Unit 2 Econ
Labor Force (calculate)=
% of a population working or seeking work = Employed + Unemployed
GNP vs GDP
GNP includes the profits of companies operating abroad (US COMPANIES OR HQ IN US)
If the inflation rate is 14% and one gets an 11% nominal pay raise, what is their real wage this year?
11 - 14 = -3
Year CPI 1990 80 1991 100 1992 110 1993 120 1994 130 1995 150 Based on the table above, what is the base year?
1991 (CPI of base year always = 100)
GDP (calculate expenditure approach)=
Consumer spending + Business investment + Government spending + (Net exports - Net Imports)
Gross Domestic Product is equivalent to the sum of:
Consumer spending, investment spending, government purchases and net exports
Private sector
Consumers and businesses
14. Nicole was laid off as a waitress when her restaurant closed down due to the slow economy. Nicole is considered A. Frictionally unemployed B. Seasonally unemployed C. Stucturally unemployed D. Cyclically unemployed E. Not in the Labor Force
D
Assume that land in an agricultural economy can be used either for producing grain or for grazing cattle to produce beef. The opportunity cost of converting an acre from cattle grazing to grain production is the (A) market value of the extra grain that is produced (B) total amount of beef produced (C) number of extra bushels of grain that are produced (D) amount by which beef production decreases (E) profits generated by the extra production of grain
D
LRAS
Long run aggregate supply
Total Income = Total Spending =
GDP
Why don't we include intermediate goods in GDP?
GDP only counts final goods because counting intermediate goods would be multiple counting which would overstate GDP
price index
a measure of market basket of goods
wage spiral
price increases as a result of higher wages. When workers receive a wage hike, they demand more goods and services and this, in turn, causes prices to rise
GDP excludes
public transfer payment (social security), private transfer payments, second hand sales, sales of securities, intermediate goods
non-productive transactions include
purely financial transactions (public and private transfer payments and security transactions) and secondhand sales
GDP per capita (calculation)=
real GDP/population
potential output
the real output an economy can produce when it fully employs its available resources
labor force
the total number of workers, including both the employed and the unemployed
rents include
payment to landlords, C (private property) + I (commercial property)
Shortcomings of GDP
- Non market activities - Leisure - Improved Product quality - The underground economy - GDP and the Environment - Composition and distribution of output - Noneconomic sources of well being
AS linkages: i taxes/i regulations/d subsidies
... -> i cost of running a business -> d AS
What does CPI stand for and what does it measure?
.CPI = Consumer Price Index. It tracks consumer prices so it tracks inflation.
Okun's Law
1 percent more unemployment results in 2 percent less output
Steps for deriving real GDP from nominal
1. Find nominal 2. Compute GDP price index 3. Divide nominal by PI in hundredths
3 types of unemployment
1. Frictional 2. Structural 3. Cyclical
2 concepts about the natural rate of unemployment
1. Not automatic (usually won't be at the natural rate of unemployment) 2.changes over time
2 flaws with us unemployment count
1. we count part timers as full timers 2. don't count discouraged workers
US target inflation
5%
recession
6 straight months of contraction
If the inflation rate is 2%, how many years would it take for prices to double?
70/2 = 35
13. A mechanic that leaves his job working on cars and is currently looking for a job working on planes is considered A. Frictionally unemployed B. Seasonally unemployed C. Stucturally unemployed D. Cyclically unemployed E. Not in the Labor Force
A
20. Demand-Pull inflation is most likely to occur when A. There is an increase in consumer spending B. There is an increase in productivity C. The government pays debt by printing money D. There is a substantial increase in the price of key resources E. Net exports decreases
A
8. If purchases of education and medical care were counted as investment rather than consumption, GDP would: A. Not change, because there is no change in total aggregate expenditures B. Increase, because investment is included in GDP but consumption is not C. Increase, because consumption is included in GDP but investment is not D. Increase, because investment is weighted more heavily than consumption in calculating GDP E. Increase because consumption is weighted more heavily than investment in calculating GDP.
A
All of the following are criticisms of how the government measures the economy except A. Real GDP overstates economic growth since it doesn't account for changes in price level B. CPI doesn't included the newest, up-to-date, consumer goods C. CPI overstates inflation since consumers will buy lower priced substitute goods D. The official unemployment rate numbers don't include people that stopped looking for work E. Real GDP is a poor measure of standard of living because it doesn't show how income is distribute
A
If a country's nominal percent change in GDP is positive, which of the following must be true? A. the real GDP and/or the price level has increased B. The inflation rate was negative C. The real GDP increased D. The price level increased E. Both the price level and real GDP increased
A
If an American student purchases a personal computer made by a Korean owned company located in California, what would happen to consumption and the GDP of the USA as a result? Consumption / GDP A. Increase / increase B. Increase / decrease C. No change / increase D. Decrease / decrease E. Decrease / increase
A
In the circular flow diagram, which of the following is true? (A) Businesses pay wages, rent, interest, and profits to households in return for use of factors of production. (B) Businesses purchase goods and services from households in return for money payments. (C) Households pay wages, rent, interest, and profits to businesses in return for use of factors of production. (D) The relationship between households and busi- nesses exists only in a traditional society. (E) The relationship between households and busi- nesses exists only in a command economy.
A
Increases in real income per capita are made possi- ble by (A) improved productivity (B) a high labor/capital ratio (C) large trade surpluses (D) stable interest rates (E) high protective tariffs
A
The unemployment rate measures the percentage of A. People in the labor force who are actively looking, but do not have jobs B. People in the labor force who have a part-time job but are looking for a full-time job C. People who do not have jobs and have given up looking for work D. People in the adult population who do not have jobs E. People in the adult population who have temporary jobs
A
Which of the following individuals is clearly considered unemployed? A. A lawyer that sold his firm and is now looking for a job as a teacher B. An electrician that is working part-time and is looking for a full-time job. C. A retired school teacher D. A 15 year-old who is looking for odd jobs to pay for summer camp. E. An auto worker who has given up looking for a job
A
Which type of unemployment would most likely increase if workers were laid off due to a large decrease in consumer spending? A. Cyclical B. Seasonal C. Structural D. Frictional E. Technological
A
product market
A market in which products are sold by firms (supply) and bought (demand) by households.
GDP
A measure of all final goods and services produced in a country over a certain amount of time.
frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
If the gov increases unemployment compensation, what happens to the natural rate of unemployment?
An increase in gov benefits means that it is easier to live off of the government and not work, so more people will be incentivized to not work. In the long run, this will result in an increased natural rate of unemployment.
How is the US gov hurt or benefit from unexpected inflation
Benefit, because it will be easier to pay off yesterday's nominal debt that is worth less in real terms today.
16. A economy facing extremely low unemployment and high GDP growth will most likely experience which of the following? A. An increase in structural unemployment B. An increase in price level C. An increase in productivity D. A decrease in living standards E. Deflation
B
21. Which of the following is true according to the circular flow model? A. Firms are suppliers in both the product and factor markets. B. Firms are demanders in the resource markets and suppliers in the product markets. C. Households are demanders in both the resource and factor markets. D. Households are demanders in the resource markets & suppliers in the product markets. E. The private sector is made up of the households, firms, and the government.
B
As a measure of economic welfare, GDP underestimates a country's production of goods and services when there is an increase in A. The production of naval ships for the military B. Household production C. The production of solar panel devices D. Legal protective services E. Crime prevention services
B
If businesses are experiencing an unplanned increase in inventories, which of the following is most likely to be true? (A) Aggregate demand is greater than output, and the level of spending will increase. (B) Aggregate demand is less than output, and the level of spending will decrease. (C) The economy is growing and will continue to grow until a new equilibrium level of spending is reached. (D) Planned investment is greater than planned saving, and the level of spending will decrease. (E) Planned investment is less than planned saving, and the level of spending will increase.
B
If the labor force participation rate increased at the same time that the unemployment rate stayed the same, which of the following must be true? A. Less workers were classified as part-time workers B. The total number of jobs in the economy increased C. The total number of jobs in the economy decreased D. The total number of jobs in the economy stayed the same E. The nominal GDP will increase
B
Which of the following will be included in the current year's calculation of GDP? A. $50 cash earned but not reported by your neighbor for babysitting B. Income earned as a lifeguard at a summer camp C. The purchase of a used car from a friend D. The purchase of a vintage surfboard from thrift store E. The purchase of one company by another company
B
How are borrowers hurt or benefit from unexpected inflation
Benefit, because it will be easier to pay off yesterday's nominal debt that is worth less in real terms today.
How are debtors hurt or benefit from unexpected inflation.
Benefit, because it will be easier to pay off yesterday's nominal debt that is worth less in real terms today.
9. The major difference between real and nominal GDP is that real GDP: A. Excludes government debt B. Excludes exports C. Is adjusted for price-level changes using a price index D. Measures only the value of intermediate goods and services that are consumed E. Measures the prices of a market basket of goods purchased by a typical consumer
C
If real GDP is increasing at 5% per year and nominal GDP is increasing at 10% per year, which of the following is necessarily true? A. Unemployment is increasing B. The economy is in a recession C. The price level is increasing D. The government is running a budget surplus E. Imports exceed exports
C
If the gross domestic product increased from $930 billion in 1969 to $975 billion in 1970 solely because of a rise in the price level, which of the following was necessarily true? (A) Real gross domestic product increased between 1969 and 1970. (B) Real gross domestic product decreased between 1969 and 1970. (C) Nominal income increased between 1969 and 1970. (D) Real income increased between 1969 and 1970. (E) The rise in the price level between 1969 and 1970 was greater than 10 percent.
C
The natural rate of unemployment A. Is zero percent unemployment B. Is when cyclical unemployment is less than frictional unemployment C. Is the sum of frictional and structural unemployment D. Results in higher cyclical unemployment E. Can never decrease since it represents the optimal amount if unemployment
C
The value of which of the following is counted in the U.S. GDP? A. Foreign countries buying US treasury bills B. Transfer payments to the elderly C. Salary bonuses given to investment bankers D. Undeclared wages paid to illegal aliens E. The change in the value of real estate in the US
C
Which of the following is true regarding full employment? A. An economy is at full employment when the unemployment rate is 0% B. An economy can never been at full employment since there are always leakages like taxes, savings, and imports C. Full employment occurs when cyclical unemployment is zero D. Full employment occurs when there is only frictional unemployment E. Full employment is shown as a rightward shift in the production possibilities curve.
C
Which of the following would represent an addition to a nation's GDP? A. Ms. Jones purchases a share of stock in a technology start-up company B. An auto retailer purchases imported cars C. The government hires workers to install streetlights D. A business sells used watches E. A mother prepares a home cooked meal for her family
C
The United States government defines an individual as unemployed if the person (A) does not hold a paying job (B) has been recently fired (C) works part-time but needs full-time work (D) is without a job but is looking for work (E) wants a job but is not searching because he or she thinks none is available
D
The official unemployment rate is not always the most accurate indicator of actual unemployment in the economy because A. Structural unemployment is less than cyclical unemployment at the going wage rate B. Full employment is greater than the labor force C. The unemployment rate is greater than natural unemployment D. The official rate does not include persons who have given up looking for work E. Part time workers are considered unemployed
D
Total spending in the economy is most likely to increase by the largest amount if which of the following occur to government spending and taxes? Government Spending Taxes (A) Decrease Increase (B) Decrease No change (C) Increase Increase (D) Increase Decrease (E) No change Increase
D
When calculating GDP, investment is best defined as A. spending on stocks, bonds, and financial assets B. spending by the central bank on government securities C. changes in private and business savings D. business spending on capital goods E. policies that lead to long run economic growth
D
Which of the following is the best example of structural unemployment? A. New immigrants have a hard time finding jobs B. Workers are laid off due to a recession C. Workers quit their current job to go back to school to get better training D. Workers are fired because they do not have the specific skills employers value E. Workers enter the labor force because wages are increasing
D
Which of the following must be true of a country that is operating inside its production possibilities frontier? (A) It has a market economy. (B) It has a command economy. (C) It is in the early stages of industrial develop- ment. (D) It is using resources inefficiently. (E) It has plentiful resources.
D
What are the 2 main causes of inflation?
Demand pull inflation and Cost-push inflation
97. Which of the following is an example of invest- ment; as the term is used by economists? (A) A schoolteacher purchases 10,000 shares of stock in an automobile company. (B) Newlyweds purchase a previously owned home. (C) One large automobile firm purchases another large automobile firm. (D). A farmer purchases $10,000 worth of govern- ment securities. (E) An apparel company purchases 15 new sewing machines.
E
The gross domestic product is best described as a measure of (A) economic welfare (B) the full-employment output of an economy (C) all monetary transactions in an economy (D) current consumption in an economy (E) current final output produced by an economy
E
Which of the following is included in the calculation of the U.S. GDP? A. The money that consumers save when using coupons B. The benefit society receives from a cleaner environment C. Online purchases of used products D. A computer produced in China by a U.S. owned company E. A plane produced in the U.S but sold in Mexico
E
Which of the following will most likely decrease a country's Natural Rate of Unemployment (NRU) A. An short run increase in domestic output B. An increase in structural unemployment C. An increase in the labor force D. A decrease in cyclical unemployment E. A decrease in unemployment benefits paid by the government
E
determinants of aggregate demand
Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
determinants of aggregate supply
Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
Full Employment Unemployment Rate (calculate)=
Frictional Unemployment rate + Structural Unem- ployment rate
How are savers hurt or benefit from unexpected inflation.
Hurt because inflation reduces the purchasing power of the dollars saved.
How are banks hurt or benefit from unexpected inflation.
Hurt, because they will be collecting yesterday's nominal dollars on old loans that are worth less today. Also, with fixed interest rates on loans, they can't raise rates with the higher PL.
How are creditors hurt or benefit from unexpected inflation.
Hurt, because they will be collecting yesterday's nominal dollars on old loans that are worth less today. Also, with fixed interest rates on loans, they can't raise rates with the higher PL.
How are lenders hurt or benefit from unexpected inflation.
Hurt, because they will be collecting yesterday's nominal dollars on old loans that are worth less today. Also, with fixed interest rates on loans, they can't raise rates with the higher PL.
How are fixed income earners hurt or benefit from unexpected inflation
Hurt, because they will continue to earn a fixed monthly nominal dollar amount that buys less due to the higher inflation. They have less purchasing power.
How are retirees with a fixed pension hurt or benefit from unexpected inflation.
Hurt, because they will continue to earn a fixed monthly nominal dollar amount that buys less due to the higher inflation. They have less purchasing power.
How are welfare recipients hurt or benefit from unexpected inflation.
Hurt, because they will continue to earn a fixed monthly nominal dollar amount that buys less due to the higher inflation. They have less purchasing power.
How are landlords hurt or benefit from unexpected inflation.
Hurt, because they will earn a fixed monthly nominal dollar rent that is worth less due to the higher inflation. They have less purchasing power. They can't break their contract.
Why do determinants of AS shift it right?
If the cost of running a business goes down, there will be more profit. Therefore, there will be greater incentive to produce more. (There will be downward pressure on prices. There will be an increase in supply and lower price levels)
If the gov decreases unemployment compensation, what happens to the natural rate of unemployment?
If there is a decrease in unemployment benefits, it is harder to live off of the gov, which will incentivize more people to work. In the long run, the natural rate of unemployment will fall
anticipated inflation
Increases in the price level (inflation) that occur at the expected rate.
Price Level
Inflation
What is Inflation?
Inflation is a general increase in prices.
If the current unemployment rate is below the NRU, is there an inflationary gap or recessionary gap?
Inflationary gap
If actual output is greater than potential output, list 2 "gaps" that this country is experiencing
Inflationary gap, positive gdp gap
factors that affect business investment includes
Interest rates, business taxes, profit expectations, degree of excess capacity
Labor Force Participation (calculate) =
Labor Force/Total Population
Value Added
Market value of a firm's output less value of inputs how much more is it worth as it moves from farm to processor to store? each time value increases, add it to total--> GDP sheep ranch cost=0 now worth=60 --> value added = 60 wool processor cost=60 now worth 120->v.a.= 120-60=60 Total= 60 + 60 = 120
Year CPI 1990 80 1991 100 1992 110 What is the inflation rate in 1991
N - O /O x 100 100-80/80 x 100 20/80 x 100 = 25% inflation
Year CPI 1990 80 1991 100 1992 110 1993 120 What is the inflation rate in 1992?
N - O/O x 100 110-100/100 x 100 10/100 x 100 = 10% inflation
How much did prices rise between 1991-1995?
N - O/O x 100 150-100 x 100 50/100 x 100 = 50% inflation
If actual output is less than than potential output, list 2 "gaps" that this country is experiencing.
Negative gdp gap, recessionary gap
How are social security recipients hurt or benefit from unexpected inflation
Neither hurt nor benefit from inflation. This is because they get a yearly COLA or Cost of Living Adjustment, causing their standard of living to remain the same.
Ination rate (calculate) =
New CPI − old CPI/old CPI ⋅ 100
Real GDP (calculation)=
Nominal GDP/(Price Index ⋅ 0.01)
Price Index (calculate)=
Price Specific Year/Price Base Year ⋅ 100
What is Price Level?
Price level measures inflation.
unanticipated inflation
increases in the price level (inflation) at a rate greater than expected, hurts and benefits
If current unemployment is 8% and the natural rate of unemployment (NRU) is 5%, is there an inflationary gap or recessionary gap?
Recessionary gap
business equation
Revenue - Expenditure = Prot
A country's productivity rate is up 5% for the past 3 years. Show the change of LRAS
Shift whole AS, AD, LRAS, graph right Shift PPC right
demand pull inflation
The AD curve shifts right. Excessive aggregate demand pulls up price level. This is the most common cause of inflation. "Too much money chasing too few goods."
cost push inflation
The AS curve shifts left. Cost of running a business rises pushing up price level. Think energy crisis or oil shock (supply shock). Or huge increases in labor cost (wage push)
How does the US track inflation?
The US uses the Consumer Price Index to track inflation
Why do determinants of AS shift it left?
The per unit cost of running a business goes up, the business will be less profitable. Therefore, there will be less supply. (Companies will increase their prices to offset the increase in cost)
labor market equilibrium
The quantity demanded for labor equals the quantity supplied (workers=jobs available)
What is a market basket of goods? What does that have to do with the CPI and inflation?
The typical American consumer buys 100s of typical items like a loaf of bread, gallon of milk, etc. To calculate monthly and yearly inflation of consumer prices, the government goes out and buys a market basket of goods the typical American consumer buys. By tracking those prices monthly/yearly, we get the CPI and then the inflation rate.
Rule of 70:
Time for a value to double = 70/Interest Rate
Total Spending = GDP =
Total Income
Total Income = GDP =
Total Spending
Unemployment rate (calculate)=
Unemployed/Labor Force ⋅ 100
GDP (Income Approach)=
Wages + Interest + Rent + Profit
How can you save?
accounts, stocks, or bonds
potential gdp is determined by
assuming that the natural rate of unemployment exists
To be considered unemployed, a person must
be willing and able to work and actively seeking a job
Government spending includes
bombs (military), books (education??), bridges (infrasture)
interest include
bonds, savings, CD interest payments
Factors that create a change in legal institutional environment
business taxes and subsidies, gov regulations
How is someone cyclically unemployed
businesses do not have enough demand for labor to employ all those who are looking for work at that point within the business cycle
If a worker receives a raise in their nominal wage from $10 to $15 per hour at the same time that price level doubles, the worker's real wage has approximately A. increased by 50% B. increased by 100% C. decreased by 50% D. decreased by 33% E. stayed the same
c
People not counted in labor force
children under 16, full time students, institutionalized, homemakers, and retirees
factors that affect consumer spending includes
consumer expectations, consumer wealth, household indebtedness, taxes
Unexpected increases in inventories usually precedes
decreases in production
cyclical unemployment
deficient demand unemployment; unemployment caused by a business cycle recession
why does the natural rate of unemployment change over time
demographics, changing laws, customs, welfare
why gDp?
domestic products (made inside the country)
full unemployment
employment level when there is no cyclical unemployment
4 stages of business cycle
expansion, peak, contraction, trough
2 methods to calculate GDP
expenditure approach and income approach
Desirable type of unemployment
frictional
Why is European unemployment higher than the US and why do they have slower GDP growth?
government policies and union contracts have increased business costs of hiring workers and reduced the cost of being unemployed to the individual
Peak in economy
high point before contraction
resource market
households sell (supply) resources to businesses (consume)
AD linkages: increase gov spending
i G -> i C i I -> i AD
AS linkages: increase productivity
i productivity -> d per unit cost -> i AS
AD linkages: increase (i) in taxes
i taxes -> d DI -> d C d I -> d AD
Real = Nominal - Inflation works for
interest, GDP, wages
GDP overstates our well-being because
it does not factor in the environment
GDP understates our well-being because
it doesn't include leisure (we produce more, but we work fewer hours)
GDP is understated because
it doesn't include non market activity (doing things for your own home) and we have an underground economy (tutors, prostitution, babysitters)
Trough in economy
low point before recovery
national income accounting
measurement of the national economy's performance, dealing with the overall economy's output and income (comparing GDPs over the years)
Profits include
money made by small business or corporation
Tight Labor Market
more jobs than workers, below natural unemployment rate
factors that affect net exports include
national income abroad, exchange rate
Was GDP meant to measure our well-being?
no, but strong positive correlation
Real =
nominal - inflation
GDP excludes _______ transactions
non-productive transactions
Unequal burdens of unemployment
occupation (blue collar > white collar unemployment), age, race and ethnicity, gender, education, duration
GDP per capita better reflects
our well-being
Factors that create a change in input prices
resource availability (l, l, c, e), prices of imported resources, market power (unions, etc.)
negative gdp gap =
sacrificed output - the amount by which actual gdp falls short of potential gdp
Wages include
salary, commission, pensions, health benefits
short-run aggregate supply curve
shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed
How to increase labor participation rate
take away benefits for unemployment, welfare, etc.
Negative net investment
the capital stock of the country is shrinking-> lower potential GDP
GDP fails to capture ______ and ________ and tells us nothing about _____
the improvements in product quality (phones in 80s v now) non-economic sources of well-being (relations, drug abuse) the composition of GDP (distribution of wealth)no
Why can we use income approach to calculate GDP?
total output = total income one's spending is another's income
structural unemployment
unemployment that occurs when workers' skills do not match the jobs that are available
Income approach
wages + rents + interest + profits
recessionary gap
when actual/current output is below potential output
Inflationary gap
when current output is above potential output
Why is saving essential to an economy?
when one saves they provide the financial capital for companies to get started to grow; essential for investment
The 2 expansionary fiscal policies of the government:
↑ Government Spending → ↑ Consumer Spending ↑ Business Investment → ↑ Aggregate Demand → ↑ GDP ↑ Price Level ↑ Employment ↓ Taxes → ↑ Consumer Spending ↑ Business Investment → ↑ Aggregate Demand → ↑ GDP ↑ Price Level ↑ Employment
The 2 contractionary fiscal policies:
↓ Government Spending → ↓ Consumer Spending ↓ Business Investment → ↓ Aggregate Demand → ↓ GDP ↓ Price Level ↓ Employment ↑ Taxes → ↓ Consumer Spending ↓ Business Investment → ↓ Aggregate Demand → ↓ GDP ↓ Price Level ↓ Employment
Nominal GDP (calculation)=
∑(Product Price ⋅ Product Quantity)