Lecture 1 - The Closed Economy Keynesian Cross Model

Question 1

National income and product accounts were developed at the end of World War II as measures of…

Answer 1

Aggregate output.

Question 2

The measure of aggregate output is called…

Answer 2

Gross domestic output (GDP).

Question 3

What is GDP?

Answer 3

The value of final goods and services produced in the economy during a given period.

Question 4

What is nominal GDP?

Answer 4

The sum of the quantities of final goods produced times their current price.

Question 5

What are the reasons that nominal GDP increases?

Answer 5

• The production of most goods increases.

- The price of most goods increases.

Question 6

What is real GDP?

Answer 6

The sum of quantities of final goods times constant (not current) prices.

Question 7

GDP is commonly used as a proxy for national economic well being. This is not correct as it does not take into account…

Answer 7

Income inequality, pollution and its effects and non accounted items.

Question 8

What is unemployment?

Answer 8

The number of people who do not have a job but are looking for one.

Question 9

What is the labour force?

Answer 9

The sum of employment and unemployment.

Question 10

What is the unemployment rate?

Answer 10

The ratio of the number of people who are unemployed to the number of people in the labour force.

Question 11

Why do economists care about unemployment?

Answer 11

• Direct effect on the welfare of the unemployed, especially
  those remaining unemployed for long periods of time.
• A signal that the economy is not using its human resources
  efficiently.
• Very low unemployment can also be a problem as the economy runs into labour shortages.

Question 12

What does evidence say about unemployment and happiness?

Answer 12

Results of the German Socio-Economic Panel survey suggest that (1)
becoming unemployed leads to a large decrease in happiness, (2) happiness declines before the actual unemployment spell, and (3) happiness does not fully recover even four years later.

Question 13

What is inflation?

Answer 13

A sustained rise in the general level of prices - the price level.

Question 14

What is the inflation rate?

Answer 14

The rate at which the price level increases.

Question 15

What is deflation?

Answer 15

A sustained decline in the price level (negative inflation rate).

Question 16

Why do economists care about inflation?

Answer 16

• Inflation affects income distribution when not all prices and wages rise proportionally.
• Inflation leads to distortions due to uncertainty.
• Most economists believe the ‘best’ rate of inflation to be a low and stable rate of inflation.

Question 17

In the short run (e.g. a few years), year-to-year

movements in output are primarily driven by…

Answer 17

Movements in demand.

Question 18

In the medium run (e.g. a decade), the economy tends to return to the level of output determined by…

Answer 18

Supply

factors, such as the capital stock, the level of technology, and the size of the labor force.

Question 19

In the long run (e.g. a few decades or more), the economy depends on…

Answer 19

Its ability to innovate and introduce new technologies, and how much people save, the
quality of the county’s education system, the quality of the government, and so on.

Question 20

Explain the goods market referring to interactions among production, income, and demand.

Answer 20

• Changes in the demand for goods lead to changes in production.
• Changes in production lead to changes in income.
• Changes in income lead to changes in the demand for goods.

Question 21

The composition of GDP - consumption (C).

Answer 21

Goods and services purchased by consumers.

Question 22

The composition of GDP - investment or fixed investment (I).

Answer 22

The purchase of capital goods. It is given by the sum of non residential investment and residential investment.

Question 23

The composition of GDP - government spending (G).

Answer 23

Purchases of goods and services by all level of government; excluding government transfers.

Question 24

The composition of GDP - exports (X).

Answer 24

Purchases of domestic goods and services by foreign residents.

Question 25

The composition of GDP - imports (IM).

Answer 25

Purchases of foreign goods and services by domestic residents.

Question 26

The composition of GDP - net exports or trade balance.

Answer 26

Exports minus imports (X-IM).

Question 27

What are savings?

Answer 27

The portion of disposable income that is not consumed.

Question 28

What are endogenous varibales?

Answer 28

Variables depend on other variables in the model.

Question 29

What are exogenous variables?

Answer 29

Variables not explained within the model but are instead taken as given.

Question 30

Macroeconomists always use three tools. What are they and what are they used for?

Answer 30

• Algebra to make sure that the logic is correct.
• Graphs to build the tuition.
• Logic to explain the results.

Question 31

The Lehman Bankruptcy, Fears of Another Great Depression, and Shifts in the Consumption.

Answer 31

When people start worrying about the future, they decide to
save more even if their current income has not changed. News about Lehman Brothers going bankrupt in September
2008 reminded people of the Great Depression, as confirmed by the number of searches for “Great Depression” in Google. Consumption fell even if disposable income had not yet
changed.