Macro Economics Midterm Flashcards
What are some examples of the economic way of thinking?
- Can you prove there is no person worth a trillion dollars?
- Why would you purchase more Coca-Cola when the price increases?
- How can you explain the relationship between the Super Bowl winner and changes in the stock market?
What are the 3 building blocks in the economic
way of thinking?
- scarcity & choice
- model building
- pitfalls of economic reasoning
What is the economic problem?
• Providing for people’s wants and needs in a world of scarcity.
What is meant by scarcity?
• The condition in which wants are forever greater than the available supply of time, goods, and resources.
What does scarcity force us to do?
• It forces us to make choices.
What are the three categories of resources?
- Land
- Labor
- Capital
What is a land resource?
• Any natural resource provided by nature.
What are resources?
• The basic categories of inputs used to produce goods and services.
What is capital?
The physical plants, machinery, and equipment used to produce other goods. They do not directly satisfy human wants.
What is labor?
• The mental and physical capacity of workers to produce goods and services.
What is financial capital?
• The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital.
What is entrepreneurship?
• Creative labor of individuals that enables them to seek profits by combining resources. Entrepreneurship organizes resources to produce goods and services. Land, Labor, and Capital.
What is economics?
• The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs.
What is macroeconomics?
• The branch of economics that studies decision-making for the economy as a whole.
What is the purpose of an economic model?
• To forecast or predict the results of various changes in variables.
What is the scientific method?
- Problem identification
- Model development
- Testing a theory
Define the scientific method of an economic model.
- Identify the problem.
- Develop a model based on simplified assumptions.
- Test the model and formulate a conclusion.
What is an economic model?
• A simplified description of reality used to understand and predict the relationships between variables.
What conclusion can we make from a scientific, economic model?
• If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected.
What assumption (rule) is always made when testing a model?
ceteris paribus - Latin phrase that translates approximately to “holding other things constant” and is usually rendered in English as “all other things being equal”. In economics and finance, the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.
What is an example of ceteris paribus?
• If the price of new Ford cars decrease, and everything else stays the same, consumers will buy more, but if other variables change, we cannot make a prediction.
What are the two common pitfalls in understanding how the economy works?
- failing to understand the ceteris paribus assumption.
2. confusing association with causation.
What is the difference between association and causation?
• We cannot always assume that when one event follows another, the first caused the second.
What conclusion can we make about the pitfalls in understanding how the economy works?
A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied.
Why do economists forecasts differ?
• Because using the same methodology, economists can agree that event A causes event B, but disagree over the assumption that event A will occur.
Why do some economists disagree?
• The answer lies in understanding the difference between positive and normative economics.
What is positive economics?
• An analysis limited to statements that are verifiable.
What is normative economics?
• An analysis based on value judgement.
economic growth
The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve.
investment
The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services.
law of increasing opportunity costs
The principle that the opportunity cost increases as production of one output expands.
marginal analysis
An examination of the effects of additions to or subtractions from a current situation.
opportunity cost
The best alternative sacrificed for a chosen alternative.
production possibilities curve
A curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology.
What are the three fundamental economic questions?***
- What to produce?
- How to produce?
- For whom to produce?
What are two key concepts in this chapter?
- Opportunity costs
* Marginal analysis
What is opportunity cost?
•The best alternative sacrificed for a chosen alternative.
What opportunity cost am I experiencing now?
•The most money that you could be making if you were somewhere else instead of studying these slides.
Can opportunity cost be something other than money?
•Yes, that most desired activity that you are presently giving up is considered an opportunity cost.
What is marginal analysis?
•An examination of the effects of additions to or subtractions from a current situation.
What is an example of marginal analysis?
•When your benefit of studying these slides exceeds the opportunity cost, you will spend time studying these slides.
What is a production possibilities curve?***
•A curve that shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology.
What is technology?
•The body of knowledge and skills applied to how goods are produced.
What assumptions underlie the production possibilities model?
- Fixed resources
- Fully employed resources
- Technology unchanged
What is the conclusion of the production possibilities curve?***
•Scarcity limits an economy to points on or below its production possibilities curve.
What are efficient points?
•Because all the points along the curve are maximum output levels with given resources and technology, they are called efficient points.
What happens when we move between two efficient points? (Demand and Supply)
•A movement between any two efficient points on the curve means that more of one product is produced only by producing less of the other.
What is the law of increasing opportunity costs?***
•The principle that the opportunity cost increases as production of one output expands.
What is economic growth?
•The ability of an economy to produce greater levels of output, an outward shift of its production possibilities curve.
What makes possible economic growth?
- Research and development of new technologies
* Increase production in excess of worn out capital.
What happens when a country does not invest in new technology?
•Everything else being equal, the country will not grow.
What is investment?***
•The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services.
What is the opportunity cost of investment?***
•The consumer goods that could have been purchased with the money spent for plants and other capital.
What does an increase in investments make possible in the future?
•Economic growth and more goods and services.
What conclusion can we make about investments?
•A nation can accelerate growth by increasing production of capital goods in excess of the capital being worn out.
The opportunity cost of an action is:
A) the value of the best opportunity that must be sacrificed in order to take the action.
B) the total time spent by all parties in carrying out the action.
C) the cost of all alternative actions that could have been taken, added together.
D) the monetary payment the action required.
A
A good or service that is forgone by choosing one alternative over another is called a(n): A) accounting cost. B) explicit cost. C) opportunity cost. D) historical cost.
C
When the opportunity cost of producing carrots increases as more carrots are produced, then:
A) the production possibilities curve becomes positively sloped.
B) resources are equally suited to the production of carrots and to other goods.
C) the law of increasing costs is present.
D) no more carrots will be produced. production possibilities curve is a straight line.
E) the production possibilities curve is a straight line.
C
The opportunity cost of watching television is:
A) all of the alternative programs that appear on other stations.
B) the alternative use of the time foregone by watching the program.
C) zero if it benefits you.
D) zero because there is no money expenditure involved.
B
Which of the following does not illustrate opportunity cost?
A) If I study, I must give up going to the football game.
B) If I buy a computer, I must do without a 35” television.
C More consumer spending now means more spending in the future.
D) If I spend more on clothes, I must spend less on food.
C
In economics, the term marginal refers to:
A) holding everything else constant in the analysis.
B) the satisfaction a consumer receives from a good.
C) the change or difference from a current situation.
D) man-made resources as opposed to natural resources.
C
Any point on the production possibilities curve illustrates:
A) a non-feasible production combination.
B) minimum production combinations.
C) economic growth.
D) maximum production combinations.
D
The production possibilities curve demonstrates the basic economic principle that:
A) market-based economies are more efficient.
B) to produce more of any one thing, assuming full employment, the economy must produce less of something else.
C) to produce more consumption goods this year requires the production of more capital goods this year.
D) supply will determine demand in the economy.
E) the production of more capital goods this year will cause the economy to produce less consumption goods next year.
B
Which of the following is true about the production possibilities curve when a technological progress occurs? The curve:
A) becomes steeper.
B) shifts inwards to the left.
C) does not change.
D) shifts outward to the right.
E) becomes flatter at one end and steeper at the other end.
C
technology
The body of knowledge applied to how goods are produced.
change in demand
An increase or a decrease in the quantity demanded at each possible price. An increase in demand is a rightward shift in the entire demand curve. A decrease in demand is a leftward shift in the entire demand curve.
change in quantity demanded
A movement between points along a stationary demand curve, ceteris paribus.
change in quantity supplied
A movement between points along a stationary supply curve, ceteris paribus.
change in supply
An increase or a decrease in the quantity supplied at each possible price. An increase in supply is a rightward shift in the entire supply curve. A decrease in supply is a leftward shift in the entire supply curve.
complementary good
A good that is jointly consumed with another good. As a result, there is an inverse relationship between a price change for one good and the demand for its “go together” good.
consumer surplus
The value of the difference between the price consumers are willing to pay for a product on the demand curve and the price actually paid for it.
equilibrium***
A market condition that occurs at any price and quantity where the quantity demanded and the quantity supplied are equal.
inferior good***
Any good for which there is an inverse relationship between changes in income and its demand curve.
law of demand***
The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus.
law of supply***
The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus.
deadweight loss
The net loss of consumer and producer surplus for underproduction or overproduction of a product.
demand
A curve or schedule showing the various quantities of a product consumers are willing to purchase at possible prices during a specified period of time, ceteris paribus.
market
Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged.
producer surplus***
The value of the difference between the actual selling price of a product and the price producers are willing to sell it for on the supply curve.
normal good
Any good for which there is a direct relationship between changes in income and its demand curve.
price system
A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices.
shortage
A market condition existing at any price where the quantity supplied is less than the quantity demanded.
substitute good
A good that competes with another good for consumer purchases. As a result, there is a direct relationship between a price change for one good and the demand for its “competitor” good.
supply
A curve or schedule showing the various quantities of a product sellers are willing to produce and offer for sale at possible prices during a specified period of time, ceteris paribus.
What is demand?***
•Demand represents the choice making behavior of buyers
What does “ceteris paribus” mean?***
•All else remains the same
What is the law of demand?***
•There is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus
surplus
A market condition existing at any price where the quantity supplied is greater than the quantity demanded.
What is a demand curve?***
•Depicts the relationship between price and quantity demanded
Why do demand curves have a negative slope?***
•At a higher price buyers will buy fewer units, and at a lower price they will buy more units
When price changes, what happens with the curve and quantity demanded?
•The curve does not shift - there is a change in the quantity demanded.
Change in price causes???
Change in Quantity Demanded.
If a price decreases describe how it effects the S & D graph.***
Downward movement along the demand curve.Increase in quantity demanded.
If a price increases describe how it effects the S & D graph.***
Upward movement along the demand curveDecrease in quantity demanded.
When something changes other than price, what happens?***
•The whole curve shifts,there is a change in demand.
Change in nonprice determinant causes a change in demand or change in quantity demanded?
Change in demand.
If a there is a change in a non price determinant describe how it effects the S & D graph.***
Leftward or rightward shift in the demand curveDecrease or increase in demand
What can cause a demand curve to shift? A change in:
Number of buyers in the market
•Tastes and preferences
•Income•Expectations•Prices of related goods.
What is the conclusion with price and demand?
•Changes in nonprice determinants can produce only a shift in a demand curve and not a movement along the demand curve.
What is a normal good?
•Any good for which there is a direct relationship between changes in income and its demand curve.
What is an inferior good?
•Any good for which there is an inverse relationship between changes in income and its demand curve.
What are substitute goods?
•Goods that compete with one another for consumer purchases.
What happens when the price increases for a good that has a substitute?
•The demand curve for the substitute good increases.
What is a demand schedule?
•Shows the quantities of a good or service that people are willing and able to buy at different prices
What are complementary goods?
•Goods that are jointly consumed with another good.
What happens when the price increases for a good that has a complement?
•The demand curve for the substitute good decreases.
What happens when the price decreases for a good that has a complement?
•The demand curve for the substitute good increases.
What does an inverse relationship between price & quantity mean?
•It means that the two move in opposite directions.
What is supply?
•Supply represents the choice making behavior of sellers.
What is the law of supply?
•There is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus.
Why do supply curves have a positive slope?
•Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity.
When price changes, what happens with S &D and the curve?
•The curve does not shift - there is a change in the quantity Supplied and Demanded.
What is market supply?
•The horizontal summation of all the quantities supplied at various prices that might prevail in the market.
Change inPrice effects?
Change in Quantity Supplied.
When something changes other than price, what happens?
•The whole curve shifts - there is a change in supply.
Change in nonprice determinant causes???
Change in supply.
What can cause a supply curve to shift? A change in:
- Number of sellers in the market
- Technology•Resource prices
- Taxes and subsidies
- Expectations of producers
- Prices of other goods the firm could produce
What is market demand?
•The summation of the individual demand schedules in a market
What happens when the price decreases for a good that has a substitute?
•The demand curve for the substitute good decreases
In economics, the demand for a good refers to the amount of the good people:
A: would like to have if the good were free.
B: are willing to buy at various prices.
C: will buy at alternative income levels.
D: need to achieve a minimum standard of living.
B
Which of the following is true for the law of demand?
A: Sellers increase the quantity of a good available as the price of the good increases.
B: There is an inverse relationship between the price of a good and the quantity of the good demanded.
C: Prices increase as more units of a product are demanded.
D: An increase in price results from false needs.
B
Other things being equal, the effect of a decrease in the price of Coca-Cola would cause which of the following?
A: An upward movement along the demand curve for Coca-Cola.
B: A rightward shift in the demand curve for Coca-Cola.
C: A downward movement along the demand curve for Coca-Cola.
D: A leftward shift in the demand curve for Coca-Cola.
C
Other things being equal, the effects of a decrease in the price of orange juice, is represented by which of the following? A:
A rightward shift in the demand curve for orange juice.
B: An increase in the quantity demanded for orange juice.
C: A decrease in the quantity demanded orange juice.
D: A leftward shift in the demand curve for orange juice.
B
Which of the following would cause a shift in the demand curve for a good?
A: An increase in consumers’ incomes.
B: All of these.
C: A decrease in the number of consumers.
D: The expectation that the price of a good will increase in the future.
B
A rightward shift of a demand curve is called a(n):
A: decrease in quantity demanded.
B: increase in supply.
C: decrease in demand.
D: increase in demand.E: increase in quantity demanded.
D
Assuming that wine is a normal good, an increase in consumer income, other things being equal, will:
A: cause an upward movement along the demand curve for wine.
B: shift the demand curve for wine to the left.
C: cause a downward movement along the demand curve for wine.
D: shift the demand curve for wine to the right.
D
Assuming that bus travel is an inferior good, a decrease in consumer income, other things being equal, will cause:
A: a downward movement along the demand curve for bus travel.
B: an upward movement along the demand curve for air travel.
C: a rightward shift in the demand curve for bus travel.
D: no change in the demand curve for bus travel.
C
Which of the following goods are most likely to be substitutes? A: potato chips and chip dip B: ketchup and French fries C: bananas and apples D: bread and peanut butter
C
Assuming that hamburgers and hot dogs are substitutes, an increase in the price of hamburgers, other things being equal, results in a:
A: rightward shift in the demand curve for hamburgers.
B: leftward shift in the demand curve for hot dogs.
C: leftward shift in the demand curve for hamburgers.
D: rightward shift in the demand curve for hot dogs.
D
What does a direct relationship between price and quantity mean?
•The two move in the same direction
What is a market?
•Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged
What is the equilibrium price?
•The price towards which the economy tends
Where is the equilibrium price?
•At the price where the quantity demanded and the quantity supplied are equal
externality
A cost or benefit imposed on people other than the consumers and producers of a good or service.
market failure
A situation in which market equilibrium results in too few or too many resources used in the production of a good or service. This inefficiency may justify government intervention.
price ceiling
A legally established maximum price a seller can charge.
price floor
A legally established minimum price a seller can be paid.
public good
A good or service with two properties: (1) users collectively consume benefits, and (2) there is no way to bar people who do not pay (free riders) from consuming the good or service.
What causes a change in market equilibrium?
•A change in demand•A change in supply
What can cause a shift in a demand curve? A change in:
•Number of buyers in the market•Tastes and preferences•Income•Expectations of consumers•Prices of related goods
An increase in Demand causes:
Increase in Equilibrium Price then Increase in Quantity Supplied
A decrease in Demand causes:
Decrease in Equilibrium Price then Decrease in Quantity Supplied
What can cause a shift in a supply curve? A change in:
•Technology•Number of sellers in the market•Resource prices•Taxes and subsidies•Expectations of producers
An increase in Supply causes:
Decrease in Equilibrium Price then Increase in Quantity Demanded
A decrease in Supply causes:
Increase in Equilibrium Price then Decrease in Quantity Demanded
What are the two types of price controls?
- Price ceilings
2. Price floors
Can the laws of demand and supply be repealed?
•In some markets, the objective of politicians is to prevent prices from reaching the equilibrium price
What is a price ceiling?
•A legally established maximum price a seller can charge
What is the purpose of price ceilings on rent?
•So needy people will pay lower rent than the equilibrium rent
What is the result of price ceilings on rent?
•A shortage of rental units
Why may rent controls be counter productive?
- Shortages
- Illegal markets
- Less maintenance
- Discrimination
A Rent Ceiling will cause:
Quantity Demanded exceeds the quantity supplied then an Shortage.
What are other examples of price ceilings?
•Wage and price controls•Usury laws
What are examples of price floors?
- Minimum wage law
* Agricultural price supports
What is a price floor?
•A legally established minimum price a seller can be paid
What is the result of a price floor on wages paid to labor?
•A surplus of labor
Why do we have price ceilings and floors?
•Because of failures in the free market
What is market failure?
•A situation in which the price system creates a problem for society or fails to achieve society’s goals
Who was Adam Smith?
•The father of modern economics who wrote The Wealth of Nations, published in 1776
What did Adam Smith say about competition?
•There must be competition for markets to function properly
What happens when competition is lacking?
•Market failure results
What is an example of another market failure?
•Externalities
What is an externality?
•A cost or benefit imposed on people other than the consumers and producers of a good or service
What is a negative externality?
•An externality that is detrimental to third parties
What is an example of a negative externality?
•Pollution
External costs cause:
Inefficient equilibrium
What is a positive externality?
•An externality that is beneficial to third parties
What is an example of a positive externality?
•Vaccinations
What is the conclusion of positive externality?
•When externalities are present, market failure gives incorrect price and quantity signals, and resources are misallocated
What is a public good?
•A good that, once produced, has two properties:
- users collectively consume benefits
- no one can be excluded
What are examples of public goods?
- National defense
* Public education•Roads
What is the effect of external costs and benefits on resources?
•External costs cause the market to over allocate resources, and external benefits cause the market to under allocate resources
What is the conclusion of public goods?
•If public goods are available only in the marketplace, people wait for someone else to pay, and the result is an underproduction or zero production of public goods
If the demand for a good decreased, what would be the effect on the equilibrium price and quantity?
A: Price would increase, and quantity would decrease.
B: Price would decrease, and quantity would decrease.
C: Price would increase, and quantity would increase.
D: Price would decrease, and quantity would increase
B
After a hurricane in Florida knocked out the regional water supply for several days, the demand for bottled water increased sharply. In a market economy, how will this increase in demand affect the equilibrium price and quantity of bottled water? A: Price will increase, and quantity will decrease.
B: Price will decrease, and quantity will decrease.
C: Price will decrease, and quantity will increase.
D: Price will increase, and quantity will increase
D
If you were a government official and wanted to raise the price of wheat, which of the following actions would you take?
A: Take wheat from government storage and sell it.
B: Encourage farmers to use more fertilizer.
C: Lower the price of rye.
D: Subsidize purchases of farm equipment.
E: Encourage farmers to grow less wheat
E
A technological breakthrough lowers the cost of manufacturing DVDs. As a result, the market changes to a new equilibrium because of a(n):
A: upward movement along the demand curve for DVDs.
B: rightward shift in the demand curve for DVDs.
C: rightward shift in the supply curve for DVDs.
D: shortage of DVDs.
C
Which of the following might cause a shift from S1 to S2? A: A decrease in input prices. B: A decrease in consumer prices. C: An increase in input prices. D: An increase in consumer income
A
Which of the following statements is true of a market?
A: An increase in demand, with no change in supply, will increase the equilibrium price and quantity
B: An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity.
C: A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity.
D: All of these.
A
An increase in both supply and demand causes which of the following?
A: Equilibrium price falls.
B: Equilibrium price rises.
C: Equilibrium price change is indeterminate.
D: Equilibrium quantity decreases.E: Equilibrium quantity change is indeterminate
C
Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that a below-equilibrium price established by rent control:
A: creates a surplus of rental housing.
B: promotes a rapid increase in the future supply of housing.
C: results in poor service and quality deterioration of many rental units.
D: leads to a reduction in housing discrimination against minorities.
C
Suppose a price floor is set by the government above the market equilibrium price. Which of the following will result?
A: There will be a surplus.
B: The quantity demanded will exceed the quantity supplied.
C: The demand curve will shift to the left.
D: None of these.
A
What is another example of market failure?
•Income inequality
circular flow model
A diagram showing the flow of products from businesses to households and the flow of resources from households to businesses. In exchange for these resources, money payments flow between businesses and households.
disposable personal income (DI)
The amount of income that households actually have to spend or save after payment of personal taxes.
expenditure approach
The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.
final goods
Finished goods and services produced for the ultimate user.
flow
A flow is a rate of change in a quantity during a given time period, such as dollars per year. For example, income and consumption are flows that occur per week, per month, or per year.
GDP chain price index
A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.
gross domestic product (GDP)
The market value of all final goods and services produced in a nation during a period of time, usually a year.
income approach
The national income accounting method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits.
indirect business taxes
Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firm’s revenue. Firms treat such taxes as production costs. Examples include general sales taxes, excise taxes, and customs duties.
intermediate goods
Goods and services used as inputs for the production of final goods.
national income (NI)
The total income earned by resource owners, including wages, rents, interest, and profits. NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output.
nominal GDP
The value of all final goods based on the prices existing during the time period of production.
personal income (PI)
The total income received by households that is available for consumption, saving, and payment of personal taxes.
real GDP
The value of all final goods produced during a given time period based on the prices existing in a selected base year.
stock
A quantity measured at one point in time. For example, an inventory of goods or the amount of money in a checking account.
transfer payment
A government payment to individuals not in exchange for goods or services currently produced.
What is national income accounting?
•The system used to measure the aggregate income and expenditures for a nation
Who was Simon Kuznets?
•He explained the first national accounting system, he is called the father of GDP
What is gross domestic product?
•GDP is the most widely reported measure of a nation’s economic performance
What does GDP measure?
•The market value of all final goods and services produced in a nation during a period of time, usually a year
What is an advantage of using GDP?
•GDP measures value using dollars, rather than a list of the number of goods and services
Does GDP measure secondhand transactions?
•No, current GDP does not include the sale of a used car or the sale of a home constructed some years ago
Does GDP measure nonproductive financial transactions?
•No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments
What is a transfer payment?
•A government payment to individuals, not in exchange for goods or services currently produced
What are intermediate goods?
•Goods and services used as inputs for production of final goods
Does GDP count intermediate goods?
•No, to avoid double counting, GDP only measures final goods and services
What are final goods?
•Finished goods and services produced for the ultimate user
Does GDP measure the whole economy?
•Yes, GDP includes markets for products, resources, consumers, workers, and businesses
What additional sectors does a complex circular flow model contain?
- Financial markets•Government
* Foreign markets
What is a circular flow model?
•A model that show us how all the pieces of the puzzle fit together. Business: “Factor Markets” through “factors of production” to “Businesses” through “supply” to “Product Markets” through “goods and services” to “Households”. Society: “Factor Markets” through “demand” to “Households” through “spending” to “Product Markets” through “demand” to “Business” though “factor payments” to “Factor Markets”
What is a flow?
•A rate of change in a quantity during a given time period
What are the two approaches we use to measure GDP?
- Expenditure
* Income
What is a stock?
•A quantity measured at one point in time
What are the four sectors of GDP?
•Consumption + Investment + Government + (X - M)
What is the income approach?
GDP = C + I + G + (X -M)
•The method that measures GDP by adding all incomes
What is the expenditure approach?
•The national income accounting method that measures GDP by adding all the spending for final goods and services
What are the income components of GDP?
GDP = C + I + G + (X -M) GDP = compensation of employees + rents + profits + net interest + indirect taxes + depreciation
What is compensation of employees?
•Income earned from wages, salaries, and certain supplements paid to labor
What is rental income of persons?
•Rent and royalties received by property owners who permit others to use their assets
What are two income categories?
•Proprietors’ income•Corporate profits
What is proprietors’ income?
•All forms of income earned by unincorporated businesses
What are corporate profits?
•All income earned by the stockholders of corporations regardless of whether stockholders receive it
What is net interest?
•Interest earned from loans to businesses
What are indirect business taxes?
•Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the revenue received by firms
What are shortcomings of GDP?
- Nonmarket transactions
- Distribution, kind, & quality of products
- Neglect of leisure time
- Underground economy
- Economic bads
What is depreciation?
•An allowance for the capital worn out producing GDP
What other national accounts measure economic performance?
- National Income
- Personal Income
- Disposable Personal Income•Nominal and Real GDP
- GDP Chain Price Index
What is national income?
•NI is the total earned by resource owners, including wages, rents, interest, and profits
What is personal income?
•PI is the total income received by households that is available for consumption, saving, and payment of personal taxes
What is disposable personal income?
•DI is the amount of income that households have to spend or save after payment of personal taxes
What is nominal GDP?
•The value of all final goods based on the prices existing during the time period of production. Real GDP =nominal GDP x 100/ GDP chain price index
What is real GDP?
•The value of all final goods produced during a given time period based on the prices existing in a selected base year. Real GDP =nominal GDP x 100/ GDP chain price index
Which of the following would be counted as a final good for inclusion in GDP? A:
A piece of glass bought this year by a consumer to fix a broken window.
B: A sheet of glass produced this year by Ford for windows in a new car.
C: A tire produced this year and sold to a car make for a new car sold this year.
D: None of the above would be counted in GDP.
A
Gross domestic product (GDP) does not include:
A: used goods sold in the current time period.
B: foreign produced goods.
C: intermediate as well as final goods.
D: None of the above would be included.
D
Gross private domestic investment:
A: excludes all investment in the United States by foreign firms.
B: includes all capital in the United States.
C: includes net additions to the capital stock plus all new corporate stocks and bonds.
D: includes business expenditures on new factories, tools, and machinery.
D
The unreported or illegal production of goods and services in the economy that is not counted in GDP is termed:
A: money laundering.
B: the underground economy.
C: net personal disposable income.
D: indirect national income.E: Unreported capital consumption.
B
The lower portion of the circular flow model contains factor markets in which households provide:
A: labor, money, and machines.
B: savings, spending, and investment.
C: natural resources, labor, and capital.
D: output of all final goods and services produced.
C
In the circular flow model,
A: money flows from the firms to the households through the product market.
B: money flows from the households to the firms through the product market.
C: money flows from the households to the firms through the resource market.
D: money flows from the households to the firms through both the product market and the resource market.
E: resources flow to the households from the firms through the product market.
B
Using the expenditure approach, total spending by households for durable goods, nondurable goods, and services is a category called: A: gross private domestic investment. B: capital consumption allowance. C: personal consumption expenditures. D: household investment.
C
Gross private domestic investment does not include: A: spending for new houses. B: spending to build up inventories. C: unintentional inventory investment. D: spending on employee salaries. E: spending for office supplies.
D
GDP does not count: A: The estimated value of homemaker production. B: state and local government purchases. C: spending for new homes. D: changes in inventories.
A
Because GDP does not account for improvements in the quality of goods, the GDP calculation:
A: tends to overstate the true value of output in the United States.
B: tends to understate the true value of output in the United States.
C: provides an accurate value of output in the United States.
D: provides the best measure of output in the United States.
E: measures the value correctly because price changes always capture the value of quality changes.
B
What is the chain price index?
•A measure that compares changes in the prices of all final goods during a given period to the prices of those goods in a base year. Real GDP =nominal GDP x 100/ GDP chain price index
business cycle
Alternating periods of economic growth and contraction, which can be measured by changes in real GDP.
civilian labor force
The number of people 16 years of age and older who are employed or who are actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other persons not in the labor force.
coincident indicators
Variables that change at the same time that real GDP changes.
cyclical unemployment
Unemployment caused by the lack of jobs during a recession.
discouraged worker
A person who wants to work, but who has given up searching for work because he or she believes there will be no job offers.
economic growth
An expansion in national output measured by the annual percentage increase in a nation’s real GDP.
frictional unemployment
Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, initially entering the labor force, reentering the labor force, or seasonally unemployed.
unemployment
jobs, initially entering the labor force, reentering the labor force, or seasonally unemployed.
full employment
The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates, also called the natural rate of unemployment.
GDP gap
The difference between actual real GDP and potential or full employment real GDP.
lagging indicators
Variables that change after real GDP changes.
leading indicators
Variables that change before real GDP changes.
peak
The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery.
recession
A downturn in the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction.
recovery
An upturn in the business cycle during which real GDP rises. Also called an expansion.
structural unemployment
Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities.
trough
The phase of the business cycle in which real GDP reaches its minimum after falling during a recession.
unemployment rate
The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs.
What is a business cycle?
•Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
What are the four phases of a business cycle?
•Peak•Recession•Trough•Recovery
What is a peak?
•The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery
What is economic growth?
•An expansion in national output measured by the annual percentage increase in a nation’s real GDP
Why is growth an economic goal?
•It increases our standard of living - it creates a bigger “economic pie”
What is a trough?
•The phase of the business cycle in which real GDP reaches its minimum after falling during a recession
What is a recession?
•A downturn in the business cycle during which real GDP declines
How long before a downturn is a recession?
•As a general rule, at least two consecutive quarters in which GDP declines
When is a downturn considered a depression?
•The term depression is primarily an historical reference to the extremely deep and long recession of the early 1930’s
What is a recovery?
•An upturn in the business cycle during which real GDP rises
What are the three types of economic indicators?
•Leading•Coincident•Lagging
What is a leading indicator?
•Variables that change before real GDP changes. I.E.•Average workweek•Unemployment claims•New consumer goods orders•Delayed deliveries•New orders for plant and equipment•New building permits•Stock prices•Money supply•Interest rates•Consumer expectations
What is a coincident indicator?
•Variables that change at the same time that real GDP changes.I.E.•Nonagricultural payrolls•Personal income•Industrial production•Manufacturing and trade sales
What is a lagging indicator?
•Variables that change after real GDP changes.I.E.•Unemployment rate•Duration of unemployment•Labor cost per unit of output•Consumer price index for services•Commercial and industrial loans•Commercial credit to personal income ratio•Prime interest rate
What is the civilian labor force?
•People 16 years or older who are either employed or actively seeking a job, excluding members of the armed forces and people in institutions
Who is considered employed?
•Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business
What causes unemployment?
•When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory
Who is considered unemployed?
•Anyone who is 16 years of age and above who is actively seeking employmentTotal Population age 16 and overNot in Labor Force:Armed forces, Household workers, Students, Retirees, Persons with disabilities, Institutionalized, Discourage workers,Civilian labor force:Employed Employees, Self-employed,Unemployed New entrants, Re-entrants, Lost last job, Quit last job, Laid off.
What is the unemployment rate?
•The percentage of people in the labor force who are without jobs and are actively seeking jobs.Unemployment rate= unemployed / civilian labor force X 100
How is the unemployment rate calculated?
•60,000 households are surveyed each month
Who is a discouraged worker?
•A person who wants to work, but who has given up searching for work
What is underemployment?
•People working at jobs below their level of skills
What are criticisms of the unemployment rate?
•Does not include discouraged workers•Includes part-time workers•Not measure underemployment
What are the types of unemployment?
•Frictional•Structural•Cyclical
What is frictional unemployment?
•Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force
What is structural unemployment?
•A mismatch of the skills of workers out of work and the skills required for existing job opportunities
What is cyclical unemployment?
•Unemployment caused by the lack of jobs during a recession
What is full employment?
•Unemployment equals the sum of frictional and structural unemployment
What is considered full employment?
•The natural rate of unemployment changes over time, but today it is considered to be about 5%
What is the GDP gap?
•The difference between full-employment real GDP and actual real GDP
What is the Conclusion of GDP Gap?
•The gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment
The point at which real output reaches a maximum during a business cycle is called the: A: peak. B: recession. C: recovery. D: trough.
A
The business cycle consists of four phases. At the top we have:
A:recovery, followed by peak, and then recession followed by a recession.
B: recovery, followed by a recession, and then peak followed by recession.
C: peak, then an upturn followed by a recession, and then recession.
D: Peak, recession, trough, and recovery
E: peak, then a recession followed by recession, and finally, recovery.
D
The phase in the business cycle in which real GDP declines is called a: A: trendline. B: peak. C: recession. D: recovery. E: trough.
C
Frank quit his job at a textile plant to return to school full time. Which of the following statements is true?
A: Frank is frictionally unemployed.
B: Frank is no longer in the labor force.
C: Frank is structurally unemployed.
D: Frank is cyclically unemployed
B
Retired persons are officially classified as: A: unemployed. B: self-employed. C: underemployed. D: not in the labor force
D
One problem with the unemployment rate is that:
A:discouraged workers are included in the calculation.
B: the data includes part-time workers as fully employed.
C: underemployment is measured in the calculation.
D: all of the above are problems.
B
Unemployment that is of a short duration to allow time to find a new job is: A: structural unemployment. B: cyclical unemployment. C: frictional unemployment. D: durational unemployment.
C
An example of structural unemployment is a (an):
A: textile worker who quits one job and waits for the new job to begin.
B: engineer permanently laid off due to advances in technology.
C: computer programmer who becomes rich and leaves the labor force.
D: All of the above.
B
Cyclical unemployment:
A: causes unemployment statistics to be understated.
B: causes unemployment statistics to be overstated.
C: occurs because of recessions.
D: occurs because of technological innovations in production.
E: only occurs with a zero inflation rate.
C
The natural rate of unemployment occurs if there is no: A: unemployment. B: frictional unemployment. C: structural unemployment. D: cyclical unemployment.
D
What is the cost of cyclical unemployment?
•The GDP gap
Adjustable-rate Mortgage (ARM)
A home loan that adjusts the nominal interest rate to changing rates of inflation.
base year
A year chosen as a reference point for comparison with some earlier or later year.
consumer price index (CPI)
An index that measures changes in the average prices of consumer goods and services.
cost push inflation
An increase in the general price level resulting from an increase in the cost of production.
deflation
A decrease in the general (average) price level of goods and services in the economy.
demand pull inflation
A rise in the general price level resulting from an excess of total spending (demand).
disinflation
A reduction in the rate of inflation.
hyperinflation
An extremely rapid rise in the general price level.
inflation
An increase in the general (average) price level of goods and services in the economy.
nominal income
The actual number of dollars received over a period of time.
nominal interest rate
The actual rate of interest without adjustment for the inflation rate.
real income
The actual number of dollars received (nominal income) adjusted for changes in the CPI.
real interest rate
The nominal rate of interest minus the inflation rate.
wage price spiral
A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wage rates and prices.
wealth
The value of the stock of assets owned at some point in time.
What is inflation?
•An increase in the general (average) price level of goods and services in the economy
What is deflation?
•A decrease in the general (average) price level of goods and services in the economy
What is the most widely reported measure of inflation?
•The Consumer Price Index (CPI)
What is the Consumer Price Index?
•It measures changes in the average prices of consumer goods and services
Who reports the CPI?
•The Bureau of Labor Statistics (BLS) of the Department of Labor
How is the CPI calculated?
•“Price collectors” contact retail stores, homeowners, and tenants in selected cities in the U.S. monthly
Which goods and services are included in the CPI?
•The BLS records average prices for a “market basket” of different items purchased by the typical urban family
What is the Composition of the CPI?
Food 13%Housing 33%Apparel 4%Transportation 18%Health Care 6%Entertainment 5%Education & communication 2%All other goods & services 19%
Does the makeup of the CPI change?
•As people’s tastes and preferences change, some of the goods and services that go into the basket change
How is the CPI computed?
•Current year prices are compared to prices of a similar basket of goods and services in a base year
What is a base year?
•A year chosen as a reference point for comparison with some earlier or later year
CYP = cost of the market basket of products at current-year pricesBYP = cost of the market basket of products at base-year prices
CPI= CYP/BYP X 100
Why is the CPI always 100 in the base year?
•The numerator and the denominator of the CPI formula are the same in the base year
How is the inflation rate computed?
•By measuring the percentage change in the official CPI from one year to the next
ARI = Annual rate of inflationCPIY = Consumer price index in given year*CPIPY = Consumer price index in previous year
ARI = CPIY - CPIPY/CPIPY X 100
What is disinflation?
•A reduction in the rate of inflation
What are some criticisms of the CPI?
•It can overstate or understate for certain groups•Does not measure quality•Substitutes are ignored
What does inflation do to people’s income?
•A general rise in prices will shrink people’s income
What is nominal income?
•The actual number of dollars received over a period of time
What is real income?
What is real income?
RI = Real incomeNI = Nominal income*CPI = CPI as a decimal or CPI ÷ 100
RI = NI/CPI
What is wealth?
•The value of the stock of assets owned at some point in time
How is wealth affected by inflation?
•Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise
What will cause your real income to decline?
•The rate of inflation is greater than your rate of income
What is the interest rate?
•Interest per year as a percentage of the amount loaned or lent
What is the nominal interest rate?
•The actual rate of interest earned over a period of time
What is the real interest rate?
•The nominal rate of interest minus the inflation rate
How does inflation affect borrowers and savers?
•They can win or lose depending on the rate of inflation and interest
What are the two basic types of inflation?
•Demand-pull•Cost-push
What is demand-pull inflation?
•A rise in the general price level resulting from an excess of total spending (demand)
When does demand-pull inflation occur?
•When the economy is operating at or near full employment
What is cost-push inflation?
•A rise in the general price level resulting from an increase in the cost of production
What can cause cost-push inflation?
•Cost increases for labor, raw materials, construction, equipment, borrowing etc.
Do people’s expectations affect inflation?
•Yes, expectations can influence both demand-pull and cost-push inflation
How does the U.S. inflation rate compare with other countries?
•It is lower than some and higher than others
What is hyperinflation?
•An extremely rapid rise in the general price level
Inflation is an increase in: A: prices of all products in the economy. B: homes, autos and basic resources. C: the general price level of products. D: none of these.
C
Losers from inflation include: A: Savers and borrowers. B: landlords and the government. C: borrowers and the government. D: those on a fixed income and borrowers. E: those on a fixed income and savers.
E
Union contracts with built-in cost-of-living adjustments and home mortgages that vary with the rate of inflation are:
A: inappropriate ways of combating inflation.
B: examples of bracket creep.
C: means of implementing fiscal policy.
D: steps that can be taken to decrease the adverse impacts of inflation.
E. examples of failed discarded policies of the 1970s.
D
Which one of the following groups benefits from inflation? A: Borrowers. B: Savers. C: Landlords. D: Lenders.
A
Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now: A: $110. B: $1,000. C: $1,100. D: $1,225.
C
Deflation means a decrease in:
A: the rate of inflation.
B: the prices of all products in the economy.
C: homes, autos, and basic resources.
D: the general level of prices in the economy.
D
When the inflation rate rises, the purchasing power of nominal income:
A: remains unchanged.
B: decreases.
C: increases.
D: changes by the inflation rate minus one.
B
The real interest rate is defined as the:
A: actual interest rate.
B: fixed-rate on consumer loans.
C: nominal interest rate minus the inflation rate.
D: expected interest rate minus the inflation rate
C
Demand-pull inflation occurs: A: at or close to full employment. B: because of excess total spending. C: When "too much money is chasing too few goods." D: all of these.
D
Cost-push inflation is due to: A:too much money chasing too few goods". B: the economy operating at full employment. C: increases in production costs. D: all of these.
C
What is a wage-price spiral?
•Increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wages and prices
