econ midterm 3 (11-12)
In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?
$1.2 million
inflation rates (π) formula
(p2-p1)/p1 x 100 = π
functions of money
- medium of exchange (buys things) - unit of account (common unit used to measure economic value - store of value (can be saved)
active labor market policies
- reduce structural unemployment - work test, job search assistance, job retraining programs
(cyclical) unemployment increases dramatically during recession because
1) GDP falling causes firms to lay off workers 2) Idle labor and idle capital hurt economy's ability to create more jobs
3 reasons why CPI may overstate the true inflation rate
1) new goods bias 2) quality change bias 3) commodity substitution and outlet substitution biases
unemployed
16 or older, non institutionalized, not in the military, doesn't have a job, looking for work
employed
16 or older, non institutionalized, not in the military, has a job
A bank lends money for a year at an interest rate of 7%, and the inflation rate for that year turns out to be 5%. What is the bank's actual real rate of return?
2.0%
velocity of money in the US
7
BLS
Bureau of Labor Statistics
quality change bias
CPI counts price raise as inflation but sometimes the goods are just getting better so their value is increasing but CPI doesn't account for that
quantity theory of money formula
MV=PYr where both sides equal the nominal GDP
GDP deflator formula
Nominal GDP/Real GDP x 100
which of the following is an example of an unemployed person? a) a recent college grad looking for her first job b) a worker who is willing to work more hours is available c) a full-time student working part time at night d) a retiree working as a volunteer in a hospital
a
According to the Fischer effect, a 5% decrease in the expected inflation rate results in
a 5% decrease in the nominal interest rate
what information does the world bank's "rigidity of employment index" provide?
a summary of firms' costs for hiring, firing, and adjusting employment hours
inflation is
an increase in the average price level
employment at will doctrine
and employee may quit and an employer may fire for any reason at any time (many exceptions but that's the jist)
most labor services rather than being final goods for consumers...
are involved in inputs into the production of goods
money
asset regularly used in transactions includes cash and deposits at banks and other depository institutions
union
association of workers that bargains collectively with employers over wages, benefits and working conditions ; more powerful in Europe
consumer price index (CPI)
average price for a basket of goods and services bought by a typical American consumer, weighted (major items count more)
before fiat money people...
bartered (goods for goods) and used commodity money (real gold/silver coins)
unexpected increase in the money supply does what to the economy
boosts economy in the short run, economy stays neutral in the long run
which of the following programs could help overcome structural unemployment? a) limitations to unemployment benefits b) worker retraining c) worker retraining, limitations to unemployment benefits, and job-search assistance d) job-search assistance programs
c
everyone that wants to work for the equilibrium wage
can because there are no gaps between ls and ld
which measure of inflation most corresponds to daily economic activity of Americans
consumer price index (CPI)
Because of money illusion, inflation usually confuses:
consumers, workers, and firms
employment protection laws
creates valuable insurances for workers with full time jobs, makes labor markets less flexible and dynamic, increases duration of unemployment, increases employment rates among "riskier" workers (young and minority)
What do Keynesian economists believe about cyclical unemployment?
cyclical unemployment is caused by deficiencies in aggregate demand
deflation
decrease in the average/general level of prices
If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005.
decreased
since the mid 1960s, the male labor force participation rate in the United States has ____ and the female labor force participation rate has ______
decreased; increased
____ is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate
deflation; disinflation
what affects labor force participation rates
demographics, tax structure, and technological advances such as the birth control pill
high and volatile inflation
destroys the ability of market prices to send signals about the value of resources and opportunities.
the demand for labor is downward sloping because
diminishing marginal product/ diminishing labor returns
Commodity Substitution Bias and Outlet Substitution Bias
doesn't account for consumers switching to cheaper substitutes
stagflation
economy faces inflation and stagnation as a result of people expecting inflation
labor force
employed + unemployed
the labor force is made up of
employed and unemployed workers
three types of unemployment
frictional, structural, cyclical
Increases in the minimum wage will most likely lead to:
higher unemployment
workers are not completely interchangeable because of
human capital
underemployment rate (as defined by BLS)
includes part-time workers who would like a full time job and discouraged workers
a big gap between the minimum wage and equilibrium wage causes
increased unemployment
inflation
increases in the average level for prices (think elevator model), general increase in prices
quantity theory of money implies what about inflation
inflation is caused by an increase in the supply of money
what does PPI include that CPI and GDP delators dont
intermediate along with finished goods and services
labor force participation rate (LFPR) formula
labor force/working age population x 100
structural unemployment is worse in Europe than in the US because of...
labor regulations
the equilibrium wage is when
labor supply and labor demand curves meet
labor supply curve represents
leisure-trade offs in response to changes in opportunity costs (wages)
If the economy experiences unexpected inflation, then the actual rate of return will be _____ than its equilibrium rate, and wealth will be distributed from _____.
less; lenders to borrowers
costs of structural unemployment
loss of economic output and higher levels of stress, suicide and lower rates of happiness for the unemployed
producer price index (PPI)
measures the average selling prices received by the domestic producers for their output
money illusion
mistaking changes in nominal prices for changes in real prices
inflation occurs when growth of _____ exceeds growth of ______
money supply, output
cyclical unemployment change change dramatically in what time frame
months
does inflation make price signals more or less difficult to interpret?
more
what should we think about when looking at long-run employment patterns
natural unemployment rate
Two of the challenging factors faced by the U.S. Bureau of Labor Statistics when computing the consumer price index are:
new goods and better quality goods
new goods bias
new goods that were not available in the base year and often replace cheaper goods that were originally there
fiat money
no intrinsic value but derives its value from trust in the government and others to accept at means of payment ex, dollar bill
real prices formula
nominal price (t) x (P0/Pt) ; Pt is the price index value of year being adjusted and P0 is price index value of base year typically we use CPI for this
monetizing the debt occurs when a government
pays off its debts by printing money.
structural unemployment
persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs
a discouraged worker is a
person who has given up looking for work but would still like a job if one is available.
GDP deflator
price index that tracks price of goods and services produced domestically
Real Prices
prices that have been corrected for inflation
the unemployment rate does not measure
quality of jobs or how well workers are matched to their jobs (ex, taxi driver with PhD in chem/ part-time workers)
which variables in the quantity theory of money are assumed stable
real GDP (Yr) and velocity of money (v)
when using the quality theory of money to analyze the relation between inflation, money, real output, and prices we typically assume that
real output and the velocity of money are constant
disinflation
reduction in the inflation rate
π < 0
represents deflation
causes of structural unemployment
restructuring as a result of globalization, new information technologies, the shift from manufacturing to a service economy
two influences on the rise in the female labor force participation rate in the united states are ____ and ____
rising proportion of services in national output; the availability of birth control
major cause of frictional unemployment
scarcity of information
frictional unemployment
short term unemployment caused by the ordinary difficulties of matching employees to employers
frictional unemployment
short-term unemployment caused by the ordinary difficulties of matching employee to employer
what is a concern among economists regarding the aging of the U.S. population
since older people are less likely to work, an aging population will lead to a decreased labor force participation rate in the united states and lower tax revenues
the unemployment rate is the
single best indicator of how well the labor market is working
the natural unemployment rate is the rate of ____ unemployment plus the rate of _____ unemployment
structural; frictional
natural unemployment rate
sum of structural unemployment and frictional unemployment
inflation acts like a
tax that transfers real resources from citizens to the government
government can influence a person's choice to work or not through
taxes on workers and benefits paid to non workers
the Keynesian explanation for cyclical unemployment is
that wage demands are too high relative to changing prices
fictional unemployment is a large share of US total unemployment because
the US economy is dynamic; "creative destruction" - innovation creates new jobs and destroys others
A country's total civilian noninstitutionalized adult population is 1 million, and 500,000 people in this country are working, with another 20,000 people looking for work. Which of the following statements about the labor force statistics in this country is accurate?
the employment rate is 96.15% and the labor force participation rate is 52%
high rates of inflation subvert (undermines the power of)
the functions of money
according to the quality theory of money, the major cause of inflation in the long run is an increase in
the growth rate of the money supply
suppose that the inflation rate is 3% when a 15-year mortgage loan is given at a fixed rate of 4.5%. Five years later, the inflation rate rises to 4%. What impact does this change have on the nominal interest rate and the real interest rate on the mortgage loan
the nominal interest rate remains the same and the real rate of interest decreases
when real GDP and velocity are stable...
the only thing causing an increase in P is an increase in M
GDP deflator formula
the ratio of the nominal value of economic output to the real value of economic output multiplied by 100
what is an effect of employment protection laws
they create employment security for workers with a job
unemployment rate formula
unemployed/labor force x 100
cyclical unemployment
unemployment correlated with the business cycle
discouraged workers
workers who want a job and have looked in the last year but not in the last month because they feel no jobs are available
minimum wages effect what kind of worker
young workers with limited skills
