Macroeconomics

Question 1

What is GDP?

Answer 1

Total dollar value (at current prices) of final goods and services produced within a country’s borders

Question 2

What is GNP?

Answer 2

Total dollar value of goods and services produced by country’s residents

Question 3

What is the most theoretically accepted solution for deflation?

Answer 3

Increase the money supply

Question 4

What are measures of inflation?

Answer 4

Consumer Price Index - compares price of fixed basket of goods and services that a consumer might purchase in earlier period to later period

Producer Price Index - measures the average change over time in the selling prices received by domestic producers for their output. Prices included in the PPI are from the first commercial transaction for many products and some services.

GDP deflator - index used to convert nominal GDP into real GDP

Question 5

What is demand-pull inflation?

Answer 5

Increase in prices caused by increase in aggregate demand (demand curve shifts upward)

Question 6

What is cost-push inflation?

Answer 6

Increase in prices caused by increase in cost of producing (supply curve shifts inward)

Question 7

What is the multiplier effect?

Answer 7

Increase in output (equilibrium GDP) =

Change in spending / MPS

Question 8

What is an expansion?

Answer 8

Several years of increase economic production

Question 9

What is a recession or contraction?

Answer 9

Several months or a few years of decreased economic production, typically two consecutive quarters of negative growth in real GDP

Question 10

What is a depression?

Answer 10

A deep or long lasting recession

Question 11

What is a recovery?

Answer 11

The early stages of an expansion, considered full expansion once peak from previous expansion is passed

Question 12

What are examples of leading indicators?

Answer 12

Stock market prices
Average hours worked per week
New orders for durable goods
Average initial claims for unemployment insurance
Building permits
Housing starts

Question 13

What are examples of coincident indicators?

Answer 13

Industrial production

Manufacturing and trade sales

Question 14

What are examples of lagging indicators?

Answer 14

Average prime rate for bank loans
Average duration of unemployment
Unemployment rate

Question 15

What is frictional unemployment?

Answer 15

Unemployment as a result of normal turnover of workers

Question 16

What is structural unemployment?

Answer 16

Unemployment due to a change in the demands for goods and services or technological advances

Question 17

What is cyclical unemployment?

Answer 17

Unemployment due to changes in the business cycle

Question 18

What is institutional unemployment?

Answer 18

Unemployment due to government restrictions

Question 19

What is NAIRU?

Answer 19

Non Accelerating Inflation Rate of Unemployment
Rate at which unemployment cannot fall without creating high inflation
NAIRU = Frictional + Structural Unemployment

Question 20

What is expansionary monetary policy?

Answer 20

Lower reserve requirements
Lower discount rate
Buy government securities through open market operations

Question 21

What is contractionary monetary policy?

Answer 21

Raise reserve requirements
Raise discount rate
Sell government securities through open market operations

Question 22

What is quantitative easing?

Answer 22

When Fed engages in open market operations and it only affects the money supply

Question 23

What is Classical Economic Theory?

Answer 23

No government intervention

Question 24

What is Keynesian Theory?

Answer 24

Use fiscal policy through taxes and spending

Question 25

What is Monetarist Theory?

Answer 25

Use monetary policy and focus on stable monetary growth, not stable interest rates

Question 26

What is Supply Side Theory?

Answer 26

Reduce taxes to increase economic production

Question 27

What is the Laffer Curve?

Answer 27

Shows that if tax rates are high enough, increasing tax rates further will not yield more revenue

Question 28

What is New Keynesian Theory?

Answer 28

Combines Keynesian and Monetarist theories

Question 29

What is Austrian Theory?

Answer 29

Low interest rates can lead to excessive borrowing

Question 30

What is a absolute advantage?

Answer 30

A country being able to produce a good at a lower cost than another country

Question 31

What is comparative advantage?

Answer 31

A country being able to produce a good at a lower relative cost than another country

Question 32

What are examples of natural barriers to international trade?

Answer 32

Transportation costs | Information costs

Question 33

What are the effects of trade restrictions?

Answer 33

Good for domestic producers of protected goods Bad for domestic users - less supply Bad for domestic users of exported goods Bad for foreign producers Good for foreign users of protected goods

Question 34

What is the Balance of Payments?

Answer 34

Summarizes a country's transactions with other countries Includes: Current Account - Balance of Trade, Balance of Goods and Services, Net Interest and Dividends, and Net Unilateral Transfers Capital Account - flow of investments

Question 35

What is formula for size of forward premium or discount?

Answer 35

Forward rate - Spot rate / Spot rate x Months in a year / Months in the forward period

Question 36

What causes a country's currency to appreciate?

Answer 36

``` Low inflation High interest rates Net exporter Long term economic stability Selling foreign reserves ```

Question 37

What is real GDP?

Answer 37

Total dollar value (at price-level adjusted prices of final goods and services produced within a country's borders

Question 38

What is net domestic product?

Answer 38

Price of all goods and services produced by labor and property supplied by the nation’s residents less depreciation.

Question 39

What is potential GDP?

Answer 39

Maximum amount of production that could take place in an economy without putting pressure on the general level of prices

Question 40

What is included in the income approach to GDP?

Answer 40

Sum of all income earned in production of final goods and services: Wages + interest + rents + business profits + adjustments for taxes and depreciation

Question 41

What is included in the expenditure approach to GDP?

Answer 41

Sum of all expenditures to purchase final goods and services: Consumption + Private investment + Government expenditure + Net exports

Question 42

What is the Phillips Curve?

Answer 42

The relationship between unemployment rate and inflation | As unemployment rate falls, inflation rate increases at an increasing rate

Question 43

What is national income?

Answer 43

Net domestic product plus income earned abroad minus indirect business taxes

Question 44

What are the major components of real GDP?

Answer 44

Total worker hours | Labor productivity