ECON 202 Exam 2

Bankruptcy and burdening future generations

False Concerns

Okun's Law

GDP gap = -2.0 x (actual unemployment rate - natural unemployment rate)

Capital goods and durable consumer durable goods

The industries or sectors of the economy in which business cycle fluctuations tend to affect output the most are

increased savings by households during an economic downturn may worsen the recession.

The so-called paradox of thrift is that ____________

Cyclical Unemployment

Typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises. Cyclical unemployment results from insufficient demand for goods and services and is exacerbated by the downward stickiness of wages in the economy

Savers to borrowers

Unanticipated inflation redistributes income from

Under 16, institutionalized, not in labor force, employed, unemployed

Unemployment measurements

Giving a hug, solving a mystery, telling a story, and making a sandwich

What are the four things people can do that robots can't?

Changes in consumer spending, investment spending, government spending, and net export spending

What can cause the AD demand curve to shift

Changes in input prices, productivity, and the legal-institutional environment

What can cause the AS curve to shift

Consumption is usually stable while investment is volatile, rising and falling often

What does your textbook say about the stability of consumption and investment in the economy?

Aggregate demand would increase

What impact does a substantial increase in household borrowing to finance auto purchases have?

Aggregate demand would decrease because of an increase

What impact would a 5-year increase in the minimum age for collecting Social Security benefits have?

The U.S. transcontinental railroads being completed

What is one factor that had a positive impact on aggregate supply in the U.S., causing aggregate supply to increase?

Both Social Security and Medicare confront funding shortfalls

What is the status of Social Security and Medicare?

Cutting government spending $100 billion and increasing income taxes by $100 billion

What would be the most effective in reducing demand-pull inflation?

Nondiscretionary

When changes to taxes and spending occur in the economy without explicit action by the federal government, such policy is

An increase in the cost of acquiring capital goods

Which would decrease investment demand?

An increase in wealth

Which would shift the consumption schedule upward?

U.S. individual citizens

Who holds the largest share of the U.S. public debt?

Flexible-income receivers and debtors

Who is helped/unaffected by inflation?

Fixed-income receivers, savers, creditors

Who is hurt by inflation?

Frictional Unemployment

"In between jobs"

Recession

A period of decline in total output, income, and employment that lasts at least six months.

Any time real GDP falls over six months or more

A recession is officially defined as

Demand pull inflation

A shortage of microchips has slowed the production of new vehicles, causing prices for new and used vehicles to increase. This is an example of

Not in the labor force

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is

Had a federal budget that was balanced

As discussed in the textbook, from 2005 to 2021 the United States never

Consumption and saving both decrease

As disposable income decreases

It increases

As real interest rates fall, what happens the amount of investment demand by businesses?

Provides built-in stability for the economy

As the economy declines, the collection of personal income tax revenues automatically falls. This relationship best describes how the progressive income tax system

Full Employment

Because frictional and structural unemployment are largely unavoidable in a dynamic economy, this employment is something less than 100 percent employment of the labor force. Economists say that the economy is "fully employed" when it is experiencing only frictional and structural unemployment. That is, this employment occurs when there is no cyclical unemployment.

Political events, financial instability, irregular innovation, productivity changes, monetary factors

Causes of business cycles

Demand Pull Inflation

Characterized by "too much spending chasing too few goods"

Cyclically adjusted budget

Compares actual government spending with the tax revenues that would have occurred if the economy had achieved full employment GDP

Expansionary Fiscal Policy

Consists of increases in government spending, reductions in taxes, or both, and is designed to expand real GDP by increasing aggregate demand.

The decline in the real interest rate

Consumption, Savings & Investment: What can cause them to shift?

Decrease in aggregate supply

Cost-push inflation is shown by a

Part-time employment

Counted as fully employed

Increase in aggregate demand

Demand-pull inflation is shown by an

Consumption exceeds income

Dissaving occurs where

Contractionary Fiscal Policy

Entails decreases in government spending, increases in taxes, or both, and is designed to reduce aggregate demand and slow or halt demand-pull inflation.

AD & AS Equilibrium

Equilibrium occurs at the price level that equalizes the amounts of real output demanded and supplied.

Core Inflation

Excludes food and energy items

Cost Push Inflation

Explains rising output prices in terms of factors that raise per-unit production costs at each level of spending. Rising per-unit production costs squeeze profits and reduce the amount of output firms are willing to supply at the existing price level. As a result, the economy's supply of goods and services declines, and the price level rises.

APC + APS = 1

Given the definitions of the average propensity to consume (APC), the average propensity to save (APS), the marginal propensity to consume (MPC) and the marginal propensity to save (MPS), which of the following is correct?

The Crowding-Out Effect

Government borrowing increases interest rates and thereby reduces private investment spending

A shift in aggregate demand

If C, (consumption) I, (Investment) G, (Government purchases of goods and services) or Xn,(net exports) change, it will cause

Shortage and the price level will rise

If at a particular price level, real domestic output from producers is greater than real domestic output desired by purchasers, there will be a

Expansionary fiscal policy

If the Congress passes legislation to cut taxes to counter the effects of a severe recession, then this would be an example of a

Fall

If the MPS rises, then the MPC will

It decreases

If the marginal propensity to consume increases, what happens to the spending multiplier?

Aggregate demand would decrease

If widespread pessimism arises about future business conditions and sales revenues, what impact does that have?

Unemployment: discouraged workers

In January 2013, the United States had a labor force of 155.8 million out of which 143.3 million, or 92.0 percent were employed. By December of that year, the United States had a labor force of 155.0 million out of which 144.7 million, or 93.4 percent were employed. Most of the decline in the __________________ rate was due to increased numbers of _________________________. They wanted to give the remaining workers raises.

Increase aggregate demand

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

Nominal income rises by 8 percent, and the price level rises by 10 percent

In which of the following cases would real income rise?

Expansion

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

Structural

Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is

CPI

Main measure of inflation in the United States. The government uses this index to report inflation rates each month and each year. It also uses this to adjust Social Security benefits and income tax brackets for inflation. The CPI reports the price of a "market basket" of some 300 consumer goods and services that are purchased by typical urban consumers.

Fiscal policy

Manipulation of government spending and taxes to stabilize domestic output, employment, and the price level

MPC

Numerical value of the slope of the consumption schedule

MPS

Numerical value of the slope of the saving schedule

Structural Unemployment

Occurs when the composition of the labor force does not respond immediately or completely to the new structure of job opportunities. Workers whose skills and experience have become obsolete or unneeded thus find that they have no marketable talents. They are structurally unemployed until they develop skills that employers want.

Multiplier Effect

Reveals that an initial change in spending can cause a larger change in domestic income and output. The multiplier is the factor by which the initial change is magnified: multiplier = change in real GDP/initial change in spending.

Inflation

Rise in the general level of prices

Discouraged workers

Stopped actively searching for work

3 percent

Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is

Actual GDP and potential GDP

The GDP gap measures the difference between

Change in income that is spent

The MPC (marginal propensity to consume) can be defined as that fraction of a

The US Public Debt

The accumulation of all past federal deficits and surpluses

Budget deficit

The amount by which government expenditures exceed revenues during a particular year is the

The aggregate demand and supply curves intersect

The equilibrium price level and level of real output occur where

Increase U.S. imports and decreases U.S. exports

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will