Exam 1

Question 1

GDP

Answer 1

Gross Domestic Product, the dollar value of final output produced during a given period within the country’s borders

Question 2

GNP

Answer 2

Gross National Product, dollar value of final output produced during a given period by domestic factors of production (not necessarily inside the country’s borders)
GNP = GDP + NFP

Question 3

Value-added approach (or the product approach)

Answer 3

GDP is calculated as a sum of value added to goods and services in production across all production units in the economy

Question 4

Income approach to GDP

Answer 4

sum of all incomes received by economic agents contributing to production

Question 5

Expenditure approach

Answer 5

GDP = C + I + G + X - M or total spending on all final goods and services produced in the economy

Question 6

best way to measure a country’s well being

Answer 6

real GDP/capita (across time or across country comparison)

Question 7

Nominal GDP

Answer 7

current year quantities x current year prices

Question 8

Real GDP

Answer 8

current year quantities x base year prices

Question 9

What does GDP leave out?

Answer 9

1. leaves out non-market activity and underground activity
   - -home production
   - -tax evasion motives
   - -crime and illegal activities
2. doesn’t accurately measure the value of goods and services produced by the government

Question 10

GDP doesn’t explain

Answer 10

1. income inequality
2. what goods are actual consumed by the people of the economy
3. leisure time enjoyed
4. future economic prospects

Question 11

inequality economic benefit

Answer 11

the possibility to earn a lot of money stimulates effort and innovation, encourages investment in human capital (education, etc.)

Question 12

inequality economic costs

Answer 12

due to high inequality, some people are very poor, they may not take full advantage of their skills because they are unable to receive education or have inferior health care, etc.

Question 13

GNP growth rate

Answer 13

g= y/ ((y-1) -1)

measure of the growth rate

Question 14

small x and g calculation

Answer 14

g= ln (GDP year) - ln (GDP year before)

Question 15

two components of an economic time series

Answer 15

growth (or trend) component

business cycle component

Question 16

when are we in a recession

Answer 16

1. when real per capita GDP has been falling for two consecutive quarters
2. GDP below trend line

Question 17

GDP deviations from trend

Answer 17

• -happen on average every 10 years
• -persistent
• -typically stay within 5% from the trend
• -hard to predict

Question 18

time series decomposed into two components

Answer 18

trend

deviations from the trend

Question 19

typical driving forces of recessions

Answer 19

energy price increase
--reduces supply, demand
financial crisis
--investors get cautious, 
--borrowing/lending is inhibited,
--bank runs
policies
--reduced money supply
--higher taxes

Question 20

policies used in recessions

Answer 20

1. combat the driving force if possible
2. temporarily stimulate supply and/or demand
   - -tax cuts
   - -increased gov. spending
   - -monetary easing (higher money supply)

Question 21

74-75 recession

Answer 21

GDP fell 3%, max unemploy 9%
oil prices went up
expanded monetary policy

Question 22

81-82 recession

Answer 22

GDP fell 2.9%, max unemploy 10.8%
monetary contraction
Raegan tax cuts

Question 23

90-91 recession

Answer 23

GDP fell 1.5%, max unemploy 7.8%
monetary contraction
moderate tax increase

Question 24

01 recession

Answer 24

GDP fell .6%, max unemploy 6.5%
stock market crash
expanded monetary policy, tax cuts

Question 25

08 recession

Answer 25

GDP fell 7%, unemploy 8.2% housing crisis, increased energy and raw material prices expanded monetary policy, TARP, tax cuts, higher gov. spending

Question 26

comovement

Answer 26

presence of some regularities in fluctuation of several economic variables cyclical

Question 27

positive correlation

Answer 27

when x increases y is also likely to increase, correlation coefficient between 0 and 1

Question 28

negative correlation

Answer 28

when x is increases y is likely to decrease, correlation coefficient between 0 and -1

Question 29

procyclical

Answer 29

positively correlated

Question 30

countercyclical

Answer 30

negatively correlated

Question 31

acyclical

Answer 31

not correlated

Question 32

GDP and imports

Answer 32

positively correlated | imports are more volatile

Question 33

GDP and comsumption

Answer 33

positively correlated coincides with GDP consumption is less volatile

Question 34

leading variable

Answer 34

x helps to predict GDP

Question 35

lagging variable

Answer 35

GDP helps to predict y

Question 36

coincident

Answer 36

variable neither leads nor lags

Question 37

GDP and investment

Answer 37

positively correlated coincides with GDP much more volatile than GDP

Question 38

GDP and employment

Answer 38

positively correlated lags GDP less volatile

Question 39

GDP and labor productivity

Answer 39

positively correlated coincides with GDP less volatile

Question 40

GDP and gov. espenses

Answer 40

acyclical cannot talk about leading/lagging as volatile as GDP

Question 41

GDP and price level

Answer 41

negatively correlated coincide with GDP less volatile

Question 42

one period model

Answer 42

``` consumption, employment and labor productivity final goods market labor market economic agents --firms --consumers --government ```

Question 43

simplifying assumptions

Answer 43

``` only one consumer-average only one producer-average only one good produced and sold only one way to spend time away from work (leisure) no money in the economy ```

Question 44

utility function

Answer 44

more is preferred to less consumers like diversity consumption and leisure are normal goods substitution > income effect

Question 45

indifference curves

Answer 45

are decreasing do not intersect correspond to higher utility if they are further from the origin are convex

Question 46

endogenous

Answer 46

variable you can choose

Question 47

exogenous

Answer 47

variable you cannot choose parameters

Question 48

consumer's optimal choice

Answer 48

marginal rate of substitution=w or | the slope of the budget line = the slope of the indifferent curve

Question 49

pure positive income effect

Answer 49

budget line shifts upward in a parallel way (because normal good)

Question 50

pure substitution effect

Answer 50

move along indifference curve, maintaining utility, but at a different slope

Question 51

combination of substitution and income effects

Answer 51

shift to higher utility while the budget line moves up or down at a different slope, so not parallel