Test 1 (Ch. 5-6)

Who loses from unanticipated inflation? Who benefits?

Workers lose temporarily (until adjustments are made over a longer time period), because the goods and services they buy have gone up in price. Creditors lose because inflation has reduced the value of the payments they receive. However, persons with fixed interest rate loans benefit from unanticipated inflation, because the real value of the loan payments are lower.

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover's 1931 salary was equivalent to a 2007 salary of about...

$1,021,382

A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The change in GDP would be:

$180

John earns $2,000. His taxes are $250 and he spends $1,500. Therefore, his savings must be:

$250

The CPI is an imperfect measure of the cost of living because of...

1. Substitution bias 2. the introduction of new goods 3. Unmeasured quality changes

What is a key problem with the way the NBER dates recessions and recoveries?

A key problem is that the dating of recessions and recoveries is done after the events have already started. Therefore, it describes what has already happened and does not help to predict when future recessions will occur or when they will end.

In a simple circular-flow diagram, total income and total expenditure are...

always equal because every transaction has a buyer and a seller

Gross private domestic investment, which consists of _______________ and changes in private inventories, is an important determinant of _______________________. a) investment in stocks and bonds; inflation b) investment in stocks and bonds; trade deficits c) fixed investments; trade deficits d) fixed investments; swings in the business cycle

d) fixed investments; swings in the business cycle

One important reason economists track business investment is that:

it is a leading indicator of the business cycle.

If Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself, then GDP...

necessarily falls

(Table) Suppose a loaf of bread goes through the following stages of production, with the values noted at the end of each stage: 1. Farmer's wheat $0.65 2. Miller's flour $1.20 3. Baker's bread $1.80 4. Grocer's bread $2.65 The sale of the loaf of bread adds _______ to GDP.

$2.65

What is a Price Index and how do we calculate a Price Index?

A tool used in measuring a change in prices We calculate a price index by comparing the price of a particular market basket (a specific collection of goods and services) in the current period to the price of that same market basket (an identical collection of goods and services) in a base or reference period.

Explain how it is possible for an economy in the recovery phase of the business cycle to have a lower GDP and a higher unemployment rate than when it was in the recession phase of the business cycle.

An economy in a recovery phase is one that has reached its low point (trough) when GDP has decreased and unemployment has increased. Therefore, in the early part of the recovery phase, an economy might not have had enough time to increase its GDP or reduce its unemployment. In this case, GDP and unemployment may appear worse during the recovery than during the recession.

How do we determine the exact composition of a particular market basket? Or, how do we determine what types of goods and services are in a market basket, and in what quantities are each of these goods and services?

CPI: Are we focused on measuring price changes in the goods and services typically purchased by consumers? Use a market basket that contains the types of goods and services that consumers tend to buy. PPI: Are we focused on measuring price changes in producer spending activity? Use a market basket that contains the types of raw materials and intermediate inputs that producers use to produce final goods and services. GPI (Government Price Index): Are we focused on measuring changes in the prices of goods and services typically purchased by the government? EPI (Export Price Index): Are we focused on measuring changes in the prices of goods and services typically exported to other countries? IPA (Import Price Index): Are we focused on measuring changes in the prices of goods and services typically imported into the US? GDP Deflator: Are we focused on measuring the overall change in a nation's price level? This market basket includes all of the goods and services purchased by all 4 spending categories: consumers, producers, government and foreign buyers. The GDP deflator is used to convert nominal GDP to real GDP. Real GDP reflects quantity of output (or quantity of goods and services produced).

Business Cycle

Fluctuations in economic activity; Alternating periods of economic expansion (increases) and economic recession (decreases). 4 phases: Expansion, Peak, Recession, Trough

Economists believe that changes in investment spending are important for forecasting the business cycle because: a) increases in investment spending raise tax revenues, which allows government to spend more. b) investment closely reflects consumer sentiment. c) changes in investment show where the economy has been. d) investment is a key determinant of economic growth.

d) investment is a key determinant of economic growth.

The consumption component of GDP includes spending on...

durable goods, nondurable goods, and services

Holding other expenditures constant, if imports fall by $20 billion and exports fall by $10 billion, then GDP:

rises by $10 billion

As a percentage of GDP, government spending tends to increase during recessions and decrease during times of economic expansion. Explain why government spending tends to change depending on the phase of the business cycle, and how that affects spending as a percentage of GDP.

- During a recession, GDP falls while government spending tends to increase as more people seek government assistance such as unemployment benefits, Medicaid, and other income assistance programs. - The increase in government spending and the decrease in GDP increases government spending as a percent of GDP. - The opposite occurs during an expansion of the economy, when GDP rises and fewer people seek government benefits, allowing government spending as a percent of GDP to fall.

Describe the three measures of inflation in use today and the focus of each measure.

1. Consumer price index (CPI): focuses on retail prices to consumers 2. Producer price index (PPI): reflects prices received by domestic producers at the wholesale level 3. GDP deflator: the broadest measure of inflation; it includes all goods and services covered by the national income and product accounts

What factors impact the natural rate of unemployment?

1. Technological advances 2. Government policy

Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2006 was...

109.2

What is a "market basket"?

A specific collection of goods and services that economic agents would tend to purchase on a monthly basis. *There are several types of economic agents: consumers, businesses (producers), government, foreigners.

Describe why GDP can be computed using either expenditures or income.

All spending in the economy necessarily equals payments to all of the factors of production. Ex. A dollar spent adds up to a dollar in wages, interest, rents, or profits.

Describe the three types of unemployment. What types of government programs would be most effective in combating each type of unemployment?

Frictional, structural, and cyclical. A job-matching employment service would reduce search time for the frictionally unemployed. Extensive job training and retraining programs would be most useful for structurally unemployed people. Cyclical unemployment is minimized with good monetary and fiscal policies to reduce the swings in the business cycle.

Why does GDP accounting include only the final value of goods and services produced? What would be the problem if intermediate products were included?

GDP accounting adds up only the final value of goods and services to avoid "double counting." Ex. When a car is sold, the final price on the lot includes the sum of the costs of the individual parts, and to count them again would be to count them twice.

What does GDP per capita measure? Why is it not a precise measure of a typical person's standard of living in a country?

GDP per capita measures the total output of an economy divided by its population. Although GDP per capita provides a general indication of the standard of living of a country, it is not a precise measure because it does not take into account differences in income distribution. Therefore, a rich country in terms of GDP per capita can have many poor citizens.

Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005, what is the nominal GDP, real GDP, and GDP deflator?

Nominal GDP is $500 (100x$3)+(50x$4) Real GDP is $400 (100x$1.50)+(50x$5) GDP deflator is 125 (500/400)x100

Describe the circular flow diagram. Why must all income equal spending in the economy?

The circular flow diagram shows how the product and factor markets interact to produce goods and services and pay the factors of production. When goods or services are produced and sold, that spending must somehow be split among the factors of production (and payments to): labor (wages), land (rent), capital (interest), and entrepreneurial activity (profits).

Describe the possible losses to our society and the economy when people are unemployed.

The economy loses the output and income from those unemployed. Although the unemployed lose income directly, we (the economy) lose jobs as well because the unemployed would have spent most of their earnings, resulting in greater employment and income. For those who want to work, not being able to find a job is a serious psychological loss.

The local Chevrolet dealership has an increase in inventory of 25 cars in 2006. In 2007, it sells all 25 cars. How will the GDP in each year be affected?

The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will not increase 2007 GDP.

What is required for a person to be considered unemployed? How is the unemployment rate computed?

To be unemployed, you must not have a job, but must be available for work and have been actively seeking work in the previous four weeks. The unemployment rate is the number of unemployed divided by the labor force (the sum of the numbers of employed and unemployed).

Why do we measure changes in the price level?

We measure changes in the price level to be able to adjust raw data (such as nominal GDP) to reflect only the quantity of goods and services produced and purchased (such as real GDP).

Gross domestic product measures the output produced by ____________________ using resources in this country, while gross national product measures output produced by resources supplied by ______________. a) foreign citizens only; U.S. citizens b) U.S. citizens only; foreign citizens c) U.S. or foreign citizens; U.S. citizens d) U.S. or foreign citizens; foreign citizens

c) U.S. or foreign citizens; U.S. citizens

In the national income accounts, which of the following is NOT classified as government spending? a) services provided by U.S. Senators b) purchases of military hardware c) payments to Social Security recipients d) services provided by police officers

c) payments to Social Security recipients