MacroEconomics Exam 1

If all of the households and businesses start saving more during economic hard times, then aggregate income (another term for gross income) will fall, hurting everyone in the economy. This is known as the:

Paradox of Thrift

What can a comparative advnatge NOT do?

can't explain why a country imports more than its exports

Definition of Microeconomics

concerned with the consumption and production decision of INDIVIDUAL CONSUMERS AND PRODUCERS and with the allocation of scarce resources among industries

When an economy is between the peak and the trough of a business cycle, it is

contraction

A decrease in the overall level of prices is:

deflation

Definition of self-regulating

describes an economy in whih problems, such as unemployment, are resolved WITHOUT gov't intervention through the working of the &*invisible hand* and in which gov't attempts to improve economic performace would be inneffective

Trade deficit definition

excess of imports over exports --the deficit that results from when the value of goods and services bought from foreigns is more than the value of goods and services sold to consumers

What does micro focus on?

focuses on decisions made by individuals and firms

Definition of macroeconomics

focuses on the behaviors of the economy as a WHOLE -examines the actions of ALL the firms in the economy

Macro focuses on the (____________) level of the economy.

general, how high it is relative to others

Intermediate good definition

goods (bought from one firm by another firm) that are imputs for the production of final goods and services

Final Goods and Services Definition

goods and services sold to the final or end user

Per capita economic growth is:

growth per person

Newly produced but unsold goods are included as ...

inventory investment

National income and product accounts, national accounts definition

keeps track of the flows of money between different sectors in the econmy

*If the economy grew at 3% this year, and average prices increased _____, people would be better off this year than last year.*

less than 3%

What type of economy does the U.S. have?

open economy: an economy that trades goods and services with other countries

*An increase in the nation's _____________ is generally accepted as a long-run indicator of a rising standard of living.*

output per person

Macroeconomics entails the study of

overall behavior of the economy

Recession (contractions) definition

periods of economic downturn when output and employment are falling

Expansion (recoveries) definition

periods of economic upturn, when output and employment are rising

Macroeconomics are concerned with questions about ______________. When did this shape?

policy. during the great depression

Economists generally believe that:

price stability is desirable

price stability definition

when the overall level of prices changes slowly or not at all

A trade deficit occurs when....

when the value of imports exceeds the value of exports

GDP is part of what account?

National Income and Product Accounts

Recessions are periods when _

both output and employment fall

The short-run alternation between recessions and expansions is known as the

business cycle

"In 2008, problems in the financial sector led to a drying up of credit around the country: home-buyers were unable to get mortgages, students were unable to get student loans, car-buyers were unable to get car loans, and so on. a. Explain how the drying up of credit can lead to compounding effects throughout the economy and result in an economic slump. b. If you believe the economy is self-regulating, what would you advocate that policy makers do? c. If you believe in Keynesian economics, what would you advocate that policy makers do?"

"When people can't get credit to finance their purchases, they will be unable to spend money. This will weaken the economy, and as others see the economy weaken, they will also cut back on their spending in order to save for future bad times. As a result, the credit shortfall will spark a compounding effect through the economy as people cut back their spending, making the economy worse, leading to more cutbacks in spending, and so on. If you believe the economy is self-regulating, then you would advocate doing nothing in response to the slump. If you believe in Keynesian economics, you would advocate that policy makers undertake monetary and fiscal policies to stimulate spending in the economy. "

What are the things not considered a good or service for GDP purposes? (Include 4 reasons)

-financial assets (stocks, bonds, etc)\ -Intermediate goods -volunteer work -household production

Which of the following would be included in GDP for 2021?• In January 2021 I bought a house; it was built in 1972.• In January 2021 I bought a house; the developer had finished construction that month. Last semester I bought a car from my in-laws; it is a 2011model. Last week my friend bought a car. It is 2020 model and had been sitting on the dealer's lot since it was manufactured in January of last year.

-no -yes -no -counted as inventory investment

What does "The whole is greater than the sum of its parts" mean?

-you cannot predict what is going to be at a macro level by summing up the micro level -the combined effect of individual decsons can have resuts that are different from what any one individual inhdened. -Contrary to what "invisible hand" metaphor implies, the results are bad

During the Great Depression.... 1. How much did industrial production decrease by? 2. Unemployment rates? 3. Consumer prices declined by how much?

1. Industrial production decreased by ∼ 50% betweenAugust '29 and July '32, didn't reach 1929 level again until late 1936• Dropped again by ∼ 30% from 1937-1938• 2. Unemployment rate peaked around *25%* in 1933, and wasa bove 10% until 1942• 3. Consumer prices declined by around 25% between 1929and 1933

Macro or Micro Question 1. Should I go to business school or take a job rn? 2. Why was there a toilet paper shortage during COVID? 3. What determines the overall trade in goods, services, and financial assers between the US and the rest of the world? 4. What gov't policies should be adopted to promote employment and growth in the economy as a whole? 5. How many people are employed in the economy as a whole this year? 6. What determines the cost to a university or college offering a new course?

1. Micro 2. Micro 3. Macro 4. Macro 5. Macro 6. Micro

Total Income Approach includes 4 factors:

1. wages 2. profit 3. interest 4. rent

When did the Great Depression start and how long did it last until?

1929. Lasted until WWII in 1940.

When did the Great Recession occur?

2007

What was the unemployment rate during the Great Depression?

23%

When the Great Depression reached its trough in 1933, the unemployment rate was approximately

25%

How much did GDP fall by during the great depression?

26%

How many GDP releases are there each quarter?

3

The equivalence of production, spending, and income means GDP can be calculated in three ways:

Add up the total value of all final goods and services produced (value approach) • Add up all spending on domestically-produced final goods and services (spending approach) • Add up the total income earned by households from firms in the economy (income approach)

Another term for gross income:

Aggregate income

How is the overall level of prices determined?

By changes in the money supply

Another term used to describe a recession is...

Contractions

trade surplus definition

Exports> Imports the surplus that results when the value of goods and services bought from foreigns is LESS THAN goods and services sold

What is the most important and common way to estimate an economy size?

GDP

The view that the government should take an active role in managing the economy dates from

Great Depression

What does inflation discourge people from doing?

Inflation discourage people from holding onto cash because cash loses value overtume if overall price level is rising

"The General Theory of Employment, Interest, and Money", written by ______________ published in ________ transformed the way economists thought about macroeconomics.

John Maynard Keynes; 1936

Post 1930's conventional wisdom

Jon Maynard Keyenes "The General Theory of Employment, Interest, and Money" *Keynesian economics* --a depressed economy is the result of inadequte spending and gov't intervention can help a depressed economy through monetary policy and interest rate --Economic slumps are caused by inadequate spending and may NOT be self-correcting, and they can be mitigated by government intervention. ALSO *CONVENTION WISDOM*

Why are Americans able to afford conveniences that many Americans lacked in 1960?

LONG-RUN ECONOMIC GROWTH

A fundamental relationship of national income accounting: Total Production = total expenditure = total income

MEMORIZE

Macro or micro?: Is the national unemployment rate rising or falling?

Macro

What sort of interventions do governments use to counteract economic slumps?

Monetary policy: uses changes in the quantity of money to alter *interest rates* and affect overall spending.• This type of policy is the responsibility of a country's central bank (the Federal Reserve in the U.S.). Fiscal policy: uses changes in *government spending* and *taxes* to affect overall spending.

An independent panel of economic experts at the _______________________________________ analyzes a varity of macroeconomics indicators and determines when a recessions begins and ends.

National Bureau of Economist Research

Value Approach: Ask firms the market value of all they produced in a given time period: • Problem: ? - Solution: ?

Problem: Some firms may only produce intermediate goods, some only final goods, and some both • Solution: for each firm take the value of sales minus intermediate goods—this is the firm's *value added* The sum of all firms' value added will equal the total value of all final goods and services.

How often is GDP calculated?

Quarterly

True or False: Recessions are part of the business cycle

TRUE

What calculates GDP?

The Bureau of Economic Analysis

Recessions are officially declared by who? They also identify business cycle dates.

The National Bureau of Economic Research

Movements in inflation are closely related to what?

The business cycle: when economy is depressed, inflation falls and when the econmy is booming, inflation rises

What is the core of macro?

The effort to understand economic slumps and find ways to prevent them.

What is the CORE of maccroeconomics?

The efforts to understand economic slumps and find ways to prevent them

Convention Wisdom

The gov't needs to take a active roll because The Invisible hand CAN lead to bad equilibrium=meaning GOVERNMENT INTERVENTION

What is a key insight that macro analysis relies on?

The whole is greater than the sum of its parts

How do recessions hurt people?

They cause them to lose their jobs and it reduces the standard of living.

What is "The Invisible Hand"?

Through market processes people operating through their own self-interest leads to a benefit outcome. The Invisible hand is a concept that explains HIDDEN economic forces in the market. It is a NATURAL force that regulates the market economy.

True or False: "Long-run economic growth is the force behind long-term increases in living standards and is important for financing some economic programs. It is especially important for poorer countries."

True

True or False: Both inflation and deflation can pose problems for the economy.

True

True or False: Inflation means an increase in the overall level of prices.

True

True or False: Only production that takes place within the borders of acountry is included in GDP

True

What is the most widely used indicator of conditions in the labor market?

Unemployment

Who is responible for monetary policy?

a country's central bank (the Federal Reserve in the U.S.)

Long-run economic growth per capita:

a sustained upward trend in output per person, key to higher wages and a higher standard of living

"Which of the following reflect comparative advantage, and which reflect macroeconomic forces? Thanks to the development of huge oil sands in the province of Alberta, Canada has become an exporter of oil and an importer of manufactured goods. Like many consumer goods, the Apple iPad is assembled in China, although many of the components are made in other countries. Since 2002, Germany has been running huge trade surpluses, exporting much more than it imports. The United States, which had roughly balanced trade in the early 1990s, began running large trade deficits later in the decade, as the technology boom took off."

a. ca b. ca c. m d. m

Final Good or Intermediate Good? a. Gas that I buy for my car for personal use. b. Gas that TCU buys for use in its University vehicles. c. Wood that I buy at Home Depot for a personal wood working project. d. Wood that a contractor buys at Home Depot for framing a house it will sell.

a. final good b. intermediate c. final d. intermediate

"Which of the following questions involve microeconomics, and which involve macroeconomics? In each case, explain your answer. a. Why did consumers switch to smaller cars in 2008? b. Why did overall consumer spending slow down in 2008? c. Why did the standard of living rise more rapidly in the first generation after World War II than in the second? d. Why have starting salaries for students with economics degrees risen sharply as of late? e. What determines the choice between rail and road transportation? f. Why did laptops get much cheaper between 2000 and 2017? g. Why did inflation fall in the 2010s?"

a. micro b. macro c. macro d. micro e. micro f. micro g. macro

Comparative advantage definition

countries export goods that they are good at producing and import goods that they are not good at producing

How does deflation deepen a recession?

if the prive level is falling, cash gains value over time causing the amount of goods and services you can buy with cash to go up. Holding on to cash becomes more attractive than investing = deepens recession

Goods and services that are produced in a foreign country but consumed domestically are called:

imports

1980-2020, the economy experienced _____________

inflation

If a country runs a trade surplus, its investment spending is probably:

low relative to its savings

A key insight of macroeconomics is that the combined effect of individual decisions:

may be very different from what any one individual intended.

What are some actions that deepend the GD? What happned during the GR to try to bring the US out of its economic slump?

monetary authorities raised Interest rates while government cut spending and raised taxes 2. interest rates were slashed, countries used temp increases in spending and reduction in taxes to sustain spending

Altering interest rates and/or the money supply in an effort to affect overall spending is a use of

monetary policy

Paradox of Thrift definition and example:

seemingly virtious behavior end up harming everyone example: If you expect a reccsion you decide to spend less and save more of your income bu then this causes... -total spending goes down -businesses let go of workers because of lower demand

Pre 1930s conventional wisdom

self-regulating economy

Definition of recession

severe economic downturn, leads to collapse in employment *periods of economic downturn, when output and employment are falling*

Economists looks for prices to be _______________

stable----> price stability

Long-run growth is a

sustained upward trend in total output per person over several decades.

Through fiscal policy, policy makers seek to affect the overall level of spending by varying

taxes and spending

Business Cycle definition

the *short-run* alteration between recessions and expansions

GDP Definition

the market value of all FINAL goods and services produced within a country in a given period of time

Peak definition

the point at which the economy turns from expansion :) to recession :(

trough definition

the point when the economy turns from recession :( to expansion :)

Aggregate Spending Definition

the sum of consumer spending, investment spending, government purchases of goods and services, the exports minus the imports

Long-run economic growth definition

the sustained rise in the quality of goods and services the economy produces

Countries with high investment spending relative to savings run _______________

trade deficit

Countries with low investment spending relative to savings run _______________

trade surplus