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Macro Exam 2
Terms in this set (190)
What two ways estimate national wealth?
National income and GDP
The household and firm circular model shows for national income and GDP
where the elements of these two measurements come from
GDP is the market value of:
all final goods and services in a time period
Four factors to consider with GDP are:
it has a common denominator od $ and this is market value; it is the value of final goods and serivces (and value added is one approach to estimating this), it does not take into consideration pure transactions; and is a flow item
Final goods and services can be broken up in to:
consumption, investment (gross), government (federal state and local) and net exports
What is the difference between nominal and real GDP?
In real GDP you are using base prices with current quantity. In nominal GDP you are using current prices and current quantity.
Why do we use real GDP?
With nominal inflation affects the measurement so the measurement may overstate productivity. Plus, it allows us to compare GDP across time directly.
What is the formula for GDP deflator?
Nominal GDP/Real GDP * 100. We take out the quantity and leave the prices.
Why do we like the GDP deflator over other measures of price levels?
It is very broad, it includes all goods and services.
What is the formula for inflation rate?
(new value - old value)/old value * 100.
What measurement do we use to compare across countries?
GDP per capita
What are the three types of unemployment?
frictional, structural, cyclical
longer termed, the structure of the economy has changed so your job has become obsolete, so you need to be retrained
long or short termed, based on the business cycle, recession
short term, matching people to "new' jobs as they acquire new skills
What policies increase unemployment?
Unemployment insurance, Minimum wage, labor unions
How does unemployment insurance increase unemployment?
if high enough there is lower incentvie to look for work
How does minimum wage increase unemployment
it will decrease the quantity demanded of unskilled labor
How does labor unions increase unemployment?
to get higher wages sacrifice jobs
How do you decrease unemployemnt?
What is the advantage of using the LFPR?
includes discouraged workers, it lets us know the level of productive labor we have available
What is the unemployment rate?
What are the concerns with inflation?
Reduces the value of money, redistributes income and wealth, hurts those most on fixed incomes, fears of it can have detrimental effects, investors are taxed nominally, high menu costs make adjusting for inflation hard, makes lending hard.
What is the CPI?
The market value of a market basket of a family of four. Use a base year quantity, current year expenditures using base year quantity over base year expenditures times 100.
What do we use the CPI for?
compare prices across years, we can measure inflation
What are the biases with CPI?
Substitution bias, increase in quality bias, new product bias, outlet bias. It is biased upwards. To correct for it, the market basket is updated every couple of years.
What determines long run growth?
The five factors of production help determine it because they provide the inputs to production. To affect long run growth, we look to increase labor productivity (quantity produced per hour worked).
What influences labor productivity?
Physical capital (capital used per hour worked) and technological change (depends on human capital and entrepreneurship).
How can an economy accomplish labor productivity increases?
Intellectual property rights, strong legal systems, solid financial markets, good infrastructure.
What is real interest rates and what are the concerns with interest rates?
Real interest rate = nominal interest - inflation rate. The concern is if inflation is different than expected, then either borrower or lenders win or lose.
How do firms get money for investment?
retianied earnings and a good financial system (direct and indirect means).
What is crowding out and why is it important?
Crowding out happens when the government is spending in deficit. To fund this deficit, the government takes out loans, competing against firms for these loans. This decreases the availability of loans for investment, and it drives up interest rates.
How do we know we have a recession and when do we know that?
We have a downturn for at least two quarters. A problem with this is hard to measure, there is a large lag time to when we know what real GDP is. WE rely also on durable good sales, housing sales, input purchases.
What happens to the UE rate during a recession and why?
It increases, even as the economy goes into an upturn. The discouraged worker begins to look for a job and now is counted as part of the labor force, as unemployed.
What else happens with the business cycle?
Inflation rates drop because workers are willing to be paid less to keep a job, and firms decrease prices to increase sales. The purchase of durable goods decreases.
What are the phases of the business cycle?
Upturn (expansion), peak, downturn(recession) and trough.
Name two policies that will increase household saving.
Decrease taxes - decrease the marginal tax rate, tax real interest rates over nominal, and use consumption taxation rather than income tax.
Foreign direct investment:
the purchase or building by a firm of a facility in a foreign country
Foregin portfolio investment:
the purchase by an individual or a firm of stocks or bonds issued in another country.
What is the backstory to the emergence of capitalism?
We begin with feudalism, then mercantilism, then capitalism. In this time line, there became stronger property rights, contracts, education, better wages, unions, and lower tariffs.
What are the policies that encourage public good growth?
Government subsidies in education and research. From there we want also strong intellectual property rights. New Growth Theory brings technological change and human capital to be endogenous to the economy.
What does the catch up model do?
predicts that real gdp per capital in poorer countries will grow faster than wealthier countries so they will catch up to them.
What does the per worker production function tell us?
Measures the output in terms of real GDP per L given K per L, and shows that we have diminishing returns. Technological change gets us around diminishing returns. Here technological change is exogenous to the economy.
What is creative destruction?
A newer industry destroys an older one, in fairly rapid time, not incrementally. The entrepreneur helps to see this through. Schumpeter is the economist who developed this theory.
What is the AD-AS model?
It is a model of the long and short run scenario of the economy. It has three curves: AD, SRAS, LRAS.
Why does the AD curve slope downwards?
It tells the relationship between price levels and real GDP. It is made up of C, I, G and NX. But we look at C, I and NX to explain why it is downwards sloping.
Whyis the AD curve downward sloping?
The Wealth Effect, the Interest Rate Effect, and the international-trade effect.
Why doesn't the catch up model always work?
It doesn't always predict correctly because of rule of law, wars, education and health, and saving and investment.
What causes the AD curve to shift?
Changes in foreign income, foreign exchange rates, household and firm expectations, and fiscal and monetary policy.
What is the SRAS curve upward sloping?
Because prices are slow to adjust to changes in price levels and because prices of final goods and services sometimes rise faster than inputs prices.
What are input prices slow to adjust?
1. Wages are sticky, 2. Firms are slow to adjust wages, and 3. Menus are sticky.
What is the LRAS curve?
It shows where the economy is in the long run. It has three important attributes: it is not affected by prices levels, it is considered where our potential GDP is, and it is where the UE rate is equal to the frictional UE + structural UE.
In both the static and dynamic ADAS models, how do you determine there is cyclical unemployment?
The short run equilibrium is below the LRAS curve.
What are the two assumptions underlying the static ADAS model?
Has no continuing inflation, and has no long run growth.
What knowledge do we gain from the static ADAS model?
They highlight how this graph models economic problems of a recession, inflation and stagflation.
What are the three assumptions underlying the dynamic ADAS model?
Potential GDP continually shifts right, during most years AD shifts right, and except in years of expected high inflation SRAS shifts right.
What is a normal cause of inflation?
Total expenditures are greater than total production, so the AD curves shifts right more than the SRAS curve.
GDP real growth rate
SUM Pi base year Qi current year
SUM pi current year QI current year
Price level change using GDP deflation=
100*(GDP deflator year 2-GDP deflator year 1/GDP deflator year 1)
Uemployment rate formula=
(#labor force/ #working age pop) *100
Employment population ratio formula
(Employed/ WA population) *100
(Sum P current Q base/ Sum P base Q base) *100
Price level changed using CPI=
(CPI 2-CPI 1/ CPI 1) *100
Real interest rate formula
= nominal interest rate- inflation rate
Growth rate between years
(GDP 2- GDP 1/ GDP 1)*100
Average over a few years interest rate
(Growth rate 1+ growth rate 2+ growth rate 3)/ 3
Rule of 70:
70/rate= # years to double
Converting money to new year:
Price "year x"=Price year "Y"*(CPI "year x"/CPI "year y"
Graph Lonable funds market:
Graph Business cycle:
Graph per work production function:
Graph Catch up model
Graph LRAS,SRAS, AD
divided into services, consumer nondurables, and actual rental payments on apartments and houses
Gross private investment
Gross private investment?
Business fixed investment, residential investment(new house), changes in business inventories
Federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on.
net exports (exports-imports)
exports minus imports
3 things that occur at LRAS:
potential GDP, national rate of UE, not affected by price level
Static model has?
no long-run growth or long-run inflation
dynamic model has?
When do you have long-run equilibrium?
When all 3 curves come together AD,SRAS, LRAS
GDP stands for
Gross Domestic Product and it means total value of all the goods and services produced in a nation.
A normal base year for CPI is?
T>G+TR is a
T<G+TR is a
A business cycle is viewed as what in terms of length?
What happens at the end of a peak in the business cycle?
end of expansion
What happens at the end of a trough in the business cycle?
end of a recession
A public good is considered?
non-rival and non-exclusive
GDP is what for a final goods?
Nominal GDP vs. Real GDP
Nominal GDP = Qproduced in Year2 x Price in Year 2
Real GDP = Q produced in Year 2 x Price in Year 1
(Real GDP accounts for inflation)
A discouraged worker does what to the unemployment rate?
Aggregate demand curve?
a curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government
Aggregate demand and aggregate supply model?
a model that explains short-run fluctuations in real GDP and the price level
changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives
Long-run aggregate supply curve?
a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied
the costs to firms of changing prices
The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
Short-run aggregate supply curve?
a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
A combination of inflation and recession, usually resulting from a supply shock.
An unexpected event that causes the short-run aggregate supply curve to shift
Alternating periods of economic expansion and economic recession
the ability of an economy to produce increasing quantities of goods and services
the period of a business cycle during which total production and total employment are increasing
Final good or service?
a good or service produced by a final user
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
the percentage increase in the price level from one year to the next
Intermediate good or service?
a good or service that is an input into another good or service, such as a tire on a truck
spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses
the value of final goods and services evaluated at current-year prices
a measure of the average prices of goods and services in the economy
the value of final goods and services evaluated as base-year prices
the period of a business cycle during which total production and total employment are decreasing
payments by the government to households for which the government does not receive a new good or service in return
buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
the market value a firm adds to a product
Consumer price index (CPI)?
A measure of the average prices a typical urban family of four pays for the goods and services
people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them
an above-market wage that a firm pays to increase workers' productivity
in government statistics, someone who currently has a job or who is temporarily away from his or her job
the percentage of the working-age population in the labor force
the sum of employed and unemployed workers in the economy
Labor force participation rate?
the percentage of the working-age population in the labor force
natural rate of unemployment?
the normal rate of unemployment, consisting of frictional unemployment and structural unemployment
Nominal interest rate?
the stated interest rate on a loan
Real interest rate?
the nominal interest rate minus the inflation rate
in the government statistics, someone who is not currently at work but who is available for work and who has actively looked for work during the previous month
the percentage of the labor force that is unemployed
manufactured goods used to make other goods and services
a decline in private expenditures as a result of an increase in government purchases
the quantity of goods and services that can be produced by one worker or by one hour of work
Long-run economic growth?
the process by which rising productivity increases the average standard of living
Market for loanable funds?
the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
the level of real GDP attained when all firms are producing at capacity
the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries
Economic growth model?
a model that explains growth rates in real GDP per capita over the long run
the accumulated knowledge and skills that workers acquire from education and training or from their life experiences
the application of mechanical power to the production of goods, beginning in England around 1750
New growth theory?
A model of long-run economic growth which emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.
the exclusive right to produce a product for a period of 20 years from the date the patent is application is filed with the government
Per-worker production function?
the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
Rule of law?
the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts
a change in the quantity of output a firm can produce using a given quantity of inputs
Suppose in 2018, you purchase a house built in 2003. Which of the following would be included in the gross domestic product for 2018?
the value of the services of the real estate agent
Which of the following transactions represents the purchase of a final good?
Your father buys a new John Deere riding lawn mower.
Gross domestic product understates the total production of final goods and services because of the omission of
Which of the following statements is true? When talking about GDP:
GDP accounting rules do not adjust for production that pollutes the economy.
Real GDP is GDP in a given year:
valued in the prices of the base year
Real GDP will increase:
only if the quantity of final goods and services produced rises.
The output of U.S. citizens who work in Canada would be included in the
gross domestic product of Canada.
The Bureau of Labor Statistics would categorize a person as ________ if they were temporarily away from their job because they were ill.
Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are not in the labor force. Calculate the unemployment rate.
If cyclical unemployment is eliminated in the economy, then
the economy is considered to be at full employment
If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would
Which of the following price indices comes closest to measuring the cost of living of the typical household?
consumer price index
What is outlet bias?
the tendency for households to spend their money at discount stores as prices rise
If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?
If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2018, we would say that in 2018, the average American could buy ________ times as many goods and services as the average American in 1950.
The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of loanable funds demanded.
negative; greater; greater
What good would be dramatically reduced during a recession?
When an economy faces diminishing returns:
the slope of the per-worker production function becomes flatter as capital per hour worked increases.
Is there technological change when there is movement along a single production function curve?
no, just means there was a change in price level. If there is a change in technological change, it would create a new production function curve
What does each production function curve face?
According to Joseph Schumpeter, which of the factors of production is central to economic growth?
Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. Based on the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries?
The growth rate of real GDP per capita will be higher in Alpha than it is in Beta
If property rights are not enforced in a country, then
entrepreneurs are unlikely to risk their own funds investing in such an economy.
Because of the slope of the aggregate demand curve, we can say that
a decrease in the price level leads to a higher level of real GDP demanded.
The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off
investment and consumption spending.
Potential GDP refers to the level of
real GDP in the long run
The long-run aggregate supply curve will shift to the right if
the economy experiences technological change.
If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?
It is a vertical line at $4.2 trillion of GDP
The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do the short-run supply curve?
It shifted the short-run aggregate supply curve to the right.
A decrease in the price level will
move the economy down along a stationary short-run aggregate supply curve.
Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
Short-run aggregate supply will shift to the right.
Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?
Aggregate demand and potential real GDP decrease continuously.
Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?
SRAS and AD do not shift.
New GDP equation:
(1+i)^n (n=being number of year)
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