BECKER ECO PART 1

Question 1

GDP

Answer 1

With borders of a nation which includes the output of foreign-owned factories in the US but excludes the output of US-owned factories operating abroad

Question 2

Nominal GDP

Answer 2

Not adjusted for inflation, measures the value of all final goods and services in CURRENT prices

Question 3

Real GDP

Answer 3

Inflation; measures the value of all final goods and services in CONSTANT prices. That is, real GDP is adjusted to account for changes in the price level.

Question 4

Real GDP formula

Answer 4

Real GDP = Nominal GDP / GDP Deflator * 100

Question 5

Change in real GDP

Answer 5

Change in real GDP = Current year real GDP / Past year real GDP - 1

Question 6

Real GDP per capita

Answer 6

Equals real GDP divided by population of the country. It is typically used to compare standards of living across countries or across time. It is also used to measure Economic Growth which is the increase in real GDP per capita over time.

Question 7

Business cycles typically comprise

Answer 7

Expansionary Phase, Peak, Contractionary Phase, Trough and Recovery Phase.

Question 8

Features of Expansionary Phase

Answer 8

GDP increase, profits increase, unemployment decrease and price increase

Question 9

Features of Peak

Answer 9

A high point of economic activity which marks the end of an EP and the beginning of a CP. At the peak of a business cycle, firms’ profits are likely to be at their highest levels. Firms also are likely to face capacity constraints and input shortages (raw materials and labor).

Question 10

Features of Contractionary Phase

Answer 10

GDP decrease, profits decrease and unemployment increase

Question 11

Features of Trough

Answer 11

A low point of economic activity. At this point of the business cycle, firms’ profits are likely to be at their lowest levels which are likely to experience significant excess production capacity, leading them to reduce their workforces and cut costs.

Question 12

Features of Recovery Phase

Answer 12

Return to its long-term growth trend.

Question 13

Recession

Answer 13

A recession occurs when the economy experiences negative real economic growth. It is a contractionary phase: GDP decrease, profits decrease and unemployment increase. Economists define a recession as TWO consecutive quarters of falling national output.

Question 14

Depression

Answer 14

Very severe recession

Question 15

Economic Indicators

Answer 15

Gathered by the Conference Board which are statistics that historically have been highly correlated with economic activity. Three types: Leading Indicators, Lagging Indicators and Coincident Indicators.

Question 16

Leading Indicators

Answer 16

Tend to predict economic activity.

Question 17

Lagging Indicators

Answer 17

Tend to follow economic activity which is to confirm or dispute previous forecasts and the effectiveness of policy directives.

Question 18

Coincident Indicators

Answer 18

Approximately the same time as the whole economy, thereby providing information about the current state of the economy.

Question 19

Reasons for fluctuations

Answer 19

Economists generally agree that business cycles result from shifts in aggregate demand and/or shifts in aggregate supply. AD and AS can be used to illustrate the relationship between a country’s output that is X-axis (real GDP) and price level that is Y-axis (the GDP deflator).

Question 20

Aggregate Demand Curve

Answer 20

Downward sloping, price increase and QD decrease. Households, firms and the governments are willing and able to purchase at any given price level. Note that this “aggregate” demand curve is the macroeconomic demand curve of the “total” demand in the economy as a whole.

Question 21

Aggregate Supply Curve

Answer 21

Short-term AS curve: Upward sloping, Price increase and QS increase; Long-run AS curve: Vertical, if all resources are fully utilized, output is determined solely by the factors of production, the availability of the product not the price. This curve corresponds to the potential level of output in the economy.

Question 22

Potential level of output (potential GDP)

Answer 22

Potential GDP refers to the level if real GDP (national output) that the economy would produce if its resources (capital ad labor) were fully employed. When real GDP is BELOW the potential level of output, the economy will typically be experiencing a recession. Similarly, when real GDP rises ABOVE the potential level of output, the economy typically will be experiencing an expansion.

Question 23

What does Y mean when the Long-run aggreagate supply vertical

Answer 23

Y* = GDP at the potential (equilibrium) level of output.

Question 24

Reduction in Demand

Answer 24

If circumstances cause individuals, businesses, or governments to reduce their demand for goods and services, then GDP fall, profits fall, unemployment rise and prices fall. EA will decline, leading to a contraction in EA and possibly a recession. Firms also are likely to experience an increase in excess capacity, leading them to reduce their workforce.

Question 25

Increase in Demand

Answer 25

If circumstances cause individuals, businesses, or governments to increase their demand for goods and services, then GDP rise, profits rise, unemployment fall and prices rise. Economic activity will rise, leading to a recovery or an expansion in EA. Firms also are likely to experience an increase in excess capacity, leading them to increase their workforce.

Question 26

Reduction of Supply

Answer 26

If circumstances cause firms to reduce their demand for goods and services, then GDP fall, profits fall, unemployment rise and prices rise. EA will fall, leading to a contraction or possibly a recession. As firms reduce their supply, Firms also are likely to reduce their workforce, leading to higher unemployment.

Question 27

Increase in Supply

Answer 27

If circumstances cause firms to increase their demand for goods and services, then GDP rise, profits rise, unemployment fall and prices fall. EA will rise, leading to an expansionary phrase of EA. As firms increase their supply, Firms also are likely to increase their workforce, leading to lower unemployment.

Question 28

A recession caused by a shift to left in the AD curve (Graphic C)

Answer 28

A decrease in AD causes actual GDP to fall below potential GDP. This is illustrated as the leftward shift in AG. As a result, real GDP falls from Y0 to Y1.

Question 29

A recession caused by a shift to left in the AS curve (Graphic D)

Answer 29

A decrease in short-run AS causes actual GDP to fall below potential GDP. This is illustrated as the leftward shift in the short-run AS. As a result, real GDP falls from Y0 to Y1.

Question 30

The primary factors that shift AD

Answer 30

TWICE Government: Taxes, Wealth, Interest Rates, Consumer Confidence, Exchange rates and Government spending.

Question 31

Changes in Wealth

Answer 31

Increase in Wealth ( + ): AD rise, GDP rise, Unemployment fall and Prices rise. Thus an increase in wealth causes the economy to expand and leads to an increase in national output (real GDP). Decrease in Wealth ( - ): AD fall, GDP fall, Unemployment rise and Prices fall.

Question 32

Changes in Real Interest Rates

Answer 32

Increase in Real Interest Rates ( + ) will result a “save more & borrow less”: AD fall, GDP fall, Unemployment rise and Prices fall. Decrease in Real Interest Rates ( - ) will lead to “save less & borrow more”: AD rise. GDP rise, Unemployment fall and Prices rise.

Question 33

Changes in Expectations about the Future Economic Outlook

Answer 33

Confident Economic Outlook ( + ): AD rise, GDP rise, Unemployment fall and Prices rise. Uncertain Economic Outlook ( - ): AD fall, GDP fall, Unemployment rise and Prices fall.

Question 34

Changes in Exchange Rates

Answer 34

Appreciated Currencies ( - ) which means “Strong - $ more expensive relative to foreign currencies”: AD fall, GDP fall, Unemployment rise and Prices fall. Depreciated Currencies ( + ) which means “Weak - $ less expensive relative to foreign currencies”: AD rise, GDP rise, Unemployment fall and Prices rise.

Question 35

Changes in Government Spending (Fiscal policy)

Answer 35

Increase in Government Spending ( + ): AD rise, GDP rise, Unemployment fall and Prices rise. Decrease in Government Spending ( - ): AD fall, GDP fall, Unemployment rise and Prices fall.

Question 36

Changes in Consumer Taxes (Fiscal policy)

Answer 36

Increase in Consumer Taxes ( - ): AD fall, GDP fall, Unemployment rise and Prices fall. Decrease in Consumer Taxes ( + ): AD rise, GDP rise, Unemployment fall and Prices rise.

Question 37

Appreciated Currencies

Answer 37

If the currency of a country appreciates in real terms relative t the currencies of its trading partners, its goods will become relatively more expensive for foreigners, while foreign goods will become relatively less expensive for its residents.

Question 38

Multiplier Effect

Answer 38

The multiplier effect refers to the factor that an increase in consumer, firm, or government spending produces a multiplied increase in the level of economic activity. The multiplier effect results from the marginal propensity to consume (MPC). Because people tend to save part of their income, the MPC is typically less than one.

Question 39

Multiplier formula

Answer 39

Multiplier = 1 / (1-MPC) = 1 / MPS; MPS is the marginal propensity to save.

Question 40

Change in real GDP formula

Answer 40

Change in real GDP formula = Multiplier = Change in spending

Question 41

Expansionary Fiscal Policy

Answer 41

An increase in government spending and/or a decrease in taxes.

Question 42

Factors that shift short-run Aggregate Supply

Answer 42

Change in Input (Resource) Prices and Supply Shocks.

Question 43

Changes in Input (Resources) Prices

Answer 43

Increase in Input Prices ( - ): AS fall, GDP fall, Unemployment rise and Prices rise. Decrease in Input Prices ( + ): AS rise, GDP rise, Unemployment fall and Prices fall.

Question 44

Supply Shocks

Answer 44

Supplies Are Plentiful ( + ): AS rise, GDP rise, Unemployment fall and Prices fall. Supplies Are Curtailed ( - ): AS fall, GDP fall, Unemployment rise and Prices rise.

Question 45

Expansionary Fiscal Policy

Answer 45

Goal: push economy back to LR potential output. In graph E, page B5-11.

Question 46

Contractionary Fiscal Policy

Answer 46

Economy “overheated” inflation. In Graph F, page B5-11.