Macroeconomics Unit 3 Test Review
Consumer price index (CPI)
measures the cost of the market basket of a typical urban American family
Investment spending
spending on new productive physical capital, such as machinery and structures, and on changes in inventories
Inventories
stocks of goods and raw materials held to facilitate business operations
Real wage
the wage rate divided by the price level to adjust for the effects of inflation or deflation
Government purchases of goods and services
total expenditures on goods and services by federal, state, and local governments
Marginally attached workers
would like to be employed and have looked for a job in the recent past but are not currently looking for work
Chain-linking
the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year
Value-added approach
survey firms and add up their contributions to the value of final goods and services to calculate GDP
Government borrowing
the amount of funds borrowed by the government in the financial markets
Cyclical unemployment
the deviation of the actual rate of unemployment from the natural rate
Net exports
the difference between the value of exports and the value of inputs (X-M)
Frictional unemployment
unemployment due to the time workers spend in job search
Efficiency wages
wages that employers set above the equilibrium wage rate as an incentive for better employee performance
Calculate the gross domestic product using these figures. Consumer spending= $1,000 Investment spending= $200 Government spending= $500 Imports= $75 Exports= $50 Transfer payments= $50
GDP= C + Ig + G + X - M $1,675= $1,000 + $200 + $500 + $50 - $75
Expansion
Growth for at least 6 months of real GDP (Inflation?)
Luke works for a building contractor and is a member of the local ironworkers union. The contractor is currently building 5 skyscrapers in the Chicago area. His union just negotiated a new 5-year contract that includes small annual raises and a cost of living adjustment (COLA).
Helped- the COLA ensures his salary keeps up with inflation and a small raise
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. Now suppose a new factory opens in Appledale that hires 1,000 workers, half of those hired had previously given up looking for work. What is the new size of Appledale's labor force?
16,000 + 8,000 + 1,500= 25,500
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. What is Appledale's unemployment rate?
2,000/25,000= .08 x 100= 8%
Use the information in this table to answer the questions that follow. Tomatoes: 2.75 (Year 1 Price), 52 (Year 1 Quantity), 3.00 (Year 2 Price), 60 (Year 2 Quantity), 3.25 (Year 3 Price), 56 (Year 3 Quantity) Watermelon: .40 (Year 1 Price), 90 (Year 1 Quantity), .44 (Year 2 Price), 100 (Year 2 Quantity), .42 (Year 3 Price), 100 (Year 3 Quantity) Peanuts: 4.00 (Year 1 Price), 87 (Year 1 Quantity), 4.10 (Year 2 Price), 100 (Year 2 Quantity), 4.25 (Year 3 Price), 92 (Year 3 Quantity) Fill in the table below using Year 1 as the base year.
Cost of Market Basket: Year 1- (2.75 x 52) + (.40 x 90) + (4.00 x 87)= 143 + 36 + 248= 527 Year 2- (3 x 60) + (.44 x 100) + (4.10 x 100)= 180 + 44 + 410= 634 Year 3- (3.25 x 56) + (.42 x 100) + (4.25 x 92)= 182 + 42 + 391= 615 Price Index Value: Year 1- (527/527) x 100= 100 Year 2- (634/527) x 100= 120.3 Year 3- (615/527) x 100= 116.7
When Dorothy had children, she decided to quit her job in advertising to stay home and raise them until they went to grade school.
Out of the labor force
Aggregate price level
a measure of the overall level of prices in the economy
Employed
people who are currently holding a job in the economy, either full time or part time
What formula would you use to determine a price index?
price index in a given year= MB cost for a year/MB cost for base year x 100
Labor force participation rate
the percentage of the population aged 16 or older that is in the labor force
Unemployment rate
the percentage of the total number of people in the labor force who are unemployed
Disinflation
the process of bringing the inflation rate down
Menu costs
the real costs of changing listed prices
Aggregate output
the total quantity of final goods and services produced within an economy
What is the formula to count the unemployment rate?
# of unemployed/# in labor force
Using the table you constructed, calculate the rate of inflation between Year 2 and Year 3.
(new-old)/old x 100 (116.7-120.3)/120.3 x 100= -.03 x 100= 3% decrease in inflation
Using the table you constructed, calculate the rate of inflation between Year 1 and Year 2.
(new-old)/old x 100 (120.3-100)/100 x 100= .203 x 100= 20.3 increase in inflation
What are the definitions of the three types of unemployment?
1) Frictional- an individual is temporarily unemployed or between jobs. The individual is qualified and has transferable skills but is not working because the individual is a new entrant to the labor market or has recently quit to find another job 2) Structural- changes in the structure of the labor force make some skills obsolete. Geographic relocation of jobs may occur. The individual does not have transferable skills and/or the jobs may never come back 3) Cyclical- unemployment that results from changes in the economy or the business cycle
What are the two categories of workers who are counted in the labor force?
1) You are employed 2) You are not employed, but are actively looking for work
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. What is the size of Appledale's labor force?
15,000 + 8,000 + 2,000= 25,000
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. What is Appledale's employment rate?
23,000/25,000= .92 x 100= 92%
Jill has worked at her current position without a raise for 4 years. Because inflation has risen 5% over the course of the 4 years, she has struggled to pay day-to-day living expenses and her house payment. She asked her employer for a raise and he gave her a 6% raise because she is such a good worker.
Helped- Jill's raise is more than inflation so she will gain in real dollars
Lando signed a 4-year fixed rate lease for the condo he is going to live in while he attends college.
Helped- Lando will pay his rate with money that have less real value in the future and will see no rent increases if there is inflation
Describe how a price index is constructed.
It measures the cost of purchasing a given MB in a given year. Economists track changes in the cost of buying a given MB. Given a current MB and a base year, a price index is calculated.
Trough to Trough
The "length" of a cycle
Misery Index
The Unemployment Rate and the Inflation Rate together
Six Months
The minimum time GDP data is relevant to cycle
Inflation initiated by increases in wages or other resource prices is labeled: a) demand-pull inflation b) demand-push inflation c) cost-push inflation d) cost-pull inflation
c) cost-push inflation
If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its labor force is: a) 335 million b) 200 million c) 155 million d) 150 million e) 135 million
d) 150 million
Stock
a share in the ownership of a company held by a shareholder
4 to 5%
"Full Employment" Unemployment Rate (Efficient)
6+ %
"Weak" Economy or "Recession" Economy
What is another name for the natural rate of unemployment?
At the natural rate of unemployment (NRU), the economy is said to be at full employment. So NRU is at Full Employment
Stagflation
Both Expansion and Recession at the same time
Fill in the table using Year 2 as the base year.
Cost of Market Basket: (see #83) Year 1- 527 Year 2-634 Year 3- 615 Price Index Value: Year 1- 527/634 x 100= 83.1 Year 2- 634/634 x 100= 100 Year 3- 615/634 x 100= 97
This leaves the "Civilian Labor Force"
Count: - full time workers (40 hours a week) - part time workers (15 to 39 hours a week) - "unpaid" family business workers (part of the family) - those on sick leave, strike, vacation Subtract: - those looking by not finding, changing careers, etc.
Bond
a loan in the form of an IOU that pays interest
Contraction Recession
Decline for at least 6 months of real GDP (Unemployment?)
Jamal has been working 3 hours a day after school at the local convenience store.
Employed
Luis has been searching for a full-time job in marketing, but has only been able to find a part-time job at the grocery store.
Employed
What is the natural rate of unemployment?
Frictional and structural unemployment make up the natural rate of unemployment. Cyclical unemployment disappears. So the natural rate of unemployment will only include frictional and structural
GDP per capita
GDP divided by the size of the population; it is equivalent to the average GDP per person
25%
Highest official unemployment rate in 1933
Household
a person or group of people who share income
This leaves the "Non Institutional Adult" population
Subtract: - retired and receiving retirement funds - homemakers - full time students over 16 - "discouraged"
Official Employment Statistics: Start with the total population of the U.S.
Subtract: - those under 16 - those in the military - those "institutionalized"
Market basket
a hypothetical set of consumer purchases of goods and services
In which of the following industries or sectors of the economy is output likely to be most strongly affected by the business cycle? a) military goods b) capital goods c) textile products d) agricultural commodities
b) capital goods
In general, economic expansions are characterized by: a) increasing rates of unemployment b) decreasing rates of unemployment c) decreasing unemployment d) unchanged rates of employment e) unchanged rates of unemployment
b) decreasing rates of unemployment
The production of durable goods varies more than the production of nondurable goods because a) durable purchases are nonpostponable b) durable purchases are postponable c) the producers of nondurables have monopoly power d) producers of durables are highly competitive
b) durable purchases are postponable
The immediate determinant of the volume of output and employment is the: a) composition of consumer spending b) ratio of public goods to private goods production c) level of total spending d) size of the labor force
c) level of total spending
Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will: a) fall by about 20 percent b) fall by about 2 percent c) rise by about 15 percent d) rise by about 25 percent
c) rise by about 15 percent
The natural rate of unemployment is: a) higher than the full-employment rate of unemployment b) lower than the full-employment rate of unemployment c) that rate of unemployment occurring when the economy is at its potential output d) found by dividing total unemployment by the size of the labor force
c) that rate of unemployment occurring when the economy is at its potential output
If the economy's real GDP doubles in 18 years, we can: a) not say anything about the average annual rate of growth b) conclude that its average annual rate of growth is about 5.5 percent c) conclude that its average annual rate of growth is about 2 percent d) conclude that its average annual rate of growth is about 4 percent
d) conclude that is average annual rate of growth is about 4 percent
A recession is a period in which: a) cost-push inflation is present b) nominal domestic output falls c) demand-pull inflation is present d) real domestic output falls
d) real domestic output falls
Year Consumer Price Index 1 80 2 (base year) 100 3 105 4 125 5 150 According to the table above, the approximate rate of inflation in Year 3 is a) 1 b) 10 c) 19 d) 20 e) 5
e) 5 (new-old)/old x 100 (105-100)/100 x 100= 5
Private savings
equal to disposable income minus consumer spending; disposable income that is not spent on consumption
Disposable income
equal to income plus government transfers minus taxes; the total amount of household income available to spend on consumption and to save
Expenditure approach
add up aggregate spending on domestically produced final goods and services in the economy ; the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports to calculate GDP
Firm
an organization that produces goods and services for sale
Unit-of-account costs
arise from the way inflation makes money a less reliable unit of measurement
Real GDP
the total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year in order to remove the effects of price changes
Value added
the value of its sales minus the value of its purchases of inputs
Tina has decided to not get a job after school because she wants to improve her grades before graduation.
Out of the labor force
Why does nominal GDP go up faster than real GDP?
- The nominal GDP moves up faster since it is unadjusted for inflation - The real GDP, which is adjusted for inflation, will generally not rise as fast as nominal GDP
Government transfers
payments that the government makes to individuals without expecting a good or service in return
Unemployed
people who are actively looking for work but aren't currently employed
Inflation rate
the percentage increase in the overall level of prices per year
The economy of Doraville produces three goods: pizza, lemons, and watches. The table below provides information about the prices and output for these goods for Years 1-3. Use the table to answer the questions that follow. Year 1: $40 (Price of Ear Buds), 100 (Quantity of Ear Buds), $1 (Price of Lemons), 200 (Quantity of Lemons), $80 (Price of Watches), 10 (Quantity of Watches) Year 2: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 216 (Quantity of Lemons), $82 (Price of Watches), 12 (Quantity of Watches) Year 3: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 220 (Quantity of Lemons), $85 (Price of Watches), 12 (Quantity of Watches) What was the percent change in nominal GDP from Year 1 to Year 2?
(6,150-5,000)/5,000= .23 x 100= 23% increase
The economy of Doraville produces three goods: pizza, lemons, and watches. The table below provides information about the prices and output for these goods for Years 1-3. Use the table to answer the questions that follow. Year 1: $40 (Price of Ear Buds), 100 (Quantity of Ear Buds), $1 (Price of Lemons), 200 (Quantity of Lemons), $80 (Price of Watches), 10 (Quantity of Watches) Year 2: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 216 (Quantity of Lemons), $82 (Price of Watches), 12 (Quantity of Watches) Year 3: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 220 (Quantity of Lemons), $85 (Price of Watches), 12 (Quantity of Watches) What was the percent change in nominal GDP from Year 2 to Year 3?
(6,190-6,150)/6,150= .006 x 100= .6% increase
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. Now suppose a new factory opens in Appledale that hires 1,000 workers, half of those hired had previously given up looking for work. What is Appledale's new unemployment rate?
1,500/25,500= .059 x 100= 5.9%
What is the CPI of the base year?
100
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. Now suppose a new factory opens in Appledale that hires 1,000 workers, half of those hired had previously given up looking for work. What percentage of the population is now considered discouraged workers?
2,500/32,000= .078 x 100= 7.8%
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. Now suppose a new factory opens in Appledale that hires 1,000 workers, half of those hired had previously given up looking for work. What is Appledale's new employment rate?
24,000/25,500= .941 x 100= 94.1%
Appledale has 32,000 full-time residents including 4,000 residents either retired or are too young to work. Of the total, 15,000 residents are employed full time while 8,000 work part time. The town has 2,000 residents not currently working but looking for work. The remaining residents have given up looking for work. What percentage of the population are discouraged workers?
3,000/32,000= .094 x 100= 9.4%
Peak
The time Expansions end
What two types of unemployment will always be part of the economy? Why?
Frictional and structural unemployment are always present in the economy. Frictional unemployment includes those just joining or coming back into the labor force. It is part of the natural cycle of the market. Structural unemployment occurs when workers lack the skills needed for the changing marketplace. They must be retrained or go back to school and get a new set of skills. This is also part of the natural cycle of the markets as innovation and technology change it.
Leia just read that the national debt owed by the federal government is at an all-time high. (Explain impact on federal government.)
Helped- the government is a borrower and will repay the debt over time with money that has loss real value is there is inflation
Peter has been saving his money to buy his girlfriend an engagement ring. He decided to give the money to his mother to hold for him so he wouldn't spend it rather than put it in a savings account in the bank. During the time he was saving, the price of the ring he picked out increased by 10%.
Hurt- his decision to not put it in a savings account lost him some interest he would've made
Wendy manages a bank in the local area. The previous manager made several fixed-rate loans to customers at low interest rates to bring in new depositors. Inflation is now rising at 3% per year.
Hurt- if the interest rate on the loans is lower than the inflation rate each year
Han works at the local tax agency. The county commissioners just voted to sell license tags at the same rate for the next 5 years. (Explain impact on county government.)
Hurt- the revenue collected from the tags will be worth less in future years
Jack retired five years ago and now lives on a fixed-income annuity and a small savings account that pays him 1% interest on the balance. The current inflation rate is 1.7%.
Hurt- the value of Jack's savings will be less since inflation is greater than his earned interest
The economy of Doraville produces three goods: pizza, lemons, and watches. The table below provides information about the prices and output for these goods for Years 1-3. Use the table to answer the questions that follow. Year 1: $40 (Price of Ear Buds), 100 (Quantity of Ear Buds), $1 (Price of Lemons), 200 (Quantity of Lemons), $80 (Price of Watches), 10 (Quantity of Watches) Year 2: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 216 (Quantity of Lemons), $82 (Price of Watches), 12 (Quantity of Watches) Year 3: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 220 (Quantity of Lemons), $85 (Price of Watches), 12 (Quantity of Watches) Calculate the nominal GDP for each year.
Nominal GDP for Year 1= ($40 x 100) + ($1 x 200) + ($80 x 10)= $5,000 Nominal GDP for Year 2= ($45 x 110) + ($1 x 216) + ($82 x 12)= $6,150 Nominal GDP for Year 3= ($45 x 110) + ($1 x 220) + ($85 x 12)= $6,190
Dr. Chan recently sold his medical practice and has retired to a house in the mountains.
Out of the labor force
Freddy has been working on the weekends for his mom's restaurant. Rather than paying Freddy a wage, his mom has agreed to make his monthly car payment.
Out of the labor force
Margaret doesn't have a job, but has been looking for work since last July. Recently she decided to stop searching for a job until the economy improves.
Out of the labor force- Discourage worker
This becomes the "Unemployment Rate" in % 0 to 3%
Overextended economy, war economy
Who are some people who are not part of the workforce?
People under the age of 16, people who are institutionalized, those serving in the military, those who choose not to be in the labor force are not part of the labor force
How do we measure changes in the price level?
Percentage change in Price (% change in P)= CPInow - CPIold/CPIold x 100
The economy of Doraville produces three goods: pizza, lemons, and watches. The table below provides information about the prices and output for these goods for Years 1-3. Use the table to answer the questions that follow. Year 1: $40 (Price of Ear Buds), 100 (Quantity of Ear Buds), $1 (Price of Lemons), 200 (Quantity of Lemons), $80 (Price of Watches), 10 (Quantity of Watches) Year 2: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 216 (Quantity of Lemons), $82 (Price of Watches), 12 (Quantity of Watches) Year 3: $45 (Price of Ear Buds), 110 (Quantity of Ear Buds), $1 (Price of Lemons), 220 (Quantity of Lemons), $85 (Price of Watches), 12 (Quantity of Watches) Using Year 1 as the base year, calculate the real GDP for each year.
Real GDP for Year 1= ($40 x 100) + ($1 x 200) + ($80 x 10)= $5,000 Real GDP for Year 2= ($40 x 110) + ($1 x 216) + ($80 x 12)= $5,576 Real GDP for Year 3= ($40 x 110) + ($1 x 220) + ($80 x 12)= $5,580
Six Years
The average length of a cycle in the U.S. history 1776-2011
Fourteen Months
The average length of a recession in the U.S. 1900-2011
How do we use the base year to explain the price index in other years?
The base year MB is compared with the price of MB in terms of other years and formula is shown in #2. It tells how the aggregate PL is increasing (inflation) or falling (deflation)
What is the difference between nominal and real GDP?
The dollar value changes as price goes up Nominal GDP- the GDP in today's dollars, NOT adjusted for inflation Real GDP- GDP is adjusted for inflation using base year prices
Define GDP
The dollar value of all final goods and services produced in a country's borders in a given time period (a year)
Secular Trend
The private assumption of Long Term Growth
Trough
The time Contractions end
What does it mean to be unemployed?
The unemployed are people willing and able to work and searching for work
Raquel was laid off at the Toyota plant because the weak economy has meant fewer people are buying new cars. Her supervisor has assured her that she will be rehired if the economy gets better.
Unemployed and cyclical
Samantha recently quit her hob at the landscaping business and has been trying to get hired at Home Depot, but has not received a reply to her application.
Unemployed and frictional
Eric has worked in the tobacco fields since he was a little kid. Because fewer people are smoking, demand for tobacco has fallen, and Eric can no longer find work in this occupation.
Unemployed- Structural
What is the name of the tool that we use to move from nominal to real GDP?
We calculate the GDP Deflator
Year 1: $2,000 (alta- real GDP), $150,000 (zorn- real GDP), 200 (alta- population), 500 (zorn- population) Year 2: $2,100 (alta- real GDP), $152,000 (zorn- real GDP), 202 (alta- population), 505 (zorn- population) Year 3: $2,200 (alta- real GDP), $154,000 (zorn- real GDP), 210 (alta- population), 508 (zorn- population) Refer to the above table. Between years 2 and 3: a) Alta's real GDP grew more rapidly than Zorn's real GDP b) real GDP fell in Zorn c) population growth reduced Alta's real GDP growth to zero d) population fell in Alta's
a) Alta's real GDP grew more rapidly than Zorn's real GDP
The consumer price index reflects the: a) changes in the prices of goods and services typically purchased by consumers b) level of prices for intermediate goods and services purchased by business c) level of prices for raw materials d) prices of all goods and services computed from the ratio of nominal GDP to real GDP e) average price of goods and services purchased by consumers
a) changes in the prices of goods and services typically purchased by consumers
The labor force includes: a) employed workers and persons who are officially unemployed b) employed workers, but excludes person who are officially unemployed c) full-time workers, but excludes part-time workers d) permanent employees, but excludes temporary employees
a) employed workers and persons who are officially unemployed
Which pair of policies is likely to have the effect of reducing the natural rate of unemployment? a) job training and employment subsidies b) high minimum wages and generous unemployment benefits c) job training and high minimum wages d) employment subsidies and policies designed to strengthen labor unions e) high minimum wages and policies designed to strengthen labor unions
a) job training and employment subsidies
If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, it real GDP per capita will: a) remain constant b) fall by 6 percent c) rise by 6 percent d) fall by 12 percent
a) remain constant
The inflation or deflation rate is a) the change in a price index divided by the initial value of the index b) the change in a price index divided by the new index value c) the difference between the initial price index number and the new price index number d) computed by dividing the old price index number by the new price index number e) the rate of change in real GDP from year to year
a) the change in price index divided by the initial value of the index
Income approach
add up the total factor income earned by households from firms in the economy, including rent, wages, interest, and profit to calculate GDP
Year 1 units of output: 4,000 (Gino's pizza), 3,000 (Bruno's spaghetti), 2,000 (Carlo's cookies), 5,000 (Aldo's salad) Year 1 price per unit: $10 (Gino's pizza), $9 (Bruno's spaghetti), $6 (Carlo's cookies), $7 (Aldo's salad) Year 2 units of output: 4,000 (Gino's pizza), 1,000 (Bruno's spaghetti), 1,000 (Carlo's cookies), 2,000 (Aldo's salad) Year 2 price per unit: $8 (Gino's pizza), $6 (Bruno's spaghetti), $1 (Carlo's cookies), $4 (Aldo's salad) Using the table above to answer the following question. Considering Year 1 as the base year, real GDP in Year 2 was: a) $47,000 b) $69,000 c) $72,000 d) $114,000 e) $55,000
b) $69,000 (10 x $4,000) + (9 x $1,000) + (6 x $1,000) + (7 x $2,000)= $69,000
Answer the next question(s) on the basis of the following information about the hypothetical economy of Bralone. All figures are in millions Not in the labor force: 45 Unemployed: 7 Total population: 145 Employed: 95 Discouraged workers: 3 Refer to the above information. The labor force in Bralone is: a) 95 million b) 102 million c) 105 million d) 145 million
b) 102 million
Year 1: $2,000 (alta- real GDP), $150,000 (zorn- real GDP), 200 (alta- population), 500 (zorn- population) Year 2: $2,100 (alta- real GDP), $152,000 (zorn- real GDP), 202 (alta- population), 505 (zorn- population) Year 3: $2,200 (alta- real GDP), $154,000 (zorn- real GDP), 210 (alta- population), 508 (zorn- population) Refer to the above table. Between years 1 and 2, real GDP per capita grew by ____________ percent in Alta: a) 3 b) 4 c) 5 d) 10
b) 4
Suppose that the nominal rate of interest is 7% and the expected inflation rate is 3% then the real rate of interest is equal to: a) 3% b) 4% c) 10% d) 7% e) 21%
b) 4% Nominal- inflation= real 7% - 3% = 4%
If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is: a) 2% b) 5% c) 7% d) 9% e) 3.5%
b) 5%
Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is: a) 4 percent b) 8 percent c) 10 percent d) 2 percent
b) 8 percent
Real GDP is nominal GDP adjusted for: a) double counting b) changes in prices c) population d) imports e) interest rates
b) changes in prices (inflation)
Last week Stephanie quit her job as a copywriter at an advertising agency. She has spent the last few days browsing the help-wanted ads, but hasn't found anything that matches her skills. Stephanie is best classified as: a) structurally unemployed b) frictionally unemployed c) a discouraged worker d) out of the labor force e) cyclically unemployed
b) frictionally unemployed
When inflation rises quickly: a) borrowers will be hurt and lenders will benefit b) lenders will be hurt and borrowers will benefit c) both borrowers and lenders will be hurt d) both borrowers and lenders will benefit e) lenders will be hurt and those on fixed income will benefit
b) lenders will be hurt and borrowers will benefit
Alex expects the inflation rate to be 4%. If Alex borrows money at a nominal interest rate of 5%, his real interest rate is: a) positive and greater than the nominal interest rate b) positive and less than the nominal interest rate c) positive and equal to the nominal interest rate d) negative and less than the nominal interest rate e) equal to zero
b) positive and less than the nominal interest rate
As it relates to economic growth, the term long-run trend refers to: a) the long-run increase in the relative importance of durable goods in the U.S. economy b) the long-term expansion or contraction of business activity that occurs over 50 or 100 years c) fluctuations in business activity that average 40 months in duration d) fluctuations in business activity that occur around Christmas, Easter, and so forth
b) the long-term expansion or contraction of business activity that occurs over 50 or 100 years
Official unemployment statistics: a) understate unemployment because individuals receiving unemployment compensation are counted as employed b) understate unemployment because discouraged workers are not counted as unemployed c) include cyclical and structural unemployment, but not frictional unemployment d) overstate employment because workers who are involuntarily working part time are counted as being employed
b) understate unemployment because discouraged workers are not counted as unemployed
Frictional unemployment
between jobs by choice
Year 1: $2,000 (alta- real GDP), $150,000 (zorn- real GDP), 200 (alta- population), 500 (zorn- population) Year 2: $2,100 (alta- real GDP), $152,000 (zorn- real GDP), 202 (alta- population), 505 (zorn- population) Year 3: $2,200 (alta- real GDP), $154,000 (zorn- real GDP), 210 (alta- population), 508 (zorn- population) Refer to the above table. Between years 1 and 2, real GDP grew by ______________ percent in Alta: a) 3 percent b) 4 percent c) 5 percent d) 10 percent
c) 5 percent
Donna was laid off by her employer at the beginning of 2014. She looked for a job for three months, but could not find anything suitable. She then decided to volunteer for a soup kitchen. Donna is considered to be a) unemployed b) underemployed c) a discouraged worker d) a part time worker e) employed
c) a discouraged worker
Given the annual rate of economic growth, the "rule of 70" allows one to: a) determine the accompanying rate of inflation b) calculate the size of the GDP gap c) calculate the number of years required for real GDP to double d) determine the growth rate of per capita GDP
c) calculate the number of years required for real GDP to double
Answer the next question(s) on the basis of the following information about the hypothetical economy of Bralone. All figures are in millions Not in the labor force: 45 Unemployed: 7 Total population: 145 Employed: 95 Discouraged workers: 3 Refer to the above information. If the natural rate of unemployment in Bralone is 5 percent, then: a) structural unemployment is 3 percent b) frictional unemployment is 2 percent c) cyclical unemployment is 2 percent d) hidden unemployment is 5 percent
c) cyclical unemployment is 2 percent
If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the: a) frictional unemployment rate is 5 percent b) cyclical unemployment rate and the frictional unemployment rate together are 5 percent c) cyclical unemployment rate is 4 percent d) natural rate of unemployment will eventually increase
c) cyclical unemployment rate is 4 percent
Real GDP per capita is found by: a) adding real GDP and population b) subtracting population from real GDP c) dividing real GDP by population d) dividing population by real GDP
c) dividing real GDP by population
Answer the next question(s) on the basis of the following information about the hypothetical economy of Bralone. All figures are in millions Not in the labor force: 45 Unemployed: 7 Total population: 145 Employed: 95 Discouraged workers: 3 Refer to the above information. The unemployment rate in Bralone is: a) 2.5 percent b) 3.2 percent c) 5.0 percent d) 6.9 percent
d) 6.9 percent
If the price level in the economy and the nominal wages both doubled, then the real wages would: a) also double b) increase by 50% c) decrease by 20% d) decrease by 50% e) remain unchanged
e) remain unchanged (cancel each other out)
Labor force
equal to the sum of the employed and the unemployed
GDP deflator
for a given year it is 100 times the ratio of nominal GDP to real GDP in that year
Intermediate goods and services
goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services
Imports
goods and services purchased from other countries
Exports
goods and services sold to other countries
Final goods and services
goods and services sold to the final, or end, user
Consumer spending
household spending on goods and services
Real income
income divided by the price level to adjust for the effects of inflation or deflation
National income and product accounts (national accounts)
keep track of the flow of money among different sectors of the economy
Cyclical unemployment
lost jobs due to recession
Structural unemployment
lost jobs due to technological changes
Price index
measures the cost of purchasing a given market in a given year; the index value is normalized so that it is equal to 100 in the selected base year
Producer price index (PPI)
measures the prices of goods and services purchased by producers
Discouraged workers
nonworking people who are capable of working but have given up looking for work
Financial markets
the banking, stack and bond markets which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing
Shoe-leather costs
the increased costs of transactions caused by inflation
Nominal interest rate
the interest rate actually paid for a loan
Real interest rate
the nominal interest rate minus the rate of inflation
Aggregate spending
the total spending on domestically produced final goods and services in the economy- the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports
Gross domestic product (GDP)
the total value of all final goods and services produced in the economy during a given year
Nominal GDP
the total value of all final goods and services produced in the economy during a given year, calculated with the prices current in the year in which the output is produced
Natural rate of unemployment
the unemployment rate that arises from the effects of frictional plus structural unemployment
Structural unemployment
unemployment that results when workers lack the skills required for the available jobs, or there are more people seeking jobs in the labor market than there are jobs available at the current wage rate
Seasonal unemployment
waiting for weather, each year
Product markets
where goods and services are brought and sold
Factor markets
where resources, especially capital and labor are brought and sold
Job search
workers who spend time looking for employment
Unemployed
workers who would like to work more hours or who are overqualified for their jobs
