NEW MACRO EXAMQUESTIONS AND ANSWERS
1. How does the Bureau of Economic Analysis (BEA) calculate the overall price level?
Once they know the CPI, how do they calculate the inflation rate for the country? -
Answers - BEA uses CPI(consumer price index)
CPI(2022)= (cost of market basket in 2023)/(cost of market basket in base-year, 1982)
Market basket= a set of goods that an average American consumer purchases in a
year.
2. Why does inflation happen? - Answers - Short-run: business cycle(if there is a boom,
then inflation occurs)
Long-run: money supply(printing $) determines inflation.
Market forces can create inflation(more demand, less supply)
3. What is hyperinflation? Explain the German hyperinflation of 1921-1923 - Answers -
Hyperinflation: out of control inflation. Why? Printing too much money can create
hyperinflation.
The Treaty of Versailles required Germany to pay reparations.
Germany starts to print marks to pay reparations.
In Nov. 1923, $1=4.2 trillion marks
4. What are the five problems that inflation creates? - Answers - Shoe-leather costs:
inflation makes money lose value. Ppl. go around to invest their money to protect its
value.
Menu-costs: rising prices require changing the menu all the time.
Unit of account: inflation makes money less reliable in measuring value of a product.
Winners/losers: inflation creates winners/losers. Ppl. on fixed incomes lose. Borrowers
win, leaders lose from higher-than-expected inflation.
Rising Inequality: some goods' prices rise faster than others, redistributing income in out
society.
5. Define deflation and disinflation. Is deflation good for the country? Explain. - Answers
- Deflation: decrease in prices (CPI down)
Disinflation: decrease in inflation rate (CPI still going up)
Example: 1979-83, FED raises interest rates, which gives us disinflation.
Deflation (prices go down), then company profits go down, so they fire ppl.,
unemployment goes up, demand for goods goes down , back to deflation.
Deflation creates a vicious cycle.
Japan's deflation: 1999-2012(Lost Decade of Japan)
6. What is the difference between nominal and real interest rates? - Answers - Suppose
your savings account pays 5% nominal interest, inflation is 3%, then the real interest is
2%.
Real interest= Nominal interest-inflation
, 7. What do short-run and long-run Phillips Curves tell us? - Answers - In the Short-Run,
as inflation goes up, unemployment goes down.
In the Long-Run, there is not a relationship between inflation and unemployment.
If an economy is in equilibrium, which equality should hold? - Answers - AS=AD
Y=C+I+G+X-IM
9. Write down the generic equation for the consumption function and explain each of its
components. What would make consumers spend more or less? - Answers - C= a+byd
A: y-intercept, autonomous consumption(consumption if disposable income is zero).
B: slope, marginal propensity to consume(MPC), percentage of additional dollar that
goes to C.
In an upward shift of the ACF, if C goes up then either it is due to optimism about the
economy's future, or household wealth is going up(stock market/home prices going up)
In a downward shift of the ACF, pessimism and wealth going down would reduce
consumption.
10.What is the Paradox of Thrift? What is the accelerator principle? - Answers - If
recession occurs, the ppl try to save more.
If ppl save more, the C and AD go down.
Recession becomes worse.
Then, national savings go down.
11. What are the three factors that affect how much businesses invest? - Answers -
Business investment: spending by companies on physical capital (machines,
computers, offices, buildings etc.)
I(investment) goes up if interest rates are lower
I goes up if business confidence is higher
I goes up if businesses have less unused(idle) capacity.
What does "automatic stabilizer" mean? Provide examples from our
Economy. - Answers - Automatic Stabilizer: government policies that automatically
reduce GDP fluctuations.
Example: unemployment benefits, food stamps, tax rates go down for poor ppl
13. Explain the adjustment process of the economy if supply and demand are not equal.
- Answers - Case 1: Y>C+I+G+X-IM
Then inventories are going up
Then production(Y) goes down
Then economy goes back to y=C+I+G+X-IM
Case 2: Y<C+I+G+X-IM
Then inventories are going down
Then production(Y) goes up
The economy goes back to Y=C+I+G+X-IM
1. How does the Bureau of Economic Analysis (BEA) calculate the overall price level?
Once they know the CPI, how do they calculate the inflation rate for the country? -
Answers - BEA uses CPI(consumer price index)
CPI(2022)= (cost of market basket in 2023)/(cost of market basket in base-year, 1982)
Market basket= a set of goods that an average American consumer purchases in a
year.
2. Why does inflation happen? - Answers - Short-run: business cycle(if there is a boom,
then inflation occurs)
Long-run: money supply(printing $) determines inflation.
Market forces can create inflation(more demand, less supply)
3. What is hyperinflation? Explain the German hyperinflation of 1921-1923 - Answers -
Hyperinflation: out of control inflation. Why? Printing too much money can create
hyperinflation.
The Treaty of Versailles required Germany to pay reparations.
Germany starts to print marks to pay reparations.
In Nov. 1923, $1=4.2 trillion marks
4. What are the five problems that inflation creates? - Answers - Shoe-leather costs:
inflation makes money lose value. Ppl. go around to invest their money to protect its
value.
Menu-costs: rising prices require changing the menu all the time.
Unit of account: inflation makes money less reliable in measuring value of a product.
Winners/losers: inflation creates winners/losers. Ppl. on fixed incomes lose. Borrowers
win, leaders lose from higher-than-expected inflation.
Rising Inequality: some goods' prices rise faster than others, redistributing income in out
society.
5. Define deflation and disinflation. Is deflation good for the country? Explain. - Answers
- Deflation: decrease in prices (CPI down)
Disinflation: decrease in inflation rate (CPI still going up)
Example: 1979-83, FED raises interest rates, which gives us disinflation.
Deflation (prices go down), then company profits go down, so they fire ppl.,
unemployment goes up, demand for goods goes down , back to deflation.
Deflation creates a vicious cycle.
Japan's deflation: 1999-2012(Lost Decade of Japan)
6. What is the difference between nominal and real interest rates? - Answers - Suppose
your savings account pays 5% nominal interest, inflation is 3%, then the real interest is
2%.
Real interest= Nominal interest-inflation
, 7. What do short-run and long-run Phillips Curves tell us? - Answers - In the Short-Run,
as inflation goes up, unemployment goes down.
In the Long-Run, there is not a relationship between inflation and unemployment.
If an economy is in equilibrium, which equality should hold? - Answers - AS=AD
Y=C+I+G+X-IM
9. Write down the generic equation for the consumption function and explain each of its
components. What would make consumers spend more or less? - Answers - C= a+byd
A: y-intercept, autonomous consumption(consumption if disposable income is zero).
B: slope, marginal propensity to consume(MPC), percentage of additional dollar that
goes to C.
In an upward shift of the ACF, if C goes up then either it is due to optimism about the
economy's future, or household wealth is going up(stock market/home prices going up)
In a downward shift of the ACF, pessimism and wealth going down would reduce
consumption.
10.What is the Paradox of Thrift? What is the accelerator principle? - Answers - If
recession occurs, the ppl try to save more.
If ppl save more, the C and AD go down.
Recession becomes worse.
Then, national savings go down.
11. What are the three factors that affect how much businesses invest? - Answers -
Business investment: spending by companies on physical capital (machines,
computers, offices, buildings etc.)
I(investment) goes up if interest rates are lower
I goes up if business confidence is higher
I goes up if businesses have less unused(idle) capacity.
What does "automatic stabilizer" mean? Provide examples from our
Economy. - Answers - Automatic Stabilizer: government policies that automatically
reduce GDP fluctuations.
Example: unemployment benefits, food stamps, tax rates go down for poor ppl
13. Explain the adjustment process of the economy if supply and demand are not equal.
- Answers - Case 1: Y>C+I+G+X-IM
Then inventories are going up
Then production(Y) goes down
Then economy goes back to y=C+I+G+X-IM
Case 2: Y<C+I+G+X-IM
Then inventories are going down
Then production(Y) goes up
The economy goes back to Y=C+I+G+X-IM
