Exam 2: Chapters 6-9

The growth rate of potential GDP is the sum of two other growth rates. These other growth rates are

labor input and labor productivity

If the capital stock decreases, then the economy will produce___ output with the___amount of labor

less, same

The real wage rate is defined as the wage rate divided by

the price level

Real GDP is the product of the

total hours of work times the output per hour

What are the 3 principal types of unemployment?

1. Frictional 2. Structural 3. Cyclical

The consumer price index (CPI) in 2006 was 201.6 and in 2007 it was 207.3; then inflation rate from 2006 to 2007 was

2.8%

The unemployment rate that many economists believe represents full unemployment is

4-6%

The average nominal wage in 1998 was $13.01, the CPI in 1998 was 163. The average nominal wage in 2007 was $17.41; CPI in 207 was 207.3. This means that the real wage rate from 1998 to 2007 has increased

5.2% real wage=nominal wage/CPI Find for both 1998 and 2007, then subtract solutions to find the difference and divide by the smaller number 1998: 13.01/163=0.0798 2007: 17.41/207.3=0.083 .083 - .0798/ .0798= 0.052= 5.2%

Someone who is out of work because they are between jobs is experiencing a. frictional unemployment b. structural unemployment c. seasonal unemployment d. cyclical unemployment

a. frictional unemployment

What is the convergence hypothesis?

Countries with lower productivity levels tend to have higher productivity growth rates than rich countries, so that poor countries can gradually close the productivity gap on rich ones.

On a consumption function graph, how would you explain a decrease in price level?

Downward shift along the function (line shift to the left)

Changes in relative prices usually lead to increases in real income because prices have changed. T or F?

False

Improvements in the level of technology will generally shift the production function downward. T or F?

False Either more capital or better technology will shift the production function UPWARD, raising potential GDP.

The growth rate in potential GDP is equal to the growth rate in the population. T or F?

False Potential GDP growth rate depends on the growth rate of the labor force, the growth rate of the nation's capital stock, and the rate of technical progress.

A decrease in disposable income causes a shift in the consumption function. T or F?

False, a decrease in disposable income causes a MOVEMENT ALONG the consumption function because the C function depicts the relationship between C and DI. (Any change in disposable income moves us along a given consumption function. A change in any of the other determinants of consumption shifts the entire consumption schedule).

In Macronesia, the MPC is approximately 0.8. If disposable income changes from 1,000 billion pukas to 1,500 billion pukas, then consumption will change by a(n)

Increase of 400 billion pukas MPC= change in consumption/change in DI =1,500-1,000 pukas (increase of 500) 0.8=x/500 Solve for x to get 500(.8)= 400 pukas

Gladys agrees to lend Kay $1000 for one year at a nominal rate of interest of 5%. At the end of the year prices have actually risen by 7%.

Kay receives extra real income

The nation's disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals

MPC=change in consumption/change in DI $320 billion/$400 billion=0.8

On a consumption function graph, how would you explain a decrease in decrease in disposable income?

Move down along the consumption function (same line)

On a consumption function graph, how would you explain a tax cut?

Move up along the function (same line) because with tax cuts, people have more money to consume (higher disposable income)

On a consumption function graph, how would you explain an increase in government transfer payments?

Move upward on the function (same line) because an increase in government transfer payments means you have more money, aka more money to consume (higher disposable income)

The use of automated teller machines (ATM) has caused some bank tellers to lose their jobs. This is an example of

Structural unemployment

What is the GDP deflator?

The price index used to deflate nominal GDP. It is a broad measure of overall inflation, includes prices of all goods and services in the economy.

What is Marginal Propensity to Consume?

The ratio of changes in consumption relative to changes in disposable income that produce change in consumption. (Change in consumption divided by change in income.)

What is Disposable Income?

The sum of the incomes of all the individuals in the economy after taxes have been deducted and transfer payments have been added.

Being on the PPF implies that increasing the production of one good or service can only be accomplished by decreasing the quantity produced of another good or service. T or F?

True

The marginal propensity to consume is calculated by dividing the change in consumer spending by the change in disposable income. T or F?

True

Productivity growth rates are usually lower in rich countries than in poor countries. T or F?

True Countries with lower productivity levels tend to have higher productivity growth rates than rich countries, so that poor countries gradually close the gap on rich ones (convergence hypothesis).

A change in the value of a consumer's stock market holdings will cause a shift in the consumption function. T or F?

True The stock market can exert a major influence on consumer spending and is by far the most volatile part of wealth. Some determinants that cause a shift in the consumption function are wealth (stocks, houses), price levels (bank accounts, government and corporate bonds), and future income expectations. The real interest rate surprisingly does not do anything to shift the consumption function.

The nominal rate of interest is the sum of the real interest rate and the expected rate of inflation. T or F?

True nominal interest rate= real interest rate + expected inflation rate

When the price level falls, consumers may feel wealthier and the consumption function will shift upward. T or F?

True. Wealth and income are two very different things, so income can cause a movement along the MPC, but wealth would be part of the other determinants that causes a SHIFT in the MPC.

How is the unemployment rate calculated?

Unemployment rate= unemployed/labor force x 100

What is frictional unemployment?

When a person has lost their job due to turnovers in the labor market. Includes people who are temporarily between jobs because they are moving or changing occupations, or are unemployed for similar reasons.

What is structural unemployment?

When a person loses their job because they have been displaced by automation, because their skills are no longer in demand, or other similar reasons.

What is cyclical unemployment?

When a person loses their job due to declines in the economy's total production. Cyclical unemployment rises during recessions and falls as prosperity is restored.

Which of the following would a macro economist classify as capital? a. a software program for an accounting firm b. a share of stock in General Electric c. a corporate bond from IBM d. all of the above

a. a software program for an accounting firm A capital is a nation's available supply of plant, equipment and software.

Which of the following would NOT be classified as capital formation? a. buying shares of stock b. building a new warehouse c. purchasing new construction equipment d. all of the above

a. buying shares of stock

Because of recent corporate downsizing, Chuck loses his job. The most likely effect on his consumption function is a(n) a. movement downward along the function b. shift upward of the function c. shift downward of the function d. increase in consumption expenditures

a. movement downward along the function

Which of the following would be most likely to shift the consumption function downward? a. stock market crash b. price level decrease c. increased corporate profits d. a stock market boom

a. stock market crash Because although price levels do cause a shift in the consumption function, they are very minor. Whereas the stock market has a major influence on consumer spending and is by far the most volatile part of wealth.

Total output equals total income a. only at equilibrium b. always c. only at non-equilibrium levels of income d. never

b. always National income and domestic product must be equal. Using C+I+G+(X-IM) and the Circular Flow of Expenditures and Income, when we add up all the wages, interest, rents, and profits in the economy to obtain the national income, we must arrive at the value of output.

In general, countries with lower rates of growth of labor productivity have a. lower levels of productivity b. higher levels of productivity c. lower levels of educational attainment d. higher levels of natural resource endowments

b. higher levels of productivity (convergence hypothesis)

The profitability of an investment project will decrease if a. tax rates decrease b. real interest rates increase c. real interest rates decrease d. business tax reductions increase

b. real interest rates increase

For each $1 of a tax cut,economists expect consumption to a. decrease by $1 b. decrease by less than $1 c. increase by less than $1 d. increase by $1

c. increase by less than $1

Which of the following scenarios best illustrates the concept of cyclical unemployment? a. Grace loses her job due to new automated machinary b. Sean quits his job to look for funner work c. Ellen quits looking for work b/c she doesn't think she can find a suitable job d. Marian loses her job due to a recession

d. Marian loses her job due to a recession Cyclical unemployment is

Suppose the federal government wants to encourage businesses to increase investment spending. Which policy may be the most effective? a. an increase in corporate income taxes b. an increase in real interest rates c. an increase in warnings of a coming recession d. an increase in tax deductions for investment spending

d. an increase in tax deductions for investment spending

Consumption functions would shift downward if a. disposable incomes fall b. disposable incomes rise c. price levels fall d. price levels rise

d. price levels rise

If the discouraged workers were included in the labor force, a. the unemployment rate would fall b. the labor force would decrease c. the employment rate would rise d. the unemployment rate would rise

d. the unemployment rate would rise

The relationship between consumption and disposable income is such that as: disposable income _____, consumption _____

disposable income rises, consumption rises.

During inflationary periods

some prices may fall