Unit 2 from Study Guide

Gross domestic product (GDP) does not include:

- used goods sold in the current time period. - foreign produced goods. - intermediate as well as final goods

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate?

3 percent

business cycle

Recurrent rises and falls in real GDP over a period of years

What is included in personal income but not in national income?

Social Security payments

circular flow model

a diagram representing the flow of products and resources between businesses and households in exchange for money payments.

A person who has given up searching for work is called:

a discouraged worker.

GDP price chain index

a measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.

full unemployment

equal to the total of the frictional and structural unemployment rates.

demand-pull inflation

is caused by pressure on prices originating from the buyers side of the market.

real GDP

is the value of all final goods and services produced during any time period valued at prices existing in a base year.

The lower portion of the circular flow model contains factor markets in which households provide:

land, labor, and capital.

consumer price index (CPI)

measures the cost of purchasing a market basket of goods and services by a typical household during a time period relative to the cost of the same bundle during a base year.

Gross domestic product (GDP) is defined as:

the market value of all final goods and services produced within the borders of a nation

National income is officially measured by adding:

the total of all incomes earned by households from the sale of factors of production.

What phase of the business cycle follows a recession?

trough

Variables that change before real GDP changes are measured by the:

index of leading indicators.

The equation for determining real GDP for year X is:

(Nominal GDP/ GDP Price Chain Index) x 100

transfer payment

A government payment to individuals not in exchange for goods or services currently produced.

Which national income account should be examined to discover trends in the after-tax income that people have to save and spend?

Disposable personal income (DI).

coincident indicators

Economic variables that change at the same time as real GDP changes are called

(True/False) Cost-push inflation is caused by too much money chasing too few goods.

False

(True/False) Full employment, which is always expected to occur, consists of the frictionally and cyclically unemployed.

False

(True/False) Gross domestic product (GDP) is a satisfactory measure of both economic "goods" and "bads".

False

(True/False) Gross domestic product is the total dollar value at current prices of all final and intermediate goods produced by a nation during a given time period.

False

(True/False) Inflation occurs when there is an increase in the purchasing power of money

False

(True/False) People with fixed incomes tend to fare best in an inflationary period.

False

If we computed GDP using the expenditure approach, and then computed it using the income approach, which of the following can be expected to be true?

GDP computed from the expenditure approach will be equal to GDP computed using the income approach.

Which of the following is a shortcoming of GDP?

GDP excludes non-market transactions.

nominal income to real income

To measure your purchasing power, requires converting _______________________ to______________________ which adjusts for inflation.

(True/False) A person who has lost his or her job because it is now performed by a robot is structurally unemployed.

True

(True/False) Business cycles are recurring periods of economic growth and decline in an economy's real GDP.

True

(True/False) Fixed investment is the dollar amount businesses are adding to our nation's amount of plant and equipment.

True

(True/False) Personal consumption expenditures is the largest component of total spending.

True

final goods

are finished goods and services produced for the ultimate user

During the 1970s, the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil, which triggered higher inflation rates in the United States. This type of inflation is best classified as:

cost-push inflation

The increase in unemployment associated with a recession is called:

cyclical unemployment

Unemployment caused by a recession is called:

cyclical unemployment

Cost-push inflation is due to:

increases in production costs

wage-price spiral

occurs when increases in nominal wages cause higher prices and in turn higher wages and prices.

disposable income

personal income minus personal taxes.

discouraged workers

persons who want to work, but who have given up.

A recession is a business contraction lasting at least:

six months

Full employment occurs when the rate of unemployment consists of:

structural plus frictional unemployment.

Sam is a musician who is out of work because electronic equipment replaced live musicians. This is an example of:

structural unemployment

A mismatch of the skills of unemployed workers and the skills required for existing jobs is defined as:

structural unemployment.

leading indicators

variables that change before real GDP changes.

cost-push inflation

caused by pressure on price originating from the sellers side of the market.

The number of people officially unemployed is not the same as the number of people who can't find a job because:

discouraged workers are not counted

Frictional unemployment refers to:

workers who are between jobs

frictional unemployment

workers who are seeking new jobs that exist.

GDP does count:

- state and local government purchases. - spending for new homes. - changes in inventories.

If the inflation rate exceeds the nominal rate of interest,

- the real interest rate is negative. - lenders lose. - savers lose

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least:

3 percent.

inflation

An increase in the general (average) price level of goods and services in the economy

recovery

An upturn in the business cycle during which real GDP rises

(True/False) Structural unemployment refers to short periods of unemployment needed to match jobs and job seekers.

False

(True/False) The civilian labor force includes only the employed.

False

(True/False) The term "recovery" refers to the maximum point of the business cycle.

False

national income (NI) formula?

Gross domestic product minus depreciation.

intermediate goods

Something GDP does not include in order to avoid double counting.

income approach

The national income account method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits.

peak

The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

(True/False) In any year, nominal GDP divided by the GDP chain price index multiplied by 100 equals real GDP.

True

(True/False) Nominal values are values measured in terms of the prices at which goods and services are actually sold.

True

(True/False) The difference between gross domestic product and national income is an estimate of the depreciation of fixed capital.

True

(True/False) The official unemployment rate can be criticized for both understating and overstating the true number of unemployed.

True

(True/False) To be counted as unemployed, a person must be looking for a job.

True

lagging indicators

Variables that change after real GDP changes

coincident indicators

Variables that change at the same time that real GDP changes

Which of the following is the correct formula for determining the civilian unemployment rate?

[(the number of unemployed, working-age civilians seeking work)/(the number of civilians in the labor force)]

trough

a phase of the business cycle during which real GDP reaches its minimum after falling during a recession.

hyperinflation

can cause serious disruptions to an economy by causing inflation psychosis, credit market collapses, a wage-price inflation spiral, and speculation.

nominal GDP

measures all final goods produced in a given time period valued at the prices existing during the time period of production.

Consider a broom factory that permanently closes because of foreign competition. If the broom factory's workers cannot find new jobs because their skills are no longer marketable, then they are classified as:

structurally unemployed.

expenditure approach

sums the four major spending components of GDP consisting of: consumption, investment, government, and net exports.

nominal interest rate

the actual rate of interest earned or paid over a period of time.

Inflation is measured by an increase in:

the consumer price index (CPI).

A criticism of the unemployment rate is that:

the data includes part-time workers as fully employed.

gross domestic product (GDP)

the most widely used measure of a nation's economic performance and is the market value of all final goods produced in the United States during a period of time.

real interest rate

the nominal interest rate adjusted for inflation

personal income

total income received by households and is calculated as national income less corporate profits, and Social Security taxes (FICA) plus transfer payments and other income.

recession

two consecutive quarters of real GDP decline.

structural unemployment

unemployment caused by factors in the economy including lack of skills, changes in product demand, or technological change.

cyclical unemployment

unemployment resulting from insufficient aggregate demand.