econ test 2
Name some factors that could cause the SRAS curve to shift, and say whether they would shift AS to the right or to the left.
A natural disaster or lack of availability of inputs could shift the AS curve to the left, while a new production technology could shift it to the right.
Many financial analysts and economists eagerly await the press releases for the reports on the home price index and consumer confidence index. What would be the effects of a negative report on both of these? What about a positive report?
A negative report on home prices would make consumers feel like the value of their homes, which for most Americans is a major portion of their wealth, has declined. A negative report on consumer confidence would make consumers feel pessimistic about the future. Both of these would likely reduce consumer spending, shifting AD to the left, reducing GDP and the price level. A positive report on the home price index or consumer confidence would do the opposite.
What is the difference between being unemployed and being out of the laborforce?
A person who is "unemployed" is trying, but unable, to find a job. A person "out of the labor force" is not working nor looking for work, such as a student or a retiree.
Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?
A shift to the right will tend to reduce prices and increase quantity, while a shift to the left will do the reverse.
What impact would a decrease in the size of the labor force have on GDP and the price level according to the AD/AS model?
A smaller labor force would be reflected in a leftward shift in AS, leading to a lower equilibrium level of GDP and higher price level.
What is an aggregate production function?
An aggregate production function describes the output of an entire economy based on various inputs such as capital, labor and technology.
Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left.
An increase in consumer confidence could cause AD to shift right, while a higher level of taxation could cause it to shift left.
How do gains in worker productivity lead to gains in per capita GDP?
As workers produce more, their wages will rise and they will have more disposable income for consumption, leading to a rise in GDP per capita.
If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?
Because the AS curve is horizontal in the Keynesian zone, a decrease in AD shoulddepress real economic activity but have no effect on prices.
Describe the mechanism by which supply creates its own demand
In order to supply goods, suppliers must employ workers, whose incomes increase as a result of their labor. They use this additional income to demand goods of an equivalent value to those they supply.
What is capital deepening?
Capital deepening is when capital is increasing relative to the number of workers, which allows workers to become more productive.
What are the main components of measuring GDP with what is demanded?
Consumption, investment, government spending, and net exports
What are the components of the aggregate demand (AD) curve?
Consumption, investment, net exports and government spending.
Name and explain some of the reasons why wages are likely to be sticky, especially in downward adjustments.
Contracts often prevent wages from adjusting quickly, and workers have a strong resistance to wage decreases, so wage adjustments downward are politically difficult for firms to manage rapidly.
Why must double counting be avoided when measuring GDP?
Counting the same production twice will result in a reported GDP that is higher than the actual amount of production. This occurs if the manufacturing inputs are counted as well as the final product. For example, GDP counts sale of a hamburger sold at a restaurant, but not the sales of the bun, meat and ketchup sold to the restaurant because all those inputs are counted at the final point of purchase.
When would you expect cyclical unemployment to be rising? Falling?
Cyclical unemployment rises during a contraction and falls during an expansion of the economy.
What are the main components of measuring GDP with what is produced?
Durable goods, nondurablegoods, services, structures, and the change in inventories
In the AD/AS model, what prevents the economy from achieving equilibrium at potential output?
Equilibrium occurs at the level of GDP where AD = AS. Insufficient aggregate demand could explain why the equilibrium occurs at a level of GDP less than potential. A decrease (or leftward shift) in aggregate supply could be another reason.
Ethiopia has a GDP of $8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.
Ethiopia: $8 billion/55 million = $145.45 per capita Costa Rica: $9 billion/4 million = $2,250 per capita Costa Rica's per capita GDP is much higher than that of Ethiopia
Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?
Expansionary monetary policy shifts AD to the right. A continuing expansionary policy would cause larger and larger shifts (given the parameters of this problem). The result would be an increase in GDP and employment (a decrease in unemployment) and higher prices until potential output was reached. After that point, the expansionary policy would simply cause inflation.
What is frictional unemployment? Give examples of frictional unemployment.
Frictional unemployment occurs in the time spent moving from one job to another. For example, if a worker leaves his job to pursue a different career or to start his own business, he is frictionally unemployed until he obtains a new job.
(graph question) Using data from the following table (shown previously in this chapter), how much of the nominal GDP growth from 1980 to 1990 was real GDP and how much was inflation?
From 1980 to 1990, nominal GDP grew by (5979.6 -2862.5) / (2,862.5/100) =109%. Over the same period, prices increased by (72.7 -48.3) / (48.3/100) = 50.5%. So about 46% of the growth (50.5/109) was inflation, and the remainder: 109% -46% = 63% was growth in real GDP.
List some of the reasons why GDP should not be considered an effective measure ofthe standard of living in a country.
GDP doesn't measure things like disease rates, life expectancy, happiness, income inequality environmental degradation and any number of other aspects that contribute to the standard of living
Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP?
GDP is C + I + G + (X-M). GDP= $2,000 billion + $50 billion + $1,000 billion + ($20 billion -$40 billion)=$3,030
Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
Given the assumptions made here, the cuts in R&D funding should reduce productivity growth. The model would show this as a leftward shift in the AS curve, leading to a lower equilibrium GDP and a higher price level.
Construct the price index for a "fruit basket" in each year using 2003 as the base year.
If 2003 is the base year, then the index number has a value of 100 in 2003. To transform the cost of a fruit basketeach year, we divide each year's value by $15.35, the value of the base year, and then multiply the result by 100. The price index is shown in the table below
Suppose the U.S. Congress passes significant immigration reform that makes it easier for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.
Immigration reform as described should increase the labor supply, shifting AS to the right, leading to a higher equilibrium GDP and a lower price level.
Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?
Increase prices and quantity, whilea shift to the left will decrease both prices and quantity
What is Keynes' law?
Keynes law states that demand creates its own supply.
Do neoclassical economists believe in Keynes' law or Say's law?
Neoclassical economists tend to believe in Say's law.
What do economists mean when they refer to improvements in technology?
New machines or techniques that improve the productivity of labor, or that can be substituted for
Is it desirable to pursue a goal of zero unemployment? Why or why not?
No. A certain amount of unemployment is necessary for an economy to be flexible in creating new jobs and new industries.
Why might per capita GDP be only an imperfect measure of a country's standard of living?
Per capita GDP tells us little about the variety and quality of goods and services available for purchase, and tells us nothing about other measures like infant mortality, life expectancy or happiness.
What is potential GDP?
Potential GDP is the output an economy can achieve when its resources are fully employed.
Explain the difference between property rights and contractual rights. Why do they matter to economic growth?
Property rights are the rights of individuals and firms to own property and use it as they see fit. Contractual rights then are based on property rights and they allow individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance. Economic growth occurs when the standard of living increases in an economy, which occurs when jobs are being created and incomes are rising. For this to happen societies mustcreate a legal environment that gives individuals the ability to use their property to their fullest and highest use, including the right to trade or sell that property. Without a legal system that enforces contracts, people would not be likely to enter into contracts for current or future services because of the risk of non-payment. This would make it difficult to transact business and would slow economic growth.
List the areas where government policy can help economic growth.
Public education, low investment taxes, funding for infrastructure projects, special economic zones
Does Say's law apply more accurately in the long run or the short run? What about Keynes' law?
Say's law applies more accurately to the long run,while Keynes' law applies more accurately to the short run.
What is Say's law?
Say's law states that supply creates its own demand.
How do you convert a series of nominal economic data over time to real terms?
Select a base year and measure changes in the value of the currency with respect to that year. The base year will have a price level of 100, and each other year's price level will be set accordingly. For example, if prices are 50% higher than in the base year, the price level will be 150. In short, to convert from nominal to real terms, for each year, divide the nominal figure by the price level and multiply by 100.
Briefly explain the reason for the near-vertical shape of the SRAS curve on its far right.
Since all of the economy's resources are already fully employed, it is difficult to increase supply further, even in response to a large price change.
What is structural unemployment? Give examples of structural unemployment.
Structural unemployment occurs when the skills of workers don't match what is demanded in the economy. For example, many workers in Detroit found themselves structurally unemployed when the American automobile industry fell into decline.
A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?
Tax cuts increase consumer and investment spending, depending on where the tax cuts are targeted. This would shift AD to the right, so if the tax cuts occurred when the economy was in recession (and GDP was less than potential), the tax cuts would increase GDP and "lead the economy out of recession."
How is per capita GDP calculated differently from worker productivity?
The amount a worker can produce and that worker's income are not always exactly equal, so these numbers may differ.
Why might it be important for policymakers to know which zone of the AS curve the economy is in?
The effect of an economic stimulus will vary considerably depending on which zone of the AS curve the economy iscurrently in.
What is on the horizontal axis of the AD/AS diagram? What is on the vertical axis?
The horizontal axis shows the aggregate level of output, while the vertical axis shows the aggregate price level.
The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer
The inflation rate is a percentage change over time, so the rates are not the same. The first change is (115 -110)/110 x 100 = 4.5%The second is (120 -115)/115 x 100 = 4.3%
Compute the inflation rate for fruit prices from 2001 to 2004.
The inflation rate is calculated as the percentage change in the price index from year-to-year. For example, the inflation ratebetween 2001 and 2002 is (89.90 -69.71) / 69.71 = 0.2896%. The inflation rates for all the years are shown in the last row of the table below.
What term describes the remaining level of unemployment that occurs even when the economy is h
The natural rate of unemployment.
Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are "not in the labor force?" What are the proportions of employed, unemployed and not in the labor force in the population? Hint: Proportions are percentages.
The population is divided into those "in the labor force" and those "not in the labor force." Thus, the number of adults not in the labor force is 237.8 -153.9 = 83.9 million. Since the labor force is divided into employed persons and unemployed persons, the number of unemployed persons is 153.9 -139.1 = 14.8 million. Thus, the adult population has the following proportions: 139.1/237.8 = 58.5% employed persons 14.8/237.8 = 6.2% unemployed persons 83.9/237.8 = 35.3% persons out of the labor force
What are some of the problems with using the unemployment rate as an accurate measure of overall joblessness?
The unemployment rate doesn't account for discouraged workers or workers who are underemployed.
A country with a population of eight million adults has five million employed, 500,000 unemployed, and the rest of the adult population is out of the labor force. What's the unemployment rate? What share of population is in the labor force?
The unemployment rate is 500,000/5,500,000 x 100 = 11% The labor force participation rate is 5,500,000 / 8,000,000 x 100 = 68.75%
Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the 2012 unemployment rate computed earlier?
The unemployment rate is defined as the number of unemployed persons as a percentage of the labor force or 14.8/153.9 = 9.6%. This is higher than the 2012 unemployment rate, computed earlier, of 8.1%.
How is the unemployment rate calculated? How is the labor force participation rate calculated?
The unemployment rate is the number of unemployed people divided by the labor force. The labor force participation rate is the number of people in the labor force divided by the total population.
Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment?
This would be a rightward shift in the AS curve, resulting in lower prices, higher output and higher employment.
During the spring of 2014 the Midwestern U.S., which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?
This would increase crop yields and shift the AS curve to the right, resulting in lower prices, higher output and higher employment.
(graph question) The table shows the prices of fruit purchased by the typical college student from 2001 to 2004. What is the amount spent each year on the "basket" of fruit with the quantities shown in column 2?
To compute the amount spent on each fruit in each year, you multiply the quantity of each fruit by the price. 10 apples × 50 cents each = $5.00 spent on apples in 200112 bananas × 20 cents each = $2.40 spent on bananas in 20012 bunches of grapes at 65cents each = $1.30 spent on grapes in 20011 pint of raspberries at $2 each = $2.00 spent on raspberries in 2001Adding up the amounts gives you to total cost of the fruit basket. The total cost of the fruit basket in 2001 was $5.00 + $2.40 + $1.30 + $2.00 = $10.70. The total costs for all the years are shown in Table 22_05.
Describe the mechanism by which demand creates its own supply.
When consumers demand more goods than are available on the market, prices are driven higher and the additional opportunities for profit induce more suppliers to enter the market, producing an equivalent amount to that which is demanded.
Why do you think that unemployment rates are lower for individuals with more education?
Workers with more education are more in demand and there are fewer of them to go around, so it is easier for them to find work than for uneducated workers.
Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?
Yes. The answer to both questions depends on whether GDP is growing faster or slower than population. If population grows faster than GDP, GDP increases, while GDP per capita decreases. If GDP falls, but population falls faster, then GDP decreases, while GDP per capita increases.
Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a.The environment becomes dirtier. b.The crime rate declines. c.A greater variety of goods become available to consumers. d.Infant mortality declines.
a.A dirtier environment would reduce the broad standard of living, but not be counted in GDP, so a rise in GDP would overstate the standard of living. b.A lower crime rate would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the standard of living. c.A greater variety of goods would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living. d.A decline in infant mortality would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.
What type of unemployment (cyclical, frictional, or structural) applies to each of the following: a.landscapers laid off in response to a drop in new housing construction during a recession. b.coal miners laid off due to EPA regulations that shut down coal fired power c.a financial analyst who quits his/her job in Chicago and is pursing similar work in Arizona d.printers laid off due to drop in demand for printed catalogues and flyers as firms go the internet to promote an advertise their products. e.factory workers in the U.S. laid off as the plants shut down and move to Mexico and Ireland.
a.Cyclical b.Structural c.Frictional d.Structural e.Structural
Which of the following are included in GDP, and which are not? a.The cost of hospital stays b.The rise in life expectancy over time c.Child care provided by a licensed day care center d.Child care provided by a grandmother e.The sale of a used car f.The sale of a new car g.The greater variety of cheese available in supermarkets h.The iron that goes into the steel that goes into a refrigerator bought by a consumer.
a.Hospital stays are part of GDP. b.Changes in life expectancy are not market transactions and not part of GDP. c.Child care that is paid for is part of GDP. d.If Grandma gets paid, it is part of GDP, otherwise not. e.A used car is not produced this year, so it is not part of GDP. f.A new car is part of GDP. g.Variety does not count in GDP, where the cheese could all be cheddar. h.The iron definitely gets counted in GDP, but the trick is to avoid counting it more than once, so it is usually counted just in the purchase price of the car to avoid double counting.
If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: a.A union member with a COLA wage contract b.Someone with a large stash of cash in asafe deposit box c.A bank lending money at a fixed rate of interest d.A person who is not due to receive a pay raise for another 11 months
a.Largely unaffected, since COLA allows wages to increase with inflation. b.Hurt, since his cash would be worth less. c.Hurt, since higher inflation lowers the real interest rate. d.Hurt, since his wages will be worth less.
Would the following events usually lead to capital deepening? Why or why not? a.A weak economy in which businesses become reluctant to make long-term investments in physical capital. b.A trend in which many more adults participate in continuing educationcourses through their employers and at colleges and universities.
a.No. Capital deepening refers to an increase in the amount of capital per person in an economy. A decrease in investment by firms will actually cause the opposite of capital deepening (since the population will grow over time). b.Yes. Capital deepening refers to an increase in either physical capital or human capital per person. Continuing education or any time of lifelong learning adds to human capital and thus creates capital deepening.
Assess whether the following would be counted as "unemployed" in the Current Employment Statistics survey. a.A husband willingly stays home with children while his wife works. b.A manufacturing worker whose factory just closed down. c.A college student doing an unpaid summer internship. d.A retiree. e.Someone who has been out of work for two years but keeps looking for a job. f.Someone who has been out of work for two months but isn't looking for a job. g.Someone who hates her present job and is actively looking for another one. h.Someone who decides to take a part time job because she could not find a full time position.
a.Not unemployed. b.Unemployed. c.Not unemployed. d.Not unemployed. e.Unemployed. f.Not unemployed. g.Not unemployed. h.Not unemployed.
Are there other ways in which we can measure productivity besides the amount produced per hour of work?
es. Since productivity is output per unit of input, we can measure productivity using GDP (output) per worker What policies can the government of a free-market economy implement to stimulate economic growth?Government can contribute to economic growth by investing in human capital through the education system, building a strong physical infrastructure for transportation and commerce, increasing investment by lowering capital gains taxes, creating special economic zones that allow for reduced tariffs, and investing in research and development.