Unit 2

Question 1

Circular Flow

Answer 1

Transactions between households, firms, government in product & factor markets
Total expenditures = total income

Question 2

GDP Expenditure calculation

Answer 2

Consumption + Investment + Gov spending + eXports - iMports

Question 3

GDP Income Calculation

Answer 3

Rent + Wages + Interest + Profit

Question 4

Nominal GDP

Answer 4

Value of all final goods & services produced in a nation in a time period

Question 5

Limitations of GDP

Answer 5

Raised by inflation
Things don’t count: used goods, transfer payments, stocks/bonds, free / foreign-produced / underground / home-produced goods and services

Question 6

Unemployment rate

Answer 6

% of workforce which is unemployed
Excludes ineligible, eligible but unavailable
(Unemployed / labor force) * 100

Question 7

GDP Gap

Answer 7

Socioeconomic costs (of unemployment)
Gap between current GDP and possible GDP

Question 8

Discouraged worker effect

Answer 8

People give up looking for work, are no longer considered part of workforce
(Eligible but unavailable)

Question 9

Labor force participation rate

Answer 9

(Labor force / total eligible) * 100

Eligible: >16, not institutionalized, out of labor force by choice

Question 10

Seasonal Unemployment

Answer 10

Unemployment due to season
Not counted (?)
Ex. Construction workers out of work during the winter

Question 11

Cyclical Unemployment

Answer 11

Unemployment due to changes in business cycle (recession)
Counted in actual unemployment

Question 12

Structural Unemployment

Answer 12

Unemployment due to permanent changes in economy
Mismatch between worker skills and available jobs
Counted in natural, actual unemployment

Question 13

Frictional Unemployment

Answer 13

Unemployment by choice of worker, “between jobs”
Counted in natural, actual unemployment

Question 14

Limitations of unemployment rate

Answer 14

Discouraged workers
Marginally-attached workers (want work and looked recently, but not currently)
Underemployed (part-timers who want full-time)

Question 15

Inflation

Answer 15

Sustained price increase of most goods and services
Weakens purchasing power at a given income
Normal, but problematic when unanticipated

Question 16

Deflation

Answer 16

Overall decrease in prices
Strengthens purchasing power at a given income
Scarier than inflation, can stop economy

Question 17

Disinflation

Answer 17

Decrease in inflation rate
NOT deflation

Question 18

Inflation rate calculation

Answer 18

(Change in price level / beginning price level) * 100

Could be price or CPI used

Question 19

Price Index

Answer 19

(Current market basket price / base market basket price) * 100

NO UNITS
Non-base MB uses current prices

Question 20

Real GDP (Y) calculations

Answer 20

(Nominal GDP / Aggregate Price Level) * 100
P(BY1) * Q(CY1) + P(BY2) * Q(CY2) + …

Adjust for inflation, measure of output

Question 21

CPI

Answer 21

Consumer Price Index
Summary, contains ~400 market basket goods
Gov uses it for COLAs

Uses fixed weights, overstates COLA changes, doesn’t account for substitution, ONLY consumer goods

Question 22

PPI

Answer 22

Producer Price Index
Measures price changes by domestic producers, inputs
Commodities, fuels, chemicals, etc

Question 23

GDP Deflator

Answer 23

Index of average AGGREGATE price levels for ALL goods/services in economy
Base of 1996
NO fixed weights, ALL goods/services, NO import prices, accounts for substitution

Question 24

Demand pull theory

Answer 24

Inflation cause
Demand increase causes price increase
Fault of consumers

Question 25

Cost push theory

Answer 25

Inflation cause Rising input costs cause greater costs for goods/services Ex. Wages increase, businesses charge more

Question 26

Too much money in circulation

Answer 26

Cause of inflation Gives some groups more purchasing power; demand increases “Too much money, too few goods”

Question 27

Shortcomings of CPI

Answer 27

Substitution bias (fixed basket doesn’t account for substitution) Introduction of new goods (greater variety of goods increases purchasing power for consumers) Unmeasured quality changes Some MB item prices vary more than others

Question 28

Who inflation helps/hurts

Answer 28

Helps Borrowers (people paying fixed amt) Hurts lenders, ppl w/ fixed incomes, social security recipients

Question 29

Nominal GDP Calculations

Answer 29

Price Level (PL)/100 * Real GDP (Y) P(CY1) * Q(CY1) + P(CY2) * Q(CY2) + … DO NOT adjust for inflation

Question 30

GDP Deflator Calculations

Answer 30

= Price index = market basket total = (Nominal GDP / Real GDP) * 100

Question 31

Business Cycle

Answer 31

Time on x axis (years/quarters) Output on y axis (gdp, gdp growth rate) Mostly increasing over time, can decrease

Question 32

Expansion

Answer 32

Positive slope in a business cycle Increasing output Employment rising

Question 33

Recession/Contraction

Answer 33

Negative slope in business cycle Output decreasing Employment falling

Question 34

Peak

Answer 34

Local max of a business cycle Increasing to decreasing output Inflationary gap

Question 35

Trough

Answer 35

Local min in business cycle graph Decreasing to increasing slope GDP/Output gap

Question 36

Output Gap

Answer 36

Actual Output - Potential Output Potential = full-time employment output (unemployment is just natural rate)