xn

You buy a new Toyota that was made in Japan CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

CS

You pay $800 a month to rent an apartment CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

CS

You pay tuition to attend college CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted

CS

You spend $10 to see a movie CS - Consumption spending IS - Investment spending GS - Government spending Xn - Net exports NC - Not counted