MacroEcon

Question 1

Gross Domestic Product (GDP)

Answer 1

Total value of all final goods and services produced in a year within a country

Question 2

Exclusions from the GDP value

Answer 2

• Value of intermediate goods (like raw materials) that go into the production of a final good (like a chair) is excluded in order to avoid double-counting
• Exchange of financial instruments like stocks, bonds, etc.
• Public and private transfer payments
• Underground economic activities and home production

Question 3

National Income

Answer 3

Sum of the income earned by a country’s citizens in the form of wages, salaries, benefits for labor services, rent for the use of land and buildings, interests for the use of money and profits received for the use of capital resources

Question 4

Personal v. Disponsable income

Answer 4

Personal Income: Income before the income taxes are subtracted
Disposable Income: Amount left when income taxes are subtracted from personal income

Question 5

Expenditure Approach to GDP

Answer 5

GDP = C + I + G + (X - M)
C: Personal consumption expenditures by households which include the purchases of all goods and services
I: Investment in physical capital, new construction (commercial and residential), and business inventories
G: Government purchases
X: Exports
M: Imports

Question 6

Deprecation. Why is it added to the income approach to the GDP?

Answer 6

Decline in the value of capital over time due to wear or obsolescence.
The depreciation cost is subtracted from corporate profits before the calculation of National Income so they must be readded to the GDP in the income approach to calculate the value that is needed to replace/repair the worn-out buildings and machineries that were previously depreciated.

Question 7

Subsidy Payment. Why is subtracted to the income approach to the GDP?

Answer 7

Payments made by the government to a certain group (usually, farmers) are added to the farmer’s income and thereby, the national income.
However, since they did not involve a transaction of goods and services, they should not be added to the GDP and are therefore subtracted from the National income

Question 8

Net Income of Foreign Workers

Answer 8

Income of foreigners working in country - income of citizens of the home country working in foreign countries
Since the national income includes that of workers everywhere in the world (even abroad), net income of foreign workers must be subtracted since the income earned by foreigners are not a part of the home country’s economy despite being a part of the home country’s national income. Similarly, the work of foreigners in home country adds to the national gdp but not to the national income. So it must be added in seperately

Question 9

Income approach to GDP

Answer 9

Follows that since GDP is basically the income at the end of the day, national income can be adjusted to find the GDP
GDP = National Income + Depreciation - Subsidies + Net Income of Foreigners

Question 10

National domestic product

Answer 10

GDP - depreciation
Calculated the amount of output left for consumption and additions to the capital stock after replacing the capital worn out in the production process

Question 11

Inflation

Answer 11

sustained increase in price levels

Question 12

Deflation

Answer 12

a sustained decrease in price levels

Question 13

Nominal vs. Real salary

Answer 13

Nominal: the amount in dollars a laborer is getting
Real: the amount in dollars a laborer is getting adjusted for inflation

Question 14

Money illusion

Answer 14

the tendency of people to think of money in nominal than real terms. This leads to overspending since on paper, although the salary may have increased due to inflation, the purchasing power stays the same since the prices of the goods also increased the same amount due to inflation.

Question 15

Menu Cost

Answer 15

The cost of constant changes in nominal prices as a result of inflation. (think how restaurants have to print new menus every so often to reflect the change in inflation)

Question 16

Value of fixed income during inflation

Answer 16

It decreases since the purchasing power of the income decreases since the nominal prices of the goods are increasing without the proportional change in income. This hurts the lenders and savers since they receive a decreasing amount of real income whereas it benefits borrowers since they have to pay the same disproportional to the change in their nominal income due to inflation

Question 17

Value of interest payments during inflation

Answer 17

It does not increase proportionally to inflation which hurts lenders and savers

Question 18

Purpose of price indexes

Answer 18

Adjusts nominal values for inflation to find real values

Question 19

Consumer Price Index. Calculate the % Inflation from the CPI

Answer 19

What the government uses to calculate inflation to adjust tax brackets and social security programs.

The government basically takes a market basket of goods and services and tracks changes to that basket throughout the years. The year in which the market basket is created is the base year.
CPI = Cost of the market basket at the current prices/Cost of the market basket as base year prices * 100
In other words, what % of the cost of the basket in the base year is it worth today.

Inflation = ((CPI in Year in Question / CPI in the Year the market basket was compiled) - 1) * 100

Question 20

The equation for Real GDP given Nominal GDP for year z and the CPI for year z

Answer 20

Real GDP = (Nominal GDP for year Z / CPI for year Z) * 100

Question 21

How is the CPI not an entirely accurate representation of the inflation rate in the market?

Answer 21

Due to fixed goods of the market basket, the CPI does not account for cheaper substitutes, quality improvements, price changes in new products etc. This causes the inflation rate calculated by the CPI to be overestimated

Question 22

Producer Price Index. How is it similar and different to the CPI?

Answer 22

It has a similar calculation method to the CPI.
How it differs in that the market basket is of wholesale goods (think raw materials like lumber and steel) rather than based on the final products the consumer gets.
It is a good future predictor of inflation since producers often pass on increases in production costs to consumers.

Question 23

Gross Domestic Product Deflator. How do you calculate it?

Answer 23

Measures the importance of products in the current market baskets rather than a basket in the base year which has probably become less relevant over time.
GDP Deflator = ( Cost of current year market basket at current price / Cost of current year market basket at the base year prices ) * 100

Question 24

How is the GDP deflator similar and different from the CPI?

Answer 24

Different: the market basket is the current year quantities rather than the base year quantities. Therefore, it reflects a lower inflation rate than the CPI items which have become less relevant over time.
Similarity: If the base year quantities in the CPI equations are replaced w/ the current year quantities, the equations are the same.

Question 25

Who accounts for the labor force? Who does not?

Answer 25

The employed adults and the unemployed adults.

Question 26

Apart from those who are employed, who does not come under the term unemployed?

Answer 26

• those who have not looked for a job in the past 4 weeks
• those who are not willing to work
• those who are not able to work

Question 27

Labor Force Participation Rate

Answer 27

Determines the amount of the total population in the labor force
Labor Force Participation Rate = Labor Force / Working-age civilian population

Question 28

Unemployment Rate

Answer 28

Unemployment Rate = (Unemployed Individuals in the Labor Force / Total individuals in the labor force) * 100

Question 29

Frictional Unemployment

Answer 29

Unemployment resulting from a worker looking for a job (think undergrad who just joined the labor force) or a worker who is moving to a new location or occupation.
This is temporary.

Question 30

Structural Unemployment

Answer 30

Unemployment resulting from workers lacking the skills the firms are looking for. This often occurs among less-educated groups who lack marketable skills and individuals whose skills are replaced by technology.
This is permanent since firms using new technologies won’t go back to old ones.

Question 31

Cyclical Unemployment

Answer 31

Unemployment results from downturns (depression, recession) during the business cycle when firms hire fewer workers and fire a few workers
This is temporary since the unemployed during a downturn would eventually find jobs once the downturn is done

Question 32

Seasonal Unemployment

Answer 32

Unemployment resulting from changes in hiring patterns throughout the year. Think ski instructors who can only instruct during a certain season.

Question 33

Discouraged workers. Impact on the unemployment rate.

Answer 33

Workers who give up looking for a job due to frustrations or other causes. They are not counted as unemployed in the unemployment status since they do not look for work once every 4 weeks, causing the unemployment rates to drop.

Question 34

Dishonest workers. Impact on the unemployment rate.

Answer 34

Workers who claim unemployment to receive the unemployment benefit when they do not want a job or when they are working for cash in an unreported job. This skews the unemployment rate upwards.

Question 35

Natural Rate of Unemployment

Answer 35

The unemployment rates in a functioning economy (5 % in the US) is a summation of frictional and structural unemployment.

Question 36

Full employment

Answer 36

Level of employment corresponding to the natural rate of unemployment rather than 100% unemployment.
No cyclical unemployment is present in the full employment scenario since cyclical unemployment exceeds the natural rate of unemployment.

Question 37

Okun’s law

Answer 37

Every one percentage point increase in the unemployment rates above the natural rate of employment causes the output to fall 2 to 3 percentage points.

Question 38

Aggregate Supply. How is it graphed?

Answer 38

The sum of all supplies in the market. In other words, the total value of output the producers are willing to supply at different price levels in a given period. It is graphed on a price level (y) v. Real GDP (x) graph
Price level – avg. of all prices
Real GDP – inflation-adjusted GDP

Question 39

How is the graph of an aggregate market different from that of an individual good or service

Answer 39

• y-axis = price (for an individual good) and price level (in an aggregate market) – it shows the collective value of the goods and services produced by a country
• x-axis = quantity/service (for an individual good) and real GDP (in an aggregate market)

Question 40

3 parts of the short-run aggregate supply curve

Answer 40

Depression or Keynesian Curve – no change in the price level because firms are trying to sell as much as possible at the current price level
Intermediate Stage – the normal range the economy is in; expansions and max product capacity causes more people hired (which leads to increased national income which increases real GDP
Classical Stage: Max real GDP

Question 41

What shifts AS curve?

Answer 41

Aggregate supply increases (suppliers are willing to supply more at the same price level) when inputs become cheaper, more productive, or more plentiful, government policies reduce production costs through tax cuts, deregulation and reform in welfare or unemployment insurance programs and macro disturbances as in war and natural disasters decrease.

Question 42

Why is the Long Run Aggregate Supply Curve Vertical

Answer 42

Because in the long run firms don’t have to change the amount of output they produce (represented by the Real GDP) since the cost of the input is going to proportionally adjust itself to the increase in revenues from selling the output.

Question 43

Classical Economy

Answer 43

Believes that the inputs quickly adjusts itself to reflect changes in the output; therefore, no government intervention is needed to adjust the inputs and the outputs

Question 44

Say’s Law

Answer 44

Supply creates its own demand since the amount used for inputs (eg. wages) often ends up increasing the demand (eg. laborer buying a product using wages(

Question 45

Counter-argument to Say’s Law

Answer 45

Investing in supplies dos not always proportionally increase demand because interest rates don’t fluctuate freely enough to clear the capital markets. Therefore, if the amount people save exceeds the amount of the firm’s investment, the output (GDP) would not be purchased. On the other hand, if the amount people save are less than the amount firms invest into their inputs, the expenditure would exceed the real GDP, causing the inventories to be depleted.

Question 46

Keynesian Economics

Answer 46

AS is horizontal (the real GDP increases while there is no change in the price level) until there is a full-employment level of output where it becomes vertical. This horizontal range is known as the depression range and it is caused by issues such as labor contracts that causes inputs such as wage to be inflexible w/ changes in price.

Question 47

Rational Expectations

Answer 47

The theory that believes government intervention is futile since people anticipate government expectations and would alter their wage and price demand