Exam 2

Question 1

Definition of GDP

Answer 1

the market value of all final goods and services produced within a country in a given period of time

Question 2

Y = C + I + G + NX What do the components stand for?

Answer 2

Y= GDP C= Consumption I= Investments G= Government NX= Net Exports

Question 3

Expenditure vs income approach

Answer 3

-Expenditure approach adds up all the domestic expenditures made on final goods and services in a single year -Income approach dd up all the income earned by households and firms in a single year

Question 4

Calculating nominal and real GDP as well as GDP deflator.

Answer 4

• Nominal involves a direct calculation of price x quantity
• Real uses a base year. Using the price from the base year you multiply each years quantity with the base year price.
• GDP deflator is nominal/real * 100

Question 5

Shortcomings of GDP as a measure of social well being

Answer 5

Does not include the following key components

• Overall health of the citizens
• Education of the citizens
• Happiness of current lifestyle

Question 6

Ideas correlated to higher real GDP per person

Answer 6

Countries with higher GDP tend to have

• Higher life expectancy
• Higher education

Question 7

Deifintion of CPI

Answer 7

a measure of the overall cost of the goods and services bought by a typical consumer

Question 8

Shortcomings of CPI

Answer 8

• substitution bias: CPI ignores the possibility of consumers substituting goods as prices rise for another good.
• introduction of new goods: CPI does not include how as new goods are introduced, the value of the dolar increases as there are more options.
• unmeasured quality change: Changes in the quality of a good are not measured thoroughly.

Question 9

Differences between CPI and GDP deflator.

Answer 9

• GDP deflator measures only domestically produced services and goods whereas CPI measures all goods and services bought by consumers.
• The basket of goods does not change frequently enough whereas the GDP accounts for new products annually.

Question 10

Nominal vs Real variables

Answer 10

Nominal: Variables measured in monetary units.

Ex: The CD cost $10

Real: Variables measured in physical units

Ex: A year of college costs as much as a new Camry.

Question 11

Define Economic Growth

Answer 11

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another

Question 12

Why is economic growth a desirable goal?

Answer 12

It is desirable goal for the prosperity of a nation as a whole. Future generations rely on the growth of an economy from on period to another.

Question 13

Factors of economic growth

Answer 13

• Natural resources within a nation. Leads to a lesser need for importing.
• Human capital: Education, skills, and value individuals bring to the economy.
• Investment in capital goods
• Role of entrepreneurship

Question 14

Define Catch Up Effect

Answer 14

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Question 15

Policies to encourage growth

Answer 15

• Fiscal policy to increase rate of AD
• Technology policy to increase innovation
• Providing incentives to start new businesses
• Monetary policy such as raising/lowering interest rates

Question 16

Explain crowding out

Answer 16

As the government deficit increases they must borrow money which leads to less money being available for non government lenders. This leads to a crowding out of available loan money for individual borrowers.

As government deficit increases -> available loan amounts decrease and interest rates rise