ECON FINAL
rule of 70 means
approximates how long it will take for the size of an economy to double. The number of years it takes for a country's economy to double in size is equal to 70 divided by the growth rate, in percent
rational people will only participate intrades that make them
better off
catch up growth vs cutting edge growth
catch-up growth comes from capital accumulation while cutting-edge growth comes from technological development
Economists believe people make decisions by
comparing marginal costs with marginal benefits.
thinking on the margin means
considering how much you value an addition of something
Holding all else equal, our AD-AS analysis tells us that a series of macroinventions opening the door to a series of technological advances will lead to - disinflation and an increased real GDP growth rate. - a heightened inflation rate coupled with declining real GDP growth rates. - increased GDP growth rates without affecting the inflation rate. - both increased inflation rates and increased real GDP growth rates.
disinflation and an increased real GDP growth rate.
factor income approach to gdp
employee compensation + rent + interest + profit
Suppose your weekly earnings (the number on your paychecks) decrease by 2 percent over the course of a year and prices in the economy fall by 3 percent. In this case, your nominal earnings have _____ and your real earnings have _____.
fallen, risen
why do LRAS curves shift
happens when there is an increase or decrease in the labor force supply, upgradation or degradation of human resources, technological development, increase or decrease in capital or funds, and changes in the supply of natural resources
diminishing returns are
increases in capital (k) produce less output (y) the more k you already have to start with
is a home purchase an investment or included in gdp
investment
structural + frictional unemployment
natural rate of unemployment
are incentives monetary
no
is property of new knowledge rivalrous
no
are marginally attached workers unemployed - They have not looked for employment in the prior four weeks, but they have looked for work sometime in the past twelve months.
no - they are not in the labor force
velocity of money equation
nominal gdp/ money supply
unemployment rate formula
number of unemployed/labor force x 100
opportunity cost is
of a choice is the value of theopportunities lost, namely the value of the next bestalternative you must give up when making a choic
the level of capital stock determines the
output level, but not its growth rate
marginal pay is
payment made by the employer to the employee for providing additional labour responsible for increasing output which as a result leads to an increase in the total revenue.
Quantity demanded changes when
price changes
If wheat farmers experienced an exceptionally large harvest and a fad diet decreased demand forwheat products, the equilibrium price and quantity for wheat would change such that
price decreases but the quantity effect is ambigious.
PPF stands for
production possibilities frontier - the possible quantities that can be produced of two products if both depend upon the same finite resource for their manufacture
echnological advances have increased the supply of digital cameras. As a result, th
quantity demanded for digital cameras will increase.
incentives are
rewards and penalties that motivate behavior
why do AD curves shift
shifts to the right as the components of aggregate demand—consumption spending, investment spending, government spending, and spending on exports minus imports—rise. The AD curve will shift back to the left as these components fall.
every choice involves
something gained and something lost
the Solow Model says that an increase in the investment rate will increase
steady state output
The above table indicates four antique car collectors' willingness to pay for a Duesenberg. If the market price is $1.4 million per car, how much total consumer surplus would the four customers gain from buying them?
$1.1 million
Leopold is considering quitting his paralegal job to go to law school for the next three years. His current job pays $60,000 per year (after taxes). Leopold's living expenses are $18,000 per year, while tuition, books, and fees would cost him $72,000 per year. What is the opportunity cost of Leopold's law degree?
$396,000
How to calculate inflation rate
(B - A)/A x 100 - where A is the starting number and B is the ending number
how to calculate GDP growth rate
(GDP Year2)/ (GDP Year 1) - 1 x 100
inflation using nominal gdp and real gdp formula
(nominal/real) x 100-100
what causes a rightward ad shift
-
what causes a leftward LRAS shift
- A natural disaster destroys a nation's infrastructure, reducing its stock of capital.
Disinflation vs. Deflation
- Disinflation is an inflation rate that is decreasing but still >0. - Deflation is a negative inflation rate
what causes a leftward ad shift
- Entrepreneurs' animal spirits lead them to increase their rate of capital investments. - There is a decrease in the rate of money-supply growth. - the equilibrium quantity of output and the price level will fall
monetary means
- Monetary value is the value of something measured in currency
what things are included when calculating GDP
- More people buy tickets to visit Fort Ticonderoga following the reenactment. - consumer spending (C) -business investment (I) - government spending (G) (excludes things like social security, unemployment and insurance payments) - net exports - things made inside America
what causes a rightward LRAS shift
- The development of smartphones pushes workers to answer emails at night and over the weekend. - When the economy experiences an increase in growth and investments, the long-run aggregate supply curve also shifts to the right, and vice versa.
the opportunity cost principle
- When Darren evaluated his marginal benefits, he compared the benefits to the next best alternative.
a sunk cost is
- a cost that has been incurred and cannot be reversed. - exists whether you make your choice or not, so it is not an opportunity cost - When weighing costs and benefits, a good decision maker ignores sunk costs
Shift of Demand vs. Movement Along Demand Curve
- a shift in the demand schedule caused by changes in consumer tastes or conditions - a change in quantity demanded due to the movement from one point on a fixed demand curve to another along the same demand curve caused by change in price
the cost benefit principle
- action should only be taken if the benefits derived from it are greater than the costs - Darren compared themarginal cost to the marginal benefit for each gallon ofgas
things that shift demand
- consumer tastes - population - price of complementary goods
things that shift both supply and demand
- expectations
the marginal principle
- individuals make decisions on purchases based on the additional utility they will receive from each unit - Darren considered each additional gallon of gas separately
challenging factors faced by the U.S. Bureau of Labor Statistics when computing the consumer price index are
- new goods - better quality goods
what causes shifts in PPF
- productivity - supply of inputs
a surplus is when
- quantity supplies is more than quantity demanded - where the price is greater than the equilibrium price
things that shift supply
- technological innovations - price of factors of production - natural events
When only the price changes
- you're thinking about a movement along the supply curve - when other factors change you need to think about shifts in the supply curve
what are the only factors stable in a free market
Equilibrium price and quantity
Which of the following statements is TRUE about GDP? - GDP does not account for the distribution of income in a country. - GDP includes a negative adjustment for damage caused by pollution. - GDP includes a positive adjustment for the value of leisure and well-being. - GDP includes all known goods and services in the underground economy.
GDP does not account for the distribution of income in a country.
Which of the following does NOT explain why lower gas prices lead to a rise in the quantity of gas demanded?
Gas station owners can sell more gas at each price.
fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
quantity demanded changing vs demand change
A change in quantity demanded refers to a movement along a fixed demand curve -- that's caused by a change in price. A change in demand refers to a shift in the demand curve -- that's caused by one of the shifters: income, preferences, changes in the price of related goods and so on.
supply shift vs demand shift
A decrease in demand shifts the demand curve leftward, and an increase in supply shifts the supply curve rightward.
What did Vernon Smith's laboratory experiments reveal about the supply and demand model?
It successfully predicts real-life behavior.
quantity theory of money formula
M × V = P × Y m= money supply v= velocity of money p= inflation y= real gdp/output
how to calculate real gdp
Nominal GDP/GDP Deflator x 100
gdp deflator formula
Nominal GDP/Real GDP x 100
What does a real GDP growth rate of 3% mean? - Output per person is rising by 3%. - The value of output per person is rising by 3%. - The value of output is rising by 3%. - Output is rising by 3%.
Output is rising by 3%.
Solow Model Formula
Y = F (A, K, eL) k= physical capital el= human capital a= ideas
national approach to gdp
Y= C + I + G + (exports-imports) - c = consumption - I = investment(need home production, private spending on tools, equipment for future output) - g = government purchases (tanks, airplanes, office equipment, roads) - net exports (exports-imputs)
aggregate production function
a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology
An increase in supply refers to
a rightward shift of the demand curve.
Frictional unemployment occurs when:
a worker decides to quit one job to seek a different job.
definition of labor force
all the civilian workers age 16 and older along with the unemployed individuals who are actively looking for work
when supply and demand both shift, the effect on either price or quantity will be
ambiguous
comparative advantage is
an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners - Ireland has a comparative advantage in cheese and butter due to climate and a large amount of land suitable for dairy cows
factors that shift demand
1. Income 2. Population 3. Price of substitutes 4. Price of complements 5. Expectations 6. Tastes
price ceilings create 5 important effects
1. Shortages 2. Reductions in product quality 3. Wasteful lines and other search costs 4. A loss of gains from trade 5. A misallocation of resources
factors that shift supply
1. Technological innovations and changes in the price ofinputs 2. Taxes and subsidies 3. Expectations 4. Entry or exit of producers 5. Changes in opportunity costs
The oil-rich state of Qumran enjoys an annual production function of Y = 2K If its capital stock this year is 100, what will be its capital stock next year? - 100 - 106 - 102 - 99
102
In 1924, a new Ford Model T cost only $260. This sounds very cheap, but the U.S. has experienced a lot of inflation over the last 99 years. Namely, the CPI rose from 17.1 in September 1924 to 309.8 in September 2023. Using this information, calculate the real cost of a 1924 Model T to the nearest 2023 dollar.
4450 - (309.8/17.1) x 260
principles 5-10 are
5. trade makes people better off 6. wealth and economic growth are important 7. institutions matter 8. booms and busts cant be avoided but can be moderated 9. inflation is caused by increases in supply of money 10. central banking is a hard job
how to calculate nominal gdp
Price x Quantity
Iron logic of diminishing returns
States that, for each new input of capital, there is less and less output produced.
suppose the United States goes from a free-trade policy to a no-trade policy with other countries. Which of the following is a result of this new policy?
The U.S. no longer consumes outside its production possibilities frontier.
irreversible vs reversible decisions
The higher the cost to undo, the more irreversible it is.The lower the cost, the more reversible it is
Suppose the inflation rate was 3% when a farmer signed a 5-year mortgage loan at a fixed rate of 8%. Two years later, the inflation rate fell to 1%. What effect did this change have on the nominal interest rate and the real interest rate on the mortgage? - The nominal interest rate remained constant, while the real interest rate fell. - The nominal interest rate remained constant, while the real interest rate rose. - The nominal interest rate and the real interest rate both decreased. - The nominal interest rate and the real interest rate both increased.
The nominal interest rate remained constant, while the real interest rate rose.
A $5,000 face-value bond costs $4,630 and matures in one year. If the interest rate on other similar bonds rises from 8% to 10%, what is the approximate price change for this bond? - The price remains unchanged at $4,630. - The price of the bond rises to $4,762. - The price of the bond falls to $4,545. - The price of the bond rises to $5,093
The price of the bond falls to $4,545.
Total producer surplus is measured by the area _____ and below the price
above the supply curve
who determines the income tax rate
the IRS
absolute advantage
the ability to produce a good using fewer inputs than another producer
intemporal substitution is
the decision to forego current consumption in order to consume in the future. The most common example is saving for retiremen
who is responsible for monetary policy
the federal reserve
real rate of return - A zero-coupon bond with a face value of $2,000 and a current price of $1,800 has a rate of return of 11.11 percent.
the nominal rate of return minus the inflation rate (($2,000 − $1,800) ÷ $1,800) × 100.= 11.11%if the interest rate offered on savings accounts decreases from 5 percent to 2 percent, then the price of an equally risky one-year maturity zero-coupon bond with a face value of $1,000 will:
quantity supplied
the quantity that sellers are willing and able to sell at a particular price
law of supply is
the tendency for the quantity supplied to be higher when the price is higher (holding other things constant)
conditional convergence is
the tendency that poorer countries grow faster than richer countries and converge to similar levels of income
All potential gains from trade are realized in free-market equilibrium.
true
Only 10% of American households held stocks traded on the New York Stock Exchange in 1929, but - uncertainties created by the October-1929 stock market crash transmitted this financial crisis into a decline in real output. - the simultaneous agricultural crisis led to a decline in America's money supply growth. - the stock-market crash directly decreased real productivity. - inequality was so great in 1929 that the wealth decline resulting from declining asset prices crashed the whole economy.
uncertainties created by the October-1929 stock market crash transmitted this financial crisis into a decline in real output.
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one - transition from a manufacturing economy to a service economy.
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
how to calculate real gdp with a base year
use base year prices and multiply them by current year quantities for all the goods and services produced in an economy.
definition of unemployed
when an individual who is not employed and is seeking employment, cannot find work - of age
steady state on a graph
when depreciation = investment