macro test one

During a recession, are all industries equally impacted? And vice versa, during a business expansion, are all industries equally impacted? Are all regions of the country equally impacted during a recession or expansion?

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How does a change in inventory affect our measure of GDP? What is the difference between a planned vs. unplanned rise in inventory levels? What are the implications of a planned vs. unplanned rise in inventory?

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What is Investment spending? What are the 3 components of Investment spending?

(Ans. 1) addition to existing capital stock, 2) construction activity on both residential and commercial construction, 3) inventory changes)

. Explain the discouraged worker effect on the unemployment rate.

-they have the effect of making the unemployment rate appear lower than it actually is. They also lower the labor force participation rate. Once an unemployed person stops looking for work, he is no longer counted unemployed and therefore, is no longer included in the labor force.

. Explain some of the redistributive effects of unanticipated inflation?

Unanticipated inflation will redistribute income and wealth. Redistribution between debtors and creditors will be moved around because debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power. Also hurts producers who must use and produce inputs whose prices are rising faster than the overall rate of inflation. Hurts pensioners and retirees who get a fixed income. -might lead to smaller redistribution of income and wealth

How do we convert nominal GDP into real GDP?

We divide nominal GDP by the GDP deflator and multiply this ratio by 100 -Real GDP= (nominal GDP / price index) x 100

What formula is used to adjust nominal income for inflation?

[real income = nominal income / (1 + inflation rate)]

Define the term national income.

national income is the total amount of money earned within a country. National income includes wages, salaries and benefits, profits for sole proprietorships, partnerships, and corporations, rental income and net interest.

Does unemployment automatically fall when a recession reaches its trough?

no

Why do measures of GDP *not* include transfer payments? (Hint: Measures of GDP take into account income earned by resources in a given time period. Transfer payments are not earned income, they are just redistributed income. It would lead to double counting.)

transfer payments are just redistributed payments, they are not earned income

What are the two composite indexes used to predict the likelihood of a recession will occur?

(Ans. The LEI and the NAI) -national activity index

What are the 4 spending groups that demand and purchase the output of a modern market economy?

(Ans: consumers, private domestic firms, government and foreigners. These are represented as consumption, investment, government purchases and net exports)

Which price index is the best overall indicator of inflationary pressures within the economy?

- (Ans: The GDP deflator

What is an under-employed person?

- a person who works part-time or the person is over-qualified for that position. Example: a doctor working at starbucks

What is the difference between nominal income and real income?

-(Hint: Nominal refers to the number of dollars one receives in wages while 'real' is nominal income adjusted for inflation. Real income is a measure of 'purchase power' - it tell us how much output can be purchased with one's nominal income.)

What is the difference between a "recession" and a "growth recession"?

-A recession is a significant decline in economic activity that goes on for more than a few months. However, an economy that is growing but is also expanding more slowly than its long-term sustainable growth rate is a growth recession. It can seem this way even if economic growth is not actually dipping below zero. This is because growth is so weak that unemployment rises and incomes fall, thus creating conditions that feel similar to a recession.

Explain the income approach to measuring GDP.

-GDP is a measure of the income that was generated by the nation's resources in a given time period. The income generated is tied to production of final goods and services. Income measures here is earned -land (landowners, landlords) → RENT -Labor (workers, salaried employees) → WAGES, SALARIES, COMMISSIONS -capital (lenders, investors) → INTEREST EARNINGS, DIVIDENDS, CAPITAL GAINS -entrepreneur (executives, owners) → PROFITS, FEES -resources→ INCOME EARNED

What is the difference between real GDP and nominal GDP?

-Real GDP is adjusted for price measures, reflects changes in price levels and Nominal GDP is based on prices that prevailed when output was produced. Nominal is also raw and unadjusted without adjusting living standards, price changes, inflation or deflation.

How do we calculate the size of a nation's labor force?

-The labor force is comprised of both employed and unemployed persons. The size of a nation's labor force is determined by adding the number of unemployed plus employed persons. -labor force size =(# of unemployed persons + # employed persons)

What is a discouraged worker?

-a discouraged worker is someone who has been seeking employment but get discouraged after a while and stops looking for work.

What is meant by a double dip recession?

-a double dip recession is when GDP growth slides back to a negative after a quarter or two of positive growth. Refers to a recession followed by a short-lived recovery, followed by another recession. When a recovering economy does not reach its former peak.

What is the technical definition of an employed person?

-employed is any person who did any work for any pay or profit during the week for any amount of hours before they are surveyed by the BLS or who worked 15+ hours in a family business (unpaid)

What is "hyperinflation?"

-hyperinflation is typically caused by excessive government spending over tax revenues and the printing of money to finance deficits.

What is "Inflation?"

-inflation is a general rise in prices of goods and services. Inflation measures changes in the cost of living. Causes include demand factors (consumers confidence, income, wealth) supply shocks (price fluctuations on items such as food and oil) government policy (its ability to borrow and print money).

How do we calculate the labor force participation rate?

-labor force participation rate is defined as share of population aged 16+ that is in the labor force. -labor force size / size population aged 16 and older

What is a price index? Give some examples of price indexes used to measure and track changes in the prices of goods and services. (CPI, PPI, GPI, EPI, IPI)

-price index is used to modify payments to account for inflation. Used to convert nominal values to real values -CPI is the consumer price index and it shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. Used to measure the overall level of prices in the economy. It compares the cost of a fixed bundle of goods and services from one period to the next. CPI= (cost of basket in the current year) / (cost of basket in the base year) times 100 -PPI is producer price index and it measures wholesale prices. -GPI -EPI -IPI

What are the 4 phases of a business cycle? List and explain each phase. Are all business cycles the same in duration and intensity? Why or why not?

-the four phases are the peak, recession, trough and recovery

Explain the spending approach to measuring GDP.

-the spending or (expenditures) approach measures of the US GDP are time specific -4 major spending groups that demand and purchase nation's output are -consumers (households) → Consumption Spending (C) -private domestic firms (businesses)→ Gross Investment Spending (I) -governement (fed, state and local, on purchases of final goods and services) → Government purchases (G) -foreigners → Net exports (X-M)

How do we calculate the rate of unemployment? Is it an accurate or reliable measure of true unemployment? What problems are associated with the way the unemployment rate is computed?

-the unemployment rate is determined by dividing the number of employed persons by the labor force size. The equation is # unemployed persons / labor force size OR # unemployed / (# unemployed + # of employed) - No it is not a accurate measure of true employment -problems that are associated with the way the unemployment rate is computed is that discouraged workers mess up the unemployment rate, under-employed workers are counted as "employed" and part-time workers and temporary are counted "employed". Many would prefer to work in a full-time permanent job.

What is the definition of Gross Domestic Product (GDP)?

-total market value of all final goods and services produced by resources in the United States in a given year

What is the technical definition of an "unemployed person?"

-unemployed person is someone who is not employed but who is actively seeking a job who is immediately available for work.

What formula is used to adjust nominal savings for inflation?

Ans: real savings = [(initial savings deposit) * (1+interest rate earned)] / (1 + inflation rate)]

Which type of price index is used to measure changes in consumers' cost of living?

CPI

What is the difference between Gross Domestic Product and Net Domestic Product?

GDP looks for the amount of economic activity within a nation's economy, while GNP looks at the value of the economic activity generated by the nation's people. This means that GNP will count the economic activities of expatriates and other citizens outside the country's borders but GDP will not, and that GDP will consider the activities of non-citizens within those borders, but GNP will not

How is a consumer price index computed? (Hint: List the items included in a market basket of consumer goods typically purchased each month by an urban family of four and note the change in the price of the market basket from one month to the next)

The index is then calculated by dividing the price of the basket of goods and services in a given year (t) by the price of the same basket in the base year (b). This ratio is then multiplied by 100, which results in the Consumer Price Index.

When measuring GDP, why do we get the same value of output regardless of whether we measure GDP from the spending approach or the income approach?

The three different ways of measuring GDP are all connected in that the spending and income always have to equal each other. The money spent on land by landowners and landlords is compensated by the rent people pay.

How does the NBER determine when an economy has entered into a recession? How does it determine when a recession has ended? Does it predict when a recession will occur? Or does it state that a recession has started/ended after the fact?

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production.