Macro midterm

Nominal GDP =

(GDP Deflator/100) * Real GDP

THE MULTIPLIER EFFECT

-Occurs when an initial amount of spending causes income to grow by a larger amount -The multiplier is calculated as: Multiplier =1 / (1 − MPC) -The greater the MPC the higher the spending multiplier

A) Unions successfully negotiate higher wages. B) Subsidies to firms increase. C) Consumer incomes decrease. D) Workers and firms believe that inflation is going to fall.

A) Unions successfully negotiate higher wages.

Q7- The largest component of GDP is: A. consumption expenditure. B. gross private domestic investment. C. government spending. D. net exports

A. Consumption expenditure

Q2-Over time, small differences in economic growth can lead to large differences in wealth because of the: A. power of compounding. B. power of linear growth. C. rule of 70. D. differences in the value of currency among different nations.

A. power of compounding.

A rising aggregate price level _____ an economy's interest rates and therefore _____output demanded. A. increases; increases B. increases; reduces C. reduces; increases D. reduces; reduces

B. increases; reduces

11. Which of the following will NOT shift the aggregate supply curve to the right? A) the discovery of cheap solar energy B) the development in the methods of production of nanotechnology C) an increase in the minimum wage D) a decrease in corporate taxes

C) an increase in the minimum wage

Q6-The multiplier effect is in effect when a(n): A. unemployment rate is greater than the inflation rate. B. recession becomes a depression. C. change in income is greater than an initial change in spending. D. increase in GDP is greater than the growth in population.

C. change in income is greater than an initial change in spending.

Q4-The marginal propensity to consume refers to the proportion of the next dollar of: A. savings that is transformed into consumption. B. government spending that trickles down to consumers. C. income that is devoted to consumption. D. business investment that is devoted to consumer products. E. the economy has the greatest effect on policies aimed at correcting fluctuations in the economy?

C. income that is devoted to consumption.

Q9-An example of frictional unemployment is: A. part-time workers seeking full-time employment. B. postal employees losing their job because email has replaced snail mail. C. new graduates looking for a job but not yet finding work. D. employees losing their job because of a recession that causes a decline in demand for the product their company produces.

C. new graduates looking for a job but not yet finding work.

Cost-push inflation is a situation in which the: A. short-run aggregate supply curve shifts rightward. B. aggregate demand curve shifts rightward. C. short-run aggregate supply curve shifts leftward. D. aggregate demand curve shifts leftward.

C. short-run aggregate supply curve shifts leftward.

Q13 - WHICH VARIABLES CONSTITUTE THE LARGEST PORTIONS OF GDP USING THE EXPENDITURE AND INCOME APPROACHES, RESPECTIVELY? A. GOVERNMENT SPENDING; CORPORATE PROFITS B. GOVERNMENT SPENDING; LABOR WAGES C. CONSUMPTION; CORPORATE PROFITS D. CONSUMPTION; LABOR WAGES E. NET EXPORTS; NET INTEREST

D. CONSUMPTION; LABOR WAGES

If an economy is in recession, the intersection of the short-run aggregate supply curve and aggregate demand curve occurs at an output level _____ the long-run output capability of the economy. A. equal to B. above C. parallel to D. below

D. below

injections

Increments of spending, including investment, government spending, and exports.

There are two major concerns facing the economy:

Inflation and Unemployment

Consumption

THE PORTION OFINCOME NOT SAVED: INCOME = C + S

Spending Withdrawals

Withdrawals include savings (S), Taxes (T), and Imports (M)

full employment

the condition in which virtually all who are able and willing to work are employed.

Foreign sector of the Keynesian model

(X-M) or net exports

GDP Deflator =

(nominal GDP/ Real GDP) * 100

Catch up effect

-Describes why developing countries may initially grow faster than developed countries. -Developing countries can use existing technologies to make their inputs more productive, while developed countries must innovate to increase growth. -The catch-up effect is subject to diminishing returns to capital.

SHIFTING THE LRAS CURVE

-Shifts of the LRAS curve take time. Rightward shifts in LRAS occur when: technology improves: automation, digitalization. labor quality is enhanced; more people pursue higher education. trade and globalization increase.

saving

-The difference between income and consumption; the amount of disposable income not spent.

The balanced budget multiplier is always:

1

Consequences of Hyperinflation

1. Hyperinflation is typically caused by excessive government spending over tax revenues and the printing of money to finance deficits. 2. Workers are paid frequently, and purchases are made immediately. 3. Eventually the monetary system breaks down and barter is used. Foreign currencies become valuable as a medium of exchange.

deflation

A decline in overall prices throughout the economy. This is the opposite of inflation.

SHIFTS OF THE SRAS CURVE

A factor that shifts SRAS to the right will increase aggregate output at every price level

disinflation

A reduction in the rate of inflation. An economy experiencing disinflation still faces inflation, but at a declining rate

Q8-Financial stability helps to improve standards of living and generate economic growth. A. True B. False

A. True

Q2- The study of macroeconomics as a specific discipline can be attributed to: A- Adam Smith. B- John Maynard Keynes. C - Milton Friedman. D- Joseph Schumpeter.

B-John Maynard Keynes

Q5-If income is $50,000, consumption is $47,500, and saving is $2,500, then the marginal propensity to consume is: A - 0.95 B - 0.50 C - 0.05 D - There is not enough information to answer this question

D - There is not enough information to answer this question

What is the primary factor in explaining how well people live, their standard of living?

Economic growth

How to calculate GDP

GDP = C + I + G + (X − M) C = PERSONAL CONSUMPTION EXPENDITURES I = GROSS PRIVATE DOMESTIC INVESTMENT (GPDI) G = GOVERNMENT SPENDING X − M = NET EXPORTS

INVESTMENT IS DETERMINED BY :

INTEREST RATES, EXPECTED RATE OF RETURN ON INVESTMENT, BUSINESS EXPECTATIONS

LONG-RUN AGGREGATE SUPPLY

In the long run, the aggregate supply curve is vertical. This incorporates the approach of classical economic analysis, which assumed that all variables are adjustable in the long run. -In the long run, the economy will gravitate toward full employment.

Spending Injections

Injections include investment (I), Government Spending (G), and Exports (X)

ORIGINS OF MACROECONOMICS

John Maynard Keynes originated macroeconomic theory. At that time: industrial capacity was unused. unemployment was high. businesses were not investing. In that situation, it was possible to expand output and employment by generating productive activity

The numerical value of the MPC is

MPC= 1 - MPS

The numerical value of the MPS is

MPS= change in saving / change in income

Total Factor productivity

Measures the portion of output that is not explained by the amount of inputs used, it captures the external effects influencing productivity of all inputs.

The numerical value of the multiplier is

Multiplier = 1 /(1- MPC)

Average propensity to save (APS)

Percentage of income that is saved (S/Y)

Average Propensity to Consume (APC)

Percentage of income that is used for consumption (C/Y)

MACROECONOMIC EQUILIBRIUM

Point e represents a short-run macroeconomic equilibrium, the point at which the short-run aggregate supply curve and aggregate demand curve intersect. In this case, point e also represents a long-run macroeconomic equilibrium because the economy is operating at full employment, producing output Qf.

Classical model

Pre 1930 mainstream economic thought argued that: -a laissez- faire (leave it alone) approach was best for the economy -the economy was self-correcting; it always adjusted to full employment by the forces of demand and supply. -prices, wages, and interest rates were flexible.

Determinants of Long-Run Aggregate Supply

SHIFTING THE LRAS CURVE The position of the LRAS curve depends on the economy's capacity: Amount of available resources The quality of the labor force Available technology

Attitudes toward inflation

THOSE WHO BENEFIT- Debtors (borrowers) benefit from unanticipated inflation because the real value of their fixed payments falls over time as their wages rise with inflation. THOSE WHO ARE HARMED- People living on fixed incomes see their purchasing power decline with inflation. Creditors (lenders) see the real value of their loan repayments fall. THOSE WHO ARE UNAFFECTED- Workers whose wages have escalator clauses. Social Security recipients whose benefits are adjusted with inflation. Banks that properly anticipate inflation.

AGGREGATE EXPENDITURES (AE)

The aggregate expenditure model is also called the Keynesian Cross. It is most important and challenging model in macroeconomics. What does the AE explain: It analyses how a country spends its money relative to what it earns.

DETERMINANTS OF AGGREGATE DEMAND

The determinants of aggregate demand are factors that shift the entire AD curve when they change: Consumption Investment Government spending Net exports

DETERMINANTS OF SRAS

The determinants of the short-run aggregate supply curve are: changes in input prices. technology and productivity. taxes and regulation. market power of firms. inflationary expectations.

Real GDP per capita

real gdp divided by population

THE MULTIPLIER AND AD/AS

-When short run equilibrium is below full employment... -...the spending multiplier magnifies new spending, shifting AD toward long-run equilibrium.

Q8-The recessionary gap is equal to the GDP gap divided by the multiplier. A. True B. False

A. True

Q9-If an economy's GDP will double in 25 years, then its growth rate must be about: A. 2.5%. B. 2.8%. C. 25%. D. 28%

B. 2.8%.

As economies grow in size, it is easier to grow at a high rate. A. True B. False

B. False

Q4- GDP can be found either by adding up all of the _____ or all of the _____ in the economy. A. spending; taxes B. spending; income C. investment; income D. net interest payments; taxes

B. spending; income

THE FULL AGGREGATE EXPENDITURES MODEL TAKES ALL SPENDING COMPONENTS INTO ACCOUNT:

C + I + G + (X − M)

SHORT-RUN AGGREGATE SUPPLY

In the short run, the aggregate supply curve is upward sloping. Some input prices (such as wages) are slow to change; they are sticky. When prices rise but input prices are sticky, profits increase and firms produce more, resulting in a short-run increase in aggregate output. -SRAS is positively sloped because input costs are slow to change. (They are sticky.) -In actuality, the curve looks as figure below. The curve is flatter at lower levels of output and steeper at higher levels of output to reflect the reduced stickiness of input prices as aggregate output increases.

Marginal Propensity to consume (MPC)

The change in consumptio9n given a change in income (change in C / change in Y) Income or Output- Y Consumption- C Saving- S

Marginal Propensity to Save (MPS)

The change in saving given a change in income (Change in S / change in Y) Income or Output- Y Consumption- C Saving- S

MACROECONOMIC EQUILIBRIUM

The economy is at equilibrium where injections of spending (investment) equal withdrawals (saving), or: I = S At this point, there is no reason for the economy to change its level of output or income.

Gross National Product (GNP)

The market value of all goods and services produced domestically and abroad using resources supplied by U.S. Citizens

THE SPENDING MULTIPLIER

The multiplier magnifies new spending into higher income and output: Each round of spending becomes income to someone else.

PROBLEMS WITH UNEMPLOYMENTSTATISTICS

The official U.S. unemployment rate does not account for: underemployed workers, those working part-time or seeking a better job. marginally attached workers, those who actively looked for work in the past 12 months but not in the past four weeks. discouraged workers, the portion of marginally attached workers who have given up actively looking for work.

Gross Domestic Product (GDP)

Total Market value of all final goods and services produced by resources in the United States in a given year

Q4-The town of Villageton has 500 residents, of which 300 are employed, 30 are not working but actively seeking work, 80 are children in school, 40 are retirees, 30 are full -time college students, and 20 are institutionalized.

a. Calculate the unemployment rate in Villagetone. - The unemployment rate is 30 / (300+30) = 9.1% b. Suppose that 10 of the 30 college students graduate and enter the labor force actively seekingwork, but only 5 find a job. How does this change the unemployment rate in Villageton? - The labor force increases from 330 to 340, and the number of unemployed persons increases from 30 to 35. The new unemployment rate is 35 / 340 = 10.3%.

Q10-A production function: A. shows the output that is produced using different combinations of inputs combined with existing technology. B. shows the output that is produced using different combinations of technology combined with existing inputs. C. shows the output that is most highly valued by consumers. D. shows the most desired production method for a given level of output.

A. shows the output that is produced using different combinations of inputs combined with existing technology.

Unemployed

AN UNEMPLOYED PERSON DOES NOT HAVE A JOB BUT HAS BEEN ACTIVELY (BUT UNSUCCESSFULLY) SEEKINGWORK IN THE PAST FOUR WEEKS.

Types of Unemployment

Frictional Unemployment results from workers who voluntarily quit to search for a better position Structural unemployment is caused by changes in consumer demand or technology Cyclical unemployment is caused by fluctuations in the business cycle

COMMON CAUSES OF UNEMPLOYMENT

- Job searching and matching: It takes time to find a job and for employers to find the right employees. - Efficiency wages: Wages are kept above market equilibrium to reduce turnover and to improve productivity. - High minimum wages: If wages are too costly, hiring is likely to be reduced. - Business cycle: Recessions reduce consumer demand, leading to layoffs.

THE MULTIPLIER WORKS IN BOTH DIRECTIONS

-A decrease in spending during an economic downturn can cause a larger drop in income. -If consumers increase their saving during arecession, they may inadvertently make therecession worse because of the multiplier.

Shifts in Agregate Demand

-A factor that shifts aggregate demand to the right will increase output at every price level -A factor that shifts aggregate demand to the left will decrease output at every price level.

Recessionary Gap

-A recessionary gap, or contractionary gap, occurs when a country's real GDP is lower than its GDP at full employment -THE INCREASE IN AGGREGATE SPENDING NECESSARY TO BRING A DEPRESSED ECONOMY BACK TO FULL EMPLOYMENT -Recessionary Gap = GDP gap / 4

GDP gap

-An inflationary gap, is the amount by which the actual gross domestic product exceeds potential full-employment GDP. -GDP gap= Actual Income - Potential Income ( GDP at full employment )

Inflationary Gap

-Inflationary Gap = GDP gap / 4 -THE DECREASE IN AGGREGATE SPENDING NECESSARY TO BRING AN OVERHEATED ECONOMY BACK TO FULL EMPLOYMENT -Inflationary pressures occur when an economy produces output above full employment. Excess spending results in higher prices, which can lead to other economic problems.

LONG-RUN AGGREGATE SUPPLY

-Long-run aggregate supply (LRAS) curve The long-run aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce. -A shift in the long-run aggregate supply curve moves the economy to a new long-run equilibrium output.

cost-push inflation

-Results when a supply shock hits the economy, reducing short-run aggregate supply, and thus reducing output and increasing the price level. -A negative supply shock reduces output and raises prices. -Increasing AD will push output back to full employment but at even higher prices. Alternatively, decreasing AD will reduce inflation but increase unemployment.

DEMAND-PULL INFLATION

-Results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises. -A positive demand shock expands the economy beyond full employment output. -Rising input prices eventual push SRAS to the left, back to long-run equilibrium but at a higher price level

consumption

-Spending by individuals and households on both durable goods(e.g., autos, appliances, and electronic equipment) and nondurable goods(e.g., food, clothing, and entertainment)

AGGREGATE DEMAND

-THE AGGREGATE DEMAND CURVE SHOWS THE OUTPUT OF GOODS AND SERVICES (REAL GDP) DEMANDED AT DIFFERENT PRICE LEVELS. -A higher aggregate price causes lower aggregate output demanded . -Aggregate demand slopes down because of the wealth effect, export price effect, and interest rate effect.

Measuring inflation

1- Consumer price index (CPI)measures the retail price level. 2- Producer price index (PPI)measures wholesale prices. 3- GDP deflator measures the average price of all items in GDP.

Causes of Inflation:

1- DEMAND FACTORS— increase in demand for products consumer confidence, income, wealth. 2- SUPPLY SHOCKS—price fluctuations on inputs such as food and oil. 3- GOVERNMENT POLICY—its ability to borrow and print money.

Q6- A TOYOTA AVALON ASSEMBLED IN THE UNITED STATES COUNTSTOWARD 1- U.S. GDP 2- U.S. GNP.

1- U.S. GDP

Q5- BROOKS RUNNING SHOES MADE IN CHINA COUNTTOWARD 1- U.S. GNP 2- U.S. GDP

1- U.S. GNP

Adjusting for Inflation

1. Price indexes are used to modify payments to account for inflation. a. Used to convert nominal values to real values. 2. Escalator clauses are designed to adjust payments or wages for changes in the price level. a. Commercial rental agreements b. Labor union contracts c. Social Security payments

Q1- The aggregate expenditure model is also called the: A. Keynesian cross. B. Friedman exchange model. C. monetarist prototype. D. Samuelson's model.

A. Keynesian cross.

Q1- What event was a major influence on the development of macroeconomics? A. the Great Depression B. Employment Act of 1946 C. the establishment of the Federal Reserve System in the United States D. the U.S. entry into World War II

A. The Great Depression

Q11-The recessionary gap is the increase in aggregate spending needed to bring a depressed economy back to full employment.. A. True B. False

A. True

Q7- The catch-up effect is the idea that up to a certain point, developing countries can achieve greater productivity for each unit of capital invested because they have the advantage of using technologies already developed by other countries. A. True B. False

A. True

Q7-A frequently used measure of inflation is the: A. consumer price index. B. federal funds rate. C. purchasing managers' index. D. marginal tax rate.

A. consumer price index.

Q5-Which segment of the economy has the greatest effect on policies aimed at correcting fluctuations in the economy? A. consumption B. government C. investment D. net exports

A. consumption

Q10-Which type of unemployment do policy makers seek to control? A. cyclical B. structural C. seasonal D. frictional

A. cyclical

withdrawals

Activities that remove spending from the economy, including saving, taxes, and imports.

Natural Rate of Unemployment

Also referred to as the nonaccelerating inflation rate of unemployment (NAIRU) inflationary pressures are at their minimum. actual inflation is equal to expectations. price and wage decisions are consistent. cyclical unemployment is zero.

GDP Deflator

An index of the average prices for all goods and services in the economy, including all components of GDP: Consumption, investment, government spending, and net exports

Export price effect:

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

Interest rate effect:

As prices rise, people hold more money, pushing interest rates higher, reducing business investment.

Wealth effect:

As prices rise, purchasing power of wealth falls, reducing consumption.

10. What happens if business expectations improve? A) Aggregate supply shifts to the left. B) Aggregate supply shifts to the right. C) Aggregate demand shifts to the left. D) Aggregate demand shifts to the right.

B) Aggregate supply shifts to the right.

Which of the following might cause a change in short-run aggregate supply? A) Unions successfully negotiate higher wages. B) Businesses are increasingly optimistic about the future. C) Consumer incomes decrease. D) Taxes on businesses increase.

B) Businesses are increasingly optimistic about the future.

The _____ is vertical at full employment. A) short-run aggregate supply curve B) long-run aggregate supply curve C) short-run aggregate demand curve D) long-run aggregate demand curve

B) long-run aggregate supply curve

High taxes and/or heavy regulation: A) can cause firms to boost production so they can cover the added costs. B) raise costs of production so that the aggregate supply curve shifts to the left. C) are not likely to affect firms' behavior, since they are more concerned about profits than taxes or regulation . D) are likely to shift aggregate supply to the right

B) raise costs of production so that the aggregate supply curve shifts to the left.

Q3-A SMALL COUNTRY HAS 1,200 CITIZENS: 800 ARE EMPLOYED, 200 ARE UNEMPLOYED, 100 ARE RETIRED,AND 100 ARE KIDS IN SCHOOL. THE UNEMPLOYMENT RATE IS: A. 16.6% B. 20.0% C. 25.0% D. 33.3%

B. 20.0%

AE is equal to C + I + G - (X + M). A. True B. False

B. False

Q10-The inflationary gap is the amount of aggregate spending greater than the spending necessary to result in full employment. A. True B. False

B. False

Q11- When Mr. Wilson worked full time, he paid a service to have his house cleaned twice a month. Now that he is retire Mr. Wilson does his own cleaning. What is the effect on GDP? A. GDP is unaffected by this change. B. GDP falls as a result of this change. C. GDP at first rises but then falls. D. GDP rises as a result of this change

B. GDP falls as a result of this change.

Q11- The relationship between economic freedom and per capita GDP is: A. negative. B. positive. C. negative for advanced economies and positive for developing economies. D. positive for advanced economies and negative for developing economies.

B. Positive

Does an incentive exist to spend four or more years of one's life and tens of thousands of dollars to earn a college degree? A. Yes, everything an individual does involves incentives. B. Yes, the student knows that going to college will help him receive a better paying job. The incentive to go to school involves self-interest. C. No, going to college does not involve an incentive. D. No, an incentive does not exist since the student must pay a price to go to college

B. Yes, the student knows that going to college will help him receive a better paying job. The incentive to go to school involves self-interest.

Q2-The aggregate expenditures model explains how: A. the inflation rate in an economy varies with the money supply. B. a country spends its money relative to what it earns. C. the Federal Reserve prints money during a recession. D. Federal spending is shaped by the level of consumption in a country.

B. a country spends its money relative to what it earns.

Q8- The U.S. gross domestic product is equal to the total market value of all: A. intermediate goods and services produced by resources in the United States. B. final goods and services produced by resources in the United States. C. final goods and services produced by U.S. citizens in the United States. D. intermediate goods and services produced by citizens in the United States.

B. final goods and services produced by resources in the United States.

Q5-Inflation is a(n) A. increase in output. B. general rise in prices. C. increase in total economic activity. D. rise in productivity.

B. general rise in prices

Several factors can shift short-run aggregate supply curves, including: A. the number of consumers and average population age. B. input prices and government regulations. C. aggregate demand and consumer tastes. D. substitute and complementary products.

B. input prices and government regulations.

Q4- In addition to consumption spending, the other components of aggregate expenditures are: A. import spending, state and local government spending, and educational spending. B. investment spending, government spending, and net export spending. C. government spending, business raw materials spending, and transportation spending. D. housing spending, energy spending, and health care spending.

B. investment spending, government spending, and net export spending.

Q10- The value of cars that the Ford Motor Company produces in a German plant: A. is a part of U.S. GDP. B. is a part of U.S. GNP. C. is a part of German GNP. D. is not a part of German GDP.

B. is a part of U.S. GNP.

Q3- Improvements in factors of production can lead countries to attain a higher rate of economic growth. Such factors include: A. Land, capital, labor, and the government. B. land, labor, capital, and entrepreneurship. C. labor, capital, defense services, and entrepreneurship. D. natural resources, defense services, government, and entrepreneurship.

B. land, labor, capital, and entrepreneurship

Q3- Which organization determines the beginning and end dates of a recession? A. the Council of Economic Advisers B. the National Bureau of Economic Research C. the U.S. Treasury Department D. the Federal Reserve Board of Governors

B. the National Bureau of Economic Research

Q8-To be considered unemployed, one must not be working and must have actively looked for work in the past 4 weeks. This definition _____ the unemployment rate. A. overstates B. understates C. exaggerates D. accurately captures

B. understates

Q15- NORTH FACE IS A POPULAR U.S. BRAND. HOWEVER, MOST OF ITS APPAREL IS MADE IN CHINA. IN WHICH CATEGORY WOULD THE VALUE OF NORTH FACE APPAREL SALES APPEAR? A.IN U.S. GDP B.IN U.S. GNP C.IN CHINA'S GNP D.IN BOTH U.S. AND CHINA'S GDP

B.IN U.S. GNP

5. Which of the following would NOT cause a rightward shift in aggregate supply? A) an increase in production by employees B) a decrease in wages paid to employees C) fear of inflation D) a decrease in tax receipts

C) fear of inflation

Q1-IF A COUNTRY GROWS AT 3% PER YEAR,APPROXIMATELY HOW MANY YEARS WILL IT TAKE FORITS GDP TO DOUBLE? A. 3 YEARS B. 10 YEARS C. 23 YEARS D.33 YEARS E. 70 YEARS

C. 23 years

Q3-The benefits of economic growth in a country include a(n): A. reduction in the life expectancy of the country's population. B. increase in the birth rate in the country. C. better standard of living for the country's citizens. D. decrease in the foreign investment to the country.

C. better standard of living for the country's citizens.

Q6-Inflation is considered a tax on savings. This is because the: A. government increases taxes on savings when inflation is high. B. growth in savings increases when inflation is present. C. purchasing power of savings declines as inflation rises. D. number of savings instruments declines as inflation increases.

C. purchasing power of savings declines as inflation rises.

Q4-Economic growth is normally measured by the growth in a country's: A. labor force. B. physical capital. C. real GDP. D. net exports.

C. real GDP.

An economy cannot increase its output level beyond its long-run maximum full-employment capacity unless: A. more consumers migrate to the country. B. firms reduce their output capabilities. C. underlying improvements in production capacity take place. D. government regulations permit productive capacity to grow.

C. underlying improvements in production capacity take place.

THE TWO COMPONENTS IN THE SIMPLE AEMODEL (AE = C + I)

CONSUMPTION -ALMOST 70% OF AGGREGATESPENDING: LARGE AND STABLE INVESTMENT -ABOUT 15% OF AGGREGATE SPENDING:VOLATILE AND SENSITIVE TOECONOMIC CONDITIONS

Consumer Price Index (CPI) how to calculate

CPI = (cost in current period / cost in base period) * 100

Keynesian Consumption Function

Consumption spending grows as income grows but not as fast. As income rises, savings rise as a percentage of income. Classical economists believe that interest rates determine saving, while Keynesians believe that income determines saving.

4. Which of the following would NOT cause a shift in the short-run aggregate supply curve? A) an increase in resource prices B) a decrease in the expected rate of inflation C) a major technological advance D) a decrease in real interest rates

D) a decrease in real interest rates

Ceteris paribus means: A) all men are created equal. B) wage parity between men and women is a worthy goal. C) there are an infinite number of factors affecting each human decision and they change all the time. D) economists isolate one or two factors that change when analyzing human decisions.

D) economists isolate one or two factors that change when analyzing human decisions.

6. All of the following are determinants of aggregate supply EXCEPT: A) productivity. B) taxes. C) subsidies. D) net exports.

D) net exports.

7. A decrease in regulation would cause aggregate: A) supply to shift to the left. B) demand to shift to the right. C) demand to shift to the left. D) supply to shift to the right.

D) supply to shift to the right.

Q16- WHICH VARIABLES CONSTITUTE THE LARGEST PORTIONS OF GDP USING THE EXPENDITURE AND INCOME APPROACHES,RESPECTIVELY? A. GOVERNMENT SPENDING; CORPORATEPROFITS B. GOVERNMENT SPENDING; LABOR WAGES C. CONSUMPTION; CORPORATE PROFITS D. CONSUMPTION; LABOR WAGES E. NET EXPORTS; NET INTEREST

D. CONSUMPTION; LABOR WAGES

Which is NOT true about the use of economic models? A) Economic models are simplified representations of the real world. B) Economists sometimes use laboratory experiments to test their theories. C) Economists use what has already happened in the real world to test their theories D) Economists are employed to explain economic phenomena but are never used to predict what might happen next.

D. Economists are employed to explain economic phenomena but are never used to predict what might happen next.

Q5-WHAT IS THE SINGLE MOST IMPORTANT FACTOR INFLUENCING ECONOMIC GROWTH FOR AN ECONOMY? A. POPULATION GROWTH B. GOVERNMENT REGULATION OF BIG BUSINESSES C. REDUCING THE CAPITAL-TO-LABOR RATIO D. INCREASED PRODUCTIVITY E. GREATER NATURAL RESOURCES

D. INCREASED PRODUCTIVITY

What is wrong with the statement "Economics is everything to do with money"? A. Yes, money is the basis of economics. The economy cannot thrive without money. B. Yes, all decisions made in the economy involve money. C. No, economics involves satisfying limited wants with unlimited resources. D. No, economics involves satisfying wants by using resources wisely. We must make choices based on limited resources

D. No , economics involves satisfying wants by using resources wisely. We must make choices based on limited resources

Q11- Cyclical unemployment occurs when: A. employees voluntarily leave a job to seek a better one. B. technological developments superannuate the products of certain companies, causing the firms to fail. C. employees voluntarily take time off between jobs. D. demand is insufficient to keep businesses fully operating.

D. demand is insufficient to keep businesses fully operating.

Q3-The figure depicts a(n) A. foreign exchange market equilibrium. B. factor market equilibrium. C. microeconomic equilibrium. D. macroeconomic equilibrium.

D. macroeconomic equilibrium.

Q12 - The goals of macroeconomic policy are to: A. eliminate short-term fluctuations in the economy and sustain high economic growth. B. ensure that the economy doesn't become depressed and wages remain high. C. increase employment and grow incomes D. minimize the effects of recessions and ensure that the economy grows over time.

D. minimize the effects of recessions and ensure that the economy grows over time.

Q14- IN 2010, THE U.S. ECONOMY WAS IN POOR SHAPE. UNEMPLOYMENT WAS VERY HIGH BUT FALLING, AND GROWTH WAS BARELY POSITIVE. WHICH PHASEOF THE BUSINESS CYCLE DOES THIS BEST DESCRIBE?A.PEAK B.RECESSION C.TROUGH D.RECOVERY

D.RECOVERY

Aggregate expenditures consist of the components of GDP that are measured by spending

GDP = AE = C + I + G + (X − M) aggregate expenditures Consist of: consumer spending, business investment spending, government spending, and net foreign spending (exports minus imports)

In a macroeconomic equilibirum

I + G + X = S + T + M

Investment Demand

Investment levels depend primarily on the rate of return on capital Investments earning a high rate of return are undertaken first Interest rates also affect investment because most business investment is financed. As interest rates fall, investment rises.

AGGREGATE INVESTMENT SCHEDULE

Investment spending is autonomous(independent) of income.

JOHN MAYNARD KEYNES (1883-1946)

Known as the father of macroeconomics. Launched a critique of classical economics by focusing on spending as the key to growth. His writings still influence economic policy (e.g., stimulus policies).

Unemployment rate is equal to:

Number of people unemployed/labor force

The rule of 70 can be used to estimate the number of years for a value to double

Number of years to double value = 70/ annual growth(%)

Inflation

The general rise in prices in the economy id referred to as inflation

Real GDP

Total output in a year measured in constant - year prices

% change in price =

[(CPI in current year / CPI in original year) * 100] -100

Nominal GDP

is GDP given in current prices, without adjustment for inflation

Marginal propensity to consume

measure what part of additional income will be either consumed or saved

Production Function

measures how an economy turns inputs into outputs using existing technology OUTPUT = A * f(L, K, H, N) Land and natural resources (N) include land and raw resources from the land. Labor (L) is mental and physical talents. Human capital (H) includes improvements to labor from training and education. Physical capital (K) is manufactured items used to produce goods and services. Entrepreneurship (A) is the ability to use resources to produce goods and services.

Real GDP =

nominal GDP * ( 100/ GDP Deflator)

How is economic growth most commonly measures

real gdp and real gdp per capita