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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
Q

Three Different Types of unemployment

A
  1. Frictional
  2. Structural
  3. Cyclical
26
Q

Frictional Unemployment (UE)

A

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
Q

Structural UE

A

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
Q

Cyclical UE

A

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
Q

The UE rate understates the “true” problem of unemployment:

A
  • not working at the education level received
  • part-time workers waiting for full-time counted as employed
  • discouraged workers counted as unemployed
30
Q

“i” can be viewed as

A

the cost of borrowing

31
Q

Example: borrow $100 for 1 year at an interest rate of 4% per year
After 1 year we must payback

A

100+(.04*100) = $104

32
Q

Real interest rates (r)
Formula is…

A

real interest rate = nominal interest rate - inflation rate
r = i - ṗ

33
Q

Example:

i = 12%
ṗ = 9%

What does the number mean?

A

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
Q

The economy works into the following sectors:

A
  1. Household sector
  2. business sector
  3. government sector
  4. monetary sector
  5. foreign sector
35
Q

Household sector involves two factors:

A
  1. household consumption spending
  2. household savings
36
Q

household consumption spending function:

A

C = a + b * Yd

37
Q

C = a + b * Yd

Define each symbol

A

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
Q

Consumption function meaning:

A

the dollar amount of consumption spending ay any level of at disposable income

39
Q

Value of “b”

A

b is slope of the consumption function

b is also the Marginal Propensity to consume (MPC)

40
Q

b or MPC identifies….

A

the change in consumption spending given a one dollar change in disposable income

41
Q

example: b = MPC = .74

A

we spend 74 cents of each additional dollar of disposable income

42
Q

an increase in the value of b or MPC..

A
  • consumption function rotates up (more steep)
  • spend more of each additional dollar of disposable income
43
Q

a decrease in the value of b or MPC…

A
  • consumption function rotates down (less steep)
  • spend less of each additional dollar of disposable income
44
Q

Changes in the value of “a”

in other words what are three causes autonomous consumption spending to change

A
  1. household wealth
  2. income expenditures
  3. ease and cheapness of borrowing
45
Q

household wealth

A
  • wealth is NOT current earned income
  • wealth: net accumulation of household assets
46
Q

If household wealth increases the value of “a”

A

will increase from a0 to a1 causing the consumption function to shift up

47
Q

income expenditures

A

expect income to increase in a future date we will spend more today

48
Q

if income expenditures is expected to increase the value of “a”

A

a0 increases to a1 causing the consumption function to shift up

49
Q

ease and cheapness of borrowing

A

becomes costly to borrow money, than consumption spending will decrease

50
Q

if borrowing money costs more then the value of “a”

A

a0 decreases to a1 causing consumption function to shift down

EC 112 (4 decks)

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