Study sets, textbooks, questions
Upgrade to remove ads
Macro Exam 2 Review
Terms in this set (149)
gross domestic product
the market value of all final goods and services produced within a country during a specific period.
gross domestic product
only final goods and services count, only transactions involving production count, only production within the country is counted, only goods produced during the current period are counted
only final goods and services count
GDP is a measure of the value of the goods and services that were purchased by households, investors, governments, and foreigners. These purchasers valued the goods and services more than the purchase price.
only transactions involving production count
production of the goods involves human toil, wear and tear on machines, use of natural resources, and other of life's unpleasantries.
only production within the country is counted:
this is because it measures economic performance within the country. The GDP figures are closely watched both by policy makers and by those in the business and financial communities. In the United States, the numbers are prepared quarterly and released a few weeks following the end of each quarter.
only goods produced during the current period are counted
GDP is a "flow" concept. By analogy, a water gauge measures the amount of water that flows through a pipe each hour. Similarly, GDP measures the market value of production that "flows" through the economy's factories and shops each year (or quarter).
household spending on consumer goods and services during the current period. Consumption is a flow concept.
the flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future.
exports minus imports
gross national product
the total market value of all final goods and services produced by the citizens of a country. It is equal to GDP minus the net income of foreigners.
Two ways to measure GDP
1. The market value of the output produced
2. The income generated by those who produced the output
source of higher income levels
an expansion in output (the additional production of goods and services that people value)
components of the expenditure approach
personal consumption expenditures, gross private domestic investment, government consumption and gross investment, net exports to foreigners
Difference between GDP and GNP
Gross domestic product is the market value of all final goods and services produced within a country during a specific period. Gross national product is the total market value of all final goods and services produced by the citizens of a country. It is equal to GDP minus the net income of foreigners
values expressed in current dollars
values that have been adjusted for the effects of inflation
an increase in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines when inflation is present.
consumer price index
an indicator of the general level of prices. It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.
a price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year (currently 2000). Unlike the consumer price index (CPI), the GDP deflator also measures the prices of capital goods and other goods and services purchased by businesses and governments. Because of this, it is thought to be a more accurate measure of changes in the general level of prices than the CPI.
Why nominal values are adjusted for inflation
because inflation is an increase in the general level of prices over time
the difference between the CPI and the GDP deflator
The GDP deflator is a broader price index than the CPI. It is designed to measure the change in the average price of the market basket of goods included in GDP. The consumer price index (CPI) is designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households.
unreported barter and cash transactions that take place outside recorded market channels. Some are otherwise legal activities undertaken to evade taxes. Others involve illegal activities, such as trafficking drugs and prostitution.
Reasons why GDP is an imperfect measure
1. Nonmarket production
2. underground economy
3. leisure and human costs
4. quality variation and the introduction of new goods
5. harmful side effects and economic "bads"
doesn't count household production
leisure and human costs
GDP excludes leisure and the human cost associated with the production of goods and services
harmful side effects and economic "bads"
GDP makes no adjustment for harmful side effects that sometimes arise from production, consumption and the destructive acts of man and nature.
adjusted for price changes
Real GDP refers to nominal GDP
Assume that between 1995 and 2000 nominal GDP increased from $1,000 to $2,500, and the index of prices increased from 100 to 200. Which of the following expenses GDP for 2000 in terms of 1995 prices?
Your real estate agent earns $5,000 commission when you sell your 100 year-old house
Which of the following transactions would be counted toward this year's GDP?
the cost of purchasing a bundle of goods has changed over time
The consumer price index (CPI) and the GDP deflator are designed to measure the degree to which
the value of a used car at its sale price
Which of the following would not be counted as part of this year's GDP?
would count as part of US GNP and German GDP
Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings
Goods produced in one period that are sold in the following period fail to get counted in any period.
Which of the following is not a problem or shortcoming of GDP?
use a price index to remove the effects of inflation to have reliable data measuring changes in the real value of things
If you were required to write a paper for your history class (or a report for your job) in which you were using dollar valued data across different years, you would
Prices increased by approximately 2 percent
Suppose that nominal GDP increased by 3 percent, but the real GDP increased by only 1 percent during that same period. Which of the following explains the phenomenon?
A Japanese automobile company produces cars within the U.S.
Which of the following would increase U.S. GDP?
You buy one hundred shares of IBM stock at $100 per share and pay $250 commission. How much will this transaction add to GDP?
value added equal to $500, and consequently $500 is added to GDP
If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer contributes
Your grandfather tells you he earned $0.65 per hour at his job when he was a boy in 1929. Given that the CPI was 17.1 in 1929 and 215.3 in 2008, how much would you have had to make in 2008 to have the same real hourly wage as your grandfather?
Assume that between 2000 and 2010 the money GDP of an economy increased from $3 trillion to $8 trillion and that the appropriate index of prices increased from 100 to 200. Which of the following expresses GDP for 2000 in terms of 2010 prices?
Suppose that Mike earned $15,000 in 2008 and $15,600 in 2009. If the consumer price index was 100 in 2008 and 103 in 2009, by approximately what percent did Mike's real salary increase?
In a country where many families make their own clothes, GDP will be understated because the clothes making represents
indicate short-term changes in the output rate of a nation.
The primary value of GDP lies in its ability to:
If the Consumer Price Index in 2008 was 150 and the CPI in 2009 was 165, the rate of inflation between 2008 and 2009 would be
GDP measures output. It is a useful tool for economists because it measures economic performance
What does GDP measure, and why is it a useful tool for economists, business decision makers, and government policy makers?
excludes household production and the underground economy, fails to take leisure and human costs into account, and adjusts imperfectly for quality changes.
Things GDP does not measure
Expenditure Approach, Resource Cost-Income Approach
Two approaches for calculating GDP
Personal Consumption Expenditures + Gross Private Domestic Investment + Government Consumption and Gross Investment + Net Exports of Goods and Services=GDP
Aggregate Income (compensation of employees (wages and salaries), Income of self-employed proprietors, Rents, Profits, Interest) + Nonincome Cost Items (indirect business taxes, depreciation) + net income of foreigners=GDP
Resource Cost-Income Approach
Nominal GDP is GDP expressed at current prices. It is often called money GDP. Real GDP is GDP adjusted for changes in the price level.
What is the difference between real and nominal GDP?
fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes in real GDP.
a downturn in economic activity characterized by declining real GDP and rising unemployment
Real GDP declines and unemployment rises
What happens to unemployment and real GDP during a recession?
Unemployment falls and real GDP increases
What happens to unemployment and real GDP during an expansion?
civilian labor force
the number of people between sixteen years of age and over who are either employed or unemployed. To be classified as unemployed, a person must be looking for a job.
labor force participation rate
the number of people in the civilian labor force sixteen years of age or over who are either employed or actively seeking employment as a percentage of the total civilian population sixteen years of age or over.
the percentage of people who are unemployed. Mathematically, it is equal to the number of people unemployed divided by the number of people in the labor force.
the number of people sixteen years of age and over employed as civilians divided by the total civilian population sixteen years of age and over. The ratio is expressed as a percentage
The labor force participation rate is the number of people in the civilian labor force sixteen years of age or over who are either employed or actively seeking employment as a percentage of the total civilian population sixteen years of age and over. The unemployment rate is the percentage of people in the labor force who are unemployed.
What's the difference between the labor force participation rate and the unemployment rate?
Information is scarce, some firms are contracting, or going out of business.
Why will an economy always have some unemployment?
unemployment due to constant changes in the economy that prevent qualified unemployed workers from being immediately matched up with existing job openings. It results from imperfect information and search activities related to suitably matching employees with employers
unemployment due to the structural characteristics of the economy that make it difficult for job seekers to find employment and for employers to hire workers. Although job openings are available, they generally require skills many unemployed workers do not have.
unemployment due to recessionary business conditions and inadequate labor demand
it occurs because employers are not fully aware of all available workers and their job qualifications and available workers are not fully aware of the jobs being offered by employers. The main cause is imperfect information.
the "computer revolution" has dramatically changed the job opportunities of many workers. The alternatives available to workers with the skills required to operate and maintain high-tech equipment have improved substantially, while the prospects of those without such skills have, in some cases, deteriorated drastically.
an unexpected fall in the general level of demand for goods and services will cause this type of unemployment to rise.
the level of employment that results from the efficient use of the labor force taking into account the normal (natural) rate of unemployment due to information costs, dynamic changes, and the structural conditions of the economy. For the United States, full employment is thought to exist when approximately 95 percent of the labor force is employed.
natural rate of unemployment
the "normal" unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output. The current natural rate of unemployment in the U.S. is thought to be approximately 5 percent.
the level of output that can be achieved and sustained in the future, given the size of the labor force, its expected productivity, and the natural rate of unemployment consistent with the efficient operation of the labor market. Actual output can differ from the economy's potential output.
When unemployment is at its natural rate, full employment is present, and the economy is achieving the highest rate of output that it can sustain.
How is full employment related to the natural rate of unemployment?
It is not fixed and it is affected by the structure of the labor force and by changes in public policy.
Why is the natural rate of unemployment not equal to zero?
A hypothetical number because looking at three factors: the size of the labor force, the quality (productivity) of labor, and the natural rate of unemployment cannot be estimated with certainty.
Is potential output a real number or a hypothetical number?
Unanticipated inflation is an increase in the general level of prices that was not expected by most decision makers. Anticipated inflation is an increase in the general level of prices that was expected by most decision makers.
What is the difference between unanticipated and anticipated inflation?
High and variable inflation reduces investment, inflation distorts the information delivered by prices, high and variable information results in less productive use of resources
Reasons why inflation creates adverse effects:
scarce information about job opportunities and the time it takes to acquire that information
Frictional unemployment results from
the percentage of persons in the civilian labor force who are not employed
a sustained increase in the general level of prices as indicated by a price index.
natural rate of unemployment
the sum of frictional and structural unemployment
labor force participation rate
the number of persons 16 years of age and older who are either employed or actively seeking work divided by the total noninstitutional population 16 years of age and older.
worker qualifications do not match available jobs
is less than potential GDP during recessions
individuals will want to make long-term contracts in order to enjoy the benefits of higher prices.
During periods of high and variable inflation, which of the following is unlikely to occur?
we would expect to have some unemployment due to normal structural and frictional factors
In a properly operating, dynamic economy,
the period of declining growth in real GDP between the peak of the business cycle and the trough
Real GDP rises and unemployment falls
Which of the following will most likely occur during the expansionary phase of a business cycle?
In the early 1990s, the U.S. government substantially reduced defense expenditures. The resulting unemployment of defense-related workers, who possessed skills no longer needed by the economy, is an example of:
number employed-120 million
number unemployed-30 million
What is the labor force of the economy?
Number Employed-120 million
Number Unemployed-30 million
What is the unemployment rate of the economy?
Number Employed-120 million
Number Unemployed-30 million
What is the labor force participation rate of the economy?
the output of the economy will exceed its long-run potential output
During a boom,
natural rate of unemployment
is associated with the economy's maximum sustainable output rate
frictional, structural and cyclical unemployment
The three types of unemployment:
frictional and structural
The two types of unemployment that compose the natural rate are:
The "normal" unemployment rate due to frictional and structural conditions in labor markets. When unemployment is at its natural rate, full employment is present, and the economy is achieving the highest rate of output that it can sustain
What is the natural rate of unemployment, and how does it relate to the concept of potential (or full-employment) GDP?
Suppose there are 25,000 employed and 5,000 unemployed persons. What is the unemployment rate?
It decreases. 10.7%
Suppose there are 25,000 employed and 5,000 unemployed persons. If 2,000 of those unemployed became discouraged and quit actively seeking works, what would happen to the unemployment rate? Calculate the new unemployment rate.
fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes in real GDP
Recession and depression. The term recession is widely used to describe conditions during the contraction and recessionary trough phases of the business cycle. When a recession is prolonged and has a sharp decline in economic activity, it is called a depression.
What economic indicators would indicate where the economy is in the business cycle? Explain.
Business peak, contraction, recessionary trough, and expansion
Give the four phases of the business cycle in their order of occurrence.
Real GDP for two or more consecutive quarters
What criterion must be met for our economy to be officially in a recession?
During a period of inflation, the impact of rising prices will outweigh the impact of falling prices. Because of the higher prices (on average), a dollar will purchase less than it did previously. It is a decline in the purchasing power of money
Discuss the dangers of inflation, that is, why may it hurt an economy?
unemployment caused by constant changes in the labor market.
changes in the basic characteristics of the economy prevent the "matching up" of available jobs with available workers.
when there is a general downturn in business activity.
Abnormally high rates of unemployment generally reflect weak demand conditions for labor, counterproductive policies, and/or the inability or lack of incentive on the part of potential workers and potential employers to arrive at mutually advantageous agreements. Frictional unemployment is efficient
Explain why economists believe some types of unemployment are efficient and some are not. Which ones are which?
a highly aggregated market encompassing all resources (labor, physical capital, land and entrepreneurship) contributing to the production of current output. The labor market is the largest component of this market.
goods and services market
a highly aggregated market encompassing the flow of all final-user goods and services. The market counts all items that enter into GDP. Thus, real output in this market is equal to real GDP.
Loanable Funds Market
a general term used to describe the market that coordinates the borrowing and lending decisions of business firms and households commercial banks, savings and loan associations, the stock and bond markets and insurance companies are important financial institutions in this market
foreign exchange market
the market in which the currencies of different countries are bought and sold.
aggregate demand curve
a downward-sloping curve showing the relationship between the price level and the quantity of domestically produced goods and services all households, business firms, governments, and foreigners (net exports) are willing to purchase
(1) a lower price level will increase the purchasing power of money. (2) The interest-rate effect a lower price level will reduce the demand for money and lower the real interest rate, which will stimulate additional purchase. (3) Other things being constant, a lower price level will make domestically produced goods less expensive relative to foreign goods.
Why does the aggregate demand curve slope downward?
aggregate supply curve
the curve showing the relationship between a nation's price level and the quantity of goods supplied by its producers. In the short run, it is an upward-sloping curve, but in the long-run the aggregate supply curve is vertical.
short-run aggregate (SRAS) curve
shows the various quantities of goods and services domestic firms will supply in response to changing demand conditions that alter the level of prices in the goods and services market
long-run aggregate supply (LRAS) curve
shows the relationship between the price level and quantity of output after decision makers have had time to adjust their prior commitments, or take steps to counterbalance them, when the price level changes.
Who demands resources in the labor market?
Who supplies resources in the labor market?
money interest rate
the percentage of the amount borrowed that must be paid to the lender in addition to the repayment of the principal. The money interest rate overstates the real cost of borrowing during an inflationary period. When inflation is anticipated, an inflationary premium will be incorporated into this rate. The money interest rate is often called the nominal interest rate.
real interest rate
the interest rate adjusted for expected inflation; it indicates the real cost to the borrower (and yield to the lender) in terms of goods and services.
a component of the money interest rate that reflects compensation to the lender for the expected decrease, due to inflation, in the purchasing power of the principal and interest during the course of the loan. It is determined by the expected rate of future inflation.
Who demands loanable funds?
Who supplies loanable funds?
real interest rate=money interest rate-inflationary premium
What is the formula to calculate the real interest rate?
an increase in the value of a currency relative to foreign currencies. An appreciation increases the purchasing power of the currency over foreign goods.
the estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.
the situation when a country's imports of goods and services are greater than its exports
the situation when a country's exports of goods and services are greater than its imports.
when the exchange market is in equilibrium
imports+capital outflow=exports + capital inflow; imports-exports=capital inflow-capital outflow
goods and services market
a highly aggregated market encompassing the flow of all final user goods and services. The market counts all items that enter into GDP. Thus, real output in this market is equal to real GDP.
natural rate of unemployment
is associated with the economy's maximum sustainable output rate.
Total real output (real GDP) of the economy
Within the aggregate demand/aggregate supply framework, the quantity on the horizontal axis in the aggregate goods and services market represents the
real (inflation adjusted) interest rate
In the loanable funds market, the true burden of borrowers and true yield to lenders is the
we are at long-run macroeconomic equilibrium; we are at the natural rate of unemployment
Which AD is equal to SRAS at an output level equal to the LRAS curve,
real interest rate must equal the money interest rate
If the expected rate of inflation is zero, the
Which of the following is a primary factor that coordinates the actions of borrowers and lenders in the loanable funds market?
The net inflow of capital from foreign economies must always be positive and equal to the amount of business investment
Which of the following statements about the circular flow diagram is not correct?
goods and services market, resources market, foreign exchange market, and loanable funds market.
The circular flow of income is coordinated by the
decline in the purchasing power of money
As prices rise, a fixed money supply will be able to buy fewer goods and services. This effect is due to a(n)
Borrowers will be better off and lenders will be worse off.
Which of the following is true regarding an unanticipated increase in inflation?
Suppose people anticipate that inflation will be 4 percent during the next several years. If the real rate of interest is 5 percent, the money rate of interest must be:
Suppose you are earning 5 percent nominal interest on your savings account. If the rate of inflation is 3 percent, the real rate of interest you are earning is
The nominal interest rate is 9 percent, and expected inflation is 7 percent.
Which of the following situations would you prefer if you planned to borrow money?
depreciated, and the English will find U.S. goods cheaper.
If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
the nation's exports to increase and imports to decline
A depreciation of a nation's currency would cause
If the value of a nation's imports exceed exports, the nation has a
changes in price have no effect on output in the long run. In the long run, the price of goods and the price of resources move together and firms have no incentive to change their output
The long-run aggregate supply curve is vertical, reflecting the fact that
In the short run, aggregate supply is sloped downward to the right, and in the long run, it is vertical.
Which of the following accurately indicated the relationship between the short-run and long-run aggregate supply curves?
above the economy's long-run capacity
If the current price level in the goods and services market is higher than what was expected, output will be
when exports are greater than imports of goods and services.
The demand for loanable funds will rise and the interest rate will rise.
Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plan capacity. What is the likely effect on the loanable funds market?
Recommended textbook explanations
Krugman's Economics for AP*
David Anderson, Margaret Ray
Principles of Economics
N. Gregory Mankiw
Principles of Microeconomics
N. Gregory Mankiw
Sets found in the same folder
Macro Final Review
Macro Final B
Chapter 7 ECO
Sets with similar terms
Econ Chapter 4,7,8 Terms
Combo with All Macro terms so far and 2 others
Intro to Macroeconomy 2
AP Economics Unit 2 Vocabulary List
Other sets by this creator
Kayla's notes for 4866 final
CTE4811 Final Exam Review
CTE4826 Final Exam Review
CTE4866 Final Study Guide
Other Quizlet sets
Government Chapter 1 Quiz Multiple Choice
Biology Lecture Exam #2: Physiology, homeostasis a…