Midterm 1 Flashcards
Calculating the value of an economy is harder than just adding up the value of every single thing that is produced because:
that would lead to overcounting, as the value of intermediate products would be counted twice.
The field of macroeconomics studies ______ and microeconomics studies ______.
economic aggregates; individual markets
GDP:
per capita gives us a sense of the average economic well-being in a country.
Gross domestic product (GDP) is:
the sum of the market values of all final goods and services produced within a country in a given period of time.
Canadian car dealers sell both used cars and new cars each year. However, only the sales of the new cars count toward GDP. The sale of used cars does not count because:
the used cars had been previously counted in the GDP of the year in which they were built.
There is a saying, “You can’t compare apples and oranges.” When economists calculate GDP, they:
are able to ‘compare apples and oranges’ by converting production to its dollar value.
When Canadians buy a good produced in the U.S., Americans earn income from Canadian expenditures. The value of this American output and Canadian expenditure is counted under the GDP of:
the U.S. because it is produced in the U.S.
Economists sometimes describe the economy as having a circular flow. In the most basic form of the circular flow model, companies hire workers and pay them wages. Workers then use these wages to buy goods and services from companies. The circular flow model explains the equivalence of the expenditure and income methods of valuing an economy because:
the revenues of all firms are turned into wages (income method), and all wages are spent on the firms’ products (expenditure method).
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
The construction of a court house:
Government Purchases
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
A taxicab ride
Consumption
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
The purchase of a taxicab by a taxicab company
Investment
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
A student buying a textbook:
Consumption
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
The trading of municipal bonds (a type of financial investment offered by city governments).
N/A
Determine whether each of the following counts as consumption, investment, government purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
A company’s purchase of foreign minerals:
Net exports
In a press conference, the president of a small country displays a chart showing that GDP has risen by 10 percent every year for five years. He argues that this growth shows the brilliance of his economic policy. However, his chart uses nominal GDP numbers.
This chart might be wrong because it:
relies on nominal GDP which might have increased because of price increases and not output increases
In a press conference, the president of a small country displays a chart showing that GDP has risen by 10 percent every year for five years. He argues that this growth shows the brilliance of his economic policy. However, his chart uses nominal GDP numbers.
If you are a reporter at the press conference and want to get a more accurate picture of the country’s economic growth, you should ask for the:
growth rate of real GDP which excludes price changes
Suppose the GDP deflator grew by 10 percent from last year to this year. That is, the inflation rate this year is 10 percent.
This means that overall:
prices in the economy have risen by 10 percent
Suppose the GDP deflator grew by 10 percent from last year to this year. That is, the inflation rate this year is 10 percent.
This inflation rate implies that the growth rate in real GDP is 10 percent:
less than the growth rate in nominal GDP
Given the following information about each economy, either calculate the missing variable or determine if it can be calculated:
a. Suppose C = $20.1 billion, I = $3.5 billion, G = $5.2 billion, and NX = −$1 billion.
Total Income is
$27.8 billion
Suppose C = $20.1 billion, I = $3.5 billion, G = $5.2 billion, and NX = −$1 billion.
Total Income is…
$27.8 billion
Suppose total income is $1 trillion, G = $0.3 trillion, and C = $0.5 trillion.
I is…
Indeterminate
Suppose total expenditure is $675 billion, C = $433 billion, I = $105 billion, and G = $75 billion.
NX is…
$62 billion
The circular flow model illustrates the crucially important idea of macroeconomics, which is that:
every expenditure of someone in the economy is exactly equal to the income of another.
Which approach to calculating GDP best highlights the relative importance of different factors of production?
The income approach
Which approach to calculating GDP is especially useful in clarifying the resale of existing goods?
The value-added approach
Canadian GDP increased from $1.5 trillion in 2005 to $1.97 trillion in 2009. This means that:
people in Canada produced more goods and services in 2009 than in 2005 and the prices of all goods and services were lower in 2005 than in 2009.
Real GDP:
is calculated based on goods and services valued at constant prices.
In the base year:
nominal and real GDP are equal by definition.
The base year refers to the year whose:
prices are used to calculate real GDP for all years.
If Canadian real GDP grew from $12 trillion one year to $12.7 trillion the next, the annual growth rate would be:
5.8 percent.
If Italy’s real GDP fell from $2.2 trillion one year to $1.9 trillion the next, the annual growth rate would be:
-13.6 percent.
If a country experiences a negative growth rate in real GDP, it means:
there are less goods to allocate in the economy than before.
A period of significant decline in economic activity, marked by falling GDP, rising unemployment, and an increased number of bankruptcies, is called:
a recession.
A depression is:
a severe and extended period of recession.
A major category of economic activity that is not counted as part of GDP is:
Non-market externalities such as environmental degradation.
When we say the cost of living has gone down, we mean that, looking broadly over a range of goods and services:
a dollar buys more today than it used to buy.
A dollar’s value can:
change across different locations and over time.
A market basket:
includes specific goods and services in fixed quantities that roughly correspond to a typical consumer’s spending.
Human capital contributes to growth because it helps workers in the economy:
produce more with the same amount of physical capital.
When the market basket is tracked over time:
the goods within the basket remain the same, so only changing prices are captured.
Which of the following goods is least likely to be in a market basket? Helicopter Gasoline Barbie dolls Breakfast cereal
Helicopter
The market basket approach:
measures changes in the cost of your shopping basket, assuming that you buy the same items in the same quantities.
Core inflation is measured because:
food and energy costs fluctuate frequently and can distort actual changes in the cost of living.
The GDP deflator differs from the CPI in its measurement of inflation in that:
it measures the price changes of all goods, not just those in a typical consumer’s basket.
The idea of purchasing power parity:
rarely holds.
The Big Mac index:
is a simple measure that indicates differing costs of living in different countries.
The Big Mac index compares:
the cost of a Big Mac all over the world.
In 1976, the cost of a movie was $4. In 2012, it’s $9. If the CPI for 1976 is 56, and 228 for 2012, then we could say the cost of a 1976 movie in 2012 would be:
$16.29, so the cost of movies has not increased as much as general inflation.
Is Rick Alexander counted as employed, unemployed, or not in the labour force by the Statistics Canada?
Alexander is self-employed in his old job as a carpenter.
Employed
Is Rick Alexander counted as employed, unemployed, or not in the labour force by the Statistics Canada?
Alexander moves from Alberta to Ontario and begins looking for work.
Unemployed
Is Rick Alexander counted as employed, unemployed, or not in the labour force by the Statistics Canada?
Alexander feels discouraged looking for work and stops applying for jobs.
Not in labor force
Is Rick Alexander counted as employed, unemployed, or not in the labour force by the Statistics Canada?
Alexander starts looking for work again.
Unemployed
Is Rick Alexander counted as employed, unemployed, or not in the labour force by the Statistics Canada?
Alexander starts work at a new job.
Employed
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Maria has started looking for work after taking time off to have a baby.
Frictional unemployment
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Juan left high school without graduating and can’t find any jobs he is qualified for.
Structural unemployment
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Rohit had a job working on the oil industry but lost his job during the fall in oil price.
Cyclical unemployment
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Adam has just arrived in a new city and is looking for work.
Frictional unemployment
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Max wants to work as an air steward, but because the airline industry is heavily unionized there are very few jobs available.
Structural unemployment
Classify each of the following situations as either frictional, structural, or cyclical unemployment.
Jada has just lost her job in a Web startup that was affected by a downturn in the economy.
Cyclical unemployment
During periods of recession:
During periods of recession:
Unemployment:
exists at any time during the business cycle.
Unemployment occurs when someone:
wants to work but cannot find a job.
The labour force includes:
those who want to work.
The unemployment rate tells us:
what percentage of the labour force wants to work and can’t find a job.
The labour demand curve:
shows the relationship between the total quantity of labour demanded by all the firms in the economy and the wage rate.
The labour demand curve:
is made up of firms who want to hire workers at each given wage.
The labour supply curve:
is made up of workers who want to work for firms at each given wage.
The labour supply curve:
shows the relationship between the total quantity of labour supplied by all workers in the economy and the wage rate.
If we wanted to describe unemployment in terms of supply and demand, we could say:
there is a surplus of labour.
The normal level of unemployment that persists in an economy in the long run:
is called the natural rate of unemployment.
The natural rate of unemployment:
is the normal level of unemployment that persists in an economy in the long run.
Frictional unemployment:
is unemployment caused by workers who are changing their location, job, or career.
Structural unemployment:
is unemployment that results from a mismatch between the skills workers can offer and the skills that are in demand.
Real-wage unemployment:
is the effect of wages remaining persistently above the market-clearing level.
Johnny has been working in a sandwich shop full-time while he attends college. When he graduates, he quits the sandwich shop and begins to search for full-time employment related to his college degree. Johnny would be considered:
frictionally unemployed.
Bob just graduated from college and has just landed his first job with a local accounting firm that will start in three months. Bob plans to use that time to find a place to live, and adjust to the new area. Bob would be considered
Bob is not in the labour force.
Sonia was a great bookkeeper 20 years ago, then left the workforce to stay home and raise her children. Now that they’re in college, Sonia looks for another bookkeeping job, but they all require computer skills that she doesn’t have. Sonia would be considered:
structurally unemployed.
Sarah used to be a music teacher at a local school, but got let go last year due to budget cuts. Sarah now works part-time as a waitress while looking for another teaching job. Sarah would be considered:
underemployed.
An economic slow-down predicts the new equilibrium wage would be:
lower because the labour demand curve shifts left.
An economic boom predicts the new equilibrium wage would be:
higher because the labour demand curve shifts right.
When economists say wages are “sticky,” they mean that they:
are slow to adjust to changes in the economy, and can cause unemployment.
The result of wage stickiness in an economic downturn is that:
actual wages are temporarily above the market-clearing level.
If the minimum wage is set at a level above the equilibrium wage:
it could cause unemployment.
The biggest benefit to members of a union is:
being able to bargain as a group.
What is the relationship between the price level and the following components of aggregate demand?
There is a ______ correct relationship between the price level and consumption.
negative
Prices rise and consumption falls.
What is the relationship between the price level and the following components of aggregate demand?
There is a _______ correct relationship between the price level and investment.
negative
Prices rise and interest rates rise, leading to a fall in investment.
What is the relationship between the price level and the following components of aggregate demand?
There is _______ correct relationship between the price level and government spending.
no
Prices have little to no effect on government spending.
What is the relationship between the price level and the following components of aggregate demand?
There is a _______ correct relationship between the price level and net exports.
negative
Prices rise, making domestic goods uncompetitive with imports leading to a fall in net exports.
If the government cuts taxes, what components of aggregate demand are affected?
Consumption
Investment
Net exports
Government spending
Consumption + Investment
For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.
Consumer confidence falls:
Demand-side shock
Consumers affect consumption.
For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.
Government spending increases:
Demand-side shock
Government spending is one of the four components of AD.
For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.
The price of foreign goods increases:
Demand-side shock
Prices of foreign goods affect net exports.
For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.
The price of oil increases:
Supply-side shock
Oil is an input in production.
For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.
A tornado destroys manufacturing plants:
Supply-side shock
Manufacturing plants represent capital, a component of LRAS.
In 2009, during the height of the U.S. financial crisis, real GDP fell by 3.5 percent, and the Consumer Price Index fell from 215.3 to 214.9. Was this recession likely caused by a shift in aggregate demand or aggregate supply?
This recession was likely caused by a decrease in aggregate demand
The equilibrium of aggregate supply and aggregate demand represents:
the general price level of the economy.
The aggregate supply and aggregate demand model describes the interaction of which macroeconomic variables?
Output and the price level
Which of the following is a component of aggregate demand?
Net exports
A rise in the overall price level means that:
a given number of dollars won’t buy as much in terms of real goods and services.
Higher interest rates caused by an increase in the price level creates:
an indirect negative relationship between the price level and investment spending.
If prices increase only in Canada, then:
Canadian goods become relatively more expensive than goods from other countries.
If Canadian prices increase relative to the rest of the world, we would expect:
net exports to decrease.
If Canadian prices increase relative to the rest of the world, we would expect:
exports to decrease and net exports to decrease.
There is a general overall __________ relationship between the price level and ____________.
negative; aggregate expenditures on GDP
A decrease in consumer confidence will cause:
a shift in aggregate demand to the left.
In the short run, the aggregate supply curve:
slopes upward.
Firms are willing to change the aggregate quantity of output supplied based on price:
in the short run only.
Sticky wages cause:
the short-run aggregate supply curve to slope upward.
The long-run aggregate supply curve is:
vertical.
In the long run:
aggregate supply is fixed.
The long-run aggregate supply curve represents:
the level of output possible if the economy is operating at full capacity.
The effect of a shift in the aggregate demand curve due to an increase in consumer confidence will be:
an increase in both prices and output in the short run.
In the macroeconomy, demand-side shifts change:
only the price level in the long run, while output eventually returns to its long-run potential level.
If the aggregate demand curve shifts in the short run moving the economy out of long-run equilibrium:
the short-run aggregate supply curve will shift to bring it back into long-run equilibrium.
A year-long drought that destroys most wheat crops for the season would:
shift the short-run aggregate supply curve only.
Stagflation refers to a situation in which the economy is experiencing:
low economic growth and high inflation.
If a hurricane were to wipe out the majority of the eastern seaboard in Canada, it would likely cause a:
long-run supply shock.
If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be:
at a higher price level and lower level of output.
A sudden increase in immigration would be considered a(n):
long-run supply shock.
Keynesian policy:
refers to policies that actively shift aggregate demand in an effort to reach full employment.
Fiscal policy can:
bring the economy to its long-run equilibrium faster than it can correct itself.
Rising unemployment and decreased business confidence could be signs that the economy is at the start of a(n):
recession.
Fiscal policy most directly affects the economy by increasing or decreasing:
aggregate demand.
If the government were to increase its spending, it would expect:
aggregate demand to shift to the right.
If the government wished to shift aggregate demand to the left, it might:
decrease military spending.
If the government increases the income tax rate:
disposable income decreases.
We use the term expansionary fiscal policy when the overall effect of decisions about taxation and spending is to:
increase aggregate demand.
If the government enacts contractionary fiscal policy, it could:
increase corporate income taxes.
