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Econ 102 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Positive statement

A

Describes what is happening, explaining why what will happen

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2
Q

Normative statement

A

What should happen which involves value judgment

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3
Q

3 ways to calculate GDP

A

Total spending, total income, market value of all goodsa and services

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4
Q

Define GDP

A

Market value of all final goods and services produced within a country in a year

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5
Q

Market value

A

Everything produced is summed in the unit of a dollar

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6
Q

If a Japanese company has hq in the US does it count as US GDP?

A

yes

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7
Q

Nominal GDP

A

GDP measured in current prices

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8
Q

Real GDP

A

GDP measured in baseline prices

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9
Q

GDP deflator formula

A

(Nominal GDP/real GDP)*100

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10
Q

Total ouput GDP formula

A

Total Output= Consumption+Investment+Government Spending+ Net Exports

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11
Q

Define Consumption

A

Final goods and service, rent does count, also durable (long-lasting goods)

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12
Q

Define Investment

A

Spending on new capital assets that increase the economy’s productive capacity

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13
Q

Define Government purchases

A

The government buys goods and services, transfer payments don’t count

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14
Q

Define value-added

A

The amount by which your company increases the value of an item

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15
Q

Deine total sales

A

Cost of intermediate goods and services

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16
Q

Total income formula of GDP

A

total wages + total profits

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17
Q

Define labor share

A

share of total income that goes to workers as wages, salaries, and benefits

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18
Q

Define capital share

A

Share of income that goes to owners of capital

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19
Q

GDP Limitations

A

Prices are not values, Nonmarket activities are excluded, Shadow economy is missing, environmental degradation isn’t counted

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20
Q

Are stocks and bonds included in GDP?

A

No

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21
Q

What does a production function describe?

A

The methods by which inputs are transformed into outputs

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22
Q

Production function

A

Y= f(L,H,K)

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23
Q

When will a country produce more output?

A

If…

  • it employs more labor
  • workers become highly skilled
  • accumulates more physical capital
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24
Q

Define labor productivity

A

Output per hour

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25
Q

Define Capital stock

A

the amount of physical capital

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26
Q

Constant returns to scale

A

If the production function increases all inputs by some proportion the output will rise by some proportion

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27
Q

Define Law of diminishing returns

A

When one input is held constant, increases in all the other inputs at some point will yield smaller and smaller increases in outputs

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28
Q

Catch-up growth

A

Rapid growth that occurs when a relatively poor country invests in capital

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29
Q

What happens when depreciation is equal to investment?

A

Capital stock stops growing

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30
Q

Define the rule of 70

A

How many years it takes for something to double

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31
Q

The rule of 70 formula

A

70/avg% growth rate

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32
Q

Define depreciation

A

Amount of capital that wears out each period

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33
Q

When does capital grow?

A

Capital grows when saving is higher than depreciation

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34
Q

Define cutting-edge growth

A

Advancements in technology, US growth

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35
Q

Define steady state

A

When capital does not grow

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36
Q

Define working-age population

A

Those 16 or older who are not in the military or institutionalized

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37
Q

Define Employed

A

People in the working-age population who are employed

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38
Q

Define unemployed

A

People in the working-age population without jobs who are trying to get jobs

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39
Q

Labor force formula

A

Labor force= Employed +Unemployed

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40
Q

Define labor force participation rate

A

the percentage of the working-age population that is either employed or unemployed

41
Q

Labor force participation rate formula

A

((Employed + Unemployed)/ working-age population)*100

42
Q

Define the unemployment rate

A

The percentage of the labor force that is unemployed

43
Q

Employment rate formula

A

(Unemployed/labor force)*100

44
Q

Define the equilibrium unemployment rate

A

the long-run employment rate to which the economy tends to return to

45
Q

What does it mean if someone is marginally attached to the labor force?

A

Aren’t currently searching for a job but have searched in the last year (not counted as unemployed or in the labor force)

46
Q

Define discouraged workers

A

Don’t believe there is a job for them in the labor force

47
Q

Define Underemployed

A

Those who want a full-time job but aren’t getting full-time hours, or job isn’t adequately using their skills

48
Q

Define frictional unemployment

A

Occurs because it takes time for workers to find jobs and employer to find workers.

49
Q

Define structural unemployment

A

Occurs when there are structural barriers that prevent wages from falling to the point where labor demand and labor supply are in equilibrium

50
Q

Define cyclical unemployment

A

Occurs when there is a temporary downturn in the economy

51
Q

What happens when the government financially supports those who are unemployed

A

Unemployment is likely to last longer

52
Q

Define prevailing wage

A

Wage that exists above the equilibrium wage

53
Q

Define Efficiency wage

A

A wage above the market wage that is paid to encourage greater work productivity

54
Q

Causes of structural unemployment

A
  • Unions
  • Job protections regulations
  • Minimum wage laws
55
Q

Define Hysteresis

A

high unemployment leads to a higher equilibrium unemployment rate

56
Q

What are the social costs of unemployment?

A
  • It’s disruptive
  • Long-term is associated w/ worse outcomes
  • Children whose parents experience unemployment suffer
  • Government receives lower tax rates
57
Q

Define Inflation

A

Generalized rise in the overall level of prices, rise in the cost of living, a decline in the purchasing power of money

58
Q

Define the consumer price index (CPI)

A

Measure of the average prices people pay overtime for the goods and services they buy in their everyday lives

59
Q

Define inflation rate

A

the percentage change in the price of a fixed basket of goods, annual percentage increase in the average price level

60
Q

Inflation rate formula

A

((Price level this year - price level last year)/price level last year)*100

61
Q

Define relative price adjustment

A

Price of an individual good rises or falls relative to other prices as demand and supply ebbs and flows

62
Q

Challenges of measuring the true cost of living

A
  • tracks the changing price of a fixed basket
  • CPI overstates changes in the cost of living
    • Quality improvements, New products make you better off, substitution bias
63
Q

Define chained CPI

A

An inflation measure that is designed to update the basket of goods each month to correct for substitution bias

64
Q

Formula for the value of today’s dollars

A

Another time’s dollars* (Price level today/ Price level in another time)

65
Q

Formula to determine real value in dollars

A

Nominal value in year t dollars* (price level in base year/Price level in year t)

66
Q

What does nominal interest rate measure?

A

The return in dollars– stated interest rate w/o being corrected for inflation

67
Q

What does real interest rate measure?

A

What you can buy with those dollars, adjusted for inflation

68
Q

Real interest rate formula

A

Nominal interest rate - inflation

69
Q

Define money illusion

A

The mistaken tendency to focus on nominal dollar amounts– can lead you to be fooled by inflation

70
Q

Define nominal wage rigidity

A

Employers try to get by w/o ever cutting wages

71
Q

Define money

A

an asset that is regularly used in transactions

  • medium of exchange
  • unit of account
  • store of value
72
Q

Define hyperinflation and give an example

A

extremely high inflation (Venezuela)

73
Q

How does inflation redistribute?

A

When inflation is lower lenders gain at the expense of borrowers and vice versa

74
Q

Define inflation fallacy

A

Mistaken belief that inflation destroys purchasing power

75
Q

Define Personal consumption expenditure deflator

A
  • Basket items you do not pay for directly, medical care paid by government or employer
  • Used by federal reserve to measure inflation
76
Q

Define Production Price Index

A
  • Measure sthe price of inputs in the production process

- Used by businesses

77
Q

Define Core inflation

A

The basket excludes energy and food

78
Q

Define menu costs for sellers

A
  • The cost of adjusting your prices

Example: printing new menus at a restaurant

79
Q

Define shoe leather costs for buyers

A
  • Time and effort occurred because you do not wan tot hold cash
    Example: Visit your bank often or spend money before it loses its value
80
Q

Costs of Unexpected inflation

A
  • Inflation confuses the signal that price sends

- Inflation redistributes

81
Q

Define consumption

A

Household spending on final goods and services

82
Q

Define the Marginal Propensity to Consume (MPC)

A

fraction of each extra dollar of income that households spend on consumption

83
Q

Formula for saving

A

saving= Income - consumption

84
Q

Define dissaving

A

when consumption exceeds income

85
Q

Define net wealth

A

Stock of wealth, the amount by which your assets exceed debt

86
Q

Define Interdependence principle

A

The choices available to you in the future depend on the choices you make today

87
Q

Define consumption smoothing

A

reallocating your spending

88
Q

Define permanent income

A

best estimate of your long-term average income

89
Q

Define permanent income hypothesis

A

people choose how to consume based on their permanent income

90
Q

MPC temporary formula

A

Change in consumption/temporary change in income

91
Q

MPC permanent formula

A

Change in consumption/permanent change in income

92
Q

define hand-to-mouth consumers

A

live paycheck to paycheck

93
Q

Define disposable income

A

income after taxes

94
Q

When do you move along the consumption function

A

A change in income

95
Q

Slope of a consumption function

A

Change in consumption/change in income

96
Q

The rational rule for consumers

A

when deciding how much to consume today, will need to compare the marginal benefit of consuming more today versus tomorrow

97
Q

Credit constraint

A

people can’t borrow

98
Q

Why do people save?

A
  • Income and needs change over life cycle
  • Bequest
  • Precautionary saving

Econ 102 (3 decks)

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