Macroeconomics - Midterm

Okun's Law

1 percent more unemployment results in 2 percent less output

CPI formula

100 x (cost of basket in current year/cost of basket in base year)

NDP (net domestic product) formula

GDP - depreciation

Real GDP

GDP adjusted for inflation

John Maynard Keynes created the aggregate expenditures model in order to explain which event? A)economic growth after World War II B)the panic of 1907 C)Great Depression D)the roaring 1920s

Great Depression

11)If you save $20 when you experience a $200 rise in your income, then your A)MPC is 0.9 B)MPS is 0.8 C)MPS is 0.3 D)MPC is 0.85

MPC is 0.9

The type of unemployment associated with recessions is called A)seasonal unemployment. B)frictional unemployment. C)structural unemployment. D)cyclical unemployment.

cyclical unemployment

unemployment rate formula

number of unemployed/labor force x 100

Alice sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Claudia for $300. Caludia uses the cloth to make dresses that she sells to Dan for$700. Dan sells the dresses for $1,200 to high school students. The total contribution to GDP of this series of transactions is A)$1,100. B)$2,300. C)$1,200. D)$500.

$1,200

16) Government Purchases $15 Consumption 90 Gross Investment 20 Consumption of Fixed Capital 5 Exports. 8 Imports 12 Refer to the accompanying data (all figures in billions of dollars). NDP (net domestic product) is A)$116. B)$125. C)$150. D)$121.

$116

Refer to the Figure below.At what level of disposable income is savings equal to zero? A)50 B)150 C)125 D)300

150

12)Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of potential GDP is A)2 percent B)10 percent. C)8 percent. D)4 percent.

8 percent

8)Which of the following is an example of gross private domestic investment? A)A bakery buys a $1000 oven. B)A bank loans $1000 to a bakery. C)A family puts $1000 in the bank. D)A family spends $1000 on financial assets.

A bakery buys a $1000 oven

3)Suppose a hospital in the USA hires both Canadian and American doctors. Then, some of the revenue received by this hospital is included in all of the following, except A)Canada's GNP B)The USA's GNP C)The USA's GDP D)Canada's GDP

Canada's GDP

Year Working Age Unemployed Employed . Population 2005 225 7 135 2010 240 15 130 2015 250 7 141 In 2015, some people argued that the labor market had not recovered from the recession that began in 2008. Does this claim have any merit? Why or why not?

Claims that the labor market still had not recovered in 2015 from the Great Recession of 2007-2009 have merit. Although the unemployment rate had fallen back to 4.7%, the labor force participation rate never recovered, and continued falling to 59.2%. The drop in both the unemployment rate and the participation rate suggests that people who lost their jobs in the recession never found work and simply left the labor force. People are designated out of the labor force, and not unemployed, when they quit searching for work, even if they never find a job.

5)Aside from the statistical discrepancy, national income is the same as A)Gross domestic product B)Net national product C)Net domestic product D)Gross national product

Net national product

Real GDP formula

Nominal GDP/Price Index

GDP Deflation

Nominal GDP/Real GDP x 100

Year Production Prices Good A. Good B Good A. Good B 2016. 50. 80 10. 5 2017. 65 64 15 3 Calculate the GDP deflator for both years. According to the GDP deflator, what is the inflation rate between 2016 and 2017?

Recall the GDP deflator is the ratio of nominal to real GDP, multiplied by 100. Year GDP deflator 2016 90.90 2017 100 The inflation rate measured by the GDP deflator is the percentage change in the GDP deflator: (100―90.90)/90.90=10.01%

7)At a higher real interest rate A)Savings and investment both go up. B)Savings goes down and investment goes up. C)Savings and investment both go down. D)Savings goes up and investment goes down.

Savings goes up and investment goes down

Short Answer: You buy $500 worth of stock in Microsoft

Since you are purchasing a financial asset and not a final good or service, this is not included in GDP.

Year Production Prices Good A. Good B Good A. Good B 2016. 50. 80 10. 5 2017. 65 64 15 3 Suppose the market basket for the typical consumer is given by the quantities produced in 2017. Calculate the CPI for both years. What is the inflation rate between 2016 and 2017 according to the CPI?

The CPI is the price of the market basket in the current year, relative to its price in the base year. Again using 2017 as the base year, we have Year CPI 2016 (970/1167)×100=83.12 2017 100 The inflation rate measured by the CPI is the percentage change in the CPI: (100―83.12)/83.12=20.31%

Short Answer: You buy a newly constructed house

The purchase of newly constructed houses is included within investment spending.

Short Answer: You buy a cup of coffee from Starbucks

The value of this transaction is included in GDP within consumption spending.

Short Answer: write whether the transaction is included in the USA's GDP, and what components of expenditure (C, I, G, Xn) are affected. A company buys pizza for its employees at a company retreat.

This is an intermediate good, so it is not included in GDP.

Short Answer: A paper producer buys a chainsaw from an American chainsaw manufacturer.

This is included in GDP within investment spending.

Year Working Age Unemployed Employed . Population 2005 225 7 135 2010 240 15 130 2015 250 7 141 Calculate the unemployment rate and the labor force participation rate in each year.

To find the unemployment rate, divide the number of people unemployed by the size of the labor force, which is the sum of the number employed and unemployed. For example, in 2005, we have a 4.9% unemployment rate because 7/(135+7)=4.9% To find the participation rate, calculate the fraction of the working age population in the labor force. For example, in 2005, we get: (135+7)/225=63.1% Year Unemployment Participation Rate Rate 2005 4.9% 63.1% 2010 10.3% 60.0% 2015 4.7% 59.2%

Year Production Prices Good A. Good B Good A. Good B 2016. 50. 80 10. 5 2017. 65 64 15 3 Calculate nominal and real GDP for both years.Which of these is a better measure of the size of the economy? Why?

Year Nominal Real GDP GDP 2016 900 990 2017 1167 1167 Real GDP is a better measure of the size of the economy, because it controls for changing prices.

CPI (Consumer Price Index)

an index of the cost of all goods and services to a typical consumer

MPC (marginal propensity to consume) formula

change in consumption/change in income

9)The resources used to produce goods and services are also called A)factors of production B)production inputs C)productivity indicators D)manufacturing aides

factors of production

13) Which of the following activities is excluded from GDP, causing GDP to understate a nation's production? A)the services of military personnel B)the construction of new buildings C)the services of health care workers D)goods and services produced in the underground economy

goods and services produced in the underground economy

Final goods and services are A)goods and services whose value has been adjusted for changes in the price level. B)goods and services that are unsold and therefore added to inventories. C)goods and services purchased by ultimate users, rather than for resale or further processing. D)the excess of U.S. exports over U.S. imports.

goods and services purchased by ultimate users, rather than for resale or further processing

15)Goods that are produced this year but not sold are A)included in GDP as inventory investment B)not included in GDP C)negative value added D)intermediate goods

included in GDP as inventory investment

Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n) A)increase in wealth. B)decline in consumer confidence. C)increase in income tax rates. D)increase in saving.

increase in wealth

labor force participation rate formula

labor force/working age population x 100

2)Macroeconomics is primarily concerned with two topics: A)long-run economic growth and short-run business cycles. B)household incomes and firms' profits. C)the price of oil and gas abroad and prices of energy in the domestic market. D)the stock market and the housing market.

long-run economic growth and short-run business cycles

Consider a machine that lasts one year and costs $2,000. A firm believes that, net of operating costs, the machine will allow the firm to generate $2,300 of additional revenue. If the interest rate is 10%, then the firm should A)not purchase the machine, because the interest rate exceeds the expected rate of return. B)not purchase the machine, because the expected rate of return exceeds the interest rate. C)purchase the machine because the expected rate of return exceeds the interest rate. D)purchase the machine because the interest rate exceeds the expected rate of return.

purchase the machine because the expected rate of return exceeds the interest rate

6)Suppose that a firm fires all its workers and moves to another country. While searching for a new job, the former workers will experience: A)frictional unemployment B)cyclical unemployment C)natural unemployment D)structural unemployment

structural unemployment

14)In which situation is a lender best off? A)the nominal interest rate is 9% and the expected inflation rate is 5% B)the real interest rate is 5% and the expected inflation rate is 1% C)the nominal interest rate is 8% and the expected inflation rate is 2% D)the nominal interest rate is 4% and the expected inflaton rate is 0%

the nominal interest rate is 8% and the expected inflation rate is 2%

4)The part of the business cycle when real GDP is at a minimum is called A)the trough. B)the peak. C)the underside. D)a recession.

the trough