Econ 101 Midterm 1 (final set)

Supply- quantity supplied definition

The quantity supplied of any good is the amount of the good that sellers are willing and able to sell.

Calculating CPI

1. Fix the Basket 2. Find the prices 3. Compute the basket's cost 4. Chose a base year and 100x (Cost of basket in current year/Cost of basket in base year)= CPI (always use base year!!)

U.S. economic growth

3%

inferior goods

-rise in income means you buy less -elasticity negative -rise in income, decrease in quantity demanded

normal goods

-rise in income means you buy more -elasticity postive -rise in income, increase in quantity demanded

quantity equation

M x V = P x Y

U.S. yearly inflation rate

2%

In the economy of Wrexington in 2008, real GDP was $5 trillion and nominal GDP was $10 trillion. What was Wrexington's GDP Deflator in 2008? 50 200 100 150

200 (nominal/real)x100

What does BLS stand for?

Bureau of Labor Statistics

Complement good

A complement good is one that is used together with another good. Two goods are complements if: an increase in the price of one good causes a decrease in demand for the other. a decrease in the price of one good causes an increase in demand for the other. Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.

Gross Domestic Product (GDP)

A measurement of the total goods and services produced within a country. -current products, within borders by citizens or foreigners

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

In a perfectly competitive market:

All goods are the exact same Buyers and sellers are so numerous that no one can affect market price

Calculating Inflation Rate

CPI for Year A minus CPI for Year B divided by CPI for Year B multiplied by 100 (remember, this does NOT use base year, only comparing one year with another)

Importance of political stability

Economic stability, efficiency, and healthy growth require law enforcement, effective courts, a stable constitution, and honest govt officials. INstability creates uncertainty over whether property rights will be protected in the future.

BLS divides population into 3 groups: (this is adult population)

Employed: paid employees, self-employed, and unpaid workers in a family business Unemployed: people not working who have looked for work during previous 4 weeks Not in the labor force: everyone else

GDP per capita

Gross domestic product divided by the number of people in the population. Helps for standard of living

What U-Rate really Measures (4)

It excludes discouraged workers. It does not distinguish between full-time and part-time work, or people working part time because full-time jobs are not available. Some people are overqualified because they can't find an appropriate position. Some people misreport their work status in the BLS survey.

2005 $4.00 90 $1.50 150 2006 $4.00 100$2.00 180 For 2006, calculate nominal, real, and deflator

Nominal- ($4.00x100)+($2.00x180)= $760 Real (accounts for inflation!!!)- ($4.00x100)+($1.50x180)= $670 Deflator- (760/670)x100= 113.4

Inflation rate in terms of deflator

One way to measure the economy's inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.

What to label on the supply and demand chart?

P, Q, D1, S1 New and old equillibrium point arrow to where supply OR demand shifted

equilibrium

Qd=Qs

shortage

Qd>Qs When quantity demanded is greater than quantity supplied

The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period? a- 2.5 percent b- 4.0 percent c- 6.76 percent d- 10.5 percent

Real interest rate = (nominal interest rate) - (inflation rate) Calculate inflation rate (234-225)/225x100= 4% then 6.5-4= a- 2.5 percent

Productivity

When a nation's workers are very productive, real GDP is large and incomes are high. When productivity grows rapidly, so do living standards.

unemployment insurance

a government program that partially protects workers' incomes when they become unemployed *increases frictional unemployment*

Market

a group of buyers and sellers of a particular good or service

Year 2004 2005 2006 Not in the labor force 400 1100 1400 Number of employed 1400 1300 1600 Number of unemployed 200 600 200 Refer to Table 28-1. The unemployment rate in 2004, 2005, and 2006 was: a- 12.5%, 31.6%, 11.11% b- 14.3%, 46.2%, 12.5% c- 50.0%, 54.5%, 14.3% d- 10.0%, 20.0%, 6.3%

a- 12.5%, 31.6%, 11.11%

What is the equation used to add up all the spending in the economy? a- Y= C + I + G + (Exports - Imports) b- Y = C+ I + G - (Exports + Imports) c- Y = C+ I + G - (Exports - Imports) d- Y = C + I + G + (Imports - Exports)

a- Y= C + I + G + (Exports - Imports)

If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7 percent, then by definition there is a- cyclical unemployment amounting to 0.5 percent of the labor force. b- frictional unemployment amounting to 0.5 percent of the labor force. c- structural unemployment amounting to 0.5 percent of the labor force. d- search unemployment amounting to 0.5 percent of the labor force.

a- cyclical unemployment amounting to 0.5 percent of the labor force.

When the consumer price index rises, the typical family a- has to spend more dollars to maintain the same standard of living. b- can spend fewer dollars to maintain the same standard of living. c- finds that its standard of living is not affected. d- can offset the effects of rising prices by saving more.

a- has to spend more dollars to maintain the same standard of living.

A recession is usually defined as: a- two quarters of falling real GDP b- two quarters of falling nominal GDP c- two quarters of falling inflation d- two quarters of falling GDP deflators

a- two quarters of falling real GDP

Comparing Dollar Figures from Different Times

amount in today's dollars = amount in year T dollars x (price level today/price level in year T)

Year 2004 2005 2006 Not in the labor force 400 1100 1400 Number of employed 1400 1300 1600 Number of unemployed 200 600 200 Refer to Table 28-1. The labor force of Wrexington in 2004, 2005, and 2006 was: a- 600, 1700, 1600 b- 1600, 1900, 1800 c- 1400, 1300, 1600 d- 1200, 700, 1400

b- 1600, 1900, 1800

Refer to Table 24-1. If 2005 is the base year, then the inflation rate in 2006 was a- 16.7 percent. b- 20 percent. c- 40 percent. d- 44.1 percent.

b- 20 percent.

Year 2004 2005 2006 Not in the labor force 400 1100 1400 Number of employed 1400 1300 1600 Number of unemployed 200 600 200 Refer to Table 28-1. The adult population in 2004, 2005, and 2006 was: a- 1600, 1900, 1800 b- 2000, 3000, 3200 c- 1800, 2400, 300 d- 600, 1900, 1800

b- 2000, 3000, 3200

The price index was 150 in the first year, 160 in the second year, and 175 in the third year. The inflation rate was about a- 6.25 percent between the first and second years, and 8.6 percent between the second and third years. b- 6.7 percent between the first and second years, and 9.4 percent between the second and third years. c- 10 percent between the first and second years, and 15 percent between the second and third years. d- 60 percent between the first and second years, and 75 percent between the second and third years.

b- 6.7 percent between the first and second years, and 9.4 percent between the second and third years. (remember NO base year)

Anna, a U.S. citizen, works only in Germany. The value she adds to production in Germany is included a- in both German GDP and U.S. GDP. b- in German GDP, but it is not included in U.S. GDP. c- in U.S. GDP, but it is not included in German GDP. d- in neither German GDP nor U.S. GDP.

b- in German GDP, but it is not included in U.S. GDP.

The law of demand is illustrated by a demand curve that is a-horizontal. b-down-ward sloping. c-vertical. d-upward-sloping.

b-down-ward sloping.

typical consumer's basket consists of 10 bushels of peaches and 15 bushels of pecans. Year Peaches Pecans 2005 $11 per bushel $6 per bushel 2006 $9 per bushel $10 per bushel Refer to Table 24-1. If 2005 is the base year, then the CPI for 2006 was a- 83.3. b- 100. c- 120. d- 240.

c- 120.

Which of the following would cause price to decrease? a- a decrease in supply b- an increase in demand c- a surplus of the good d- a shortage of the good

c- a surplus of the good

Economic growth can be achieved through a- a decrease in the supply of labor. b- a decrease in the number of people who are working. c- an increase in the production of physical capital. d- a reduction in spending on research and development.

c- an increase in the production of physical capital.

What is CPI?

consumer price index Measures the average price of consumer goods and services purchased by households

Components of gdp

consumption, investment, government purchases, and net exports

Year 2004 2005 2006 Not in the labor force 400 1100 1400 Number of employed 1400 1300 1600 Number of unemployed 200 600 200 Refer to Table 28-1. The labor-force participation rate of Wrexington in 2004, 2005, and 2006 was: a- 87.5%, 68.4%, 88.9% b- 70.0%, 43.3%, 50.0% c- 7.0%, 2.17%, 8.0% d- 80.0%, 63.3%, 56.3%

d- 80.0%, 63.3%, 56.3%

An early frost in the vineyards of Napa Valley would cause a- an increase in the demand for wine, increasing price. b- an increase in the supply of wine, decreasing price. c- a decrease in the demand for wine, decreasing price. d- a decrease in the supply of wine, increasing price.

d- a decrease in the supply of wine, increasing price.

Which of the following would cause price to increase? a- an increase in supply b- a decrease in demand c- a surplus of the good d- a shortage of the good

d- a shortage of the good

Which of the following will not increase labor's productivity? a- education b- technology c- new physical capital d- depletion of natural resources

d- depletion of natural resources

Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies that X and Y are a- complementary goods. b- normal goods. c- inferior goods. d- substitute goods.

d- substitute goods.

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a a-shortage to exist and the market price of roses to increase. b- shortage to exist and the market price of roses to decrease. c-surplus to exist and the market price of roses to increase. d- surplus to exist and the market price of roses to decrease.

d- surplus to exist and the market price of roses to decrease.

shift left

decrease

decrease in demand

decrease in price, decrease in quantity (shift demand curve to the left)

increase in supply

decrease in price, increase in quantity (shift supply to right)

shift right

increase

decrease in supply

increase in price, decrease in quantity (shift supply to the left)

increase in demand

increase in price, increase in quantity demanded (shift demand curve to the right)

labor force participation rate formula

labor force/adult population x 100

unemployment rate formula

number of unemployed/labor force x 100

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Substitue good

one that can be used in place of another good. Two goods are substitutes if: an increase in the price of one good causes an increase in demand for the other. a decrease in the price of one good causes a decrease in demand for the other. Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.

surplus

price > equilibrium price When quantity supplied is greater than quantity demanded

real interest rate formula

real interest rate = nominal interest rate - inflation rate

classical dichotomy

separation of real and nominal variables

Technological Knowledge (4 factors of production)

society's understanding of the best ways to produce g&s *programs that calculate best time to farm*

Law of demand

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

Law of supply

the claim that the quantity supplied of a good increases when the price of the good rises, other things equal

Natural resources per worker (4 factors of production)

the inputs into production that nature provides, e.g., land, mineral deposits *Saudi arabia has so much oil!*

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

Human Capital (4 factors of production)

the skills and knowledge gained by a worker through education and experience *tech school*

Physical capital per worker (4 factors of production)

the stock of equipment and structures that are used to produce goods and services *owning tractors*

Labor force is: (NOT population)

total # of workers, including the employed and unemployed.

frictional unemployment

unemployment that occurs when people take time to find a job *short term*

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 *long term*

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves *deviation from natural rate*

Nominal GDP

values output using current prices. It is not corrected for inflation.

Real GDP

values output using the prices of a base year. Real GDP is corrected for inflation.

Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CPI is 125. Arlo's job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power? a- $42,000 b- $65,625 c- $68,880 d- $189,000

x= 42,000 (125/80) b- $65,625

Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about a- $5,874. b- $1,089,474. c- $1,216,000. d- $16,560,000.

x= 80,000x (207/15.2) b- $1,089,474.

Inflation v. Deflation

•Inflation is positive when most prices are rising •Increases the cost of living •Money is worth less •Deflation is when most prices are falling •Decreases the cost of living •Money is worth more