Macroeconomics
What happens during expansion?
- aggregate economic activity is rising - production, income, and employment go up
What is the business cycle?
- alternating periods of economic growth and contraction in real GDP - a period of macroeconomic expansion followed by one of macroeconomic contraction
Believed causes of the Great Depression:
- bank failures could have been prevented with better regulation (poor banking regulation) - with a different approach from the American government and if other countries would have been more independent the depression could have been avoided all together
Actual investment spending includes
- change in inventories - spending on new capital equipment - spending on new houses
What causes seasonal unemployment?
- changes in the seasonal demands of the labor market
What causes structural unemployment?
- changing product demand - changing in technological skills needed
4 phases of the business cycle include:
- contraction (recession) - trough - expansion - peak
4 categories of unemployment:
- cyclical - frictional - structural - seasonal
2 MAIN phases of the business cycle:
- expansion phase - contraction phase
Components of aggregate expenditure?
- government spending - consumption spending - net export spending
What happens during the contraction phase?
- real GDP falls - makes life more difficult - many people have less money to spend - firms hire fewer workers & more go out of business
What is defined as the total amount of goods and services in the economy available at all possible price levels?
aggregate supply
GDP is an imperfect measure of economic well being because it fails to measure what types of production?
Household production and the underground economy
What has occurred when real GDP is greater than 0 (positive)?
expansion
One major component of GDP that can be negative is
net exports
If inflation in the US is higher than inflation in other countries, what will be the effect on net exports for the US
net exports will decrease as US exports decrease
Investment is defined as the purchase of
new capital goods and additions to inventories
- GDP measured in current prices - use current years prices to calculate value of current years output but increase in process appears to make GDP rise
nominal GDP
What type of spending is the following: A family pays $75,000 for a house built three years ago.
not counted
What is the equation for unemployment rate?
# unemployed / labor force
What is the Xnet equation?
(exports - imports) * (foreign sector)
What is GDP?
(gross domestic product) the total dollar value of all final goods and services produced within the country's borders in a given year.
What is inflation?
- a general increase in prices - a rise in the general prices of goods and services in a particular country over a period of time, resulting in a fall in the value of money
What causes frictional unemployment?
- a mismatch of workers with employers - personal conflict between employer/employee - unsuitability of worker for the demands of the position
What happens during a recession?
- aggregate economic activity is falling - production, employment, and income go down
What happens during the expansion phase?
- real GDP rises - firms hire more employees, which makes it easier for people to find jobs - income levels rise
What is NOT included/counted in GDP?
- transfer payments (ex. social security) - used/secondhand goods - self-provided services (unpaid work) - underground economic activity (ex. legal = babysitting, illegal = drugs) - intermediate goods - financial transactions (sale of stocks and bonds)
The circular flow shows that GDP measures 1. total income. 2. total expenditures. 3. price changes.
1 and 2
Which of the following is included as investment in GDP? 1. cars produced during the year but unsold at the end of the year 2. new capital equipment produced and purchased during the year 3. purchases of a company's stocks and bonds
1 and 2
How does real GDP deal with the problem inflation causes with nominal GDP?
1. Real GDP separates price changes from quantity changes 2. Real GDP uses the prices of goods and services in the base year to calculate 3. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced
Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?
1. Value or leisure not measured 2. GDP is not adjusted for pollution and it does not account for unequal income distribution 3. GDP is not adjusted for crime or other social problems
Which of the following is classified as an intermediate good? 1. the purchase of a Big Mac by a college student 2. McDonald's purchase of pickles 3. a McDonald's restaurant owner's interest payment for the loan on her building. 2
2
Which of the following is classified as a final good or service? 1. tires bought by GM to put on new Tahoes 2. mustard bought by Subway to put on its sub sandwiches 3. your purchase of online access to the Wall Street Journal
3
Investment includes A) GM's purchase of robotic machinery. B) student purchases of laptops. C) Wal-Mart's purchase of health insurance for its workers. D) the New York City Library's purchase of new books. E) wages paid to military personnel.
A
If firms find that consumers are purchasing more than expected, then?
Aggregate expenditure will likely be greater than GDP
Which of the following is a final good or service? A) the grilled chicken purchased by Taco Bell for use in their burritos B) a new replacement muffler installed by Midas Mufflers C) the fertilizer purchased by Royal Lawn and Landscape D) the computers purchased by Office Depot for sale to its customers E) the CPUs purchased by Dell to be used in their computers
B
Which of the following is a final good or service? A) tires purchased by Ford for use on one of their SUVs B) the new economics textbook you are using C) the hair gels used by a hair stylist at the local hair salon D) the butter used by a chef to make butter cream frosting E) the taco shells purchased by Taco Bell for use in their tacos
B
Define nominal GDP
GDP measured in current prices
A restaurant buys fish to offer as a daily menu special. The purchase of the fish by the restaurant is A) a consumption expenditure. B) an investment. C) an intermediate good. D) an example of government expenditures on goods and services. E) part of net exports if the fish was caught beyond the U.S. border.
C
An increase in nominal GDP could result from an increase in i. production. ii. prices. iii. subsidies. A) i only B) ii only C) i and ii D) i and iii E) i, ii, and iii
C
Nominal GDP increases A) only if total production increases. B) only if prices increase. C) if either prices and/or total production increase. D) only if the productivity of resources increase. E) only if depreciation decreases.
C
How does the size of a country's GDP affect the quality of life of the country's people?
Generally, the more goods and services people have, the better off they are
Define real GDP.
GDP expressed in constant, or unchanging, prices
Suppose a house is built and sold in the year 2000. If the house is resold in the year 2013, is the value of the house included in Gross Domestic Product for 2013?
No. GDP for 2013 includes only production that occurs during 2013
What economic activities are not included in GDP?
Non-market activities such as things people make or do themselves (childcare, lawn-mowing).
What is the difference between the value of a firm's final product and the value added by the firm to the final product?
The value of a firm's final product is the sale price; value added is the difference between the sale price and the price of intermediate goods.
If aggregate demand rises, what happens to real GDP and what happens to the price level?
They are all directly proportional. When aggregate demand rises, so does real GDP and the price level.
The circular flow diagram shows that _____ should equal _______
Total expenditure; Total income
Transfer payments are not included in GDP calculations because:
Transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service
What are the four categories of income?
Wages Interest Rent and Profit
What are the 4 categories of income?
Wages, Interest, Rent, and Profit
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities
Which equation represents the relationship between GDP and the four major expenditure components?
Y=C+I+G+NX
Would the service of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2013?
Yes. GDP for 2013 includes the market value of final goods and services. This includes real estate services.
A decrease in consumer confidence can put your job at risk if
aggregate expenditures fall
Define recession.
a contraction severe enough to to last several months or longer and have widespread effects on production, real income, employment, and sales across the country.
What causes cyclical unemployment?
a decreased demand for labor during a downturn of the business cycle (recession)
Definition of depression
a downturn that last more than a year or two
Definition of recession
a downturn that lasts more than 6 months
What is the definition of a discouraged worker?
a person who has a job but has given up looking
What can happen during the contraction phase?
a recession
What has occured when real GDP growth is less than 0 (negative)?
a recession
What is deflation?
a reduction in the amount of money in a country's economy so that prices fall or remain the same
Define economic growth
a steady, long-term increase in real GDP
Not a component of aggregate expenditure?
actual investment spending
In calculating GDP, we must
add the market value of exports and subtract the market value of exports
What is defined as the amount of goods and services in the economy that will be purchased at all possible price levels?
aggregate demand
GDP is
an imperfect measure of the standard of living
________ is most likely to contribute to an improvement in our living standard.
an increase in real GDP
How are final goods and services valued when measuring nominal GDP?
at current market prices
Why does total expenditure equal total income
because firms pay out everything they receive as income to the factors of production
Investment spending will increase when
business cash flow increases
Consumption expenditure includes spending
by households
What type of spending is the following: You buy a new Toyota that was made in Japan.
net exports
What in the income approach?
calculates GDP by adding all incomes in economy
Economists define investment to include purchases of
capital goods and inventories
What type of spending is the following: An accountant pays a tailor $175 to sew a suit for her.
consumption
What type of spending is the following: You pay $800 a month to rent an apartment.
consumption
What type of spending is the following: You spend $10 to see a movie.
consumption
4 categories of spending:
consumption investment government purchases Xnet (net exports)
Expenditures on U.S. produced steaks, shoes, and doctor visits are most likely classified as
consumption expenditure
Household spending on goods and services is known as
consumption spending
A period of economic decline marked by falling real GDP
contraction
The phase in the business cycle that follows the peak by going downwards is called __________
contraction
What type of unemployment is the following: A computer programmer is laid off because of a recession.
cyclical
What type of unemployment is the following: Slumping sales lead to the cashier being laid off.
cyclical
What type of unemployment is the following: Workers are laid off when the local manufacturing plant closes because the product made there isn't selling during a recession.
cyclical
When individuals lose jobs due to a fall in aggregate demand, often during an economic recession.
cyclical unemployment
A period of economic growth as measured by a rise in real GDP
expansion
The phase in the business cycle that follows the trough by going upwards is called __________
expansion
Investment spending ____ during a recession, and _____ during an expansion
declines; increases
Increases real GDP
decrease in interest rates
A recession that is especially long and severe
depression
A recession that is especially long and severe; high unemployment/ low factory input
depression
Important features of GDP:
dollar value goods and services final products, within a country's borders, and in a given year
Real GDP goes up during ________ and goes down during _________
economic growth (expansionary phase); recession (2 consecutive quarters, aka contraction phase)
What is the Expenditure Approach?
economics estimate annual expenditure on 4 categories of final goods and services, then add total expenditures on all categories
During a(n) ____ many firms experience increased profits, which increases ____ and investment spending
expansion; cash flow
Net exports of goods and services is equal to the value of
exports minus the value of imports
Investment is the expenditure done by
firms
Consumer spending ___ and investment spending ____
follows a smooth trend; is more volatile and subject to fluctuations
All labor markets have this type of unemployment.
frictional
What type of unemployment is the following: A literary editor leaves his job in NYC to look for a new job in San Francisco.
frictional
What type of unemployment is the following: An unemployed college graduate is looking for his first job.
frictional
this type of unemployment will always exist to some degree
frictional
When an individual is unemployed because they are looking for a new job.
frictional unemployment
What type of spending is the following: The government increases its defense expenditures by $1,000,000,000.
government
____ usually increase(s) when the US economy is in recession and decrease(s) when the US economy is expanding
net exports
The circular flow diagram shows that all sources of income are owned by
households
Determine wether or not the following be included in the calculation of GDP: A new building for Tony Hawk Industries.
included
Determine wether or not the following be included in the calculation of GDP: A new skateboard that you buy for your niece.
included
What type of spending is the following: A family pays a contractor a $150,000 for a house he built for them this year.
investment
What type of spending is the following: Consumer electronics corporation Apple Inc. builds a new factory in the United States.
investment
What type of spending is the following: Ford Motor Company buys new auto-making robots.
investment
Determine wether or not the following be included in the calculation of GDP: A ticket for the X Games bought from a person on a street corner.
not included
Determine wether or not the following be included in the calculation of GDP: A used copy of the Tony Hawk video game.
not included
Determine wether or not the following be included in the calculation of GDP: Wheels for a skateboard that will be sold new.
not included
If you make dinner for yourself, what would be included in the GDP?
only the market value of the ingredients
The height of an economic expansion, when real GDP stops rising
peak
What is the highest point of the business cycle called?
peak
What phase of the business cycle is described as the end of expansion and beginning of recession (contraction)?
peak
P.C.T.E
peak, contraction, trough, expansion
The business cycle exists because:
production experience periods of increases and periods of decrease
Define intermediate goods
products used in the production of final goods
A prolonged economic contraction, marked by 10% unemployment and declared when GDP falls for 2 quarters
recession
Higher unemployment causes a __________
recession
What is cyclical unemployment almost always associated with?
recession
income not used for consumption
savings
When individuals are unemployed due to a change in season, e.g. Santa Claus after christmas.
seasonal unemployment
What phase of the business cycle is described as the end of recession (contraction) and beginning of expansion?
trough
Give an example of someone who is seasonally unemployed.
ski instructors during the winter
What type of unemployment is the following: A high school graduate lacks the skills necessary for a particular job.
structural
What type of unemployment is the following: A skilled glass blower becomes unemployed when a new machine does her job faster.
structural
What type of unemployment is the following: Advances in technology make the assembly-line worker's job obsolete.
structural
Which type of unemployment occurs when technology can replace your job?
structural
Individuals are unemployed due to a lack in skills that modern industries need, change in technology.
structural unemployment
What is gross national product?
the annual income earned by a nation's firms and citizens
US net export spending rises when
the growth rate of US GDP is slower than the growth rate of GDP in other countries
Define depreciation
the loss of the value of capital equipment that results from normal wear and tear
The difference between nominal GDP and real GDP is
the prices used in their calculations
Define nondurable goods
those goods that last a short period of time, such as food, light bulbs, and sneakers
Define durable goods
those goods that last for a relatively long time, such as refrigerators, cars, and DVD players
The lowest point in an economic contraction
trough
The lowest point of an economic contraction, when real GDP stops falling
trough
What is the lowest point of the business cycle called?
trough
Expenditures in GDP do not include ________.
used goods or financial assets
Net exports of goods and service are defined as the
value of exports minus the value of imports
Consumption goods and services include
washing machines and tickets to football games
When would a recession occur?
when an economy experiences a period in which there is a decrease in total production
Who are the types of people that face frictional unemployment?
workers in between jobs, workers who haven't started work yet (college grad.)
