ECO 101 midterm

Question 1

What is GDP?

Answer 1

Gross domestic product is the market value of all final goods and services produced within a country in a given time period.

Question 2

What are the three approaches to measuring GDP?

Answer 2

1. The production approach, 2. The expenditure approach, 3. The income approach.

Question 3

What is the GDP formula for a closed economy?

Answer 3

Y = C + I + G.

Question 4

What is the GDP formula for an open economy?

Answer 4

Y = C + I + G + XN (net exports).

Question 5

What is the GDP deflator formula?

Answer 5

GDP Deflator = (Nominal GDP / Real GDP) * 100.

Question 6

What are the issues with measuring GDP?

Answer 6

1. Different units of measurement, 2. Double counting in supply chains, 3. Valuation of public services. 4. Free services not included 5. not reported economic activity
   2.

Question 7

What is the rule of 72?

Answer 7

72 / growth rate = number of years for something to double.

Question 8

What is nominal GDP?

Answer 8

Nominal GDP is the market value of goods and services produced in a given year using that year’s prices.

Question 9

What is real GDP?

Answer 9

Real GDP is the market value of goods and services produced in a given year using base-year prices.

Question 10

What is the formula for calculating GDP growth rate?

Answer 10

Growth Rate = (GDP in current year - GDP in previous year) / GDP in previous year * 100%.

Question 11

What are the key components of GDP?

Answer 11

Consumption (C), Investment (I), Government Spending (G), and Net Exports (XN).

Question 12

What is consumption in GDP?

Answer 12

Consumption is spending by households on goods and services, including education.

Question 13

What is investment in GDP?

Answer 13

Investment is the purchase of capital goods used for future production.

Question 14

What is government spending in GDP?

Answer 14

Government spending measures government expenditure on goods and services.

Question 15

What are net exports?

Answer 15

Net exports (XN) = Exports (X) - Imports (M).

Question 16

What is the difference between GDP deflator and CPI?

Answer 16

GDP deflator includes all goods produced domestically, while CPI measures the price of a fixed basket of consumer goods.

Question 17

What is inflation?

Answer 17

Inflation is the rate at which the prices of goods and services in an economy increase over time.

Question 18

What is the formula for the inflation rate?

Answer 18

Inflation Rate = ((CPI in current year - CPI in previous year) / CPI in previous year) * 100%.

Question 19

What is the CPI formula?

Answer 19

CPI = (Cost of basket in current year / Cost of basket in base year) * 100.

Question 20

What is the unemployment rate formula?

Answer 20

Unemployment Rate = (Unemployed / Labor Force) * 100%.

Question 21

What is the labor force participation rate?

Answer 21

Labor Force Participation Rate = (Labor Force / Working-age Population) * 100%.

Question 22

What are the three types of unemployment?

Answer 22

1. Frictional (job searching), 2. Structural (mismatch of skills), 3. Cyclical (economic downturns).

Question 23

What is Okun’s Law?

Answer 23

It states that for every 1% increase in unemployment, GDP falls by approximately 2%.

Question 24

What is the Solow Growth Model?

Answer 24

A model explaining long-run economic growth through capital accumulation, labor force growth, and technological progress.

Question 25

What is the Cobb-Douglas production function?

Answer 25

Y = A K^θ (e L)^(1-θ), where Y is output, A is technology, K is capital, e is worker skill, and L is labor. expresses the level of production as a function of physical capital and labor.

Question 26

What is the steady state in the Solow model?

Answer 26

The steady state is when capital per worker and output per worker remain constant over time.

Question 27

What are diminishing returns to capital?

Answer 27

As more capital is added, the additional output from each unit of capital decreases.

Question 28

What is total factor productivity (TFP)?

Answer 28

TFP measures efficiency in using capital and labor to produce output and is often linked to technological progress.

Question 29

What is the formula for investment in the Solow model?

Answer 29

I_t = s Y_t, where s is the savings rate and Y_t is output.

Question 30

What is the law of motion for capital?

Answer 30

K_t+1 = (1 - δ)K_t + I_t, where δ is the depreciation rate. he change in the capital stock over time is determined by the difference between new investment and the depreciation of existing capital

Question 31

What are the main determinants of GDP per worker?

Answer 31

Capital per worker (K/L), skills per worker (e), and total factor productivity (A).

Question 32

What is the formula for growth decomposition in the Solow model?

Answer 32

Δlog(Y/L) = Δlog(A) + θ * Δlog(K/L) + (1 - θ) * Δlog(e).

Question 33

What is the impact of a natural disaster in the Solow model?

Answer 33

It destroys capital, reducing output, but the economy eventually returns to its steady state.

Question 34

What is the effect of a pandemic in the Solow model?

Answer 34

A temporary drop in labor reduces output, but long-term recovery depends on investment and capital stock.

Question 35

What is the development ladder?

Answer 35

It describes how countries move to higher steady states by increasing L, s, e, and A.

Question 36

How does an increase in savings (s) affect the economy?

Answer 36

Higher savings lead to more investment and higher long-term output, but lower short-term consumption.

Question 37

How does an increase in technology (A) affect the economy?

Answer 37

It directly increases output and leads to long-term economic growth.

Question 38

What is the growth accounting equation?

Answer 38

Δlog(Y/L) = Δlog(A) + θ * Δlog(K/L) + (1 - θ) * Δlog(e).

Question 39

What are the three waves of development?

Answer 39

1. Lack of capital, 2. Lack of education, 3. Poor institutions.

Question 40

What is misallocation in economic development?

Answer 40

It occurs when resources are not allocated efficiently, reducing overall productivity.

Question 41

What is the difference between growth accounting and development accounting?

Answer 41

Growth accounting examines changes in GDP over time, while development accounting compares GDP across countries.

Question 42

What is the difference between GDP per capita and GDP per worker?

Answer 42

GDP per worker measures productivity, while GDP per capita accounts for the entire population.

Question 43

What is the efficient market hypothesis?

Answer 43

It states that asset prices fully reflect all available information, reflecting their fundamental value, making it impossible to consistently achieve higher returns than the market.

Question 44

What is the J-curve effect?

Answer 44

It describes how currency depreciation initially worsens the trade balance before improving it over time.

Question 45

What is the quantity theory of money?

Answer 45

M * V = P * Y, where M is money supply, V is velocity, P is price level, and Y is output.

Question 46

What is the Fisher Effect?

Answer 46

The Fisher Effect is an economic theory that states that nominal interest rates adjust to reflect expected inflation, meaning when inflation is expected to rise, lenders will also increase nominal interest rates to maintain a stable real interest rate; essentially, the real interest rate remains constant while nominal rates adjust to changes in expected inflation

Question 47

What is the Laffer curve?

Answer 47

It suggests that there is an optimal tax rate that maximizes government revenue.

Question 48

What is moral hazard?

Answer 48

A situation where one party takes excessive risks because they do not bear the full consequences of their actions.

Question 49

What is adverse selection?

Answer 49

A problem where one party in a transaction has more information than the other, leading to inefficient outcomes.