Econ 2013 test 2
If there are 1,500 people in the population, 800 are employed, and 100 are unemployed, what is the unemployment rate?
%11.1
GDP deflator equation
(nominal GDP÷real GDP)×100%
unemployment rate equation
(unemployed in labour force÷labour force)×100%
Problems with CPI
- CPI measures only private goods. - CPI tends to overstate inflation because it uses a fixed market basket. - Market surveys are three to five years old. - It does not account for product substitution, quality improvements, or new products. - CPI measures only consumers' out-ofpocket health care expenditures. - It does not measure the overall rise in health care costs.
The National Income and Product Accounts (NIPA) does three things
- measure our nation's economic performance. - compare U.S. income and output to those of other nations. - track the economy's condition throughout the business cycle.
NAIRU nonaccelerating inflation rate of unemployment
-inflationary pressures are at their minimum. -actual inflation is equal to expectations. -price and wage decisions are consistent. -cyclical unemployment is zero.
If nominal GDP is $14 billion and the GDP deflator is 125, what is real GDP?
11.2 Billion. Real GDP is determined by multiplying the nominal GDP by the base year index multiplied by the current year index, so Real GDP = $14 billion × (100/125) = $14 billion × 0.8 = $11.2 billion.
Suppose the consumer price index in 2006 was 140 and its corresponding basket of goods was $17,000. If the consumer price index was 150 in 2010, what was the cost of that same basket of goods in that year?
18,214. To find the cost of the basket of goods in 2010, divide the CPI in 2010 by the CPI in 2006 and multiply by the cost of the basket of goods in 2006. The equation is Cost = (150/140) × $17,000 = 1.071 × $17,000 = $18,214.
DEFLATION
A DECLINE IN THE PRICE LEVEL. PRICES ON AVERAGE FALL.
DISINFLATION
A REDUCTION IN THE RATE OF INFLATION. PRICES RISE AT A DECREASING PACE.
producer price index (PPI)
A measure of the average changes in the prices received by domestic producers for their output.
gross domestic product (GDP)
A measure of the economy's total output; it is the most widely reported value in the national income and product accounts (NIPA) and is equal to the total market value of all final goods and services produced by resources in a given year.
double dip recession
A recession that begins after only a short period of economic recovery from the previous recession.
MARGINAL PROPENSITY is diff. from AVERAGE BECAUSE
ADDITIONAL propensity to consume/save
national income
All income, including wages, salaries and benefits, profits (for sole proprietors, partnerships, and corporations), rental income, and interest.
business cycles
Alternating increases and decreases in economic activity that are typically punctuated by periods of recession and recovery. The four phases include peak, recession, trough, and recovery.
GDP deflator
An index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA).
Do you think that the business cycle has a bigger impact on automobile and capital goods manufacturers or on grocery stores?
Big-ticket (high-priced, high-margin) items such as automobiles are affected by a recession more than grocery stores
EXPENDITURES APPROACH TO GDP
C = PERSONAL CONSUMPTION EXPENDITURES I = GROSS PRIVATE DOMESTIC INVESTMENT (GPDI) G = GOVERNMENT SPENDING NX = NET EXPORTS
GDP equation
C+G+I+(X-M)
What is the average propensity to consume?
C/Y
Income approach
Compensation of employees Proprietor's income Corporate profits Rental income Net interest Miscellaneous adjustments
consumer price index (CPI) definition
Cost of goods index. A measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services. CPI = (cost in current period ÷ cost in base period) × 100
_____ unemployment results from changes in the business cycle.
Cyclical
THOSE WHO BENEFIT FROM INFLATION
Debtors (borrowers) benefit from unanticipated inflation because the real value of their fixed payments falls over time as their wages rise with inflation.
People are counted as _____ if they have done any work at all for pay or profit during the survey week.
Employed
net exports
Exports minus imports for the current period. Exports include all the items we sell overseas such as agricultural products, movies, and technology products. Imports are all those items we bring into the country, such as vegetables from Mexico, wine from Italy, and cars from Germany
The unemployment rate is the number of unemployed divided by the _____.
Labor Force
What does a consumer price index of 130 mean?
Prices have increased by 30% from the base year to the current year.
GDP DEFLATOR EQUATION IS
REAL = NOMINAL X (100 DIVIDED BY INDEX NUMBER)
Nominal values are converted to real values using the following formula:
Real value = nominal value × (base year index / current year index)
GOVERNMENT SPENDING INCLUDES
WAGES (FEDERAL, STATE, AND LOCAL), PURCHASES OF GOODS AND SERVICES FROM PRIVATE BUSINESSES, AND PURCHASES OF NEW STRUCTURES AND EQUIPMENT.
The consumer price index overstates inflation because it measures:
a fixed basket of goods and services
Inflation was about 5.5% in the middle of 2008 but had fallen to near zero by the end of the year. This is an example of:
disinflation
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.
disposable income; consumption
Core inflation is found by removing _________ from the consumer price index
food and energy
The natural rate of unemployment is equal to:
frictional unemployment + structural unemployment
The unemployment rate typically _____ during recessions
increases
The natural rate of unemployment is the level also known as the nonaccelerating _____ rate of unemployment.
inflation definition
Structural unemployment
is caused by changes in consumer demand or technology.
spending multiplier equation is
k = 1/(1-MPC)
The _____ is the total number of those employed and unemployed.
labor force
We are most likely to see a recession if interest rates on long-term bonds are:
lower than interest rates on short-term bonds.
What is a person's classification if he or she is available for work and has actively looked for work in the past year but not in the past four weeks?
marginally attached
Inflation rate equation
present year-previous year/ previous year*100=
per capita GDP equation
real GDP÷country population
The natural rate of unemployment is the rate at which all unemployment is either frictional or _____.
structural
A recession begins after...
TWO CONSECUTIVE QUARTERS OF NEGATIVE GROWTH.
If there are 3,000 in the population, 930 are employed, and 70 are unemployed, what is the unemployment rate?
The unemployment rate is defined as the number of unemployed divided by the total labor force. The total labor force is equal to the number of unemployed plus the number of employed. Thus the equation is Unemployment Rate = 70/1,000 = 7%.
In the Keynesian model, the principal determinant of saving is:
interest rate
GROSS PRIVATE DOMESTIC INVESTMENT (GPDI) INCLUDES:
• INVESTMENT IN STRUCTURES (RESIDENTIAL AND BUSINESS). • EQUIPMENT AND SOFTWARE PURCHASES. • CHANGES IN BUSINESS INVENTORY.
Why is the consumer price index a conditional cost-of-goods index?
It measures only private goods and services.
THOSE WHO ARE HARMED BY INFLATION
People living on fixed incomes see their purchasing power decline with inflation. Creditors (lenders) see the real value of their loan repayments fall.
disposable personal income
Personal income minus taxes.
CPI EQUATION IS
CURRENT / BASE YEAR X 100
What causes inflation?
Demand factors, supply shocks, and government policy
calculate Real GDP
Real value = nominal value × (base year index / current year index)
yield curve
Shows the relationship between the interest rate earned on a bond (measured on the vertical axis) and the length of time until the bond's maturity date (shown on the horizontal axis).
If a set basket of goods costs $6,000 in the current year and $5,000 in the base year, what is the consumer price index ?
The CPI is 120. It is determined by dividing the cost of a typical market basket of consumer goods and services in the current year by its cost the base year and multiplying by 100. The equation is CPI = ($6,000/$5,000) × 100 = 1.2 × 100 = 120.
circular flow diagram
Illustrates how households and firms interact through product and resource markets and shows that economic aggregates can be determined by either examining spending flows or income flows to households.
government spending
Includes the wages and salaries of government employees (federal, state, and local); the purchase of products and services from private businesses and the rest of the world; and government purchases of new structures and equipment.
gross private domestic investment (GPDI)
Investments in such things as structures (residential and nonresidential), equipment, and software, and changes in private business inventories.
Change in CPI equation
{CURRENT CPI / ORIGNIAL CPI } X 100)- 100
The natural rate of unemployment is the rate at which all unemployment is either structural or _____.
Frictional
_____ employment is natural for an economy and is seen as necessary and beneficial.
Frictional
Cyclical unemployment is the difference between the current unemployment rate and:
Full employment.
The _____ is the broadest measure of inflation in the national income and product accounts.
GDP deflator
personal consumption expenditures
Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.
Who officially dates the U.S. business cycle.
NBER (National Bureau of Economic Research)
NET EXPORTS EQUAL
NET EXPORTS EQUAL EXPORTS MINUS IMPORTS. IN MOST YEARS, IMPORTS EXCEED EXPORTS; NET EXPORTS ARE A NEGATIVE PERCENTAGE OF GDP.
The _____ rate of unemployment is the unemployment rate associated with minimal upward pressure on prices.
Natural
UNEMPLOYMENT RATE IS EQUAL TO
Number of people unemployed / Labor force
DISPOSABLE PERSONAL INCOME EQUALS
PERSONAL INCOME MINUS TAXES. DISPOSABLE PERSONAL INCOME CAN BE SPENT OR SAVED; THEREFORE, Y = C + S
PERSONAL CONSUMPTION EXPENDITURES INCLUDE
PURCHASES OF DURABLE GOODS, NONDURABLE GOODS, AND SERVICES BY CONSUMERS AND BUSINESSES.
Which of the following is an example of efficiency wages?
Paid above the market equilibrium rate, she is motivated to work hard and stay in her job.
Proprietor's income
Partnerships and tax exempt cooperatives in the country
price level
The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).
Frictional unemployment results from
workers who voluntarily quit to search for a better position.
If nominal GDP increases by 7.5% in one year, and inflation as measured by the GDP deflator grows by 7.5%, how much has real output increased?
zero
The natural rate of unemployment occurs when cyclical unemployment is:
zero
Efficiency wages:
Wages are kept above market equilibrium to reduce turnover and to improve productivity.