Test #2

The multiplier effect ( slide 26 - chapter 8 )

1/(1-MPC)

Spending Injections

Injections include investment (I), government spending (G), and exports (X).

Deflation

A situation in which prices are declining

Real value

Nominal Value * ( base year index/current year index )

mandatory spending

Required govt spending by permanent laws ex. medicare

higher rate of return

attracts investment money

MPC (marginal propensity to consume)

change in consumption/change in income

An economy going through this is typically still facing inflation, but at a declining rate.

disinflation ( lowering inflation )

What is the slope of the aggregated demand curve ?

downward sloping

increasing aggregated expenditures

increases income

household survey

interviews households and measures the unemployment rate

Creating a new technology that makes production line workers more efficient is likely to produce _____ growth.

long-run

The _____ propensity to save is the change in savings associated with a given change in income.

marginal

information lag

most data that policymakers need are not available until at least one quarter after the fact

Which of the following illustrates how to calculate the number of years required to double value using the Rule of 70?

number of years to double value = 70/growth rate

Long-run growth

occurs when an economy finds new resources or finds ways to use existing resources better

What is internally held debt?

public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals

Real GDP per capita

real GDP divided by the total population

If the spending multiplier is 5, then the marginal propensity to _____ is 0.2.

save

The natural rate of unemployment is the rate at which all unemployment is either frictional or:

structural.

What is the capital-to-labor ratio?

the capital employed per worker

marginally attached workers

would like to be employed and have looked for a job in the recent past but are not currently looking for work

Aggregated Expenditure

total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports

Causes of inflation

demand factors, supply shocks, and government policy

45 degree line ( slide 10 chapter 8 )

Total income

Factors that shift the aggregated demand curve

increase of output

Real GDP per capita is _____ GDP divided by _____.

real; population

decision lag

the lag in policy that arises because it takes time for policymakers to make a decision

unemployment rate

the number of unemployed workers divided by the labor force.

paradox of thrift

The idea that when many households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and aggregate demand will reduce income and employment.

If the marginal propensity to save is 0.75, what is the multiplier?

The multiplier is 1.33. It is determined by dividing 1 by the marginal propensity to save. The equation is Multiplier = 1/0.75 = 1.33.

Underemployed

working at a job for which one is overqualified, or working part-time when full-time work is desired

The natural rate of unemployment occurs when cyclical unemployment is:

zero

Which of the following would NOT cause inflation? -increasing consumer wealth -an increase in the supply of food -the government increasing the supply of money -increasing input prices

an increase in the supply of food

escalator clauses

are designed to adjust payments or wages for changes in the price level

balanced budget amendment

constitutional amendment requiring government to spend no more than it collects in taxes and other revenues, excluding borrowing

If the marginal propensity to consume is 0.2 and $200 of new investment spending occurs, how much will equilibrium income increase?

$250 First, calculate the multiplier, which is 1/(1 − MPC) = 1/(1−$0.2) = 1/0.8 = 1.25. New spending will increase by the multiplier times the amount of new money spent, so 1.25 × $200 = $250.

According to the full aggregate expenditures model, if government spending is $4 trillion, business investment is $3 trillion, and taxes are $3 trillion, how much is saving in a closed economy?

$4 trillion The sum of government spending and business investment must equal the sum of saving and taxes in a closed economy.

John has an escalator clause in his labor contract by which his salary automatically increases according to the previous year's inflation rate. If John's salary is $50,000, this year's consumer price index is 120, and the previous year's CPI was 115, what will John's new salary be?

$52,000 The equation is New Salary = $50,000 × (120/115) = $50,000 × 1.04 = $52,000.

the rule of 70

A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.

What are aggregate expenditures (AE) if consumer spending is $2 trillion, business investment is $3 trillion, government spending is $1 trillion, exports are $2 trillion, and imports are $1 trillion?

Aggregate expenditures are $7 trillion. The equation is AE = C + I + G + (X − M) = $2 trillion + $3 trillion + $1 trillion + ($2 trillion − $1 trillion) = $7 trillion.

supply-side economics

An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output shifts AD curve to the right

Producer Price Index (PPI)

An index that measures prices at the wholesale level.

recognition lag

It takes time to recognize trends in the data.

Short run growth

OCCURS WHEN AN ECONOMY MAKES USE OF EXISTING BUT UNDERUTILIZED RESOURCES. IT IS COMMON DURING RECOVERY FROM A RECESSION.

payroll survey

SURVEYS JOBS AT BUSINESSES

What does the full aggregate expenditures model take into consideration that the simple aggregate expenditures model does not?

The full aggregate expenditures model adds government spending, taxes, and the foreign sector to the simple aggregate expenditures model.

Which of the following is a key way in which the government contributes to productivity?

The government acts as a facilitator of economic growth.

wealth effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.

Calculating unemployment rate

The unemployment rate is defined as the number of unemployed divided by the total labor force. The total labor force is equal to the number of unemployed plus the number of employed.

If the recessionary gap is $200 billion and the multiplier is 5, what is the increase in aggregate spending needed to reach full employment?

$200 billion The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment. This increase in aggregate spending will affect GDP according to the multiplier.

frictional unemployment

includes workers who voluntarily quit their job to search for a better position or are moving to new a job, although it may still take several days or weeks before they can report to their new employer.

macroeconomic equilibrium

the point where the quantity of aggregate demand equals the quantity of aggregate supply

Consumption

the portion of income not saved

implementation lag

the time needed to execute a change in policy

The labor force is

the total number of those employed and unemployed. This is the definition of the labor force. Only those who have looked for work in the past four weeks are considered unemployed.

Because Mayara received a raise in pay from $90,000 to $100,000, her consumption increased from $50,000 to $55,000. What is Mayara's marginal propensity to consume?

0.5 Mayara's marginal propensity to consume is determined by dividing the change in consumption by the change in income.

If the marginal propensity to consume is 0.9 and taxes are increased by a lump sum of $100 billion, what will be the reduction in income?

$900 Billion

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

The inflationary gap is the reduction in _____ that will move the economy back to full employment.

aggregated spending

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation. Shifts AD curve to the left

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

inflation

A continuous rise in the price of goods and services

Suppose the consumer price index in 2010 was 150 and its corresponding basket of goods was $19,000. If the consumer price index was 140 in 2006, what is the cost of that same basket of goods in that year?

$17,733 The equation is Cost in 2006 = (140/150) × $19,000 = 0.9333 × $19,000 = $17,733.

If nominal GDP is $20 trillion and the GDP deflator is 125, what is real GDP?

$16 trillion Real GDP = $20 trillion × (100/125) = $20 billion × 0.8 = $16 trillion.

In a simple aggregate expenditures model with no government and no international trade, if business investment is $2 trillion and consumer spending is $7 trillion, what are aggregate expenditures?

$9 trillion Aggregate expenditures are $9 trillion, since in the simple aggregate expenditures model aggregate expenditures are the sum of consumer spending and business investment.

The annualized percent change in real GDP is 0.1%. What is the quarter-to-quarter percent change in real GDP upon which this annualized rate was calculated?

0.025% The annualized rate of change is the quarter rate multiplied by 4.

Because Susom received a raise in pay from $30,000 to $50,000, his consumption increased from $29,000 to $45,000. What is Susom's marginal propensity to save?

0.2 First, calculate Susom's saving. When income was $30,000, his consumption was $29,000, so his saving was $1,000. When his income increased, his consumption increased, and his new level of saving was $50,000 − $45,000, or $5,000. Susom's marginal propensity to save is 0.2, which is determined by dividing the change in saving by the change in income. The equation is MPS = ($5,000 − $1,000)/($50,000 − $30,000) = $4,000/$20,000 = 0.2.

If there are 2,000 people in the population and 1,000 people in the labor force, and 900 are classified as employed, what is the unemployment rate?

10% 100/1,000 = 0.10 = 10%.

If a set basket of goods costs $22,000 in the current year and $20,000 in the base year, how much have prices risen since the base year?

10% The equation is % Change in Price= [($22,000/$20,000) × 100] − 100 = (1.1 × 100) − 100 = 110 − 100 = 10 or 10%.

If a set basket of goods costs $6,000 in the current year and $5,000 in the base year, what is the consumer price index?

120 The equation is CPI = ($6,000/$5,000) × 100 = 1.2 × 100 = 120.

Suppose the consumer price index in 2006 was 120 and its corresponding basket of goods was $19,000. If that same basket of goods was $23,000 in 2010, what was the value of the consumer price index in that year? To find the value of the CPI in 2010, divide the cost of the basket of goods in 2010 by its cost in 2006 and multiply by the value of the CPI in 2006.

145

If there are 2,000 people in the population, 950 are employed, 50 are unemployed, and 100 are discouraged workers, what is the unemployment rate?

5% Thus the equation is Unemployment Rate = 50/1,000 = 5%.

export price effect

As prices rise, exports become more expensive, and exports drop.

APC

C/Y

Calculating CPI and Inflation

Cost in current period / cost in base period * 100

Spending Withdrawals

Withdrawals include savings (S), taxes (T), and imports (M).

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

MPS (marginal propensity to save)

change in savings/change in income

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

Which of the following appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

exports

An increase in a country's real GDP per capita generally translates into a _____ standard of living for most of its residents.

higher

interest rate effect

higher prices lead to inflation, which leads to less borrowing and a lowering of RGDP

CPI measures what?

private goods

labor productivity

ratio of the output of goods and services to the labor hours used to produce output

APS

s/y ( percent of income that is saved )

discretionary spending

spending that works through the appropriations process in congress each year ex. transportation

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Real GDP

using one standard to measure everything

Suppose investment declines by $300. By how much will equilibrium income change if the marginal propensity to save is 0.2?

−$1,500 This is determined by multiplying the amount of reduced spending by the multiplier, which is 1/(1 − MPC) = 1/MPS = 1/(0.2) = 5; 5 × −$300 = −$1,500.