Macroecon

Question 1

Identify the five major sectors (or elements) of a macroeconomic free market flow model.

Answer 1

1. Individuals
2. Business entities
3. Governmental entities
4. Financial entities
5. Foreign entities

Question 2

In a macroeconomic free market flow model, what are “leakages”?

Answer 2

Leakages are the purposes for which individual income is used other than for domestic consumption expenditures. These leakages include amounts of income that go for taxes, savings, and payments for imports.

Question 3

In a macroeconomic free market flow model, what are “injections”?

Answer 3

Injections are the sources of amounts added to domestic production that do not result from domestic consumption expenditures. These injections include amounts that come from government spending and subsidies, investment spending, and amounts received for exports.

Question 4

Define “nominal gross domestic product (nominal GDP).”

Answer 4

Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), without adjustment for changing price levels

Question 5

Define “national income (NI).”

Answer 5

The total payments for economic resources included in all production (but not including taxes as a payment)

Question 6

Define “gross national product (GNP).”

Answer 6

Total output of all goods and services produced worldwide using economic resources of U.S. entities

Question 7

Define “potential gross domestic product (potential GDP).”

Answer 7

The maximum final output that can occur in the domestic economy at a point in time, without creating upward pressure on the general level of prices in the economy

Question 8

Define “personal disposable income.”

Answer 8

Amount of income that individuals have available for spending, defined as total personal income after taxes are deducted.

Question 9

Define “real gross domestic product (real GDP).”

Answer 9

Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), measured at constant prices

Question 10

Define “net national product (NNP).”

Answer 10

Total output of all goods and services produced worldwide using economic resources of U.S. entities, but only including the cost of investment in new capital (excludes depreciation)

Question 11

Identify important gross measures used in macroeconomics.

Answer 11

Measures of total activity or output in an economy including:
Nominal gross domestic product (GDP)
Real gross domestic product
Potential gross domestic product
Gross national product (GNP)
Net national product
National income
Personal disposable income

Question 12

Define “cyclical unemployment.”

Answer 12

Unemployment in which members of the labor force are not employed because a downturn in the business cycle has reduced the current need for workers

Question 13

Define “official full employment.”

Answer 13

Officially, full employment exists where there is no cyclical unemployment. When there is official full employment, there could still be frictional, structural, and/or seasonal unemployment.

Question 14

Define “seasonal unemployment.”

Answer 14

Unemployment in which members of the labor force are not employed because their work opportunities regularly and predictably vary by the season of the year

Question 15

Define “frictional unemployment.”

Answer 15

Unemployment in which members of the labor force are not employed because they are in transition between jobs or have imperfect information about job opportunities

Question 16

Identify characteristics that exclude individuals from the labor (or work) force.

Answer 16

The following are not included in the labor force:

• Those less than 16 years old
• The retired
• Those not actively seeking work
• Those who are institutionalized
• Military members on active duty

Question 17

Define “structural unemployment.”

Answer 17

Unemployment in which members of the labor force are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs.

Question 18

Define “aggregate demand.”

Answer 18

Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level

Question 19

What is the effect of interest rate on investment spending?

Answer 19

1) Higher interest rates lead to lower levels of investment.

2) Lower interest rates lead to higher levels of investment.

Question 20

What are the factors that influence investment spending?

Answer 20

Interest rate
Demographics
Consumer confidence
Consumer income and wealth
Current vacancy rates
Level of capacity utilization
Technological advances
Current and expected sales levels

Question 21

Define the “consumption function.”

Answer 21

The relationship between consumption spending and disposable income

Question 22

Define “marginal propensity to consume (MPC)” and “marginal propensity to save (MPS).”

Answer 22

MPC = Change in consumption as a result of a change in disposable income (or percentage of an additional dollar of disposable income that will be spent)

MPS = Change in savings as a result of a change in disposable income (or percentage of an additional dollar of disposable income that will be saved).

MPC + MPS = 1 (i.e., the change in disposable income).

Question 23

List the significant factors that cause a negatively-sloped demand curve.

Answer 23

1. Interest rate factor
2. Wealth-level factor
3. Foreign purchasing power factor

Question 24

Define “average propensity to consume (APC)” and “average propensity to save (APS).”

Answer 24

1. APC = Percentage of disposable income spent on consumption goods
2. APS = Percentage of disposable income saved
3. APC + APS = 1 (i.e., disposable income)

Question 25

Define “discretionary fiscal policy.”

Answer 25

Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand (e.g., to close a recessionary gap, increase demand; to close an inflationary gap, reduce demand).

Question 26

Give at least three examples of investment spending.

Answer 26

1. Residential construction
2. Nonresidential construction
3. Business durable equipment
4. Business inventory

Question 27

What are the factors that determine the level of imports/exports?

Answer 27

1) Relative levels of income and wealth
2) Relative values of currencies
3) Relative price levels
4) Import and export restrictions and tariffs
5) Relative inflationary rates

Question 28

What is the slope of a conventional aggregate supply curve?

Answer 28

It is a continuously positive slope, with a steeper slope beginning at the level of full employment; supply increases with price but requires proportionately higher prices at full employment.

Question 29

Define “aggregate supply.”

Answer 29

Total output of goods and services at different price levels at the macroeconomic (economy) level

Question 30

What factors will cause a change in the level of a supply curve?

Answer 30

Resource availability
Resource cost
Technological advances
Note: Not the price of the item supplied, which causes a movement along a given supply curve.

Question 31

What is the slope of a classical aggregate supply curve?

Answer 31

It is completely vertical; supply remains unchanged at various price levels.

Question 32

What is the slope of a Keynesian aggregate supply curve?

Answer 32

It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.