Macroeconomics Exam #2

Front 1

Gross Domestic Product (GDP)

Back 1

market value of all FINAL goods/services produced W/IN A COUNTRY, during a specific time period

Front 2

Only the market value of the ___ goods/service count, not ____ goods

Back 2

final; intermediate

Front 3

Does Bobby's Social Security Check count towards GDP?

Back 3

No (transfer payment)

Front 4

Dr. Calhoun purchases 100 shares of Apple.. GDP?

Back 4

No (nothing produced/no service provided)

Front 5

If Calhoun purchases shares from broker.. GDP?

Back 5

Yes (broker provides a service)

Front 6

Buying illegal drugs.. GDP?

Back 6

No (underground, not declaring taxes)

Front 7

For GDP, only the FINAL market value of goods/services are counted bc...

Back 7

this shows the value consumers place on the good/services

Front 8

A local car dealership buys a used Saturn for $5,000, refurbishes it, and resells for $6,000. What's added to GDP?

Back 8

$1,000

Front 9

Anything ___ is not included in GDP

Back 9

produced in a foreign country

Front 10

Ford (a U.S. based company), produces a vehicle in Japan but sells it here in the US. What country will include it in their GDP?

Back 10

Japan

Front 11

BMW (german company), produces a car in the US & exports it to germany. What country will include it in their GDP?

Back 11

US, bc that's where it's produced

Front 12

Gross National Product (GNP)

Back 12

includes everything in GDP PRODUCED BY U.S. CITIZENS as well as production in foreign countries by U.S. citizens

Front 13

What happens to U.S. GNP when an American owned Starbucks makes a sale in Europe?

Back 13

Goes up

Front 14

What happens to U.S. GDP when an American owned Starbucks makes a sale in Europe?

Back 14

Stays the same bc it's not produced in the U.S.

Front 15

GDP ___ include the income payments to foreigners for their work in the U.S.

Back 15

will

Front 16

GNP _____ include work done by foreigners in the US

Back 16

will not

Front 17

GDP measures the output produced w/in a specific country. GNP measures the output of ___ of a specific country

Back 17

citizens

Front 18

How do you calculate GDP?

Back 18

1. The Expenditure Approach
2. Income Approach

Front 19

The Expenditure Approach:

Back 19

Y = C + I + G + X

Front 20

Y=
C=
I=
G=
X=

Back 20

Y = GDP
C = Consumption (by consumers)
I = Investment (business/home purchases)
G = Government Purchases
X = Exports - imports (net exports) [what foreigners buy]

Front 21

___ purchases include food, clothing, & medical services

Back 21

Consumption

Front 22

___ is the largest component of GDP with 67%

Back 22

consumption

Front 23

Gross Private Investment includes

Back 23

purchases of machinery & building used in the production process; investment goods-->will help produce goods in future

-new home sales

Front 24

If businesses are investing in capital, then production should ____

Back 24

capital

Front 25

If businesses aren't investing in capital, then output is likely ___ or ___

Back 25

constant; decreasing

Front 26

A business produced $5 million of goods in 2005, but could only sell $4 mill worth of those goods. Is the $1 mill increase in inventory factored into GDP?

Back 26

Yes, bc the goods have been produced

Front 27

Dr. Calhoun purchased a new house for $200,000 in 2010 & sells it for $250,000 in 2013. What was the added GDP in 2010 at the time of his initial purchase

Back 27

$200,000

Front 28

What is added to GDP in 2013 from current sale?

Back 28

$0 (only new home sales count)

Front 29

Government purchases include:

Back 29

payments to law enforcement, veterans hospitals, & construction of roads & buildings
-No market prices for this so its value to GDP isn't perfect

Front 30

Net Exports

Back 30

the diff btw exports & imports

Front 31

if a country has net exports of $12.3 billion & sold $48.5 billion of goods/services to foreign nations, then exports are ___ & imports are ___

Back 31

48.5; 36.2

Front 32

Income Approach

Back 32

sum of all income generated from the population of goods/services

Front 33

Can calc GDP based on:

Back 33

how much ppl spend or how much they make

Front 34

GDP is thus a measure of both ___ & ___

Back 34

expenditure; income

Front 35

What is the largest component of GDP using the expenditure approach?

Back 35

consumption

Front 36

What is the largest component of GDP using the income approach?

Back 36

income of employees

Front 37

Consumption is ___ than all other components of GDP combined

Back 37

greater

Front 38

Since GDP doesn't fully acct for improvements in the quality of goods, the GDP calc is ___

Back 38

understated

Front 39

An addition to a used car may only cost $5,000, but may increase the value of the car by $10,000. GDP would acct for___

Back 39

$5,000, assuming it's not sold

Front 40

What does GDP measure?

Back 40

The wealth of a nation

Front 41

___ in GDP is a good sign of progress for a nation

Back 41

Growth

Front 42

___ GDP (output), leads to ___ income

Back 42

higher; higher

Front 43

Inflation refers to a general ___ in prices

Back 43

rise

Front 44

To compare GDP across 2 time periods, ___ must be accted for

Back 44

inflation

Front 45

Inflation is calc as the ___

Back 45

percent change in an index

Front 46

An increase in price level req ppl to hold ___ money and therefore deposit ___ money into the bank

Back 46

more; less

Front 47

Inflation is measure using:

Back 47

-Consumer Price Index (CPI)
-GDP Deflator

Front 48

CPI uses ___, while the GDP Deflator uses ___

Back 48

consumer goods; more than just consumer goods

Front 49

2007: 2 packs of ramen = $10; 2008: 2 packs of ramen = $20. What happened to prices? Did production increase

Back 49

Prices doubled; no still produce same amt

Front 50

Main reason for measuring price change is to be able to compare __ ___ __ ___ __ __ ___

Back 50

dollar figures (from GDP) across diff periods of time

Front 51

If the GDP Deflator is 120 in 2008 and 100 in 2006, then prices rose by ___%

Back 51

20

Front 52

If the CPI measured 150 in 2008, then prices rose by ___% since the based year

Back 52

50

Front 53

If the CPI rises, then you'll have to use ___ dollars to buy the same amt of good

Back 53

more

Front 54

What is the difference btw nominal GDP & real GDP?

Back 54

Real GDP is adjusted for inflation

Front 55

real GDP =

Back 55

Nominal GDP - inflation

Front 56

Given that nominal GDP increases by 3%, what happens to prices?

Back 56

rose by 2%

Front 57

Given that the dollar value of GDP increases by 3% & real GDP increases by 6%, what has happened to prices?

Back 57

drop 3% in prices

Front 58

During a period of rising prices, do real GDP & nominal GDP increase @ the same rate?

Back 58

No, nominal (which includes inflation) will increase more

Front 59

Over a period of a year, real GDP fell by 2% but nominal (dollar value) of GDP rose by 2%, what happened to prices?

Back 59

increase in 4% for inflation (-2% = 2% - x)

Front 60

Over a period of a yr, real GDP increased by 3% but nominal GDP rose by 5%, what happened to prices?

Back 60

rose 2%

Front 61

The change in nominal GDP will always exceed the change in real GDP when nominal GDP is ___ & prices are ___

Back 61

rising; rising

Front 62

Problems w/GDP:

Back 62

1. Household chores not considered in GDP
2. Underground economy
3. Doesn't acct for quality of life
4. No adjustments for natural disasters/war/terrorism
5. Not effected when companies pollute

Front 63

If you decide to hire a housekeeper to clean your house rather than do it yourself, GDP ___

Back 63

increases

Front 64

Since GDP doesn't acct for illegal activities, GDP calc is ___

Back 64

understated

Front 65

Business cycle:

Back 65

ref to the economic fluctuations that occur in industrialized nations

Front 66

___ occur during expansionary times. ___ occur during recessionary times

Back 66

higs; lows

Front 67

Average growth rate of business cycle has historically been ___

Back 67

3%

Front 68

A ___ is def as 2 consecutive quarters of declining GDP

Back 68

recession

Front 69

A ___ is def as a prolonged recession w/a sharp decline in economic activity

Back 69

depression

Front 70

Expansionary phases are char by ___ unemployment & ___ real output

Back 70

decreasing; increasing

Front 71

Recessionary phases are char by ___ unemployment & ___ real output

Back 71

increasing; decreasing

Front 72

There is an ___ relationship btw growth of output & unemployment

Back 72

inverse

Front 73

Although the avg growth rate is 3%, there's always fluctuations in real world. How would you char the current state of the economy in terms of unemployment & growth

Back 73

unemployment --> decrease
GDP --> increase

Front 74

___ is made up of indivs over the age of 16 that aren't household wrkers, students, retirees, disables, or institutionalized

Back 74

labor force

Front 75

An ___ indiv is a person who isn't working, but is looking for a job/waiting to being/return to a job

Back 75

unemployed

Front 76

If you aren't employed & aren't looking for work then...

Back 76

you're not in the labor force

Front 77

A laid off worker waiting to get back to work @ previous job

Back 77

unemployed

Front 78

housekeeper working once a week while looking for another job

Back 78

employed

Front 79

What happens when ppl who were working/looking for work do neither anymore? The # of ppl unemployed ___ & the labor force ___

Back 79

decrease; decrease

Front 80

What is the Labor Force Participation Rate (LFPR)?

Back 80

Employed + Unemployed / civilian pop over 16yrs
OR
Labor force / civilian pop over 16yrs

Front 81

What is the Unemployment Rate?

Back 81

Unemployed / Employed + Unemployed
OR
Unemployed / labor force

Front 82

You just finished high school (no college) & start looking for 1st job, but haven't found one yet. The LFPR ___ and the UR ___

Back 82

increases, increases

Front 83

If your friend loses his job & decides to relax instead of looking for a job, then what happens to the LFPR & UR?

Back 83

decreases; increases

Front 84

Jorge loses his job and begins looking for another, what happens to LFPR & UR

Back 84

no change, increase

Front 85

___ unemployment is due to lack of info btw potential employer/employee

Back 85

frictional

Front 86

Using the internet to post job openings ___ amt of time of frictional unemployment

Back 86

decreases

Front 87

If a great job candidate receives several job offers, but is waiting for a better option, then they're experiencing ___

Back 87

frictional unemployment

Front 88

___ unemployment is due to a lack of skills of a potential employee

Back 88

structural

Front 89

___ unemployment is due to recessions

Back 89

cyclical

Front 90

T/F: When the labor market is operating efficiently, there will be a lg amt of cyclical unemployment

Back 90

FALSE, there should be none; everyone that wants job has one

Front 91

One theory to explain current high unemployment is that indivs need to increase their level of education. This is considered ___ unemployment

Back 91

structural

Front 92

Another possible theory to explain the current high unemployment rate is the idea that the US may be in a constant recessionary phase. This would be ___ unemployment

Back 92

cyclical

Front 93

The __ __ _ ___ is the sum of the structural & frictional unemployment rates when there is no cyclical unemployment

Back 93

natural rate of unemployment

Front 94

The Natural rate of unemployment is around

Back 94

5%

Front 95

Full employment occurs when the cyclical unemployment rate is = to __

Back 95

0

Front 96

When the cyclical unemployment rate is = to 0, the nation is considered to be @ ___ or ___

Back 96

full employment; natural rate of unemployment

Front 97

T/F: When full employment occurs, the unemployment rate is 0

Back 97

FALSE; 5%

Front 98

T/F: When full employment is present, there will not be any structural unemployment

Back 98

FALSE; will be structural + frictional

Front 99

T/F: The actual rate of unemployment will = the natural rate of unemployment when the nation is experiencing full employment

Back 99

TRUE

Front 100

T/F: Unemployment will still be present when the economy is operating efficiently

Back 100

True; 5% will exist

Front 101

Full employment occurs when __% of the labor force is employed

Back 101

95

Front 102

In LR equilibrium, the actual rate of unemployment will be __ __ the natural rate of unemployment

Back 102

equal to

Front 103

If the economy is in a recession, the actual rate of unemployment will be __ __ the natural rate of unemployment

Back 103

greater than

Front 104

When the actual rate of unemployment is less than the natural rate of unemployment, then the economy will be operating at an output that is __ __ its LR potential

Back 104

greater than

Front 105

__ GDP is the output that occurs when the nation is operating @ the natural rate of unemployment (full employment)

Back 105

potential

Front 106

___ GDP is the actual output that occurs in the nation; can be >, <, or = potential output

Back 106

actual

Front 107

When the nation is in a recession, actual GDP is ___ than potential GDP. The unemployment rate will ___, which will lead to __ pressure on prices

Back 107

less; rise; downward

Front 108

When the nation is in a boom, actual GDP is __ than potential GDP. The unemployment rate will ___, which will lead to __ pressure on prices

Back 108

greater; fall; upward

Front 109

When an economy is operating @ its LR potential output level, then the natural rate of unemployment & the actual rate of unemployment are __

Back 109

equal

Front 110

If the actual rate of unemployment is greater than the natural rate of unemployment, then actual output is ___ than potential output

Back 110

less

Front 111

The actual unemployment rate will be less than the natural unemployment rate during a ___

Back 111

boom/expansion

Front 112

Inflation will generally cause __ in nominal wages/prices

Back 112

increases

Front 113

Unanticipated inflation can cause problems bc it:

Back 113

1. Reduces investment
2. Distorts info delivered by prices & results in..
3. Less productive use of resources

Front 114

Nominal wage is your stated wage. Real wages adjust for ___

Back 114

inflation

Front 115

real wage =

Back 115

nominal wage - inflation

Front 116

If you received a 2% increase in your nominal wage but inflation was 6%, then your real wage ___ and your nominal wage ___

Back 116

decreases; increases

Front 117

You get a wage increase that rises by a greater percentage than the inflation rate. How could you explain this in terms of nominal/real wages

Back 117

both increase

Front 118

You get a raise of $50/wk at your job, but you can't buy as much stuff as you could buy before your raise. How could you explain this in terms of nominal/real wages?

Back 118

nominal increases; real decrease.

Front 119

4 kep markets in the macroeconomy:

Back 119

1. Goods/services market
2. Resource market
3. Loanable funds market
4. Foreign Exchange market

Front 120

__ __ is the sum of all demand for goods/services in all markets

Back 120

aggregate demand

Front 121

Aggregate demand is the relationship btw _____ & _____

Back 121

amt of goods desired; price level

Front 122

Why does aggregate demand slope downward?

Back 122

1. Purchasing power of the dollar increases (more goods @ lower prices
2. Interest rate effect stimulating demand for money
3. Relative Price of Domestic & Foreign goods

Front 123

When price level ___, the purchasing power of the dollar __ which induces ppl to buy ___

Back 123

decreases; increases; more
increases; decreases; less

Front 124

___ ___ is the sum of all supply of goods & services in all markets

Back 124

aggregate supply

Front 125

Aggregate supply is the relationship btw the ___ & ___

Back 125

amt of goods offered for sale; price level

Front 126

____ curve is upward sloping since increase in the price level will induce businesses to make more goods

Back 126

SRAS

Front 127

Since prices (wages) are fixed for some resources in SR, profits will usually __ when prices __

Back 127

rise; rise

Front 128

Higher prices lead to higher profits since costs are kept ___ to fixed wages

Back 128

constant

Front 129

T/F: In SR, ppl/businesses are able to adjust to changes in the price level

Back 129

FALSE; accept wages as fixed for certain amt of time

Front 130

Therefore, when prices go up, businesses will make __ money in the SR since wages are fixed

Back 130

more

Front 131

In SR, costs (wages) will increase __ than prices due to long-term contracts

Back 131

less

Front 132

If current prices are higher than previously anticipated, the actual rate of unemployment will be __ __ the natural rate of unemployment

Back 132

less than

Front 133

___ curve is vertical, since an increase in the price level will not induce businesses to make more goods

Back 133

LRAS

Front 134

LRAS is determined by:

Back 134

1. level of technology
2. quantity of resources present
3. efficiency of its institutional structures

Front 135

The vertical LRAS curve demonstrates that an ___ in price level will ___ ___ AS

Back 135

increase OR decrease; not affect

output remains fixed

Front 136

The vertical LRAS curve shows that an ___ in price level will __ __ the economy's sustainable rate

Back 136

increase OR decrease; not affect

Front 137

T/F: In LR, ppl/businesses are able to adjust to changes in the price level by modifying their purchase behavior & asking for raises

Back 137

true

Front 138

LRAS curve will be place @ level of output where __ ___ exists

Back 138

potential GDP

Front 139

The economy is in __ __ where the SRAS curve intersects the AD curve

Back 139

SR equilibrium

Front 140

The economy is in __ __ where the SRAS, LRAS, and AD intersect

Back 140

LR equilibrium

Front 141

T/F: Output level of potential GDP is the max production possible for the U.S.

Back 141

False; potential GDP = full employment which is only 95%

Front 142

In LR equilibrium, the natural rate of unemployment is __ __ actual rate of unemployment

Back 142

= to

Front 143

When the economy is in LR equilibrium, the nation will be experiencing:

Back 143

1. Full employment
2. Natural rate of unemployment
Potential output, Y*

Front 144

___ ___ is the place where labor service, raw materials, machines, & other factors of production are bought & sold

Back 144

resource market

Front 145

__ is largest component of resource market

Back 145

labor

Front 146

An __ in demand for the good/service will cause an __ in demand for the resource (labor)

Back 146

increase; increase
decrease; decrease

Front 147

An __ in the price of resources will lead to a __ in supply of goods produced using that resource

Back 147

increase; decrease
decrease; increase

Front 148

__ __ __ is the place where borrowers demand and lenders supply funds (banks)

Back 148

loanable funds market

Front 149

The price in the loanable funds market is the __ __

Back 149

interest rate

Front 150

If businesses desire more funds to expand operations, then what happens to the loanable funds market?

Back 150

interest price increases & quantity of loans increases

Front 151

An __ in the interest rate will discourage consumption & encourage saving

Back 151

increase

Front 152

A __ in the interest rate will encourage borrowing/spending since money will be cheap to borrow

Back 152

decrease

Front 153

If the nominal interest rate was 10% and the inflation rate was 5% in 1990, while the nominal interest rate was 6% & inflation was 2% in 2000, then which time period had higher real interest

Back 153

1990

Front 154

If expected inflation is constant (no inflation), then when nominal interest rate falls the real interest rate will __ by __

Back 154

fall; same amt

Front 155

T/F: Real interest rates are always pos

Back 155

FALSE

Front 156

T/F: nominal interest rates are always pos

Back 156

True; nominal is what's stated on contract, must be positive

Front 157

When there's an increase in the expected inflation rate, the nominal interest rate must ___

Back 157

rise

Front 158

__ __ __ is where imports (exports) are bought (sold)

Back 158

foreign exchange market

Front 159

as more imports are bought, there tends to be a trade __ and capital __

Back 159

deficit; inflow

Front 160

as more exports are sold, there tends to be a trade __ & a capital __

Back 160

surplus, outflow

Front 161

When a nation is experiencing a trade deficit, they must also experience a capital __

Back 161

inflow

Front 162

If Am buy more Chinese goods, the demand for Chinese currency __

Back 162

increases

Front 163

When a nation is experiencing a trade surplus, it must also experience a capital __

Back 163

outflow

Front 164

If net exports are neg, then __ are greater than __. The nation is therefor experiencing a capital __ which means that foreigners are buying __ of Am assets

Back 164

imports; exports; inflow; more

Front 165

If the dollar price of the English pound decreases from $1.90 to $1.80, then the dollar has __

Back 165

appreciated

Front 166

If the dollar price of the English pound has increased from $2.00 to $2.50, then the dollar has __

Back 166

depreciated

Front 167

When the dollar appreciated against a foreign currency, foreign goods are __ expensive for Am's. Exports will __ .

Back 167

less; decrease

Front 168

When the dollar depreciates against a foreign currency, foreign goods are __ expensive for Am's. Exports will __

Back 168

more; increase

Front 169

__ __ are forseen by indivs which allows them to make adjustments

Back 169

Anticipated changes

Ex: Seasonal changes

Front 170

__ __ are those that catch indivs by surprise

Back 170

unanticipated changes

ex: hurricane

Front 171

Factors that shift agg dem:

Back 171

1. Changes in real wealth
2. Changes in the real interest rate
3. Changes in expectations of future economy
4. Changes in expected rate of inflation
5. Changes in real income abroad
6. Changes in exchange rates

Front 172

Increase in real wealth (boom in house/stock market) will shift AD __. Decrease in real wealth, shift AD __

Back 172

R; L

Front 173

Lower real interest rate will make houses/cars cheaper now, inducing consumers to purchase now, so lower interest rate will shift AD __; high interest rate will shift AD __

Back 173

right; left

Front 174

an increase in the real interest rate will cause consumers to __ their purchase of cars/homes

Back 174

decrease

Front 175

Good expectations of future economy will shift AD __; pessimistic expectations will shift it __

Back 175

right; left

Front 176

If housing prices are expected to rise, consumers will purchase __ housing now

Back 176

more

Front 177

If European economies are in the midst of a recession, the US net exports will ___ and AD will shift __

Back 177

decrease; left

Front 178

If Japan is experiencing a growth in their income, U.S. net expoerts will __ and AD will shift __

Back 178

increase; right

Front 179

When dollar appreciated against foreign currency, imports become __. Therefore, AD shifts __.

Back 179

cheaper; left

Front 180

When dollar depreciates against a foreign currency, we export __ . Thus, AD shifts __

Back 180

more; right

Front 181

An increase in AD will __ inflation & GDP __

Back 181

increase; increase

Front 182

A decrease in AD will __ inflation & GDP __

Back 182

decrease; decreases

Front 183

Factors that can shift LRAS:

will also shift SRAS

Back 183

1. Resource base
2. Level of technology
3. Social infrastructure (rules)

Front 184

Factors that shift SRAS (& not necessarily LRAS):

Back 184

1. Change in resource prices
2. Changes in expected rate of inflation
3. Supply shocks (drought, hurricane)

Front 185

Increase in SRAS will __ inflation & GDP ___

Back 185

decrease; increases

Front 186

Decrease in SRAS will __ inflation & GDP ___

Back 186

increase; decreases

Front 187

The immediate effects of a supply shock due to a sharp increase in price of oil will lead to __ price level & __ GDP

Back 187

increasing; decreasing

Front 188

When the economy is experiencing an economic boom & operating beyond capacity, strong demand for investment funds will ___ interest rates

Back 188

increase

Front 189

When an economy is operating beyond full employment rate, excess demand will lead to __ resource prices which will __ costs & direct the economy toward full employment

Back 189

higher; increase

Front 190

An unanticipated increase in AD will lead to what in the SR:

Back 190

1. increase in output
2. higher prices
3. appreciation of dollar

Front 191

When economy is operating beyond its LR capacity (boom) due to unanticipated increase in AD, we can expect resource prices to __ & real interest rates to ___. This will force SRAS to shift __ and output will return to __ levels

Back 191

rise; rise; left; LR

Front 192

If the economy is in LR equilibrium & there's an increase in AD then what will happen in LR?

Back 192

inflation

Front 193

If theres an unanticipated increase in AD when the economy is initially in LR equilibrium, then a TEMPORARY increase in output & employment will occur

Back 193

1 to 2

Front 194

If the economy is producing below its full employment level, then there will be __ demand for investment which will __ real interest rates

Back 194

weak; decrease

Front 195

When economy is experiencing a recession & operating below capacity, weak demand for investment funds will __ interest rates

Back 195

decrease

Front 196

When the economy is experiencing a recession due to an unanticipated decrease in AD, __ interest rates & __ resource prices will act as a stabilizing force

Back 196

falling; lower

Front 197

For an oil importing country, a supply shock caused by a decrease in price of imported oil will tend to __ the general level of prices & __ real output

Back 197

decrease; increase

Front 198

If the shock isn't temporary, then ___ would shift in direction of SRAS

Back 198

LRAS

Front 199

If economy is operating at LR equilibrium & SR equilibrium @ same time, then:

Back 199

1. Full employment/nat rate of unemployment
2. @ potential GDP
3. growing @ 3%

Front 200

Will there be a self correcting mech in the market when there's disequilibrium & economic instability?

Back 200

Yes

Front 201

Key drivers of self-correcting mech are:

Back 201

1. Interest rates
2. Resource prices