Test 2: Chapters 6, 7, & 8

Question 1

<p>What is the business cycle?</p>

Answer 1

<p>1. The long-run economic growth.
2. The short-run fluctuations in output and employment
(What Macroeconomics is primarily concerned with)
-Both occur simultaneously</p>

Question 2

<p>What is a recession?</p>

Answer 2

<p>When economic growth is negative, so output and living standards actually decline.</p>

Question 3

<p>When was the Great Recession?</p>

Answer 3

<p>Starting in late 2007 and continuing through 2008 and into 2009.</p>

Question 4

<p>Real Gross Domestic Product (RGDP)</p>

Answer 4

<p>Measures the value of final goods and services produced within the borders of a country during a specific period of time, typically a year.
Pros: Can determine if a country's output is growing.</p>

Question 5

<p>Nominal GDP</p>

Answer 5

<p>The total dollar value of all goods and services produced within the borders of a country using their current prices during the year that they were produced.
Cons: Can increase from year to year, but not actually indicate an increase in output. </p>

Question 6

<p>Unemployment</p>

Answer 6

<p>The state a person is in if he or she cannot get a job despite willing to work and actively seeking a work.</p>

Question 7

<p>Inflation</p>

Answer 7

<p>The increase in the overall level of prices.

| I.e. The price of buying the same type and quantity of goods year to year increases or decreases due to inflation.</p>

Question 8

<p>3 Chief Statistics of Macroeconomics</p>

Answer 8

<p>1. Real GDP

2. Unemployment
3. Inflation</p>

Question 9

<p>Modern Economic Growth</p>

Answer 9

<p>When the output per person increases year to year.
Economies can grow without a change of the standard of living because the population increases at a similar rate. The industrial revolution ignited a large increase in output per person, which increases income and therefore the quality of life.</p>

Question 10

<p>Saving</p>

Answer 10

<p>Occurs when current consumption is less than current output (current spending is less than current income)</p>

Question 11

<p>Investment</p>

Answer 11

<p>Happens when resources are devoted to increasing future output.
Ex: Building a new research facility in which scientists invent the next generation of fuel-efficient automobiles or constructing a modern, super-efficient factory.</p>

Question 12

<p>How do households and businesses interact with savings and investments?</p>

Answer 12

<p>Households are principal source of savings.
Businesses are main economic investors.
Through banks and other financial institutions (mutual funds, pension plans, insurance companies).
-By collecting savings and rewarding with interest. Lend funds to businesses to invest in capital goods. </p>

Question 13

<p>Expectations</p>

Answer 13

<p>Changing expectations change current behavior. Increased pessimism leads to less current investment and less future consumption.
</p>

Question 14

<p>Shocks</p>

Answer 14

<p>Situations in which there were expectations for one thing, but instead another thing happened. Shocks can be positive or negative.
I.e. Building a high speed railway in hopes of it being popular. Is completed but is largely unpopular. </p>

Question 15

<p>Demand Shocks</p>

Answer 15

<p>Unexpected changes in the demand for goods and services. Most short-run fluctuations in GDP and the business cycle are the result of demand shocks.</p>

Question 16

<p>Supply Shocks</p>

Answer 16

<p>Unexpected changes in the supply of goods and services.</p>

Question 17

<p>Sticky prices</p>

Answer 17

<p>The answer to why demand shocks are such a big problem. The prices of many goods and services are inflexible, or slow to change, "sticky", in the short-run.
Price changes do not quickly equalize the quantities demanded of goods and services with their respective quantities supplied. </p>

Question 18

<p>Inventory</p>

Answer 18

<p>A store of output that has been produced but not yet sold. Useful because they can be used to grow or decline in periods when demand is unexpectedly low or high-thereby allowing production to proceed smoothly even when demand is variable.
Inventory levels increase with unexpectedly low demand
Inventory levels decrease with unexpectedly high demand</p>

Question 19

National Income Accounting

Answer 19

Measures the economy’s overall performance. (analogous to private accounting for the individual firm in regards to the economy as a whole.)

• Assess the health of the economy by comparing levels of production at regular intervals.
• Track the long-run course of the economy to see whether it has grown, been constant, or declined.
• Formulate policies that will safeguard and improve the economy’s health.

Question 20

Bureau of Economic Analysis

Answer 20

An agency of the Department of Commerce that compiles the National Income and Product Accounts (NIPA) for the U.S. Economy.

Question 21

Aggregate Output

Answer 21

The primary measure of the economy’s performance is its annual total output of goods and services.

Question 22

Gross Domestic Product

Answer 22

Defines aggregate output as the dollar value of all final goods and services produced within the borders of a country in a given time period, typically a year.
GDP is a monetary measure, not quantitative measure

Question 23

Intermediate goods

Answer 23

Products purchased for retail or for further processing or manufacturing. (NOT INCLUDED IN GDP)
Examples: Crude Oil, Steel beams, lettuce, carrots and vinegar in salads

Question 24

Final Goods

Answer 24

Products that are purchased by their end users.
Examples: Gasoline used for personal transportation, completed high-rise apartments, restaurant salads, sunglasses, smart phones, satellites bought by the government.

Question 25

Multiple counting

Answer 25

Including the value of intermediate goods in the calculation of GDP, distorting the true value.

Question 26

Value Added

Answer 26

The market value of a firm’s output less the value of the inputs the firm has bought from others. A way to avoid multiple counting

Question 27

Nonproduction Transactions

Answer 27

Purely financial transactions and secondhand sales. Both of which are excluded from GDP

Question 28

Financial Transactions

Answer 28

Nonproduction transactions (Excluded from GDP)

1. Public transfer payments: Social security, welfare, veterans’ payments
2. Private transfer payments: Money given by parents to children on holidays.
3. Stock market transactions:The buying and selling of stocks (and bonds) is just a matter a swapping bits of paper.

Question 29

Secondhand Sales

Answer 29

Exculded from GDP, contributes nothing tot he current production.
Example: Selling your 2005 Ford Mustang to a friend