Macro Exam 2
If in 2016, consumption spending is $7,000, gov. purchases is $2,000 and investment is $1500. If GDP is $10300, then export is _________ and import is _________
$500 and $700
Three Ws GDP cares about
What: monetary value Where When
For any change in __________ there is a corresponding but smaller change in planned ______________ and ______________ savings
Yd, consumption, planned
Formula for disposable income
Yd= GDP- taxes +transfer payments
If a consumer becomes more pessimistic consumption will
decrease
If price level increases, consumption power will
decrease
If price level increases, purchasing power will
decrease
if consumers expect their incomes to fall in the future, consumption will
decrease
if taxes increase, consumption will
decrease
if taxes increase, disposable income will
decrease
If wealth decreases consumption
decreases
unemployment rises inflation _____ so there are _______
decreases, surplus
type of inflation when congress lowers taxes, increases government expenditure, with deficit spending leading to economic growth and an increase in the CPI
demand pull inflation
What is the primary determinant of household saving/consumption?
disposable income
Types of unemployment: Cyclical
downturn in economy, recession, depression
The demand for loanable funds is ________ sloping because _______ respond to lower interest rates by ______ their quantity demanded for loanable funds
downward, investors, increasing
Types of unemployment: frictional
due to friction or informational inefficiencies quit lower level job to find a better one job skills match job openings
Types of unemployment: Structural
due to structural shifts in economy force people to get new skills bad for individual, good for economy
To avoid __________, it is important and necessary to differentiate between _______ and __________ economic values.
economic illusion, nominal, and real
One person's _________ is another's __________
expenditure, income
GDP tends to overstate our economic well being by including _________
expenditures used for crime prevention, payments for cleaning up the environment, and repairs for structures destroyed by storms
In the united states, over the last 40 years, as a percentage of gross domestic product:
exports and imports have grown
The growth rate of GDP is above historical average, the there is a tendency for the unemployment rate to
fall
exports are a ___________ imports are a __________
injection leakage
I induced
investment expenditure that is a positive function of GDP
I automous
investment expenditure that is independent of GDP
In the consumption function, an individual household's consumer spending
is positively related to its current disposable income
If you're unemployed you will have ______, _________, and __________ consequences
personal, social, economical
Problems with GDP: Costs of ___________ are not netted out
pollution
GDP real
value of GDP measured in constant year prices/dollars
Unemployment rate formula
# unemployed / #in labor force
Labor force participation rate formula
#labor force/ # working age population
A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The GDP would be:
$180
The boeing corp. buys $3 million worth of steel from the steel manufacturers, $2.5 million worth of computerized hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing corp. sells this model at $10 million. The value added by Boeing is
$3.5 million
If the MPS = .1 , then the value of MPC is ____ the multiplier equals ________
.9, 10
APC + APS ALWAYS EQUALS
1
Multiplier =
1/ 1-MPC
To be in the working age population you must:
16-64 years old not institutionalized not in military
To be in the labor force you must:
16-64 years old not institutionalized not in military working or actively seeking work
The CPI in 2007 was 207.3. In 2008, it was 215.3. What was the rate of inflation between 2007 and 2008
3.86%
The consumer price index in 2012 was 207.3. In 2013, it was 215.3. What was the rate of inflation from 2012 to 2013?
3.86%
If CPI is 180 in year 1 and 190 in year 2, the inflation rate was
5.56%
If the population of the United states is 260 mill, the labor force is 130 mill, and 120 mill workers are employed, the rate of unemployment is:
7.7%
A bank wishes to make a 5% rate of return on a one year loan but expects that inflation over the course of the loan will be roughly 3%. If the bank charges an interest rate of _____________, this will guarantee it to earn the expected return
8% of higher.
As income increases both consumption and savings will increase but by an amount less than the change in income. Therefore, both MPC and MPS have value greater than _________ but less than ________
APS, APC
Inflation measurement formula
CPI2-CPI1 / CPI 1
CPI formula
CPI= Cost of base year market basket in the given year/ cost of base year market basket in the base year x 100
An increase in the minimum wage and higher costs for natural resources cause the CPI to rise and GDP to fall
Cost push inflation
Unemployment rate - natural rate =
Cyclical
Problems with GDP: ________ is not netted out
Depreciation
Costs of unemployment: (economical) Unemployment causes ____________
GDP to operate inside of its PPF
Summation of expenditure
GDP= Consumption + Investment + Government + exports - imports
Summation of factor incomes
GDP= Wages+ rent + interest + profot
What will be the equilibrium level of GDP?
GDP=National Income (Y) = Real planned aggregate expenditure leakages +injections
I total =
I autonomous+ I induced
What happens to consumption as income increases?
Increases
What happens to savings as income increases
Increases
Problems with GDP: GDP only accounts for __________ and ________ market transactions
Legal and reported. Underground economy is left out Self value added- housewife value
M= change in GDP/ change in I
M= change in GDP/ change in I
Components of a CPI
Market basket, Base year, and Index formula
If I hire a lawn service to mow my grass, the money I pay the service are included in the GDP whereas if I mow my own lawn, the value of this service is not included in the GDP. This fact represents a criticism on GDP's focus on
Market produced goods and services
Formula for marginal propensity to save
S=MPS= change in S/ Change in Yd
higher unemployment rates for computer help center workers in US because of out sourcing jobs to India
Structural
Last month, Brent lost his job at the auto parts factory, because it moved to Asia. Brent is classified as:
Structurally unemployed
Problems with Price Index
Substitution bias, quality bias, index number problem
Types of unemployment: Seasonal
Tahoe after ski resorts close
The Multiplier
The ability of a given change in autonomous expenditure to induce a larger change in equilibrium GDP the ratio of change in equilibrium GDP relative to the initial change of expenditure
Problems with GDP: ____________ is not accounted for
Value of leisure
Summation of Value added
Value of output- value of input
Inflation
a sustained increase in the general price level
Costs of inflation: Unanticipated inflation leads to
arbitrary redistribution of income with windfall profits for borrowers and windfall loses for lendors
Index formula
base year weighted formula to answer this question: how much does it cost to purchase the base year market basket in a given year
Unexpected inflation ______ borrowers and ________ lenders
benefits, hurts
Average propensity to consume:
ch. Consumption/ ch. Yd
changes in supply of loanable funds
ch. in savings behavior ch. in capital inflows. ch. in capital outflows
Formula for marginal propensity to consume
change in C/ change in Yd
Marginal propensity to consume (MPC)
change in consumption/ change in YD
Changes in the demand for loanable funds
change in profit expectations change in government building change in capital inflows change in capital outflows
Marginal propensity to save (MPS) formula
change in savings/ change in YD
Determinants of net exports
change of foreign incomes exchange rates
both ________________ and _____________ are a _________ relation with ______________
consumption, savings, positive relation, disposable income
Costs of unemployment: (social) Increased levels of __________ and __________
crime and illness
After the election, economic uncertainty leads to layoffs across the country with falling GDP
cyclical
As incomes rise, does the APC increase or decrease
decrease
rule of the 70
for a constant rate of inflation, it is possible to estimate the # of period to double by dividing the inflation rate into 70.
Okuni's Law
for every 1% increase in the unemployment rate, above the natural rate of unemployment (4%) there is a loss of 2% GDP
Base year
frame of reference, year in which nominal GDP = real GDP and the index number is 100
a recent grad from the culinary academy is seeking employment as a pastry chef and restaurants are seeking to hire chefs
frictional
Natural rate of unemployment
frictional + structural
if we add up the consumer spending on goods and services, investment, government purchases of goods and services, and the value of exports and subtract the value of imports, we measure
gross domestic product
Inflation occurs in Zambia with excessive increases in the money supply and government spending being out of control
hyperinflation
Savings are ______ funds that are not _____________
income, consumed
As incomes rise, does the APS increase or decrease
increase
If a consumer becomes more optimistic consumption will
increase
If price level increases, savings will
increase
if consumers expect their incomes to rise in the future, consumption will
increase
if taxes decrease, consumption will
increase
Problems with GDP: wars and natural disasters _________ but _____________
increase spending but lower quality of life
If you get a 6% raise in your salary, but overall prices in the economy has increased by 4%, your real wage is
increased by 2%
If wealth increases consumption
increases
during a recession: unemployment ___________ and growth rate of real GDP ___________
increases, decreases
unemployment lowers, inflation _____, so there are _______
increases, shortages
Costs of inflation: Inflation leads to a _________ of purchasing power unless _______ change to keep pace
loss, wages
rise CPI = _________ purchasing power = ____________ inflation
lower lower
if $ appreciates
lower exports rise imports lower GDP
rise tax = __________ Yd __________ consumption _______ savings
lower, lower, lower
Types of inflation: Cost push
lowers aggregate supply, rises price level,lowers GDP, rises unemployment
The practical significance of the multiplier is that is
magnifies initial changes in spending into larger changes in GDP
planned investment spending is _______ to the interest rate because ______
negatively related, a rise in the market interest rate makes any given investment project less profitable
Components of investments
new capital goods change in business inventories new residential housing
To be classified as unemployed, a person must be
not working and actively looking for a job in the last four weeks
Determinants of investments (3)
profit expectations interest rate change change in taxes
example of frictional unemployment
real estate agent leaves a job in Texas, searches for a similar high paying job in California
Nominal Interest =
real interest + inflation premium
Costs of unemployment: (personal) ____________ in consumption
reduction
Costs of inflation: inflation leads to changes is ___________ or _________ forcing consumers to make new choices
relative prices, opportunity cost
Market basket
representative bundle of goods used in the index number calculation
if $ depreciates
rise in exports lower imports rise GDP
lower APC, ______ income
rise income
rise APS, ______ income
rise income
Types of inflation: Hyper
runaway increase in the price level with inflation rates exceeding 200% a year only source- gov. increasing $ supply
Average propensity to save:
savings/Yd
Costs of unemployment: (personal) Loss of _____________
self esteem
Shelley, who is 55 years old and has been a steel worker for 30 years is unemployed because the steel plant in his town is closed and moved to Mexico. He is experiencing ___________ unemployment
structural unemployment
Says law
supply creates its own demand
Problems w/ unemployment statistics
surveying through land lines lies part time v. full time Discouraged worker problem
Reason the actual value of the multiplier is lower than 1
taxation imports inflation
If the stock market crashes:
the aggregate consumption function will shift down
Of the following items, which would not be included GDP: the dollar value of a repair job done by me on my own bike the $ value of a lawyers services new car sales by a local car dealer the production of new cars that were not sold in the current year
the dollar value of a repair job done by me on my own bike
Banks are issuing loans at a interest rate of 9%. If expected inflation is supposed to be 3%, then
the real interest rate is 6% and the nominal rate is 9%
Real GDP is
the value of production of all final goods and services adjusted for price changes
short term goal of macro econ
to achieve noninflationary full employment gdp (opperate on PPF)
long run goal of macro econ
to increase gdp per capita (shift gdp outward)
Types of inflation: Demand pull
too much $ chasing too few goods shortages > raise CPI rises aggregate demand, rises price level, rises GDP, lowers unemployment
Initially, assume that there is a balance trade in the US. Then, as a result of an increase in the value of the dollar in relation to other currencies, American imports increase and exports decrease. this will lead to a
trade deficit, a decrease in US GDP
x smaller than m
trade deficit, lower GDP
x bigger than m
trade surplus, raise GDP
True/false inflation and unemployment lead to a decrease in purchasing power
true
Costs of inflation: ______________ __________ makes it risky to enter into long term contracts
unanticipated inflation
In equilibrium there will be: a recessionary gap w/ ______________ an inflationary gap w/ ______________ noninflationary ______________
unemployment inflation full employment
GDP nominal
value of GDP measured in a given year prices/dollars