AP Macro - Unit 2 Test
Government's role in preventing unemployment and inflation
-If the government focuses too much on preventing inflation and slows down the economy we will have unemployment -If the government focuses too much on limiting unemployment and overheats the economy we will have inflation
Net exports
-exports create a flow of money to the US in exchange for domestic production (injection) -imports create a flow of money away from the US in exchange for foreign production (leakage)
Nominal interest rate
-interest rate actually paid for a loan i%=r%+pi% -the percentage increase in purchasing power that a borrower pays (adjusted for inflation)
GDP deflator
-measures entire economy's inflation -includes everything -used to deflate nominal GDP
Producer price index
-measures the cost of a typical basket of goods and services - containing raw commodities, such as steel, purchased by producers; commodity probers raise prices when they perceived change in overall demand for their goods -shows inflation quicker than CPI
Real interest rate
-nominal interest rate minus the rate of inflation -the percentage increase in money that the borrower pays not adjusting for inflation
Who is hurt by inflation?
-those with large cash savings (not worth as much) -those who lent at low fixed interest rates - paid back with "cheap" dollars or dollars worth less value -those receiving fixed payments
Who is helped by inflation?
-those with large debt - repay with "cheap" dollars -those who borrowed at low fixed interest rates -those who make fixed payments
Consumer price index
-used to measure consumer inflation -market basket approach - more than 300 goods typically purchased by urban consumer -quick, efficient -ignores consumer situation, quality changes
Problems with the CPI
1. Substitution bias - as prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket 2. New products - the CPI market basket may not include the newest consumer products 3. Product quality - the CPI ignores both improvements and decline in product quality
What are the two ways that GDP can increase?
1. an increase in the prices of goods and services 2. an increase in the quantity of goods and services
A person who moved to a new state and took two months to find a new job experienced which type of unemployment? A. frictional B. structural C. cyclical D. seasonal E. none of the above
A
Which of the following is included in GDP? A. changes to inventories B. intermediate goods C. used goods D. financial assets (stocks and bonds) E. foreign-produced goods
A
A person who is unemployed because of a mismatch between the quantity of labor supplied and the quantity of labor demanded is experiencing what type of unemployment? A. frictional B. structural C. cyclical D. seasonal E. none of the above
B
Hyperinflation is typically caused by A. high tax rates that discourage work effort B. continuous expansion of the money supply to finance government budget deficits C. trade surpluses that are caused by strong protectionist policies D. bad harvests that lead to widespread shortages E. a large decline in corporate profits that leads to a decrease in production
B
Which of the following is NOT included in GDP? A. capital goods such as machinery B. imports C. the value of domestically produced services D. Government purchases of goods and services E. the construction of structures
B
In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real interest rate in Agronomia is A. 14% B. 10% C. 6% D. 4% E. 2.5%
C
The major difference between real and nominal gross domestic product is that real GDP A. excludes government transfer payments B. excludes imports C. is adjusted for price-level changes using a price index D. measure only the value of final goods and services that are consumed E. measures the prices of a market basket of goods purchased by a typical urban consumer
C
Which of the following will be counted as unemployed by the US Bureau of Labor Statistics? A. persons who quit their previous jobs to stay at home to care for sick parents B. persons who were laid off from their previous jobs and have not applied for a job in two years C. persons who were fired from their previous jobs and are actively applying for work D. persons who have given up looking for jobs after long searches E. persons who quit their previous jobs to start their own businesses
C
The circular flow of economic activity between consumers and producers includes which of the following? I. households buy factor services from firms II. households sell factor services to firms III. households buy outputs from firms IV. households sell outputs to firms A. III only B. IV only C. I and II only D. II and III only E. III and IV only
D
Which of the following groups would most likely gain from unanticipated inflation? A. landlords who own apartments in cities with rent controls B. individuals who have fixed retirement incomes C. individuals who earn high incomes D. individuals who have borrowed money at fixed interest rates E. banks that have loaned all excess reserves at a fixed interest rate
D
Which of the following individuals is classified as unemployed? A. a fifteen-year-old high school student who is looking for a babysitting job B. a laid-off computer programmer who has given up looking for a new job C. a parent who works in an after-school day care center for 15 hours a week D. a recent college graduate who is looking for his/her first job E. a mayor who lost an election and retired
D
Which of the following is true in the circular flow model? A. firms are suppliers in both the product and factor markets B. firms are demanders in the product markets and suppliers in the factor markets C. households are demanders in both the product and factor markets D. households are demanders in the product markets and suppliers in the factor markets E. the government is a demanded in the product market only
D
The consumer price index is designed to measure changes in the A. spending patterns of urban consumers only B. spending patterns of all consumers C. wholesale price of manufactured goods D. prices of all goods and services produced in an economy E. cost of a select market basket of goods and services
E
Okun's law
Every 1% increase the u% causes a 2% decline in real GDP.
GDP per capita
GDP divided by population, identifies on average how many products each person makes, best measure of a nation's standard of living
Price level
a measure of the average prices of goods and services in the economy
Injections
added spending in circular flow that does not come out of current resource income
Government spending
all levels of government spending on final goods and services and infrastructure
Balanced budget
amount spent by government = amount collected in taxes
Surplus budget
amount spent by government is less than that collected in taxes
Deficit budget
amount spent by government is more than that collected in taxes
Inflation
an increase in the economy's price level and a decrease in money's purchasing power
Cyclical unemployment
associated with downturns/recession in business cycle, bad for society and individuals, sometimes called demand deficient unemployment
What are the 3 ways that inflation can be measured?
consumer price index (CPI), producer price index (PPI), GDP deflator
Consumption
consumer spending on durable and non-durable goods, largest component of US GDP
GDP expenditure formula
consumption, gross private investment, government spending, net exports or balance of trade (exports X - imports M)
Nominal GDP
current GDP measured at current market prices, may overstate the value of production because of the effects of inflation
Real GDP
current GDP measured with a fixed dollar, holds the value of the dollar constant and is useful for making year to year comparisons
What are the 2 types of inflation?
demand pull and cost push
Who is not counted in the unemployment rate/makes rate seem lower than it should?
discouraged workers, marginally attached workers, underemployed
Structural unemployment
don't have transferable skills, associated with lack of skills or declining industry, more people seeking a job with certain labor skills than there are jobs available
Leakages
flows out of circular flow when resource income is received and not spent directly on purchases from domestic firms
Natural rate of unemployment
frictional unemployment + structural unemployment
Government transfer payments
government payments to individuals without expecting a good or service in return
Frictional unemployment
have trasferibile skills, "between jobs", voluntary, good for individuals and society bc people are always leaving jobs voluntarily and new people are always going labor force
Private savings
households don't spend all their rent, wages, profits, and interest on goods and services, but instead save some money in a bank or financial market
What does GDP tell us?
how well the US is doing financially
What are the two "arms" of GDP?
income and expenditure
What things are not included in GDP?
intermediate goods, financial assets, used goods, non-market and illegal activities, transfer payments, anything made outside of country in question
3 examples of injections
investment, government spending, exports
Causes of the business cycle
irregularity of investment, changes in productivity, changes in total spending
What groups of people are not in the labor force?
kids, military personnel, retired people, stay at home moms and dads, full-time students, those institutionalized (jails or hospitals), people who don't want a job/lazy, most of the homeless
Cost push inflation
major cause is a supply shock, creates a negative supply shock: price rises and quantity falls -stagflation -AS curve will shift to the left resulting in a higher price level and a decrease in real GDP
Real GDP per capita
most commonly used to compare and measure each country's standard of living and overall economic growth -Real GDP/nation's population
Actual unemployment
natural unemployment + cyclical unemployment
Deflation
negative inflation rate, prices falling -bad for economy because people will hoard money and hurt GDP -crease perverse incentive to delay spending on durable goods and capital investments
Discouraged workers
nonworking people who are capable of working, but have given up looking for a job due to the state of the job market
Labor force
number of people in a country that are classified as either employed or unemployed
Full employment
occurs when there is no cyclical unemployment present in the economy, associate with natural rate unemployment
Unemployed
people 16 years and older that don't have a job, but have actively searched for a job in the last 2-4 weeks
Employed
people 16 years and older that have a job, part-time or full-time
Underemployed
people who work part time because they cannot find full-time jobs
Disinflation
prices increasing at a slower rate, decrease in inflation rate -good for the economy -referred to as price stability
Why do some countries have higher GDPs than others?
productivity, economic system, property rights, capital, human capital (knowledge), natural resources
3 examples of leakages
savings, taxes, imports
3 examples of transfer payments
social security, disability, unemployment
Seasonal unemployment
specific type of frictional unemployment due to a job not being available year-round, mall Santas, life-guards
Gross private investment
spending in order to increase future output or productivity -business spending on capital and more inventory -new construction of homes or factories/plants -change in unsold inventories
Financial markets
take household savings and make loans to firms and buy and sell stocks and bonds abroad
Business cycle - peak
temporary maximum in real GDP, unemployment rate is probably below the natural rate of unemployment and inflation rate is probably increasing
Business cycle - trough
the bottom of the business cycle, unemployment rate is probably high and inflation rate is probably low
Business cycle - recession
the contractionary phase of the business cycle, a period of decline in real GDP accompanied by an increase in u%, economic decline must be at least 6 months long to be classified as a recession
What happens if leakages are higher than injections?
the economy contracts resulting in inventory accumulation, too little spending, and drop in prices
What happens if injections are higher than leakages?
the economy expands resulting in more goods and services produced and higher prices
Gross Domestic Product
the market value of all final goods and services produced within a nation in a year
Inflation rate
the percentage increase in the price level from one year to the next
Business cycle - recovery
the phase of the business cycle where the economy is returning to full employment
Full employment output
the real GDP created when there is no cyclical unemployment
What is the ultimate cause of inflation?
too much money chasing too few goods
Demand pull inflation
too much money chasing too few goods, creates an overheated economy with excessive spending, but the same amount of goods -AD curve will shift to the right, resulting in a higher price level and greater output
Real wage
wage adjusted for inflation
Nominal wage
wage measured by dollars rather than purchasing power
Product market
where goods and services are exchanged, where households buy goods and services and businesses/firms sell goods and services
Resource market
where the factors of production are exchanged, firms buy factors of production and households supply factors of production
Marginally attached workers
would like to be employed and have looked for a job in the recent past, but are not currently looking for word
