Economics 200 Exam 3

Front 1

What is the definition of GDP?

Back 1

Gross Domestic Product: The Market value of all final goods and services newly produced by the economy during a specified period of time.

Front 2

List at least four things included when calculating GDP.

Back 2

1. Final goods and services
2. Newly Produced
3. Specified period of time
4. Market Value (must go through a market).

Front 3

List at least four things not included when calculating GDP.

Back 3

1. No Do-it-yourself projects
2. No Illegal Activity
3. No Unreported Activity
4. No Financial Transactions

Front 4

What are the components of GDP and their definitions?

Back 4

GDP = C + I + G + (X - IM)
C = consumption is consumer spending on final goods and services (Largest component 2/3)
I = Investments is firm spending on plant, equipment, inventory, and consumer spending on new homes (most unstable)
G = Gov. spending is all Federal, State, Regional, and local spending on goods and services used by the government.
(X - Im) = Net Exports = Exports (foreign spending on domestic goods and services) minus Imports (domestic spending on foreign goods and services).

Front 5

Name the two Methods for measuring GDP.

Back 5

Expenditure Method and the Income Method

Front 6

How do you calculate GDP using the Expenditure Method?

Back 6

GDP = Consumption (C) + Investment (I) + Government (G) + Net Exports (X - IM)

Front 7

How do you calculate GDP using the Income Method?

Back 7

GDP = Employee Compensation + Rents + Profits + Net Interest + Indirect Business Taxes + Depreciation

Front 8

What does MPC stand for?

Back 8

Marginal Propensity to Consume: The change in C (consumption) resulting from each dollar increases in DI.

Front 9

List five reasons why GDP is not a measure of National Welfare.

Back 9

1. GDP does not account for leisure activities
2. GDP doesn't include the cost of negative externalities.
3. GDP doesn't account for the composition (mix) of output.
4. GDP doesn't account for the distribution of output.
5. GDP doesn't include non-market production.

Front 10

Define a Labor Force

Back 10

The number of people holding or seeking jobs.

Front 11

Define who is not in the labor force.

Back 11

People not actively searching for a job.

Front 12

Define who is Employed.

Back 12

All full and part-time workers.

Front 13

Define who is unemployed

Back 13

All temporarily laid off-workers and all persons actively searching for a job.

Front 14

Define The Natural Rate of Unemployment (Full Employment).

Back 14

The natural rate of unemployment a.k.a (Full Employment). Which is the Frictional plus the Structural Unemployment.
(Non-inflationary level of unemployment).

Front 15

List and describe the methods for measuring unemployment.

Back 15

1. Establishment Survey - calculates payroll unemployment 160,000 business and gov. agencies from unemployment tax.
2. Household Survey - 60,000 households are surveyed each month by U.S. census bureau

Front 16

List five problems with the Unemployment rate measurement

Back 16

1.Ignores Discouraged Workers
2.Ignores underemployed workers (Part time & lower skill level)
3. Ignores Increasing Prison Populations
4. Ignores Increasing Disability claims
5.

Front 17

List and describe the three types of unemployment.

Back 17

1. Frictional (Natural): Normal turnover rate in the labor market.
2. Structural (Natural): Changes in the structure of the economy.
(ie changes in Demand).
3. Cyclical (Not Natural): Decline in the economy's total production.

Front 18

List and describe the three costs of unemployment.

Back 18

1. Social Crisis - increase in crime, substance abuse, domestic violence, depression, suicide...
2. Lower living standards - Workers lose wages. (which may be partially offset by unemployment benefits).
3. Slow Economic Growth - Permanent loss of goods and services.

Front 19

Define Inflation.

Back 19

Increase in the general price level from one year to the next.

Front 20

Define Deflation.

Back 20

Decreases in the general price level from one year to the next.

Front 21

Define Stagflation.

Back 21

The combination of high unemployment and severe inflation.

Front 22

Give three reasons why inflation may be overstated a.k.a the Three Uneven Redistributive Effects

Back 22

(Winners and Losers)
1. Price Effects - Goods and services
2. Wealth Effects - Stocks, Bonds, Home
3. Income Effects - Wages and salary

Front 23

List and describe the three costs of inflation.

Back 23

1. Credit and Spending Crisis - Redistributes income from lenders to borrowers
2. Lower standard of living - People on fixed incomes suffer.
3. Slow Economic Growth - Discourages long-term contracts and planning.

Front 24

List and describe the three costs of deflation.

Back 24

1. Credit and Spending Crisis - Redistributes income from borrowers to lenders.
2. Lower living standards - Workers lose jobs.
3. Slow economic growth - Discourages long-term contracts and planning.

Front 25

What is the CPI? How is it used? and how is it calculated?

Back 25

CPI is the Consumer Price index which is used for changes in consumer prices.

CPI = (Market value of a bundle of consumer products in a given year/ Market value of a bundle of consumer products in a base year) x 100
CPI = 1 (--) take last two digits to make a percent.

Front 26

What is the PPI? How is this used?

Back 26

PPI is the Producer Price Index which is used for changes in producer prices.

Front 27

What is the GDP Deflator? How is this used?

Back 27

GDP Deflator is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. This is used for general Price Changes

Front 28

What is the difference between nominal variables and real variables?

Back 28

Nominal: measured in current dollars.
Real: measured in constant dollars

Front 29

How do you calculate Real Income?

Back 29

Real Income =
Nominal Income/CPI x 100

To find percentage change (New - Old) / Old

Front 30

How do you calculate Real GDP? What does this number mean?

Back 30

REAL GDP = (Nominal GDP/ GDP Deflation) x 100

Real GDP shows the changes in the actual number of goods and services.

Front 31

Define Aggregate Supply.

Back 31

The quantity of goods and services firms are willing to supply at different price levels, certeris paribus.

Front 32

Describe the meaning of the flat and steep parts of the Aggregate Supply Curve

Back 32

Flat at low levels of GDP
Low GDP = Low capacity utilization = low cost pressure.
(firms willing to produce more without higher prices)
Steep section at high GDP
High GDP = High capacity utilization = high cost pressure. (firms are willing to produce more only with much higher prices).

Front 33

What are the three factors that account for the shifting of the Aggregate Supply curve.

Back 33

1. Change in Cost of Inputs
2. Change in productivity
3. Change Available Supplies of Land, Labor, and capital

Front 34

Define Aggregate Demand

Back 34

The quantity of goods and services individuals demand at different price levels, certeris paribus

Front 35

What are the determinants of consumer spending?

Back 35

Wealth
Price Levels
Expectations of Future Income

Front 36

What are the determinants of Investment Spending?

Back 36

Technology
Interest Rate
Expectations
Level of AD
Corporate Taxes

Front 37

What are the determinants of government spending?

Back 37

Political Manipulation

Front 38

What are the determinants of Net Export Spending (X-IM)?

Back 38

Price Levels
Economic Conditions

Front 39

What determines the slope of the Aggregate Demand Curve? What does that consist of?

Back 39

AD determined by Price Level
(consists of Consumer Spending and Net Export Spending, C and X - IM)

Front 40

What are the non-price determinants of AD called?

Back 40

Autonomous Spending Changes

Front 41

How do you calculate the oversimplified Multiplier? Why is this done,and what does this mean?

Back 41

1/(1-MPC)
The oversimplified multiplier summarizes the infinite geometric progression of Initial and induced spending. which is oversimplified because it ignores price level changes, financial transactions, and international trade.

Front 42

What is the formula used to calculate the shift of the Aggregate Demand Curve?

Back 42

= Autonomous Spending Change x Oversimplified Multiplier

ie = $100B x (1/1-.9) = 10

Front 43

What are the three perspectives that make up the classical models ideas about the macro economy?

Back 43

1. Macro is just a simple aggregation of Macro
2. Say's law holds (supply creates its own demand)
3. Engine of growth is supply
A.S. self corrects to full employment, vertical at potential GDP, and government interference will make it worse.
Policy: Laissez Faire

Front 44

What five perspectives make up the Keynesian ideas about the macro economy?

Back 44

1. Macro > Micro because of expectations. Negative expectations creating inadequate AD (recessionary gap). Positive expectations creating excessive AD (inflationary gap)
2. May - self - correct in the long run, but... "In the long run, we are all dead!"
3. Say's law doesn't hold
4. Demand can be the engine of growth
5. Government can stabilize the economy through fiscal and monetary policy.
2. Ov

Front 45

How do you calculate Real GDP?

Back 45

Real GDP = (Nominal GDP / GDP Deflation) x 100

Front 46

How many federal reserve district banks are there?

Back 46

12 Banks

Front 47

What is a stabilization Policy? Define and explain its means of effects on consumer spending.

Back 47

Stabilization Policy is a fiscal policy or a use of government spending and taxes (on middle and lower income people) to affect levels of GDP
change government spending or change tax level to change consumer spending

Front 48

What are the characteristics of an expansionary fiscal policy?

Back 48

Increase Government Spending
Decrease taxes to increase consumer spending & AD

Front 49

What are the characteristics of a contractionary fiscal policy?

Back 49

Decrease Government Spending
Increase taxation to decrease consumer spending & AD
(Political Suicide)

Front 50

What a monetary policy entail?

Back 50

The use of interest rates to affect levels of GDP.
(Changes in interest rates affect changes in Investments)

Front 51

What are the characteristics of a loose monetary policy?

Back 51

Decrease in federal reserve interest rate to increase Investments

Front 52

What are the characteristics of a tight monetary policy?

Back 52

An increase in the interest rate causes a decrease in the number of investments.

Front 53

According to the supply side theory how would you correct government intervention artificially shifting AS to the left and stagflation.

Back 53

By making production more profitable for firms and increase full employment.
Solutions:
1. Increase tax incentives to: work, save, and Invest
2. Deregulation
3. Ease Trade Barriers
4. Infrastructure Development
5. Invest in Human Capital
6. Business Friendly Expectations

Front 54

How would the Keynesian model fix a recessionary gap?

Back 54

It would advocate shifting the AD right by increasing government spending (initial spending) increasing consumer spending (Induced spending).

Front 55

How would the Keynesian Model fix an inflationary gap?

Back 55

Increase the interest rate to decrease the investment rate. (Tight Monetary Policy).

Front 56

What are the supply side criticisms of the Keynesian Solutions?

Back 56

1. Creates Inflation and unemployment.
2. Decreases standard of living (Lower Real GDP).

Front 57

What are the three Keynesian Criticisms of Supply Side Solutions?

Back 57

1. Excuse to make the rich richer (i.e. increase income inequality.)
2. Increase Profitablity doesn't mean Increased production. (ie increased mergers)
3. Irresponsible tax cuts (evidence: increase budget deficit and debt).

Front 58

Describe the organization of the Federal Reserve.

Back 58

U.S. Central Bank
12 District Banks
7 Members of the board of governors
14 year non-reservable term
Chairman: 4 terms
Federal Open Market Committee
12 members: 7 BOCY, 5 Rotating

Front 59

What are the goals of the federal reserve?

Back 59

1. Sustainable Economic Growth
2. Sustainable Prices
3. Full Employment

Front 60

What are the steps taken from changing the interest rate to changing GDP?

Back 60

Change in interest rate causes change in investment, causes
change in Shift of AD, causes
change in GDP.

Front 61

What monetary policy do you want to use if economy is in recessionary gap? Expansionary gap?

Back 61

Recessionary Gap: Want lose monetary policy.
Expansionary Gap: Want tight monetary policy.

Front 62

What is money?

Back 62

A unit of exchange and repayment for debt.

Front 63

What is the interest rate?

Back 63

The price of money (determined in the market) "r"

Front 64

What is the Money Multiplier?

Back 64

Fraction:
1/RR (Reserve Requirement)

Front 65

How do you calculate the Induced change in Money supply?

Back 65

Induced Change in Money Supply = Initial Excess Reserve x Money Multiplier.

Front 66

What affect would a decrease in "r" have on the money market?

Back 66

Decreasing "r" would increase investments which would shift AD right shifting the Money supply to the right.

Front 67

What affect would an increase in "r" have on the money market?

Back 67

Increasing "r" would decrease investments which would shift AD left which would shift the Money supply left.

Front 68

What role do commercial banks play?

Back 68

They control the money supply, however are subject to Federal Reserves' Reserve Requirement "RR"

Front 69

What are the three actions available to the Federal Reserve?

Back 69

1. Change Reserve Requirement
(Amount of $ commercial banks must hold)
2. Change in the Discount Rate (rate of interest Fed charges for loans)
3. Open Market Operators (the buying and selling of Government securities)

Front 70

If the federal Reserve chose to change the reserve requirement would it be increased or decreased if the economy was in a recessionary gap? Expansionary Gap?

Back 70

Recessionary Gap: Decrease RR
Expansionary Gap: Increase RR

Front 71

If the federal Reserve chose to change the discount rate would it be increased or decreased if the economy was in a recessionary gap? Expansionary Gap?

Back 71

Recessionary Gap: Decrease DR
Expansionary Gap: Increase DR

Front 72

If the federal reserve chose to sell government securities would it buy or sell them if the economy was in a recessionary gap? Expansionary Gap?

Back 72

Recessionary Gap: Buy Gov. Securities
Expansionary Gap: Sell Gov. Securities

Front 73

What are the three "mechanics" of the federal reserve?

Back 73

Three Books:
1. Beige Book (Current Econ. Conditions)
2. Green Book (Econ. Forecast)
3. Blue Book (Staff Policy Recommendations).