ECON 104 BILLE GOFFE FINAL EXAM QUESTIONS REVIEWED AND REVISED WITH CORRECT ANSWERS

ECON 104 BILLE GOFFE FINAL EXAM QUESTIONS REVIEWED AND REVISED WITH CORRECT ANSWERS "Real GDP per capita is an imperfect measure of well being because.... - CORRECT ANSWER 1. It does not account for income inequality 2. RGDP per capita does not adjust for pollution 3. RGDP per capita does not account for leisure time" "Labor productivity is expressed as... - CORRECT ANSWER Y/L" "Core CPI is best used to... - CORRECT ANSWER Understand if a sudden change in inflation is due to volatile items" "What would happen to real gdp per capita if labor productivity fell, but the fraction of the population working increased? - CORRECT ANSWER There is not enough information to determine if it will rise, fall, or stay the same Y/pop= L/pop x Y/L" "What is an example of a final good? - CORRECT ANSWER A delivery truck owned by UPS *all capital goods are final goods*" "What would happen to the per worker production function if human capital rose? - CORRECT ANSWER The curve shifts up *Increase in HC is an increase in "technology"" "Which of the following people is marginally attached to the labor force? Give an example - CORRECT ANSWER A mom who cannot work because her young kids have virtual school *She is not unemployed due to an economic reason*" "What is an example of a capital good? - CORRECT ANSWER A stethoscope at a doctors office" "Which of the following is a price index? A. GDP deflator B. Real GDP C. Nominal GDP D. All of the above - CORRECT ANSWER A. GDP Deflator *GDP deflator and CPI index are the only 2 price indexes*" "Which of the following is an example of monetary policy? A. Fed purchasing debt securities B. Making decisions to fulfill the dual mandate C. The treasury selling bonds D. Increasing the Fed funds rate - CORRECT ANSWER C. The treasury selling bonds" "Business Cycle: - CORRECT ANSWER Alternating economic expansion and recession" "What is expansion? - CORRECT ANSWER Total production and total employment increasing" "What is deflation? - CORRECT ANSWER Total production and total employment decreasing" "Economic Growth: - CORRECT ANSWER an increase in the amount of goods and services an economy is able to produce" "Employment levels: - CORRECT ANSWER Affected by the business cycle in the short run" "Inflation rate: - CORRECT ANSWER The percentage of increase in price levels from year to year" "What affects inflation rate? - CORRECT ANSWER The business cycle" "What is consumption? - CORRECT ANSWER Total purchases made by households" "What does consumption include? - CORRECT ANSWER Durable goods, nondurable goods, and services" "Does consumption include spending on new houses? - CORRECT ANSWER NO" "What does investment include? - CORRECT ANSWER Purchases of capital goods, additions to inventory, residential investments" "What does government purchases include? - CORRECT ANSWER Spending on goods and services by local, state, and federal governments" "What are examples of government purchases? - CORRECT ANSWER Teacher salaries, road work" "Transfer payments: - CORRECT ANSWER Payments by the government to households for financial assistance" "What is an example of a transfer payment? - CORRECT ANSWER Social Security" "Government Expenditures= - CORRECT ANSWER Government purchases + transfers + interests (on its debt)" "Net Exports: - CORRECT ANSWER Goods and services produced in the US and sold to foreign firms, households and governments" "Net Exports= - CORRECT ANSWER exports - imports" "Y= - CORRECT ANSWER C + I + G + NX" "GDP can also be used as a measurement of... - CORRECT ANSWER Total income" "Income is... - CORRECT ANSWER Total revenue received from a state" "% ∆ in GDP deflator= - CORRECT ANSWER new-old/old x 100%" "GDP deflator and CPI are both... - CORRECT ANSWER Price indexes" "Consumer Price Index (CPI): - CORRECT ANSWER A price index that focuses on the cost of living experienced by a typical household" "Market Basket: - CORRECT ANSWER A representative selection of goods and services consumed by a typical household" "Three biggest categories of the market basket: - CORRECT ANSWER Housing, transportation, food and beverage" "CPI= - CORRECT ANSWER (cost of basket in current year/cost of basket in base year) x 100" "Core CPI: - CORRECT ANSWER Measures CPI without including food and energy prices" "Core Rate: - CORRECT ANSWER The inflation rate measured by the percent change in core CPI" "Headline CPI: - CORRECT ANSWER Another term used to refer to regular CPI, which DOES include food and energy prices" "Deflating Method Formula: - CORRECT ANSWER Real price= 100/ CPI for current year x Nominal Price" "nominal interest rate: - CORRECT ANSWER the stated interest rate on a loan" "real interest rate: - CORRECT ANSWER the interest rate corrected for the effects of inflation on purchasing power" "Real Interest Rate= - CORRECT ANSWER nominal interest rate - inflation rate" "When inflation is higher than expected... - CORRECT ANSWER Bad for lenders, good for borrowers" "Problems with anticipated inflation: - CORRECT ANSWER 1. redistribution of income 2. paper money 3. menu costs" "Problems with deflation: - CORRECT ANSWER 1. Waiting for prices to keep falling 2. Bad for borrowers" "The FED has a goal to maintain... - CORRECT ANSWER 2% inflation" "Fiscal Policy: - CORRECT ANSWER Controlled by the president and congress" "US Treasury: - CORRECT ANSWER Executive department that manages fiscal policy" "What does the treasury control? - CORRECT ANSWER Fed expenditures and taxes" "Federal taxes do not affect... - CORRECT ANSWER government expenditures" "Bond: - CORRECT ANSWER sold by the government or a large business; offers fixed future payments to the buyer (investor)" "M1= - CORRECT ANSWER cash + checking accounts" "M2= - CORRECT ANSWER M1 + savings accounts" "monetary policy: - CORRECT ANSWER actions controlled by the fed to manage the money supply and interest rates" "Feds dual mandate: - CORRECT ANSWER To promote effectively the goals of 1)maximum employment, 2)stable prices, and moderate long-term interest rates" "Notation for Economic growth model: - CORRECT ANSWER Y= real gdp L = number of workers Y/L = real gdp per worker, aka labor productivity pop = the population of a country Y/pop = real Gdp per capita L/pop = proportion of the population in the labor force" "Economic growth model formula: - CORRECT ANSWER Y/pop = L/pop x Y/L" "Categories of adults without jobs who are not considered "unemployed" include: - CORRECT ANSWER retirees, homemakers, full time students, prisoners etc" "Discouraged workers: - CORRECT ANSWER people who are not actively looking for work because they have given up on finding a job" "Marginally attached workers: - CORRECT ANSWER people who have actively looked for work in the past 12 months but NOT in the past four weeks due to discouragement or personal reasons" "Labor force = - CORRECT ANSWER employed + unemployed" "Unemployment rate (U-3): - CORRECT ANSWER unemployed/labor force x 100" "Underemployed: - CORRECT ANSWER people with part time jobs are considered to be employed, even if they would prefer a full time job" "Labor force participation rate: - CORRECT ANSWER the percentage of working age (16+) U.S population who are a part of the labor force" "Labor force participation rate = - CORRECT ANSWER labor force/working age population x 100" "Potential GDP: - CORRECT ANSWER the real GDP that COULD be attained if all firms were working at capacity" "Capacity: - CORRECT ANSWER maximum output rate that can be achieved by a normal workforce" "Potential GDP increases over time: - CORRECT ANSWER caused by increases in the size of the labor force and labor productivity" "At full employment: - CORRECT ANSWER real GDP will be equal to potential GDP" "During recessions: - CORRECT ANSWER Real GDP falls below potential GDP" "Okun's law: - CORRECT ANSWER there must be some economic growth in order to keep the unemployment rate constant" "Business cycle: - CORRECT ANSWER alternating periods of economic expansion and recession shown by the fluctuations in real GDP" "Expansion: - CORRECT ANSWER when production, income, and employment are increasing" "Business cycle peak: - CORRECT ANSWER the end of the expansion phase" "Recession: - CORRECT ANSWER when production, income, and employment are decreasing" "Business cycle trough: - CORRECT ANSWER the end of the recession phase; followed by another period of expansion" "NEBR: - CORRECT ANSWER business cycle dating committee of the national bureau of economic research; decide when the economy is in a recession" "Shifts in AD or SRAS: - CORRECT ANSWER cause fluctuations in real GDP and price level" "As the price level goes up, ________ goes up as well - CORRECT ANSWER aggregate supply" "Shift: - CORRECT ANSWER Shifting the entire AD curve to the left or right *caused by a change in any other variable other than the price level*" "Monetary policy: - CORRECT ANSWER the FED takes action to manage interest rates" "Lower interest rates: - CORRECT ANSWER lower cost of borrowing for households and firms *shifts AD to the right*" "Higher interest rates: - CORRECT ANSWER higher cost of borrowing for households and firms *shifts AD to the left*" "Fiscal policy: - CORRECT ANSWER changes in federal taxes and and government purchases" "Government purchases: - CORRECT ANSWER A component of GDP increase = AD right decrease= AD left" "Personal income taxes: - CORRECT ANSWER reduce the income a household has available for consumption increase = AD left decrease= AD right" "Business taxes: - CORRECT ANSWER reduce the amount of profit a firm earns, which reduces their investment spending increase = AD left decrease= AD right" "Transfer payments: - CORRECT ANSWER payments from the government to households increase = AD right decrease= AD left" "Wealth: - CORRECT ANSWER if households have more wealth, they have more money available for consumption increase = AD right decrease= AD left" "Population: - CORRECT ANSWER If there are more people in a country, consumption will increase increase = AD right decrease= AD left" "Number of firms: - CORRECT ANSWER If there are more firms in a country, investment will increase increase = AD right decrease= AD left" "Foreign income: - CORRECT ANSWER measures the change in income earned in a country relative to that of the U.S" "Exchange rate: - CORRECT ANSWER The value of the U.S dollar compared to the value of foreign currencies" "Increase in exchange rate: - CORRECT ANSWER The purchasing power of the U.S dollar increases relative to other currency" "Decrease in exchange rate: - CORRECT ANSWER The purchasing power of the U.S dollar decreases relative to other currency" "Price levels are not changing: - CORRECT ANSWER Net Exports are changing at every possible price level because of the relative purchasing power to other currency" "Short run aggregate supply (SRAS) curve: - CORRECT ANSWER shows the upward sloping relationship between price level and quantity of real GDP supplied" "Contracts: - CORRECT ANSWER make some prices and wages "sticky" because they cannot change until the contract expires" "Labor Contracts: - CORRECT ANSWER Firms often have contracts with employees that specify the amount the firm will pay in wages" "Supply contracts: - CORRECT ANSWER Firms often have contracts with their suppliers" "Increase in the price level: - CORRECT ANSWER the firm is able to increase the price it charges for goods and services" "Decrease in the price level: - CORRECT ANSWER the firm HAS to decrease the price it charges in order to sell its goods and services" "Menu Costs: - CORRECT ANSWER the costs associated with changing prices (reprinting menus, updating advertising materials, etc.,) can make firms slow to adjust prices" "Macroeconomic Equilibrium: - CORRECT ANSWER the point where the AD curve and SRAS curve intersect total spending = total production gives us the values of the price level measured by the GDP deflator (P) and Real GDP (Y)" "Static analysis: - CORRECT ANSWER focus on shifting one curve at a time" "AD curve shifts to the left: - CORRECT ANSWER decreased spending at any price level *recession: Real GDP decreases *deflation: price level decreases" "AD curve shifts to the right: - CORRECT ANSWER increased spending at any price level *expansion: Real GDP increases *inflation: price level increases" "SRAS curve shifts to the right: - CORRECT ANSWER increased production at any price level *expansion: Real GDP increases *deflation: price level decreases" "SRAS curve shifts to the left: - CORRECT ANSWER decreased production at any price level *recession: Real GDP decreases *inflation: price level increases" "Stagnation: - CORRECT ANSWER the combination of inflation and recession" "Asset: - CORRECT ANSWER a resource owned or controlled by a firm or household example: savings or checkings account" "Liability: - CORRECT ANSWER an obligation to pay example: mortgage on a house" "Financial Asset: - CORRECT ANSWER legal agreements to exchange future payments" "Security: - CORRECT ANSWER A financial asset that can be sold" "Interest rate= - CORRECT ANSWER (face value - initial price) / initial price" Nominal GDP - CORRECT ANSWER the value of final goods and services evaluated at current-year prices" "How to calculate nominal GDP - CORRECT ANSWER C + I + G +NX" "Real GDP - CORRECT ANSWER The value of final goods and services evaluated at base-year prices" "How to calculate real GDP - CORRECT ANSWER P*Q for every good in GDP and add them all together BASE YEAR 2014 - 100M visits at $50 each 2015 - 103M visits at $53 10M cars at $20,000 each 11M cars at $20,500 each real GDP for 2015: (103M * $50 + 11M * 20,000) 2015Q(1) * 2014P(1) + 2015Q(2) * 2014 P(2)" "Monetary Policy - CORRECT ANSWER federal reserve's dual mandate (which focuses on max employment, stable prices, and moderate long-term interest rates)" "What will result from the Fed increasing the federal rate? - CORRECT ANSWER Costs for banks will increase and loan rates for consumers and firms will increase. This leads to slower growth." "Fiscal Policy - CORRECT ANSWER Controlled by the president and congress. It is the government budget." "GDP Deflator - CORRECT ANSWER uses nominal and real GDP to measure the price level (not in dollars)" "Price level - CORRECT ANSWER The average price of all goods and services in an economy" "How to calculate GDP deflator - CORRECT ANSWER (Nominal/Real)*100" "CPI - CORRECT ANSWER used to correct nominal prices and wages over time for the impact of inflation using market basket prices" "How to calculate CPI - CORRECT ANSWER (market base price in current year/ market basket price in base year)*100" "Limitations of GDP - CORRECT ANSWER 1. Doesn't account for change in quality. 2. Doesn't account for underground economy. 3. Doesn't account for 'bads' of economy 4. Doesn't account for non-market production" "Limitations of CPI - CORRECT ANSWER Substitution bias, increase in quality bias, new product bias, outlet bias." "Core Inflation - CORRECT ANSWER ignores food/energy, as they can be more volatile" "Headline inflation - CORRECT ANSWER takes food and energy in to account when calculating" "Real prices - CORRECT ANSWER what would have been paid for the same good or service in the base year based on inflation" "Real wages - CORRECT ANSWER wages based on the base year" "Inflation rate (Calculation) - CORRECT ANSWER (CPI this year - CPI last year)/ CPI last year" "Real interest rate (calculation) - CORRECT ANSWER nominal interest rate - inflation rate" "Real interest rate - CORRECT ANSWER provides a better measure of the true cost of borrowing and the true rate of return of lending than nominal interest rates" "Money - CORRECT ANSWER 1. Medium of exchange 2. Store of value 3. Unit of account 4. Standard of deferred payment" "Current Nominal GDP - CORRECT ANSWER $18 trillion" "Current Real GDP - CORRECT ANSWER $16.4 trillion" "Current GDP deflator - CORRECT ANSWER 110" "Anticipated inflation - CORRECT ANSWER value of money declines and menu costs need to change" "Unanticipated inflation - CORRECT ANSWER reduces real wages and real interest rates" "Business Cycle - CORRECT ANSWER alternating periods of economic expansion and economic recession" "Consumption - CORRECT ANSWER spending by households on goods and services, not including spending on new houses" "Economic growth - CORRECT ANSWER the ability of an economy to produce increasing quantities of goods and services" "Expansion - CORRECT ANSWER the period of a business cycle during which total production and total employment are increasing" "Final good or service - CORRECT ANSWER a good or service purchased by a final user" "Government purchases - CORRECT ANSWER spending by federal, state, and local governments on goods and services" "GDP - CORRECT ANSWER the market value of all final goods and services produced in a country during a period of time, typically one year" "Inflation rate - CORRECT ANSWER the percentage increase in the price level from one year to the next" "intermediate good or service - CORRECT ANSWER a good or service that is an input into another good or service, such as a tire on a truck" "Investment (I) - CORRECT ANSWER spending by firms on new factories, office buildings machinery, and additions to inventories, plus spending by households and firms on new houses" "Macroeconomics - CORRECT ANSWER the study the economy as a whole including topics such as inflation, unemployment, and economic growth" "Microeconomics - CORRECT ANSWER the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices" "Net Exports - CORRECT ANSWER Exports-Imports" "Recession - CORRECT ANSWER the period of a business cycle during which total production and total employment are decreasing" "Transfer payments - CORRECT ANSWER payments by the government to households for which the government does not receive a new good or service in return" "Underground Economy - CORRECT ANSWER buying and selling of goods and services that concealed from the government to avoid taxes or regulations or because the goods and services are illegal" "value added - CORRECT ANSWER the market value a firm adds to a product" "Current CPI value - CORRECT ANSWER 237.8" "Why economic growth isn't zero sum - CORRECT ANSWER The economy would not grow if it was zero sum because someone would always be at a loss which isn't true" "Connection between health and economic growth - CORRECT ANSWER technological advances help to grow the economy and because of these advances medicine has been updated keeping the population healthier than before" "How long run economic growth has dramatically changed life and how novel the last two centuries have been - CORRECT ANSWER as wages increased so did GDP per capita. this meant people could spend more of their money" "Calculate the growth rate - CORRECT ANSWER (current year/first year)^(1/n) - 1" "Rule of 70 - CORRECT ANSWER approximation for number of years it will take for the economy to double in size - growth rate/70*100" "Why small differences in growth rates matter dramatically over long periods of time - CORRECT ANSWER small annual growth rates have big impacts over many years" "per-worker production function - CORRECT ANSWER key inputs are K/L and technology (x-axis) that increases Y/L (y-axis)" "Per-worker production function equation - CORRECT ANSWER Y/L = A*(K/L)*.3" "Impact of the capital to labor ratio and technology on economic growth - CORRECT ANSWER More human capital, better capital, better organization of production" "The fundamental role of markets - CORRECT ANSWER people and firms freely buying and selling. markets set the wage of just about everyone at wages far above the minimum" "Rule of law - CORRECT ANSWER this provides peace, limits on government power, rewards for innovation, property rights, commercial law, and government promotion of markets" "Government - CORRECT ANSWER correct market failures and externalities" "how rising productivity can lead to falling employment in a given industry yet is essential for long-run growth - CORRECT ANSWER fewer farmers can be more productive, and therefore, not as many are needed. This means the people who would have been farmers can now contribute to other parts of the economy" "Future economic growth in the U.S. - CORRECT ANSWER 1. Slowing capital 2. Falling labor force participation 3. Rising inequality 4. Innovation slowdown" "Cyclical unemployment - CORRECT ANSWER unemployment cause by a business cycle recession" "deflation - CORRECT ANSWER a decline in the price level" "discouraged workers - CORRECT ANSWER people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them" "Efficiency wage - CORRECT ANSWER an above market wage that a firm pays to increase workers' productivity" "Frictional unemployment - CORRECT ANSWER short-term unemployment that arises from the process of matching workers with jobs" "inflation rate - CORRECT ANSWER the percentage increase in the price level from one year to the next" "labor force - CORRECT ANSWER the sum of employed and unemployed workers in the economy" "labor force participation rate - CORRECT ANSWER the percentage of the working-age population in the labor force" "menu costs - CORRECT ANSWER the costs to firms of changing prices" "natural rate of unemployment - CORRECT ANSWER the normal rate of unemployment consisting of frictional unemployment and structural employment" "Nominal Interest Rate - CORRECT ANSWER the stated interest rate on a loan" "Producer Price Index (PPI) - CORRECT ANSWER an average of the prices received by producers of goods and services at all stages of the production process" "Structural unemployment - CORRECT ANSWER Unemployment that arises from a persistent mismatch between the skills to attributes of workers and the requirement of jobs" "Unemployed - CORRECT ANSWER in the government statistics, someone who is not currently at work but who is available for work and who has actively looked for work during the previous month" "Unemployment rate - CORRECT ANSWER the percentage of the labor force that is unemployed" "United States growth rate - CORRECT ANSWER 2%" "Unemployment rate Calculation - CORRECT ANSWER (number of unemployed/labor force)*100" "labor force participation rate calculation - CORRECT ANSWER (labor force/working age population)*100" "Underemployment - CORRECT ANSWER are working part time but wish to be working full time" "marginally attached workers - CORRECT ANSWER those who've looked for a job in the past 12 months" "underemployment rate (U-6) - CORRECT ANSWER much higher than unemployment rate, about a 7.5% difference in the height of the most recent recession" "Unemployed more than 27 weeks - CORRECT ANSWER highest its been was right after the great recession and is lower now at about 30%" "Okun's Law - CORRECT ANSWER Δ%Y=3-2ΔU y is real GDP and U is unemployment rate" "Causes of recessions - CORRECT ANSWER 1. Monetary policy 2. Oil Shock 3. Fiscal policy 4. Financial policy" "Monetary policy and recessions - CORRECT ANSWER federal reserve's dual mandate which focuses on max employment, stable prices, and moderate long term interest rates" "Oil Shock - CORRECT ANSWER " "Fiscal policy and recessions - CORRECT ANSWER federal spending and taxes" "Financial policy and recessions - CORRECT ANSWER " "market - CORRECT ANSWER a group of buyers and sellers of a good or service and the institution or arrangement by which they came together to trade" "product market - CORRECT ANSWER a market for goods and services" "factor market - CORRECT ANSWER a market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability" "free market - CORRECT ANSWER a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed" "property rights - CORRECT ANSWER the rights individuals or firms have to the exclusive use of their property including the right to buy or sell it" "long run economic growth - CORRECT ANSWER the process by which rising productivity increases the average standard of living" "labor productivity - CORRECT ANSWER the quantity of goods and services that can be produced by one worker or by one hour of work" "capital - CORRECT ANSWER manufactured goods that are used to produce other goods and services" "industrial revolution - CORRECT ANSWER the application of mechanical power to the production of goods, beginning in England around 1750" "economic growth model - CORRECT ANSWER a model that explains growth rates in real GDP per capita over the long run" "technological change - CORRECT ANSWER a change in the quantity of output a firm can produce using a given quantity of inputs" "human capital - CORRECT ANSWER the accumulated knowledge and skills that workers acquire from education and training or from their life experiences" "new growth theory - CORRECT ANSWER a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system" "Patent - CORRECT ANSWER the exclusive rights to produce a product for a period of 20 years from the date the patent is applied for" "Influences of the aggregate demand curve - CORRECT ANSWER Shift Right Shift left Movement -Fiscal Policy -Increase in interest rates -Monetary Policy -Increase in wealth -Increase in population -Increase in number of firms -Increase in foreign income -Decrease in the value of the dollar Left -Increase in T -Decrease in NX Movement -increase in price" "Influences of the short run aggregate supply - CORRECT ANSWER Shift Right -Increase in labor force or capital stock -Increase in productivity (tech change) Shift Left -Inflation -Costs to businesses -Increase in the expected price of a natural resource" "Macroeconomic equilibrium - CORRECT ANSWER P rises or falls until AD=SRAS. One moves along AD and SRAS. Equilibrium is where all spending (AD) equals all production (SRAS). Equilibrium tells you the values of P and Y." "aggregate demand and supply model - CORRECT ANSWER a model that explains short-run fluctuations in real GDP and the price level" "Aggregate demand curve - CORRECT ANSWER a curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government" "short-run aggregate supply curve - CORRECT ANSWER a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms" "long run aggregate supply curve - CORRECT ANSWER a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied" "supply shock - CORRECT ANSWER an unexpected event that causes the short-run aggregate supply curve to shift" "stagflation - CORRECT ANSWER a combination of inflation and recession, usually resulting from a supply shocks" "Securities - CORRECT ANSWER financial asset that can be bought or sold" "stocks - CORRECT ANSWER a 'share' in ownership of a company" "bonds - CORRECT ANSWER a security sold by large businesses or governments. Consumers buy these and the seller is entitled to pay back the owner with interest at a given date." "Why should college students know about financing retirement and how it is done - CORRECT ANSWER 1. save early and often 2. invest in stocks while you're young 3. save about $300 a month" "What is money? - CORRECT ANSWER M1and M2" "M1 - CORRECT ANSWER currency (all paper and coins), value of all checking account deposits in banks, the value of traveler's checks" "M2 - CORRECT ANSWER M2 - includes M1 as well as savings account deposits, small denomination time deposits, balances in money market deposit accounts in banks, and noninstitutional money market fund shares" "why is money more efficient than bartering - CORRECT ANSWER barter can only use double conscious wants - both parties want to trade for what the other one has. anyone can use money, meaning both parties will always want it" "how and why the fed can alter interest rates - CORRECT ANSWER to make interest rates to go down the Fed buys bonds because then bonds are worth more" "how the Fed can reduce the rate of inflation - CORRECT ANSWER higher rates make it more expensive to borrow, there is less spending, slower growth, and less inflation" "Assets equation - CORRECT ANSWER liabilities + net worth" "Reserve Ratio - CORRECT ANSWER the amount of money that must be set aside (usually a percent)" "Reserves - CORRECT ANSWER a bank deposit at the Fed" "Checking deposit Calculation - CORRECT ANSWER (1/RR)*reserves" "Interest Rate calculation - CORRECT ANSWER (face value - PTBill)(/PTBill) face value minus P T-Bill divided by P T-Bill" "assets - CORRECT ANSWER something you own" "liabilities - CORRECT ANSWER something you owe" "Deficit - CORRECT ANSWER amount of money borrowed per year" "Debt - CORRECT ANSWER total amount of money owed" “What is an example of creative destruction? - CORRECT ANSWER iPhone replacing old flip phones" "Changes in federal funds rate influences interest rates on car loans, mortgages and student loans (T or F) - CORRECT ANSWER True" "In order to grow quickly, China concentrated spending in which piece of GDP? - CORRECT ANSWER Investment" "What would be the best explanation for an economy with inflation and falling spending? - CORRECT ANSWER Rising oil prices (SRAS shifts left)" "What will happen to the natural rate of unemployment if a new phone app were to speed up the job search process? - CORRECT ANSWER It will fall" "The concept of "zero sum" is _________ because.... - CORRECT ANSWER Incorrect; since 1800 most countries have seen a rise in real gdp" "WHich method would you use if you wanted to convert the prices of a car in 1980 to an equivalent price today? - CORRECT ANSWER The division method" "If the natural rate of unemployment rises, potential gdp will... - CORRECT ANSWER Fall" "According to AD-SRAS, interest rates affect... - CORRECT ANSWER Consumption and Investment" "Which type of unemployment is the most tied to the business cycle? - CORRECT ANSWER Cyclical" "Deflation is less common in the U.S economy than disinflation since 1970 - CORRECT ANSWER True" "If over ten years the GDP Deflator in a country grew by 20% but real gdp grew by 25%, what happened to nominal GDP over that decade? - CORRECT ANSWER It must have grown (Nominal/Real) x 100; for GDP deflator to grow, the nominal gdp must grow, or real gdp must fall. NGDP must have grown" "Markets are most efficient when... - CORRECT ANSWER There are strong institutions in an economy" "What is the best explanation for an economy within inflation during an expansion? - CORRECT ANSWER Rising wealth" "A borrower of money benefits when inflation is lower than expected (T or F) - CORRECT ANSWER False Real interest rate= nominal interest rate - inflation" "When would inflation be the least costly? - CORRECT ANSWER When inflation is expected to be 8% and is actually 8%" "Which would be the best example of an investment? - CORRECT ANSWER Your parents purchase a new house" "Say that the unemployment rate is 10% with 80 million people in the labor force. If economic conditions improve next month and 1 million people re-enter the labor force looking for jobs, what happens to the unemployment rate? - CORRECT ANSWER It rises" "If total income in an economy grew, what happens to total spending? - CORRECT ANSWER Total spending must grow *income = spending= recession" "Recessions are best described as period of slow growth in an economy (T or F) - CORRECT ANSWER False (no growing)" "Which captures more types of unemployment? U3 or U6? - CORRECT ANSWER The U6 "underemployment" unemployment rate" "If given real gdp in 2010 and 2015, which formula would you use to find how much the economy grew on average from ? - CORRECT ANSWER Annual average growth rate" "Which of the following compares given prices to base year prices? A. GDP deflator only B. Neither GDP deflator or CPI C. CPI only D. Both GDP deflator and CPI - CORRECT ANSWER D. Both GDP deflator and CPI" "How is the Federal debt different from the Fed. deficit? - CORRECT ANSWER The deficit is the total amount of treasury bonds sold to the treasury *debt always higher than deficit in the US*" "Which of the following is NOT a part of GDP when measured by expenditures? A. Net Exports B. Investment C. Capital D. Government Purchases - CORRECT ANSWER C. Capital: C stands for consumption, not capital" "What happens if technology (A) improves? - CORRECT ANSWER SRAS shifts to the right, and the PWPF curve shifts up" "The AD curve is the relationship between... - CORRECT ANSWER The price level and real domestic output demanded" "If economic growth was "zero sum", we would most likely see which of the following? A. Little change in per capita real GDP around the world over the decades B. Significant change in per capita real GDP around the world over the decades C. A shift up in the PWPF D. A shift down in the PWPF - CORRECT ANSWER A. Little change in per capita real GDP around the world over the decades" "Macroeconomics: - CORRECT ANSWER The study of the economy as a whole" "What does macroeconomics focus on? - CORRECT ANSWER - Markets that affect many economies - Helps households and firms analyze current economic conditions and predict future economic conditions" "International trade and finance: - CORRECT ANSWER The interaction between the economies in different countries is an important part in macro" "Gross Domestic Product (GDP): - CORRECT ANSWER Measures the total production, expenditures, or income for an economy during a period of time" "The Bureau of Economic Analysis (BEA): - CORRECT ANSWER Collects data and calculates the GDP in the U.S" "Measurement in production: - CORRECT ANSWER GDP is the value of all final goods and services produced in a century during a period of time" "What does GDP include? - CORRECT ANSWER Final goods and services, not intermediate!" "Final goods and services: - CORRECT ANSWER Purchased by their final consumer" "Intermediate goods and services: - CORRECT ANSWER Purchased to become a part of another good or service" "What is the requirement to be included in GDP in that year? - CORRECT ANSWER Good or service must be produced in a given year in order to be a part of that years GDP" "Capital Goods (K): - CORRECT ANSWER Manufactured products used in the production of other goods and services" "What does capital typically include? - CORRECT ANSWER Factories, machinery, tools owned by businesses" "New production of capital goods is counted in gdp (T or F) - CORRECT ANSWER True" "How can we find GDP? - CORRECT ANSWER GDP can be found by totaling up the amount of money spent on final goods and services in an economy" "Components of GDP expenditures: - CORRECT ANSWER Consumption Investment Government expenditures Net Exports" "Gross Domestic Income (GDI): - CORRECT ANSWER The sum of all income (wages, interest, rent, and profits) paid to the four factors of production" "Household production: - CORRECT ANSWER goods and services people produce for themselves" "Underground economy: - CORRECT ANSWER Markets hidden from the government to avoid taxes or regulations, or because goods/services are illegal" "What is the estimated GDP in the US currently? - CORRECT ANSWER 8%" "In which countries is GDP typically larger? - CORRECT ANSWER Low income and developing countries" "Nominal GDP: - CORRECT ANSWER the value of final goods and services evaluated at current-year prices" "Because prices increase over time, it is likely that nominal gdp... - CORRECT ANSWER Will rise from year to year" "Real GDP: - CORRECT ANSWER The value of final goods and services evaluated at base year prices" "Which GDP holds prices constant at their specified base year levels? - CORRECT ANSWER Real GDP" "In the base year, nominal and real GDP are the same (T of F) - CORRECT ANSWER True!" "Because base year prices are typically rising... - CORRECT ANSWER real gdp > nominal gdp before the base year real gdp < nominal gdp after the base year" "GDP deflator: - CORRECT ANSWER a measurement of the price level that is found using real gdp and nominal gdp given from that year" "Price Level: - CORRECT ANSWER The average of all prices in the economy" "Price Index: - CORRECT ANSWER A measurement of the price level (average prices throughout the economy)" "The GDP deflator is a... - CORRECT ANSWER price index" "The more prices increase.... - CORRECT ANSWER the higher the gdp deflator" "Calculation for GDP deflator: - CORRECT ANSWER Nominal GDP/Real GDP x 100" "Inflation: - CORRECT ANSWER The percent increase in a price index from one year to the next" "Deflation: - CORRECT ANSWER When the inflation rate is negative, prices are falling over time" "Disinflation: - CORRECT ANSWER When the inflation rate is decreasing, meaning prices are increasing more slowly than previously" "Substitution Bias: - CORRECT ANSWER CPI assumes that consumers buy the same amount of each good yearly" "Increase in quality bias: - CORRECT ANSWER Some of the increase in price of products is due to improvements in the products quality, not inflation" "New product bias: - CORRECT ANSWER New products that are introduced between market basket updates are NOT included in CPI" "Outlet bias: - CORRECT ANSWER Products purchased at discount stores and online may not be taken into account when finding the average prices" "Subtraction Method: - CORRECT ANSWER Used to find the percentage in real price over a period of time" "Subtraction Method Formula: - CORRECT ANSWER % ∆ in real price= % ∆ in nominal price - inflation rate" "Division Method: - CORRECT ANSWER Used to compare prices from two different years" "Division Method Formula: - CORRECT ANSWER Year B Price, reported in Year A values= Nominal Price x year A CPI/ Year B CPI" "Deflating Method: - CORRECT ANSWER Uses a base year to convert a nominal price into real price" "Federal debt: - CORRECT ANSWER The total value of bonds sold by the U.S treasury" "Actions of the U.S Treasury: - CORRECT ANSWER 1. Collects federal taxes 2. Makes federal expenditures 3. Sells treasury bonds 4. Prints currency (must be issued by the FED)" "Government budget surplus: - CORRECT ANSWER When federal taxes are higher than federal expenditures" "What were some examples of fiscal policy during the COVID19 recession? - CORRECT ANSWER CARES Act, American Rescue Plan Act, Coronavirus response and relief supplemental appropriations act" "Fractional reserve banking system: - CORRECT ANSWER When banks do not keep all deposits on hand; instead, the bank uses the money to make loans" "Bank run: - CORRECT ANSWER Many people trying to withdraw their money from a bank at the same time" "Bank panic: - CORRECT ANSWER When many banks experience bank runs at the same time" "The "FED": - CORRECT ANSWER the central bank of the United State; lends money to banks so depositors can still access their money during a bank panic" "Discount loans: - CORRECT ANSWER Loans that banks take from the Fed." "Discount rate: - CORRECT ANSWER The interest rate on the loans that the Fed makes to banks" "Federal Deposit Insurance Corporation (FDIC) - CORRECT ANSWER insures the deposits of commercial banks" "What does the FED control? - CORRECT ANSWER monetary policy" "Money: - CORRECT ANSWER used to complete exchanges, to store value, to use as a measurement of units when keeping records, and to value debt in a standardized manner" "Federal funds rate: - CORRECT ANSWER The rate banks charge eachother for overnight loans" "Federal Open Markets Committee (FOMC): - CORRECT ANSWER responsible for setting most policies concerning interest rates and money supply amounts" "Buying bonds: - CORRECT ANSWER higher bond prices, lower interest rates" "Selling bonds: - CORRECT ANSWER low bond prices, higher interest rates" "Actions of the FED: - CORRECT ANSWER 1. Changes interest rates 2. Buys bonds from and sells bonds to public 3. Keeps deposits from banks 4. Lends to banks" "Fiscal policy involves... - CORRECT ANSWER government expenditures and taxes" "What is the FED most likely o to do if the economy is in risk of entering a recession? - CORRECT ANSWER decrease federal funds rate" "Where does the fed. government get money to cover the budget deficit? - CORRECT ANSWER Bond auctions" "Where does the Fed get money to purchase bonds from the public? - CORRECT ANSWER Nowhere" "Standard of living: - CORRECT ANSWER A measure of the quality of life; expectancy, health, leisure time, access to goods" "What is the best measure of standard of living? - CORRECT ANSWER real GDP per capita" "Real GDP per capita: - CORRECT ANSWER total production of goods and services in an economy" "Long term economic growth: - CORRECT ANSWER When the average standard of living improves due to increased productivity" "Growth rate: - CORRECT ANSWER The rate of long-run economic growth" "How is growth rate measured? - CORRECT ANSWER The percent change in real GDP per capita" "Growth rate= - CORRECT ANSWER new-old/old x 100%" "Zero-sum: - CORRECT ANSWER One groups gain is balanced out by another groups loss" "What IF economic growth was zero sum? - CORRECT ANSWER Only if certain countries became richer only by making other countries poorer real GDP per capita for the entire world would never change" "Human health is an example of something that affects well-being but is not related to GDP per capita and economic growth (T or F) - CORRECT ANSWER False; access to medical care is related to GDP per capita" "Compounding: - CORRECT ANSWER When a growth rate us applied to an original value plus previous growth" "Rule of 70: - CORRECT ANSWER Used to find the approximate number of years it would take to double the current value of any variable" "Years to double = - CORRECT ANSWER 70/growth rate" "Economic growth model: - CORRECT ANSWER explains long run growth rates in real GDP per capita" "Real GDP is affected by two factors: - CORRECT ANSWER Labor productivity, The proportion of the population in the labor force" "Labor productivity: - CORRECT ANSWER The amount of goods and services that can be produced by an average worker in one year" "Increases in labor productivity can increase... - CORRECT ANSWER real GDP per capita" "Key factors that affect labor productivity: - CORRECT ANSWER 1. Amount of physical capital 2. Technological change" "Sources of technological change in labor productivity: - CORRECT ANSWER 1. Better equipment 2. Increases in human capital 3. Better organization or management" "Per-worker production function: - CORRECT ANSWER analyzes the relationship between real GDP per worker and capital per worker" "The PWPF holds ____________ constant - CORRECT ANSWER technology" "Law of diminishing returns: - CORRECT ANSWER As we continue to ass more of one input to a fixed quantity of another input, the resulting amount of additional output becomes smaller" "When labor is fixed, adding more capital will... - CORRECT ANSWER result in diminishing returns" "PWPF Notation: - CORRECT ANSWER Equation: Y = A x (K/L) ^.3 K- Capital A- Technology L- Labor Y/L- real gdp per worker (vertical) K/L- capital available per worker (horizontal)" "Technological change: - CORRECT ANSWER changes the quantity of output that can be produced with a fixed level of inputs" "Technological changes causes the PWPF to shift... - CORRECT ANSWER up!" "Labor force: - CORRECT ANSWER made up of both employed and unemployed workers" "Employed: - CORRECT ANSWER individuals who fall into either of the categories below: 1. worked during the week prior to the survey 2. Was temporarily away from work due to illness, vacation etc" "Unemployed: - CORRECT ANSWER individuals who meet ALL the criteria below: 1. Did not work during the week prior to the survey 2. Was available to work in the week prior to the survey 3. Has actively looked for work within the last four weeks" "Employment-population ratio: - CORRECT ANSWER the percentage of the working-age population that is employed" "Underemployment (U6) = - CORRECT ANSWER unemployed + marginally attached + part time who want full time / labor force + marginally attached x 100%" "Employment population ratio= - CORRECT ANSWER # employed/ working age population x 100" "Types of unemployment: - CORRECT ANSWER 1. Frictional 2. Structural 3. Cyclical" "Frictional unemployment: - CORRECT ANSWER short-term unemployment that occurs while workers are matched with jobs" "Structural unemployment: - CORRECT ANSWER unemployment that occurs when workers' skills do not match the jobs that are available" "Cyclical unemployment: - CORRECT ANSWER unemployment caused by a business cycle recession" "Total unemployment = - CORRECT ANSWER frictional + structural + cyclical" "The overall unemployment level will NEVER... - CORRECT ANSWER be zero" "Natural rate of unemployment: - CORRECT ANSWER the sum of structural and frictional unemployment" "Natural rate of unemployment= - CORRECT ANSWER frictional unemployment + structural unemployment" "Causes of a recession: - CORRECT ANSWER 1.) Monetary Policy (to reduce inflation) 2.) Oil Shock 3.) Fiscal Policy 4.) Financial Policy 5.) Severe Pandemic" "Patterns of the business cycle: - CORRECT ANSWER End of an expansion, beginning of recession, end of recession" "Unemployment ____________ during recessions: - CORRECT ANSWER increases" "Unemployment EVENTUALLY ____________ during recessions: - CORRECT ANSWER decreases" "The Great Depression: - CORRECT ANSWER most severe recession in the modern history of the US (4years) decline in real gdp was about 27% increase in unemployment rate 20%" "The Great Recession: - CORRECT ANSWER longest and most severe recession since 1945 (18months) decline in real gdp: 4.2%" "The Covid Recession: - CORRECT ANSWER shorter but more severe than the great recession decline in real gdp 9.1%" "The "Great Moderation": - CORRECT ANSWER time period between 1950 and 2007 during which there were no severe recessions" "Aggregate demand: - CORRECT ANSWER All spending in an economy" "Aggregate supply: - CORRECT ANSWER All production in an economy" "Aggregate demand and aggregate supply model: - CORRECT ANSWER helps explain the short term fluctuations of real GDP price level throughout the business cycle" "GDP deflator (P): - CORRECT ANSWER a measure of the price level" "Real GDP (Y): - CORRECT ANSWER measurement of production, expenditures, and income" "Aggregate Demand (AD) curve: - CORRECT ANSWER shows the inverse relationship between price level and quantity of real GDP demanded" "Short-run aggregate supply (SRAS) curve: - CORRECT ANSWER shows the direct relationship between price level and quantity of real GDP demanded" "Components of GDP: - CORRECT ANSWER Consumption Investment Government purchases Net exports" "Government purchases: - CORRECT ANSWER regulated by laws and policies; not affected by a change in price level" "Consumption, Investment, and Net Exports: - CORRECT ANSWER WILL be affected by a change in the price level" "Reasons aggregate demand is downward sloping: - CORRECT ANSWER wealth effect, interest rate effect, international tarde effect" "↑ price level= - CORRECT ANSWER ↓ purchasing value of cash = ↓ real wealth = ↓consumption" "↓price level= - CORRECT ANSWER ↑purchasing value of cash = ↑real wealth = ↑consumption" "interest rate effect: - CORRECT ANSWER effect of price level on investment" "international trade effect: - CORRECT ANSWER effect on price level on net exports" "Movement: - CORRECT ANSWER moving from one point to another point along the existing AD curve *can only be caused by a change in price level*"