Macroeconomics

Purchasing Power Parity Theory is the idea that

currencies should have the same purchasing power in different countries

Which of the following is included in Gross Domestic Product for the United States?

economics classes at Binghamton University

Which of the following is an assumption of the classical model?

1. Households and firms are rationally self-interested. 2. Wages, prices, and interest rates are flexible so that markets always clear. 3. There is no money illusion in the economy 4. The Law of Diminishing Returns holds. (ALL ARE TRUE)

The classical dichotomy is the idea that

real variables can be separated from nominal variables in the classical model.

real GDP growth rate

realGDP2 - realGDP1 / realGDP1 * 100

The current account

records the flows of goods, services, income and unilateral transfers.

GDP as the value of final output

sigma ( Pi * Qi)

Nominal GDP 1

summation(P1*Q1)

Real GDP 1

summation(P1*Q1) (Y1: real GDP = nom GDP because Y1 is base year)

Real GDP 2

summation(P1*Q2)

Nominal GDP 2

summation(P2*Q2)

Say's Law

supply creates its own demand

assume that the labor force of Jobville consists of 100 people, and that 20 people are currently looking for work but unable to find a job. If 10 people give up looking for work, then

the unemployment rate declines from 20% to 11.1%. (Formula: UR = labor force / population * 100)

To measure the contributions of each sector of the economy, economists use

the value-added approach.

Nominal GDP equation

units of output x price per unit (Price x Quantity)

Since NNP = GNP - CCA, NNP =

w + i + R + profit + SD w= wages i= interest R = rents SD = statistical descrepancy

If the United States has a negative balance in its current account, then

1. It has a trade deficit 2. It must have a surplus in its capital and financial accounts 3. it is buying more from the rest of the world then it is selling to the rest of the world 4. its overall balance of payments will always equal 0. (ALL OF THESE ARE TRUE)

Who would be included in the labor force?

Betty is actively seeking employment as a carpenter but is currently without a job.

Which of the following individuals would be included in the labor force?

David was just laid off from his factory job and is actively seeking another form of employment.

Which of the following is an example of structural unemployment?

Donald was replaced by voice recognition software

Which of the following individuals is in the labor force?

Edna quit her job as a cashier and is actively seeking a job as a waitress. Key word: ACTIVELY SEEKING

True or false: Suppose that GDP in Testland is $220 million and that net factor income from abroad is equal to $20 million. Then, in Testland, GNP is equal to $200 million

FALSE. GNP = GDP + NFIA GNP = $220mill + $20 mill GNP = $240mill

True or false: If one million more families in the United States decide to educate their children at home (home schooling), then GDP will decline.

True, goods and services produced inside the home are not included in GDP. If children are home-schooled inside the home, then these activities are not included in GDP. If children are educated in schools outside of the home, then these activities are included in GDP. So an increase in home-schooling will reduce GDP since more services would be produced inside the home.

True or false: Unanticipated inflation tends to redistribute income from the rich to the poor.

True, with unanticipated inflation savers, lenders, and payees of fixed-price contracts are harmed. Spenders, borrowers, and payers of fixed-price contracts gain from unanticipated inflation since the purchasing power of their payments will be declining. Since savers and lenders tend to be rich, while spenders and borrowers tend to be poor, then unanticipated inflation represents a transfer of wealth from rich to poor.

TRUE OR FALSE: Unanticipated deflation harms borrowers

True-

Increases in income inequality lead to increases in the Gini Coefficient.

True- increases in income inequality would cause the curve to bow out more and create more area within the curve which increases the Gini coefficient.

TRUE OR FALSE: Suppose that Flatland consists of 100 people. Out of those 100 people, 20 are actively seeking work and 60 people are employed. If 5 people give up looking for work, the unemployment rate changes from 25% to 20%.

True- the unemployment rate is equal to the # of people actively seeking jobs but not finding one by the number of people in the labor force (multiplied by 100). At first it would be 20/80 x 100 to give you 25% and then it would change to 15/75 x 100 due to the 5 people becoming discouraged workers and leaving the labor force, which will then equal 20%.

Price Index Equation

(cost of market basket in a given year)/ (cost of market basket in base year) x 100

Compared to the GDP Price Deflator, the Consumer Price Index

1. is used for Cost of Living Adjustments by the federal government 2. usually provides a higher estimate of inflation 3. suffers from a substitution 4. is a fixed-weight price index (ALL OF THESE ARE TRUE)

In 1913, the CPI was approximately equal to 10. In 2007, the CPI was approximately equal to 200. This means that

1. prices increased by twenty times from 1913 to 2007. 2. the value of the dollar declined by twenty times from 1913 to 2007. 3. what a nickel could purchase in 1913 would require one dollar in 2007. 4. the economy experienced inflation.

Purchasing Power Parity Theory

1. states that currencies should have the same purchasing power in different countries. 2. results from international arbitrage. 3. is represented by the formula P = Pf x E. 4. provides a model for the long-term movements of exchange rates over time.

The typical American lifestyle takes

23.5 acres of land per year

Since NI (national income) = NNP - SD, NI =

= w + i + R + profit + SD - SD = w + i + R +profit

True or false: If a travel agent loses his job because everyone can book their trips on the internet, then the travel agent is experiencing frictional unemployment.

FALSE. This is structural unemployment because it involves a change in technology that caused him to lose his job. Frictional unemployment is when someone is between jobs or just graduated and is looking for a job.

TRUE OR FALSE: If one dollar trades for two euros and one euro trades for 50 yen, then one yen should trade for two pennies, or $0.02.

False - If $1 trades for 2 euro and 1 euro trades for 50 yen, then one yen should trade for one penny, or $0.01.

True or False: If the value of the dollar falls, the current account deficit will increase.

False, if the value of the dollar falls, then imports become more expensive to US consumers, so imports will decline. Exports become less expensive to foreigners, so export spending increases. If exports increase and imports decline, then net exports will increase. The increase in net exports leads to a decline in the current account deficit.

True or False: Nominal GDP measures the output of an economy using constant, or base year, prices, so changes in nominal GDP reflect changes in output.

False, real GDP measures output using constant prices. Nominal GDP measures output using current prices. Changes in nominal GDP reflect both changes in output and prices since prices are not held constant.

Say's Law states that nominal variables are separable from real variables in the classical model.

False, the classical dichotomy states that real variables can be separated from nominal variables in the classical model. Say's Law is the idea that supply creates its own demand. In the process of production, enough income is generated to purchase that output. If not, the price level will adjust.

TRUE OR FALSE: If the price level is increasing, then nominal GDP must be increasing.

False- if output is declining at a greater rate than price level, then the GDP will fall

True or false: Frictional unemployment occurs when technological change makes some jobs obsolete.

False. Frictional unemployment occurs when workers are between jobs to seek better employment. Or Structural unemployment occurs when technological change makes some jobs obsolete.

True or False: one British pound trades for two euros, and if one euro trades for two dollars, then one British pound should trade for one dollar.

False. One British pound buys two euros, which could be used to purchase 4 dollars. So one British pound should trade for 4 dollars. Or If one British pound trades for one dollar, then the dollar could be used to purchase ½ euro, which could be exchanged for ¼ of a British pound. So Purchasing Power Parity does not hold here. Or Start with $1, trade $1 for one British pound, trade one British pound for two euros, and then trade two euros for $4. So again, Purchasing Power parity does not hold.

True or false: Say's Law states that demand creates its own supply.

False. Say's Law states that supply creates its own demand. In the process of production, enough income is generated to purchase that output. If not, prices will adjust.

True or false: As long as inflation is anticipated, then there are no costs of inflation to the economy as a whole.

False. The costs of anticipated inflation include menu costs, shoe leather costs, and increased uncertainty about revenues and costs.

GNP (Gross National Product)

GDP + NFIA (net factor income from abroad)

GDP Expenditure Approach

GDP = C + I + G + (X-M) C= Consumption spending by households I = Investment by spending firms G = Government spending X = Exports M = Imports

GDP as the uses of income

GDP = DC + S + T + M

GDP as the sources of income

GDP = w + i + R + profit - NFIA + CCA + SD

NNP

GNP - CCA * Capital consumption allowance

What is the classical dichotomy?

In the classical model, nominal variables are separable from real variables.

Toyota is a Japanese automobile manufacturer and Ford is an American automobile manufacturer. Ford automobiles in Japan would be included in

Japan's GDP and America's GDP

Real GDP equation

Nominal GDP/GDP Deflator x 100

GDP deflator equation

Nominal GDP/Real GDP x 100

Purchasing Power Parity equation

P= Pf x E

True or false: If there is a surplus in the current account, then there must be a deficit in the capital and financial accounts.

TRUE. The balance of payments account must always equal 0 due to double-entry bookkeeping. The balance of payments account consists of the current account and the capital and financial accounts. A surplus in one results in the deficit of the other.

True or false: Suppose that copper sells for $300 per ton in the U.S. and 200 euros in France. If one euro trades for two dollars and if shipping costs are $10.00, then it is possible to profit through international arbitrage.

TRUE. You can make a profit if you buy copper in the U.S. and sell it in France. PPP doesn't hold. $90 profit.

Which of the following statements are true?

The classical model assumes that wages, prices and interest rates are flexible

Suppose that in 2005, one dollar was worth 120 yen. In 2008, one dollar was worth 100 yen. Then, from 2005 to 2008,

The dollar depreciated and the yen appreciated.

True or False: Since Coca-Cola is an American company, then Coca-Cola produced in India would be included in Indian GDP but not Indian GNP.

True. GDP includes all output produced inside a country's borders, so Coca-Cola produced in India is included in Indian GDP. GNP includes all output produced by a nation's resources, so Coca-Cola produced in India would not be included in Indian GNP, but it would be included in US GNP.

If one euro trades for $1.50, and if one pound trades for $3.00, then one pound should be equal to how many euros?

Two euros

In the classical model, complete crowding out means that

any increase in government spending is exactly offset by declines in consumption and investment spending

Shoe leather costs

are the costs of resources devoted to keeping ahead of price changes in the economy

chain-type growth rate equation

g = sqrt( { [summation(Q2xP1)]/[summation(Q1xP1)] } * { [summation(Q2xP2)]/[summation(Q1xP2)] } )

Which of the following would be included in both US GDP and US GNP?

goods produced in the United States by American firms

For all firms producing final goods and services in the economy,

gross profit = gross sales - gross costs gross sales = gross costs + gross profits

Unanticipated inflation

harms lenders because the real interest rate earned on the loan will be less than expected

In March 2008, the unemployment rate in the United States

increased to 5.1%.

Structural unemployment

is unemployment that results from technological change as some jobs become obsolete.

Cyclical unemployment

is unemployment that results from the business cycle. The unemployment rate is countercyclical; it increases during recessions and declines during expansions of the economy.

If Russia is experiencing a current account deficit, then

it must have a surplus in its capital and financial accounts.

Who is harmed by unanticipated inflation?

lenders

Which of the following is not a macroeconomic goal of the United States government?

low interest rates

One difference between the classical and Keynesian models is that

markets always clear in the classical model.

Nominal GDP

measures a country's output using current prices

The overall balance of payments

must always be equal to 0 due to double-entry bookkeeping

nomGDP growth rate

nom GDP2 - nomGDP1 / nomGDP1 * 100

GDP Price Deflator 1

nomGDP1/realGDP1 * 100

GDP Price Deflator 2

nomGDP2/realGDP2 * 100

If the economy experiences inflation, then, in the years after the base year,

nominal GDP is greater than real GDP

Suppose that an economy experiences inflation in the relevant time period. Then in years after the base year,

nominal GDP is greater than real GDP

If the economy experiences deflation, then, in the years after the base year,

nominal GDP is less than real GDP

Seasonal unemployment

occurs due to changes in seasons throughout the year.

Frictional unemployment

occurs when workers are between jobs or are temporarily unemployed to have the time to find a better job.

For any firm,

profit = sales - costs