Macro Final Study Guide

Labor Force Participation Rate

% of Adult population in the labor force

Production possibility frontier (PPF) diagram illustrates all of the following concepts...

(1) Scarcity (2) Constrained Choice (3) Marginal rate of transformation

What is the Formula for GDP deflator

(Nominal GDP /real GDP) * 100. It includes all spending in GDP for consumers, businesses, governemnt spending and net exports.

an example of frictional unemployment is a

(in between jobs) real estate agent who leave a job I Texas and searches for a similar higher paying job in California(

May Jobs Report for April

+211,000 jobs Unemployment Rate = 4.4%

Assume that in 2014 the consumer price index has increased by 20%. In 2014 and 2015 CPI was 120 and 126 respectively. What is the CPI inflation in 2015?

-- 5%

which of the following statements about the IS/LM model is correct?

-- An increase of investment at the national level combines with expansionary monetary policy will certainly increase production

Suppose the marginal propensity to consume changes from .75 to .9 how will this effect the consumption function?

-- The slope will get steeper

The present value of the future payment:

-- decreases when interest rate rises

If a country sold more goods and services to the rest of the world than it purchased from other countries then the country has a

-- trade surplus

long run economic growth has been mostly dependent on

--Rising production

Real Interest Rate

= Nominal Interest Rate- Inflation Rate

CPI and GDP Deflator

Both measure overall level of prices

Equilibrium GDP (y)= 5,000; C=500+0.6Y ; No government exists. Equilibrium investment is....

C=500+0.6(5000) C= 3500 Y = C + I +NX +G or Y = C + I 5000 = 3500 + I I = 1500

what relates the prices paid by all urban consumers for a basket of goods and services during a period to the price of the basket in a prior reference period.

CPI

For homeowners, consumption includes the imputed rental value of the house, but not the purchase price or mortgage payment (True/False)

True

For two conventional projects whose cumulative cash flows are identical, the higher the discount rate, the more valuable the proposal with the early cashflows (True/False)

True

Many indicators of the quality of life are positively correlated with GDP (True/False)

True

The net present value of a project generally decreases as the required rate of return increases (True/False)

True

Bernie Sanders' economic plan calls for the federal government to make major investments in our infrastructure. All else equal, the classical model predicts the policy will cause real interest rates to rise and crowd out private investment. (True/False)

True- in the short-run, real interest rates will rise False- in the long-run, infrastructure provides opportunity for private investment

unemployment and employment remain constant from period to period. how is the unemployment rate affected by a fall in the job finding rate

Unemployment rate formula= U/L= S/(f+S) U=uneployment L= labor force S= Job separation/ job losers F= Job finders THEREFORE if the job finding rate (f) decreases, U/L increases

the money demand curve is:

downward slopping because the opportunity cost of holding money rises as the interest rate rises

changing the level of government spending must come from

fiscal policy

changes in aggregate demand can be caused by changes in

government spending

Nation N is operating at a point INSIDE its production possibilities frontier (PPF) therefore it has...

has unemployed or inefficiently employed resources

A business will want to borrow to undertake an investment project when the rate of return on that project is

higher than the interest rate

the term consumer deleveraging refers to as

households paying off debts and reducing their consumption purchases

the skills, training and education possessed by workers that contribute to economic growth are known as

human capital

As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n):

increase in aggregate demand.

according to the wealth effect when prices decrease the purchasing power of assets

increases and consumption increases

suppose that the economy is in the long run macroeconomics equilibrium and aggregate demand increases. As the economy moves to the short run macroeconomics equilibrium there is a

inflationary gap with low unemployment

liquidity trap

injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective

increases in the rate of inflation are ______ related to the output gap

inversely related to the output gap in general

the trough of the business cycle

is a temporary minimum level of real GDP

When the government spends more than its tax proceeds, the result is a deficit, this borrowing is desirable because...

it helps achieve increases in aggregate demand and economic activity during recession

when an economy's overall production grows faster than its population, it is referred to as

long- run growth per capita

In the classical model with fixed income, a reduction in the gov't budget deficit will lead to a...

lower real interest rate

Banks create money when they

make loans

in a simple closed economy, all investment spending must come from

savings

Periods of very high inflation rates are most often caused by...

sharp increases in aggregate demand

what kind of unemployment consists of members of the workforce whom aren't employed because the types of jobs they had previously had been greatly reduced or eliminated, potentially due to technological advances

structural unemployment

The marginal propensity to consume is

the change in consumer spending divided by the change in aggregate disposable income

The wealth effect is reflected in

the downward slope in aggregate demand

All of the following examples of bank regulations designed to prevent bank runs except: Reserve requirements Deposit insurance The federal funds rate Capital requirements

the federal funds rate

planned investment spending is

the investment spending that business intend to undertake during a given period

Potential GDP (conceptually)

the level of output that an economy can produce at a constant inflation rate

every year more and more purchases are made with credit cards on the internet. Given this trend. All else equal, we would expect:

the money demand curve to shift inward

people forgo interest and holds money

to reduce their transactions cost

deviations from the natural rate of unemployment are known as

cyclical unemployment

GDP Deflator Equation

Nominal GDP/Real GDP x 100

Flow Variable (3)

1. Business expenditures on plant and equipment 2. Government debt 3. Number of people losing jobs

An important part of the feds quantitative easing policy is (2)

1. Buying government bonds 2.buying mortgage backed securities

To increase the money multiplier the fed can... (3)

1. Conduct open-market purchases 2. Decrease the reserve requirement 3. Increase the money supply

M1 (3)

1. Currency 2. Demand Deposits 3. Travelers Checks

liabilities of banks include...(2)

1. Demand Deposits 2. Borrowings (often from federal funds market)

GDP does not value (3)

1. Environmental externalities (pollution) 2. Black market 3. Value of childcare services rendered to their own children by housewives

M2 (4)

1. M1 2. Savings Deposits 3. Small Time Deposits 4. Money Market Funds

LM Curve (2)

1. Represents the output(y) to real interest rate (r) combinations at which money supply and money demand are equal 2. Upward sloping because money demand is positively related to output and negatively related to interest rate

Monetary policy that fights inflation

1. Sell bonds (decrease money supply) 2. Increase reserve ratio 3. Increase the discount rate

Government transfer payment (3)

1. Social security payment 2. Welfare (unemployment) 3. Subsidies

IS Curve (2)

1. describes equilibrium in the market for goods and services in terms of interest rate and output 2. downward sloping because as the interest rate falls, investment increases, thus increasing output

Excluded from the civilian workforce (3)

1. prison population 2. non-us citizens 3. armed forces

which of the following do economists view as investment spending (2)

1. spending on physical capital 2. Adding to inventories

In studying growth theory... (3)

1. we focus on the long run 2. we assume that all inputs are fully employed 3. we ignore recessions and booms (All of the above)

Assume that the cyclical unemployment rate in a country is 4% whereas the structural unemployment rate is 6%. What is the number of unemployed workers given that labor workforce in that country amounts to 100 million?

10 Million (the unemployment rate is 10%)

depression

A severe recession

What measures total spending on goods and services at different price levels of all entities of the economy

Aggregate Demand Curve

Durable good

Any good that does not quickly wear out. One that yields utility over time than being completely consumed in one use. (More than 3 years lifespan)

non-durable good

Any good that is intended to be used completely within 3 years (consumable goods)

secondary reserve

Assets that are invested in safe, marketable, short-term securities such as Treasury bills when the demand for loans is low

Boom and Recession effects inflation and unemployment

Boom: Inflation UP Unemployment DOWN Recession: Inflation DOWN Unemployment UP

Inflation (way to compute it)

Compute the percentage increase in the GDP deflator from one year to the next; or the changes in the CPI

Components of GDP

Consumption (largest), Government expenditures, Investment, and Net exports OR Aggregate expenditures on goods and services in the economy OR total income of everyone in the economy

Monetary Policy (3)

Enacted by the Fed 1. Sets reserve ratio 2. Sets the discount rate 3. Buys/and Sells bonds in the open-market

What can be defined as members of the workforce who are employed because of job transition or moving, or because of imperfect information by the types of jobs qualified for those available

Frictional

In an economy, if real GDP is less than potential GDP, this is a

GDP gap

GDP per Capita Equation

GDP/population

what is the formula for L, the demand to hold money?

L= P/M--> where M is money supply and P is the price level

IS/LM Curve

LM= Liquidity preference/Money Supply IS= Investment/Saving

Monica's disposable income increases by $1000 and she spends $600 of it. Monica's

MPS is .4 and saves $400

Civilian workforce

Men and Women 16 years old and over(not members of the armed services) who are either working or actively looking for a job

Demand-pull inflation is consistent with

Money supply increases led to excess demand and price increases

fiat money

Money that has no other value other than money

what contains structural, frictional and seasonal employment

Official Full Employment

what is the measure of the max amount of goods and services an economy can produce a given time, assuming available technology and full utilization of available economic resources including labor

Potential GDP

Output gap (formula)

Potential GDP - actual GDP

seigniorage

The printing of money

Many silicon valley entrepreneurs, including Steve jobs, the CEO of apple Tim Cook and the famous Mark Zucker endorse raising the quote of H1B visas for foreign nationals who complete degrees in the US in science, math and engineering. This would do the following to the ratio of skilled to unskilled wages in employment.

Reduce the relative wage ratio and raise relative skilled to unskilled employment

GDP

Statistic used by economists to measure the value of economic output

Households are..

Suppliers in the inputs (factors) markets; Demanders in the goods and services markets

Real GDP

Values output using the prices of base year

Factor Payments

What are paid to the owners of the factors of production

21) which of the following assets is the most liquid

a $50 bill

which of the following does not cause the money curve to shift

a change in the interest rate

intertemporal budget constraint

a constraint faced by a decision maker who is making choices for both the present and the future.

An increase in the demand for money would result from:

a decrease in the price level

What are some of the costs of inflation (6)

a) people might find themselves in higher tax brackets without earning more in real income b) frequent price changes impose costs on business owners who have to print new price means c) people holding cash experience a diminution in the value of their holdings d) wages set in nominal terms are slow to adjust so real wages might decline e)people lose time and sources by having to make monetary transactions more frequently f) everyday financial transactions are complicated by uncertainty about future

Which of these are motives for holding money (3) a)Speculative demand b) legal tender laws c) elective demand d) precautionary demand e) aggregate demand f) transactions demand g) exchange demand

a)Speculative demand d) precautionary demand f) transactions demand ANS: a, d, f

anticipated inflation affects

all aspects of the economy

rising inventories usually indicate

an economy that slows unexpectedly

Real GDP is nominal GDP adjusted for

changes in price

If technology advances, then:

more output can be obtained from the same inputs.

the most desirable alternative given up as a result of a decision is a(n)

opportunity cost

In Classical model with fixed income, if households want to save more than firms want to invest...

output falls

what term are max prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus customers need some help purchasing them

price ceiling

The short- run aggregate supply curve slopes upward because of

wage and price stickiness

US. CPI over the last 4 decades shows that inflation

was at its highest during Reagan's Presidency in the early 1980s

price ceiling

when a price cannot go above a certain amount (example: NY rent appartments)

price floor

when a price cannot go lower than a certain amount (ussualy in agriculture)