Final Review

Question 1

When do inflation and output growth move in the same direction?

Answer 1

When AD shifts

Question 2

When do inflation and output growth move in opposite directions?

Answer 2

When AS shifts

Question 3

How cyclical are durable goods?

Answer 3

Very cyclical

Question 4

How cyclical are non-durable goods?

Answer 4

Slightly cyclical

Question 5

How cyclical are services?

Answer 5

Not cyclical (not very cyclical)

Question 6

How cyclical are luxury goods?

Answer 6

Very cyclical

Question 7

What is the Phillips curve?

Answer 7

Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy is correlated with a higher rate of inflation.
While there is a short run tradeoff between unemployment and inflation, it has not been observed in the long run.[1] Accordingly, the Phillips curve is now seen as too simplistic, with the unemployment rate supplanted by more accurate predictors of inflation based on velocity of money supply measures such as the MZM (“money zero maturity”) velocity,[2] which is affected by unemployment in the short but not the long term.

Question 8

Taylor’s Rule?

Answer 8

i= r* + pi + 0.5 (pi-pi) + 0.5 ( y-y).

Where:
i = nominal fed funds rate 
r* = real federal funds rate (usually 2%)
pi = rate of inflation
p* = target inflation rate 
Y = logarithm of real output 
y* = logarithm of potential output

Question 9

GDP Deflator

Answer 9

GDP Deflation = (Nominal / Real)*100

Question 10

Real GDP

Answer 10

Real GDP = Q of Current * P of Base Year

Question 11

Nominal GDP

Answer 11

P current year * Q current year

Question 12

CPI

Answer 12

.CPI = (quantities held constant * price) / (base price * base quantities)

Question 13

Calculating Inflation Rates

Answer 13

ln(nominal / base)) / (t nominal - t base)

Question 14

Real Exchange Rate

Answer 14

RER = eP* / P

Question 15

Primary Deficit and Debt Dynamics

Answer 15

Deficit = Gov. Spending - Taxes Collected + (1 + interest rate on debt per period)*(Gov. debt of the previous period)

Question 16

Can country run a deficit forever?

Answer 16

The present value of future primary surpluses has to equal the current debt. Thus past deficits must be balanced by future surpluses – you can’t run a primary deficit forever. The key word is primary: you can run a primary surplus and an overall deficit at the same time.

Question 17

Taxes, better to spread out or target a specific demographic?

Answer 17

Taxes create economic inefficiency through the loss of consumer and producer surplus. Optimal taxation minimizes dead weight loss. The rate of loss grows faster than the rate of tax collected, taxes spread among a population reduces DWL.

Question 18

When a country has high one time costs, should they place a high tax for a short period or spread the cost over time?

Answer 18

Over time. Less DWL. The caveat is that deficits must eventually be offset by future primary surpluses or debt would rise unsustainably.

Question 19

Where did the first sustained GDP per capita appear?

Answer 19

United Kingdom, then Western Europe, then the USA.

Question 20

Production Function.

Answer 20

Y = AK^(a) * L ^ (1-a)

Where alpha represents is the proportion paid out to capital inputs and the remainder is paid out to labor.

A represents total factor productivity. It is the “leave behind” that normalizes for technology, infustructure, etc.

Question 21

GDP: name 3 , methods for calculating it.

Answer 21

Expenditure approach:

Y = G + I + NX + C

Gov. Spending
Net Exports
Consumption
Investment

Income approach: add up everyone’s income

Production Approach: add up value added throughout the market.

Question 22

What do we know about savings rate and investment?

Answer 22

Savings = Investment

savings rate * y = depreciation rate * capital

y = (Y / L) and k = (K / L)

Question 23

GNP

Answer 23

Gross National Production, the sum of all products produced domestically and those produced abroad by the citizens of the nation in question.