Econ 102 Final UW Madison

Both the equilibrium price and quantity fall.

(101 throwback question!) What happens to the equilibrium price and quantity when demand decreases and simultaneously supply increases, but the demand shift is larger than the supply shift? Both the equilibrium price and quantity fall. The equilibrium price falls, and the equilibrium quantity rises. The equilibrium price rises, and the equilibrium quantity falls. Both the equilibrium price and the equilibrium quantity rise.

more than $100 million.

A $100 million increase in government spending increases GDP by: $100 million. more than $100 million. zero. less than $100 million.

make business cycles more severe.

A law requiring the federal budget to be balanced each year would likely: make business cycles less severe. make business cycles more severe. increase the effectiveness of automatic stabilizers. not affect the severity of business cycles.

expansionary; contracts; contractionary; expands

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically _____ when the economy _____ and automatically _____ when the economy _____. expansionary; expands; contractionary; contracts expansionary; contracts; contractionary; expands expansionary; contracts; contractionary; contracts expansionary; expands; contractionary; expands

may overstate the negative impact of inflation on peoples' lives.

Because of Substitution Bias and other issues, the CPI... may understate the negative impact of inflation on peoples' lives. accurately estimates the impact of inflation on peoples' lives. is not often used when discussing inflation. may overstate the negative impact of inflation on peoples' lives.

increase; less than

Because of diminishing returns to physical capital, doubling the amount of physical capital available to one worker will _____ GDP per worker by _____ a factor of 2. increase; exactly decrease; less than increase; less than increase; more than

1. Property rights 2. Government stability 3. Efficient regulation 4. Government policy encouraging innovation.

CP10: What can institutions adjust to slow or foster growth?

Catch-up growth: the rapid growth that occurs when a relatively poor country invests in its physical capital.

CP10: What is catch up growth?

Production function: the methods by which inputs are transformed into output, which determines the total production that's possible with a given set of ingredients.

CP10: What is production function?

at some point, adding more capital leads to no more growth. Need technology change for long run growth.

CP10: What is the Solow model?

If you only double your physical capital, and don't change the number of workers, then you will produce more, but you won't produce twice as much.

CP10: What is the concept of diminishing returns to capital?

Output = technological progress x (Labor input + Human Capital + Physical Capital)

CP10: What is the equation for output?

(Labor force/ working age population) x 100

CP11: How do you calculate the labor force participation rate?

(Unemployed / Labor Force) x 100

CP11: How do you calculate the unemployment rate?

Key Takeaways Unemployment

CP11: Key Takeaways

Part of the working-age population Not currently working Actively searching for work Able to accept a job if it were offered.

CP11: To be unemployed you must be

• Marginally Attached/Discouraged Workers • Underemployed (involuntarily part time)

CP11: What are some Alternative measures of unemployment?

frictional, structural, cyclical

CP11: What are the three kinds of unemployment?

unemployment that is due to a temporary downturn inthe economy.

CP11: What is Cyclical unemployment?

unemployment due to the time it takes for employers to search for workers and for workers to search for jobs

CP11: What is Frictional unemployment?

unemployment that occurs because wages don't fall to bring labor demand and supply into equilibrium.

CP11: What is Structural unemployment?

((Price level this year - Price level last year) / Price level last year) x 100

CP12: How do you calculate the inflation rate?

Changing basket Substitution bias Quality New Products

CP12: What are some issues with CPI?

Hyperinflation, expected inflation, and unexpected inflation

CP12: What are the costs of inflation?

CPI: consumer price index - most cited. Basket of goods and services PPI: Producer price index - inputs PCE: Personal Consumer Expenditure (includes healthcare and such) GDP Deflator: includes everything in GDP Core inflation: excludes highly volatile stuff like electricity and some food

CP12: What are the different measures of inflation?

Medium of exchange Unit of account Store or value ALL REQUIRE STABILITY

CP12: What are the roles of money?

Todays Dollars = Another time's dollars x (price level today / price level in another time)

CP12: What equation do you use to adjust for inflation using CPI?

Nominal interest rate - inflation (for low inflation)

CP12: What equation do you use to calculate the real interest rate?

the (mistaken) tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts.

CP12: What is money illusion?

1. A temporary change in income leads to a small change in consumption for consumption smoothers and a large change in consumption for hand-to-mouth consumers. 2. A permanent change in income leads to a large change in consumption from both consumption smoothers and hand-to-mouth consumers. 3. An anticipated change in income leads to no change in consumption for consumption smoothers, but a large change for hand-to-mouth consumers. 4. Learning about a future income change leads to a large change in consumption for consumption smoothers, but no change for hand-to-mouth until the extra income arrives.

CP13: How do different changes to income affect consumption if you're a hand to mouth consumer? Temporary Permanent Anticipated Learning of Future Income

1. A temporary change in income leads to a small change in consumption. 2. A permanent change in income leads to a large change in consumption. 3. An anticipated change in income leads to no change in consumption. 4. Learning about a future income change leads to a large change in consumption. 5. It's hard to forecast changes in consumption.

CP13: How do different changes to income affect consumption? Temporary Permanent Anticipated Learning of Future Income

Real Interest Rate (high rates shift C down) Expectations (pessimism shifts C down) Taxes (high taxes shifts C down) Wealth (lower wealth shifts C down)

CP13: What factors shift the consumption function?

the excess amount you consume above your income in a given period that you therefore must pay for by either withdrawing money from your savings or borrowing money.

CP13: What is Dissaving?

the fraction of each extra dollar of income that households spend on consumption.

CP13: What is the MPC (Marginal propensity to consume)?

a curve plotting the level of consumption associated with each level of income.

CP13: What is the consumption function?

The rational rule for consumers: consumer more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

CP13: What is the rational rule for consumers?

Save money when income high or needs are low Borrow or dissave when income low or needs high Precautionary saving rises in times of uncertainty.

CP13: When should you save money and when should you spend it?

Compounding: Future value in t years = present value x (1 + r)^t Discounting: Present value = future value in t years / (1+r)^t r = real interest rate = nominal - inflation

CP14: What are the compounding and discounting formulas?

Business Investment: Equipment: new computers, machines, company cars, etc. Structures: new offices, stores, factories, remodeling of existing facilities Intellectual property: software, research and development, spending onliterary, television, movie and music production. Housing investment: the money spent on building or improving houses or apartments. Businesses also invest by maintain inventories of raw materials, work-in-progress, andunsold goods.

CP14: What different types of investment are there?

1. The market value of total output must be equal to total spending. 2. Total spending must equal total income. 3. Total output, total spending and total income are all equal.

CP9: Circular flow model shows what?

Net exports: spending on exports - spending on imports.

CP9: How are Net Exports calculated?

1. Prices are not values. 2. Nonmarket activities -including household production - are excluded. 3. The shadow economy is missing. 4. Environmental degradation isn't counted. 5. Leisure doesn't count. 6. GDP ignores distribution.

CP9: What are some GDP shortcomings?

• Spending (easiest) • Production (value added - a bit more detail) • Income (Wages and profits at each step - even more detail)

CP9: What are the three ways GDP is interpreted?

Nomial GDP = P x Q Real GDP = ((this years price - last years price) / 2) x Q

CP9: What equations are used to calculate Nominal GDP and Real GDP when using the price and quantities of items between two years?

Gross domestic product: the market value of all final goods and services produced within a country in a given year. GDP = Consumption + Investment + Gov Purchases + Net Exports

CP9: What is GDP and how is it calculated?

Nominal GDP is measured in today's prices while Real GDP is measured in constant prices

CP9: What's the difference between real and nominal GDP?

inflation falls below expected inflation.

Consider the Phillips curve shown here. In region A: the output gap is positive. inflation falls below expected inflation. there is excess demand. inflation rises above expected inflation.

5.5

Consider the following data. By what percentage did Real GDP grow in Macroville between 2021 and 2022 (report one decimal place - so answer will be "X.X": Year Output CPI 2021 1,043,434 100 2022 1,100,491 103

5.1

Consider the following data. What is the unemployment rate? (one decimal place - so answer should be X.X)

zero

Consider the graph of the labor market shown here. At the wage rate of $13, the number of unemployed people in this market is: 4,000. 2,000. zero. 22,000.

discouraged workers.

Devina lost her job a while ago when the economy entered a recession. She no longer believes she can get a job and has lost hope of employment. She has several friends in the same scenario. They have all stopped looking for work. This scenario describes: underemployment. discouraged workers. frictional unemployment. structural unemployment.

lags in assessing problems, and in creating and implementing policy changes.

Discretionary fiscal policy may fail to stabilize the economy and even destabilize it because of: ​ government waste. the business cycle.​ its ineffectiveness. lags in assessing problems, and in creating and implementing policy changes.

precautionary saving rises.

During recessions: precautionary saving rises. anticipated future income increases. bequests rise. credit card bills fall.

All prices adjust, and the economy returns to long-run potential.

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the long-run impact of a decrease in aggregate demand? There is a sharp fall in prices in the economy as business hurriedly lower prices to try to boost sales. All prices adjust, and the economy returns to long-run potential. There is a slow fall in prices as the short-run aggregate supply begins to have a positive slope, and the initial decline in output will moderate. There is a recession as output falls sharply, and prices will not have had time to adjust.

there is a recessionary gap.

Government spending will NOT crowd out private spending if: there is a recessionary gap. there is an inflationary gap. all of the resources in the economy are employed. aggregate income is at its potential level.

all aspects of the economy.

High rates of anticipated inflation affect: lenders only. borrowers only. all aspects of the economy. only business firms involved in investment spending.

other member banks and borrow money at the federal funds rate.

If a bank needs more extra money (a quick overnight loan), normally it will first turn to the: other member banks and borrow money at the federal funds rate. federal open market committee and borrow money there. Federal Reserve and borrow money at the discount rate. Congress to borrow funds.

there will be a rightward movement along the consumption function.

If income increases: there will be a leftward movement along the consumption function. the consumption function will shift upward. there will be a rightward movement along the consumption function. the consumption function will shift downward.

Japanese; an export; U.S.; an export

If the Japanese electronics company Sanyo sells 3,000 televisions to the American hotel chain Wyndham, that contributes to _____ GDP as _____. If the U.S. law firm Baker McKenzie LLP litigates a copyright infringement case in Japan on behalf of a Japanese client, that contributes to _____ GDP as _____. U.S.; an export; Japanese; an import Japanese; an export; U.S.; an export Japanese; an import; U.S.; an import U.S.; an import; Japanese; an export

raise; down

If the actual inflation rate is greater than the target inflation rate, then the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment. lower; up raise; up lower; down raise; down

the equilibrium rate of unemployment is 3.1%.

If the frictional rate of unemployment is 1%, the structural rate of unemployment is 2.1%, and the total unemployment rate is 7%, then we can conclude that: The equilibrium unemployment rate is 3.9%. the economic growth rate is −7%. the equilibrium rate of unemployment is 3.1%. the cyclical rate of unemployment is 3.1%.

lower; reduce unemployment

If the output gap is negative, the Federal Reserve will _____ the real interest rate to _____. lower; reduce unemployment raise; reduce unemployment lower; cool inflationary pressures raise; cool inflationary pressures

operating below capacity, and inflation will likely fall.

If unemployment is above its "equilibrium" level, then the economy is: ​ operating below capacity, and inflation will likely fall. operating above capacity, and inflation will likely rise. experiencing above normal growth rates. at potential GDP, and inflation is at its target level. ​

239

In 1986, Top Gun earned $180 million in the US Box Office. In 2022, Top Gun Maverick earned $720 million in the US Box Office. CPI in 1986 was 110 CPI in 2022 was 294 How much more or less did Maverick earn than the original Top Gun in 2022 dollars? (in millions, round to nearest million, number should be negative if Maverick earned less)

have been counted in GDP in 2020 as investment.

In 2020, Tesla produced 509,737 electric vehicles, of which it sold 499,550, placing the remaining 10,187 in inventory. The 499,550 vehicles sold would have been counted in GDP in 2020 as consumption; the remaining 10,187 would: have been counted in GDP in 2020 as investment. be added to GDP as consumption in later years as they were sold. not have been counted in GDP. have been counted in GDP in 2021.

contractionary monetary policy.

In the IS-MP framework of the Fed model, the risk-free interest rate rises in response to: contractionary monetary policy. increased capital inflows. adverse supply shocks. expansionary fiscal policy. expansionary monetary policy an increase in the risk factor of loans.

IS curve to the left.

In the IS-MP-PC framework of the Fed model, a fall in investment will shift the: MP curve up. Phillips curve down. MP curve down. IS curve to the right. IS curve to the left.

right, increase

In the IS-MP-PC framework of the Fed model, an increase in net exports will shift the IS curve left, right, down and lead to an ____ in inflation decrease, increase

aggregate expenditure at a given interest rate potential GDP.

In the context of the IS-MP-PC model, a spending shock is any change in: aggregate expenditure at a given interest rate potential GDP. borrowing conditions that changes the real interest rate. production costs that leads suppliers to change the prices they charge at any given level of output.

inflation expectations.

In the long run, the most powerful determinant of inflation is the output gap the risk premium. the short-term Federal Funds rate. inflation expectations.

nothing; nothing

Last week I made my kid vacuum the house for free. This week he refused to do it unless I paid him $5 (which he did not report to the IRS). Last week, the vacuuming added ______ to GDP. This week, the vacuuming added _____ to GDP. whatever a professional would have charged to vacuum; $5 nothing; nothing $5; nothing nothing; $5 $5; $5

2.4%

Nominal GDP in the United States was $20.3 trillion in 2018 and $21.2 trillion in 2019. If the inflation rate in 2018-2019 was approximately 2%, real GDP increased by approximately: 1.5%. 4.3%. 3.7%. 2.4%.

anchored adaptive

Padma always assumes the Federal Reserve will reach its goal of 2% inflation despite the latest data, whereas Chemali pays no attention to her economist friends and expects the recent high rates of inflation will persist. Padma's expectations are _____ , whereas Chemali's are _____.

aggregate demand; left

Raising income taxes shifts the _____ curve to the _____. long-run aggregate supply; left aggregate demand; left aggregate demand; right short-run aggregate supply; left

the consumption function to shift downward.

Researchers at the Federal Reserve Bank of New York estimate that, as a result of the collapse of the housing bubble in 2007-2008, homeowners' equity in the United States fell by over 50%, or about $6 trillion. This caused: the consumption function to shift upward. a movement down and to the left along the consumption function. the consumption function to shift downward. a movement up and to the right along the consumption function.

6

Sarah finds a pinecone in her yard. She adds some eyes and feet from other stuff she finds in the yard (so it was free). She sells the pinecone doll to a local shop for $2. The shop sells it to a consumer for $6. How much is added to GDP?

(i), (ii), (iii), and (iv)

Structural unemployment can be caused by: (i) efficiency wages. (ii) union-determined wages. (iii) minimum wage laws. (iv) job protection regulations. (i), (ii), (iii), and (iv) (ii) and (iii) (ii), (iii), and (iv) (i), (ii), and (iv)

cost-push inflation.

Suppose aluminum prices rise in international markets. U.S. firms that import aluminum face higher marginal costs and raise prices. This scenario describes: a decrease in potential output. a positive supply shock. cost-push inflation. demand-pull inflation.

Figure A

Suppose falling interest rates in Australia discourage saving. What effect does this have on the consumption function in Australia? Figure C Figure D Figure A Figure B

3%

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% above potential GDP. If the expected rate of inflation is 2%,what is your forecast next year's inflation? 3% 5% 4% 1% 2%

1.9

Suppose that last year, wages rose by 6.5 percent while prices rose by 4.6 percent. By what percentage did real wages rise or fall (include negative sign if they fall). Report answer with one decimal place (so "X.X") (hint: use the "trick")

0.63

Suppose you get a one time $4,292 bonus at work. You immediately spend $2,711 and save the rest. You marginal propensity to consume (MPC) is what? (report 2 decimal places - so .xx)

the output gap would become more positive (output would move to the right) and inflation would rise.

Take a look at the IS-MP-PC model shown here. If the Fed lowered the real interest rate, ​ the output gap would become more negative (output would move to the left) and inflation would rise. the output gap would become more negative (output would move to the left) and inflation would fall. it's impossible to tell what would happen. The world is an illusion of our own making and there is no "Fed". the output gap would become more positive (output would move to the right) and inflation would rise. the output gap would become more positive (output would move to the right) and inflation would fall.

lending to banks through the discount window borrowing money from banks overnight buying and selling government bonds paying interest on excess bank reserves

The Fed controls interest rates by... (choose all that apply) passing laws forcing banks to charge certain rates lending to banks through the discount window borrowing money from banks overnight buying and selling government bonds paying interest on excess bank reserves

series of bank runs and bankruptcies.

The Federal Reserve was created after a(n): period of very high unemployment. series of bank runs and bankruptcies. increase in the inflation rate. extended period of economic stagnation.

a new output gap of −4%. inflation 1% below expected

The economy shown here begins at a 0% output gap. Now suppose that consumers fear a recession and reduce their spending. This leads to (choose all that apply): ​ a new real interest rate of 3%. a new real interest rate of 0%.​ inflation of -1% (deflation) a new output gap of −4%. inflation 1% below expected lower real interest rates unexpected inflation of 1%.

nominal interest rate minus the rate of inflation.

The real interest rate is the: nominal interest rate plus the rate of inflation. percentage of the nominal interest that is inflation. economic growth rate adjusted for the effects of inflation. nominal interest rate minus the rate of inflation.

investment equals depreciation.

The steady state in the Solow growth model occurs when: depreciation reaches zero. investment equals depreciation. savings increases in the economy. capital accumulation begins.

2.26%

The table shows consumer price index data for the United States. Based on this information, what is the rate of inflation in 1993 (so, from 1992 to 1993)? 2.26% 2.79% 4.22% 2.97% 3.04%

technological advances in agriculture outpaced population growth rates.

Thomas Malthus's predictions about the earth did not come true because: subsistence agriculture became the most important form of food production. technological advances in agriculture outpaced population growth rates. population growth slowed to the lowest level in history. population growth exceeded the advent of technology in agriculture.

False

True or false: The Phillips Curve/Fed Model can be used to assess the effects of long term changes in expected inflation. True False

supply

Using the Fed model to diagnose the economy, if inflation rises even though the economy is weak or if it falls even though the economy is strong, you will conclude that the economy has been hit by a(n) _____ shock. financial inflation supply spending

(i), (ii), and (iv)

When output exceeds potential output: (i) there is excess demand (according to the AD-AS model). (ii) demand-pull inflation occurs. (iii) the output gap becomes negative. (iv) the output gap becomes positive. (i), (ii), and (iii) (ii) and (iv) (iii) only (i), (ii), and (iv) (i) only

an increase in unemployment benefits

Which of these exemplifies an expansionary fiscal policy? an increase in unemployment benefits a decrease in government spending an increase in the money supply that decreases interest rates an increase in taxes that reduces the budget deficit and decreases consumption

A rise in input costs An appreciation of the US dollar.

Which of these would shift the Phillips curve? (choose all that apply) A series of bank runs A fall in consumer confidence A rise in input costs An appreciation of the US dollar.

the producer price index

Which price measure indicates changes in the cost of a market basket containing raw commodities such as steel, electricity, and coal? the Dow Jones Industrial Average the consumer price index the producer price index the GDP deflator

6.5%

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy? 3% 4.5% 7.5% 3.5% 6.5% 2%

GDP does not change.

You just bought two used textbooks for $25 each. How much does GDP change because of your purchase? GDP does not change. GDP rises by $25. GDP falls by $50. GDP rises by $50.

confusing unemployment with not being in the labor force.

Your cousin (from Boston), who was a full-time college student during the spring semester, just moved from the campus dorm back into their parents' house for the summer. When asked what they plan on doing until the fall semester, they reply, "Since I'm unemployed, I'll just enjoy the summer with friends and eat my parent's food." Your cousin is: long-term unemployed since they'll be at their parents' house for three months.​ confusing unemployment with not being in the labor force. currently unemployed since they were previously a full-time student. both unemployed and not in the labor force.

frictionally

Zhou got laid off by Google and it's taking a while to find a new job that pays well enough to accept. Zhou is _____ unemployed. structurally frictionally cyclically permanently