# Macroeconomics: Chapter 10 & 11 (Exam 2)

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Chapter 10: Measuring a Nation's Income Chapter 11: Measuring the Cost of Living

### CPI (consumer price index)

The ___________________ shows the cost of a basket of goods and services relative to the cost of the same basket in the base year.

### CPI (consumer price index)

________ is used to measure the overall level of prices in the economy

### CPI (consumer price index)

The percentage change in the ________________ measures the inflation rate.

### CPI (consumer price index)

The ______ does not take into account consumers' ability to substitute towards goods that become relatively cheaper over time.

### CPI (consumer price index)

_______ does not take into account increases in the purchasing power of the dollar due to the introduction of new goods.

### CPI (consumer price index)

______ is distorted by unmeasured changes in the quality of goods and services.

### CPI (consumer price index)

The main index used to measure inflation is the _______________ .

### CPI (consumer price index)

Measure of the overall cost of goods & services bought by a typical consumer

### firms

Producer Price Index - Measure of the cost of a basket of goods and services bought by __________

### Nominal

Interest rate as usually reported

### Nominal

__________ interest rate is without a correction for the effects of inflation

### Real

Interest rate corrected for the effects of inflation

### Nominal interest rate - Inflation rate

Real Interest Rate = __________ - ___________

### Real Interest Rate

Nominal interest rate - Inflation rate

### Nominal Income increases by 10% and Real Income increases by 7%.

If you had a 10% raise and inflation is 3% this year, what happens to your nominal income? your real income?

### Nominal Income increases by 5% and Real Income decrease by 5%

If you had a 5% raise and inflation is 10% this year, what happens to your nominal income? your real income?

### Inflation rate

the percentage change in the price index from the preceding period

### GDP (gross domestic product)

measures an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.

### GDP (gross domestic product)

market value of all final goods and services produced within a country in a given period of time.

### Nominal GDP

uses current prices to value the economy's production of goods and services.

### Real GDP

uses constant base-year prices to value the economy's production of goods and services.

### GDP (gross domestic product)

a good measure of economic well-being because people prefer higher to lower incomes. But it is not a perfect measure of well-being.

### Nominal GDP

the production of goods and services valued at current prices.

### GDP (gross domestic product)

can be measured as the sum of consumption, investment, government purchases, and net exports.

### market value

Gross domestic product is the sum of the ____________ of the final goods and services.

### No

Would GDP include intermediate sales?

### No

Would GDP include housework?

### No

Would GDP include illegal drug sales?

### \$500

If a cobbler buys leather for \$100 and thread for \$50 and uses them to produce and sell \$500 worth of shoes to consumers, the contribution to GDP is how many dollars?

### True

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer. (T/F)

### False

The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself. (T/F)

### False

If the lumberyard sells \$1,000 of lumber to a carpenter and the carpenter uses the lumber to build a garage that he sales for \$5,000, the contribution GDP is \$6,000. (T/F)

### True

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person. (T/F)

### False

If nominal GDP in 2006 exceeds nominal GDP in 2005, real output must have risen. (T/F)

### False

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker. (T/F)

### False

In the United States investment is the largest component of GDP? (T/F)

### True

Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output. (T/F)

### False

When the city of Chicago purchases a new school building, the investment component of GDP increases. (T/F)

### True

A recession occurs when real GDP declines. (T/F)

### True

Depreciation is the value of the wear and tear on the economy's equipment and structures. (T/F)

### True

Cigarettes should be valued in GDP at \$4.50 per pack even though \$1.00 of that price is tax because the buyers paid \$4.50 per pack.

### Consumption

Which of the components of GDP is spending by households on goods and services except purchases of new housing.

### Investment

Which of the components of GDP is spending of capital equipment, inventories, and structures. Including household purchases of new housing. Also includes inventory accumulation.

### Government Purchases

Which of the components of GDP is government consumption expenditure and gross investment, spending on goods and services by local, state, and federal governments. This component also does not include transfer payments such as Social Security.

### Net exports

Which of the components of GDP is equal to spending on domestically produced goods by foreigners minus spending of foreign goods by domestic residents. Or Exports - Imports.

### GNP (gross national product)

________, includes goods and services produced abroad by American firms.

### Real

____________ GDP is adjusted for inflation

### Nominal

____________ GDP is not adjusted for inflation

### Intermediate

______________ is a good that will be used in further production.

### exports - imports

Net exports = __________________________

### COLA

____________ is an automatic increase in income in order to maintain a constant standard of living; cost of living allowance.

### market

____________ of goods and services = items that are purchased by the typical consumer.

### CPI (consumer price index)

____________ is the ratio of the value of a fixed basket purchased by the typical consumer to the basket's value in the base year * 100.

### inflation

___________ is the rate at which prices are rising.

### depreciation

___________ is the process of equipment wearing out.

### base

________ year is the year from which prices are used to measure real GDP.

### real

The _________ interest rate is corrected for the effects of inflation.

### productivity

Policies governments might pursue to increase ______________ of their citizens include Education, Health and Nutrition, Research and Development, and Political Stability.

### CPI (consumer price index)

a measure of the overall cost of the goods and services bought by a consumer.

### inflation rate

the percentage change in the price index from the preceding period.

### PPI (producer price index)

a measure of the cost of a basket of goods and services bought by firms.

### indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation.

### nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation.

### real interest rate

the interest rate corrected for the effects of inflation

### microeconomics

the study of how households and firms make decisions and how they interact in markets.

### macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

### GDP (gross domestic product)

the market value of all final goods and services produced within a country in a given period of time

### consumption

spending by households on goods and services, with the exception of purchases of new housing

### investment

spending on capital equipment, inventories, and structures, including household purchase of new housing.

### government purchases

spending on goods and services by local, state, and federal governments.

### net exports

spending on domestically produced goods and services by foreigners (exports) minus spending on foreign goods by domestic residents (imports).

### nominal GDP

the production of goods and services valued at current prices

### real GDP

the production of goods and services valued at constant prices

### GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

### real GDP

________________ is found by adjusting nominal GDP by the consumer price index

### False

If imports exceed exports, the "net exports" term in GDP is positive. (T/F)

### True

If exports exceed imports, the "net exports" term in GDP is positive. (T/F)

### True

In order from largest to smallest, the components of U.S. expenditures comprising GDP are: Consumption, Government Purchases, Gross Investment, and Net Exports. (T/F)

### False

In order from largest to smallest, the components of U.S. expenditures comprising GDP are: Consumption, Gross Investment, Government Purchases, and Net Exports. (T/F)

### True

In 2007, Maxine's nominal income increased by 3% while the price level rose by 1%. Consequently, Maxine's real income: rose by approximately 2%. (T/F)

### False

In 2007, Maxine's nominal income increased by 3% while the price level rose by 1%. Consequently, Maxine's real income: rose by approximately 4%. (T/F)

### False

In 2007, Maxine's nominal income increased by 3% while the price level rose by 1%. Consequently, Maxine's real income: fell by approximately 1%. (T/F)

### False

In 2007, Maxine's nominal income increased by 3% while the price level rose by 1%. Consequently, Maxine's real income: fell by approximately 2%. (T/F)

### natural

The normal rate of unemployment around which the unemployment rate fluctuates is called the _____________ rate of unemployment.

### frictional

The unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills is called __________________ unemployment.

### structural

The unemployment that results because of the number of jobs available in some labor market is insufficient to provide a job for everyone who wants one is called ______________ unemployment.

### True

It is impossible for an economy to eliminate unemployment. (T/F)

### False

It is possible for an economy to completely and permanently eliminate unemployment. (T/F)

### False

It is possible for an economy to eliminate unemployment completely, but only temporarily. (T/F)

### False

It is possible for an economy to completely and permanently eliminate unemployment, but only if the government finds a way to avoid recessions altogether. (T/F)

### True

Countries have a great variance in both the level and growth rate of GDP per person; thus, poor countries can become relatively rich over time. (T/F)

### False

Countries may have a different level of GDP per person, but they all grow at the same rate. (T/F)

### False

Countries may have a different growth, but they all the the same level of GDP per person. (T/F)

### False

Counties all have the same growth rate and level of output because any country can obtain the same factors of production. (T/F)

### No

Will the government policy of increasing restrictions on the importing of autos and electronics be likely to increase economic growth?

### Yes

Will the government policy of increasing expenditures on public education be likely to increase economic growth?

### Yes

Will the government policy of eliminating civil war be likely to increase economic growth?

### Yes

Will the government policy of reducing restrictions on foreign capital investments be likely to increase economic growth?

Example: