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EC 112 > Quiz #1 > Flashcards

Quiz #1 Flashcards

1
Q

Four Macroeconomic Variables

A
  1. Output/Income
  2. Inflation
  3. Unemployment
  4. Interest Rates
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2
Q

Nominal GDP is…

A

the current value of newly produced final goods + services

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3
Q

GDP does not include ____.

A

the sale or resale of previously produced good

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4
Q

Nominal GDP equation

A

Nominal GDP = (p) * (x)

p: the average price of all goods
x: the number of goods produced

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5
Q

GDP Implicit Price Deflator
(Deflator - 100) tells us….

A

the percent change in prices from the base year through a given year

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6
Q

Example: Deflator in 2018= 120

A

The average price of all newly produced final goods + services increased 20% from base year through 2018

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7
Q

Equation of Real GDP

A

Real GDP = (Nominal GDP / Deflator) * 100

value of output produced in any year measured with base year prices

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8
Q

GDP is not a perfect measure of a nation’s output:

A
  • does not include the work we do ourselves
  • does not include volunteer work
  • does not include illegal work
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9
Q

GDP is not a perfect measure of nation’s well-being:

A
  • leisure
  • economic bads
  • negative externalities
  • distribution of wealth
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10
Q

Inflation

A

Symbol: p̂
defined as the rate of growth of prices in a given time period (1 year)

DOES NOT compare prices to a base year!!!!

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11
Q

Price Indexes

A
  1. GDP Implicit Price Deflator
  2. Consumer Price Index
  3. Producer Price Index
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12
Q

Consumer Price Index (CPI)

A

average price of a “basket” of consumer goods (what we can buy)

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13
Q

CPI in 2019 = 111

A

The average price of a basket of consumer goods rose 11% from base year through 2019.

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14
Q

Producer Price Index (PPI)

A

average price of a basket of producer goods

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15
Q

PPI in 2021 = 114

A

the average price of a basket of producer goods rose 14% from base year through 2021

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16
Q

Example:
CPI in 2018 = 112
CPI in 2019 = 125

What was inflation in 2019?

A

(CPI in 2019 - CPI in 2018) / CPI in 2018 * 100
(125-112)/112 * 100 = 11.6%

Consumer prices rose 11.6% during 2019

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17
Q

Inflation rate overstate the “true” problem of rising prices

A
  1. Substitution Effect
  2. Increases in Quality Effect
  3. New Product Effect
  4. Outlet Effect
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18
Q

Labor Force =

A

= Employed + Unemployed

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19
Q

Employed

A
  • work within the past week
    -those who did not work due to sickness or vacation
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20
Q

Unemployed

A
  • those who did’t work in the past week but who would look for work in the past four weeks
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21
Q

Not included in the labor force

A
  • full-time college students
  • retired people
  • institutionalized
  • active military
22
Q

Calculating unemployment rate

U.E=

A

= unemployed/labor force * 100

23
Q

labor force participation rate =

A

=labor force/working age population * 100

percent of working age people who are either working or looking for work

24
Q

Example:
Employed = 70
Unemployed = 10
Working Age population = 120

Calculate unemployment rate and labor force participation rate

A

UE rate = 10/(10+70) * 100 = 10/80 * 100 = 12.5%

LFP rate = 80/120 * 100 = 66%

25
Three Different Types of unemployment
1. Frictional 2. Structural 3. Cyclical
26
Frictional Unemployment (UE)
jobs available in industry "a" and at the same time there are unemployed people with "a" skills not a major threat to the economy
27
Structural UE
jobs available in industry "a" and there are unemployed people with "b" skills more severe threat to economy requires more time, money, and other resources
28
Cyclical UE
an economic downturn creates unemployment throughout the economy during periods of recession that we experience cyclical UE Presents GREATEST threat to economy's health
29
The UE rate understates the "true" problem of unemployment:
- not working at the education level received - part-time workers waiting for full-time counted as employed - discouraged workers counted as unemployed
30
"i" can be viewed as
the cost of borrowing
31
Example: borrow $100 for 1 year at an interest rate of 4% per year After 1 year we must payback
100+(.04*100) = $104
32
Real interest rates (r) Formula is...
real interest rate = nominal interest rate - inflation rate r = i - ṗ
33
Example: i = 12% ṗ = 9% What does the number mean?
r = 12 - 9 r = 3 Price of goods rose 9% while our money grew by 12% with 12% more money we can buy 3% more goods "purchasing power" has increased by 3%
34
The economy works into the following sectors:
1. Household sector 2. business sector 3. government sector 4. monetary sector 5. foreign sector
35
Household sector involves two factors:
1. household consumption spending 2. household savings
36
household consumption spending function:
C = a + b * Yd
37
C = a + b * Yd Define each symbol
C: total dollar amount of household consumption spending a: autonomous consumption spending - gifts, borrowed, savings NOT FROM current earned income b * Yd: consumption spending derived from current earned income Yd: Disposable income --> gross income - taxes (Yd = Y - T)
38
Consumption function meaning:
the dollar amount of consumption spending ay any level of at disposable income
39
Value of "b"
b is slope of the consumption function b is also the Marginal Propensity to consume (MPC)
40
b or MPC identifies....
the change in consumption spending given a one dollar change in disposable income
41
example: b = MPC = .74
we spend 74 cents of each additional dollar of disposable income
42
an increase in the value of b or MPC..
- consumption function rotates up (more steep) - spend more of each additional dollar of disposable income
43
a decrease in the value of b or MPC...
- consumption function rotates down (less steep) - spend less of each additional dollar of disposable income
44
Changes in the value of "a" in other words what are three causes autonomous consumption spending to change
1. household wealth 2. income expenditures 3. ease and cheapness of borrowing
45
household wealth
- wealth is NOT current earned income - wealth: net accumulation of household assets
46
If household wealth increases the value of "a"
will increase from a0 to a1 causing the consumption function to shift up
47
income expenditures
expect income to increase in a future date we will spend more today
48
if income expenditures is expected to increase the value of "a"
a0 increases to a1 causing the consumption function to shift up
49
ease and cheapness of borrowing
becomes costly to borrow money, than consumption spending will decrease
50
if borrowing money costs more then the value of "a"
a0 decreases to a1 causing consumption function to shift down

EC 112 (4 decks)

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