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85 Cards in this Set
- Front
- Back
What is the CPI?
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a measure of the overall cost of the goods and services bought by a consumer.
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Who reports the CPI?
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The Bureau of Labor Statistics
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How often is the CPI reported?
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Monthly
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What is the CPI used to monitor?
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changes in the cost of living over time
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Steps of calculating CPI?
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1. Fix the Basket
2. Find the Prices 3. Compute Basket Cost 4. Choose a Base Year and Compute Index 5. Computer Inflation rate 6. |
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What is "Fixing the Basket"?
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determine what prices are most important
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How does the BLS Fix the Basket?
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1. Identifies market basket of goods that everyone buys
2. Conduct monthly consumer surverys |
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How do we Find the Prices?
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Find prices of each good/service in the basket for each point in time
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How do we Computer the Basket's Cost?
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Use the data on prices to calculate cost of basket at different times.
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How do we Compute the Index?
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Divide price of basket in one year by the price in the base year, multiply by 100
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How do we calculator inflation rate?
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((CPI year 2 - CPI year 1) / (CPI year 1) ) X 100
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Calculate the Inflation Rate:
-Base year 2002 -Basket in 2002 is 1200 -Basket in 2004 is 1,236 |
(1236-1200)/1200
x 100 |
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Biggest basket?
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Housing
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Three biggest baskets?
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Housing, Transportation, Food
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3 problems with CPI?
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-Subsitution bias
-Intro of new goods -Unmeasured quality changes |
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What is Substitution Bias? (the problem with CPI)
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The basket does not change to reflect consumer reaction to relative prices
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Under Substitution Bias, 2 reason whythe basket doesnt change to reflect consumer reactions to prices?
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-New Products result in variety, making each dollar more valluable
-Consumers need fewer dollars to maintain standard of living |
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What are Unmeasured Quality Changes?
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The BLS tries to adjust price for constant quality, but this is hard:
-If the quality of a good rises, the value of the dollar rices -vice versa |
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The CPI overstates the true cost of living by __
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Overstates it by 1% point per year
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GDP deflator equation?
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Nominal GDP / Real GDP times 100
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What is the producer price index?
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measures the cost of a basket of goods and services bought by FIRMS
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Economists monitor what to gauge how quickly prices are rising?
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GDP deflator and the CPI
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Different between GDP deflator and CPI?
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GDP deflator reflects prices of all goods produced domestically.CPI reflects all prices bought by consumers
and CPI compares price of a fixed basket, GDP deflator compares current produced goods prices |
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The movement of the GDP deflator and CPI rate is...
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generally the same
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Indexing for inflation means ___
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some dollar amount is automatically correct for inflation by law
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Equation for indexing for inflation?
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Amount in today's dollars =
(Amount in ___ )(price level today/price level in ___ ) |
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What is the nominal interest rate?
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The interest rate reported and not corrected for inflation
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What interest rates do banks pay?
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nominal interest rate
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What is the real interest rate?
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nominal interest rate correct for inflation
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Calculate real interest rate
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Nominal interest rate - Inflation
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The Nominal Interest Rate and Real Interest Rate move ___
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not always together
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What is GDP?
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Measure of income and expenditures of an economy.
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Income must equal ____
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expenditure
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Why must income equal expenditure?
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Every transaction has a buyer and a seller
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What is NOT in the GDP?
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1. Things made at home
2. Illegal stuff |
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How do you calculate GDP?
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Consumption + Investment + Government Purchases + Net Exports
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What is Consumption?
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Spending on goods by households
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What is Investment?
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Spending on capital stuff, including houses
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What is Net Exports?
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Exports minus imports
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Which part of the GDP is the largest?
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Consumption
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What is Nominal GDP?
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values production of goods at current prices
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What is Real GDP?
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values production of goods and services at constant prices
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An accurate view of the economy requires adjusting which things?
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Nominal AND Real GDP
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Best measure of economic well-being of a society?
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GDP
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Higher per-capita GDP indicates what?
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higher standard of living
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A country's standard of living depends on what?
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The ability to produce goods
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How much does the US GDP grow annually?
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2%
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Standard of living is determined by what?
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Productivity
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How can one measure productivity and standard of living?
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Real GDP per capita
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What are the Factors of Production?
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Physical capital
Human Capital Natural resources Technology |
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What directly determine productivity?
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Factors of production
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What is Physical Capital?
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Input in production
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What is Human Capital?
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Knowledge and skills acquired through training
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What are Natural Resources?
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Inputs used provided by nature
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What is Technological Knowledge?
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Society's understanding of efficient ways to produce things
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As the stock of capital rises, extra ouput produced from an addition unit ___
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falls
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What is the effect referring to countries that start off poor tending to grow more rapidly than those starting rich
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catch-up effect
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Two kinds of Foreign Investment?
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Direct
Portfolio |
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What is Foreign Direct Investment?
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Capital investment owned by foreign entity
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What is Foreign Portfolio?
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Investments financed with foreign money but operated domestically
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How can population growth interact with factors of production?
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1. Stretches natural resources
2. Diluting capital stock 3. Promoting tech progress |
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What is the financial system made of?
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financial institutions that coordinate actions of savers/borrowers
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What are the two components of financial serve industries?
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Financial markets
Financial intermediaries |
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What are Financial markets?
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institutions through which savers provide DIRECT funds
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What are Financial Intermediaries?
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instituions through which savers indirectly provide funds to borrowers
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Examples of financial markets?
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Stock
Bond |
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Examples of Financial Intermediaires?
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Banking firms
Mutual Funds Insurance Firms |
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What is the sale of stock to raise money called?
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equity financing
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What is a securities firm?
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a group selling stocks or bonds
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What is a mutual fund firm?
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sells shares to public then uses money to buy diversified portfolio
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What is private saving?
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among income households have after paying taxes
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what is public saving?
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amount revenue that goverment has after paying its spending
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Tax incentives increases do what? (graph)
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Shifts the demand curve to the right
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What is crowding out?
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increased borrowing and reduction in invesment
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What will the effect of a deficit be?
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interest rates rise
invesments fall |
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What is Cyclical Unemployment?
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year-to-year fluctuations in unemployment around natural rate
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What 3 categories does the BLS put people into?
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Employed
Unemployed Not in Labor Force |
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If you are waiting for the start date of a new job, you are ___
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unemployed
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Who is in the Labor Force?
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Employed AND the Unemployed.
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How is the unemployment rate calculated?
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Unemployed divided by Labor Force
Times 100 |
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What is the Labor Force Participation Rate?
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Labor Force divided by Adult Population
times 100 |
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Most observed unemployment at a GIVE TIME is what kind of unemployment?
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Long term
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What is Frictional Unemployment?
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unemployment from the time it takes to match workers with jobs
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What is structual unemployment?
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not enough spots for a job
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Most unemployment is attributable to ____
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a few people unemployed for long periods of time
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