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What are the 3 major things that we are concerned with in Macro?
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What is GDP? What does it measure?
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gross domestic product (GDP)
The market value of all final goods and services produced in a nation during a period of time, usually a year.
The market value of all final goods and services produced in a nation during a period of time, usually a year.
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Why does GDP only measure final goods and services?
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To avoid double counting.
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Know the difference between Real and Nominal GDP and why Real GDP is an important measure.
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What is the Expenditure approach?
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The national income accounting method that measures GDP by adding all the spending for final goods during a period of time. GDP= C+I+G+(X-M)
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Why are the income approach and the expenditure approach equal to each other?
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What are the shortcomings of GDP calculations?
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What does the business cycle show?
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What are the 4 phases of the business cycle?
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Recession, Trough, Expansion, Peak.
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What is a leading indicator?
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How do we calculate the unemployment rate?
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What is the civilian labor force? Who counts in CLF? Who doesn't count in CLF?
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Why does the unemployment rate understate the "true" unemployment rate?
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Know the difference between structural, frictional and cyclical unemployment.
Which type are we most concerned with in Macro? Why?
Which type are we most concerned with in Macro? Why?
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What is full employment? Why do we care about full employment?
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What is the GDP gap?
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The difference between actual real GDP and potential or full-employment real GDP.
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What is a recessionary gap?
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The amount by which the aggregate expenditures curve must be increased to achieve full-employment equilibrium.
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How does inflation affect real income?
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When Keynes visited the U.S. he saw falling wages and full safe deposit boxes. How did this show that the Classical model was flawed?
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What is the reason we can't get to full-employment for Keynes?
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What does the Consumption function show?
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What is Consumption a function of?
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What is the Marginal Propensity to Consume (conceptually and equation)? What is it on the Consumption Function graph?
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When does saving happen? When does dissaving happen? (be able to show this portion on the graph).
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Where is Macro equilibrium for Keynes?
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What two things influence private investment (I)? For Keynes, which is most important?
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Why was Keynes not concerned with cost-push inflation?
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Be able to explain the multiplier effect. What does it mean conceptually?
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What effect does a high MPC have on the multiplier? What effect does a low MPC have on the multiplier?
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Know the relationship between the multiplier and the amount government needs to spend to get the economy out of a recession.
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Why is the AD curve downward sloping? What does the downward slope show?
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What is the real balances effect?
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What comprises the AD curve (what is it made up of)?
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What would cause a shift in the AD curve?
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What does the Keynesian portion of the AS curve show?
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Why don't prices increase along the Keynesian range?
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What does the intermediate portion of the AS curve show?
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Why do prices increase along this range?
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What is a bottle-neck?
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Why would wages increase as Real GDP increases? Why would that cause prices to increase?
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What does the classical portion of the AS curve show?
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Why is it vertical at the full-employment level of GDP?
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Know what should be done if AD is less than the full-employment level of GDP. What happens to GDP and CPI if it changes?
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If we are at full-employment in the AS/AD model know what happens if AD increases/decreases.
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If there is a high level of inflation what should government do?
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What is Fiscal policy?
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The use of government spending and taxes to influence the nation's spending, employment, and price level.
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Know the difference between discretionary and non-discretionary fiscal policy.
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What is expansionary fiscal policy? Examples? When should it be used?
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What is contractionary fiscal policy? Examples? When should it be used?
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When should expansionary/contractionary fiscal policy be used (Hint: inflation and recession)?
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What is demand side fiscal policy (AD)? Supply side fiscal policy (AS)?
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What are automatic stabilizers? What role do they play in stabilizing demand?
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Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as nondiscretionary fiscal policy.
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Are automatic stabilizers discretionary or non-discretionary?
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non-discretionary.
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Know how to use the spending multiplier and the tex multiplier.
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What is the balanced budget multiplier?
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You need to study the graph's section of the macro study guide still.
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1. Which of the following activities would be calculated as part of GDP accounts?
a. Drug trafficking.
b. Money laundry.
c. Prostitution.
d. Purchasing plastic surgery.
e. Burglary.
a. Drug trafficking.
b. Money laundry.
c. Prostitution.
d. Purchasing plastic surgery.
e. Burglary.
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d. Purchasing plastic surgery.
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2. Which of the following would be classified as a personal consumption expenditure?
a. All of the following.
b. Your purchase of a newly constructed house
c. Your purchase of a preowned house.
d. Your purchase of one share of Microsoft stock.
e. Your purchase of this economics course.
a. All of the following.
b. Your purchase of a newly constructed house
c. Your purchase of a preowned house.
d. Your purchase of one share of Microsoft stock.
e. Your purchase of this economics course.
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e. Your purchase of this economics course. (Consumption)
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3. Suppose in 2000, GDP was $7,242 billion and the GDP chain price index is 117.5.
Real GDP in constant 1996 dollars is:
a. $5,488 billion.
b. $6,740 billion.
c. $6,163 billion.
d. $7,789 billion.
Real GDP in constant 1996 dollars is:
a. $5,488 billion.
b. $6,740 billion.
c. $6,163 billion.
d. $7,789 billion.
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c. $6,163 billion. 7242/117.5*100
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4. The presence of discouraged workers may cause:
a. the employment rate to be overstated.
b. the employment rate to be understated.
c. the unemployment rate to be overstated.
d. the unemployment rate to be understated.
e. GDP to be too large.
a. the employment rate to be overstated.
b. the employment rate to be understated.
c. the unemployment rate to be overstated.
d. the unemployment rate to be understated.
e. GDP to be too large.
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d. the unemployment rate to be understated.
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5. When the rate of cyclical unemployment is zero, the:
a. natural rate of unemployment must also be zero.
b. rate of frictional unemployment must be negative.
c. economy must have entered a recessionary stage.
d. Keynesian aggregate supply curve must be horizontal.
e. economy is considered to be at full employment.
a. natural rate of unemployment must also be zero.
b. rate of frictional unemployment must be negative.
c. economy must have entered a recessionary stage.
d. Keynesian aggregate supply curve must be horizontal.
e. economy is considered to be at full employment.
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e. economy is considered to be at full employment.
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6. The GDP gap is the difference between:
a. full-employment real GDP and real GDP chain price index.
b. unemployment rate and real GDP chain price index.
c. actual real GDP and full-employment real GDP.
d. frictional unemployment and actual real GDP.
a. full-employment real GDP and real GDP chain price index.
b. unemployment rate and real GDP chain price index.
c. actual real GDP and full-employment real GDP.
d. frictional unemployment and actual real GDP.
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c. actual real GDP and full-employment real GDP.
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7. One way the consumer price index (CPI) differs from the GDP chain price index is that
it:
a. includes only purchases of items bought by typical urban consumers.
b. uses only current year quantities.
c. is based on all final goods and services.
d. includes only services.
it:
a. includes only purchases of items bought by typical urban consumers.
b. uses only current year quantities.
c. is based on all final goods and services.
d. includes only services.
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a. includes only purchases of items bought by typical urban consumers.
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8. Suppose that the consumer price index (CPI) was 160 in Year 1 and 166 in Year 2, inflation during Year 2 was approximately:
a. zero; prices were stable.
b. 3.8 percent.
c. 6 percent.
d. 66 percent.
a. zero; prices were stable.
b. 3.8 percent.
c. 6 percent.
d. 66 percent.
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b. 3.8 percent. =166/160-1
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9.Which of the following would understate the consumer price index?
a. Substitution bias.
b. Deteriorating quality of products.
c. Improving quality of products.
d. Law of demand bias.
a. Substitution bias.
b. Deteriorating quality of products.
c. Improving quality of products.
d. Law of demand bias.
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c. Improving quality of products.
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10. Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price
index?
a. substitution bias
b. transportation bias
c. quality bias
d. indexing bias
index?
a. substitution bias
b. transportation bias
c. quality bias
d. indexing bias
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a. substitution bias
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11. The consumption function will shift upward if real asset and money holdings:
a. increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
b. increase, if people expect prices to increase, if interest rates increase, and if taxes increase.
c. increase, if people expect prices to increase, if interest rates increase, and if taxes decrease.
d. decrease, if people expect prices to decrease, if interest rates decrease, and if taxes decrease.
e. decrease, if people expect prices to increase, if interest rates increase, and if taxes decrease.
a. increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
b. increase, if people expect prices to increase, if interest rates increase, and if taxes increase.
c. increase, if people expect prices to increase, if interest rates increase, and if taxes decrease.
d. decrease, if people expect prices to decrease, if interest rates decrease, and if taxes decrease.
e. decrease, if people expect prices to increase, if interest rates increase, and if taxes decrease.
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a. increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
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12. Use the table below to answer the following question.
Income Consumption
(Dollars) (Dollars)
60,000 58,000
66,000 62,000
What is the marginal propensity to consume? (Change in Consumption/Change in Investment)
a. 0.33.
b. 0.67.
c. 0.96
d. 1.5.
Income Consumption
(Dollars) (Dollars)
60,000 58,000
66,000 62,000
What is the marginal propensity to consume? (Change in Consumption/Change in Investment)
a. 0.33.
b. 0.67.
c. 0.96
d. 1.5.
answer
b. 0.67.
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13. Suppose equilibrium real GDP is currently at $800 billion and investment is $100 billion. If an increase in the interest rate reduces investment from $100 billion to $75 billion, and the MPC is 0.8, the new level of equilibrium real GDP will be:
a. $500 billion.
b. $600 billion.
c. $675 billion.
d. $775 billion.
e. $800 billion.
a. $500 billion.
b. $600 billion.
c. $675 billion.
d. $775 billion.
e. $800 billion.
answer
c. $675 billion.
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14. Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?
300=1/.25*change AE
a. $300 decrease in taxes.
b. $75 increase in government spending.
c. $75 decrease in taxes.
d. $300 increase in government spending.
e. $75 decrease in government spending.
300=1/.25*change AE
a. $300 decrease in taxes.
b. $75 increase in government spending.
c. $75 decrease in taxes.
d. $300 increase in government spending.
e. $75 decrease in government spending.
answer
b. $75 increase in government spending.
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15. The interest rate effect predicts that higher prices:
a. make it more expensive to borrow, leading to higher interest rates and less investment.
b. make people worse off by reducing the value of their wealth, leading them to save more and spend less.
c. decrease borrowing, leading to higher interest rates and less investment.
d. decrease borrowing, leading to lower interest rates and more investment.
e. increase borrowing, leading to higher interest rates and less investment. Defined
a. make it more expensive to borrow, leading to higher interest rates and less investment.
b. make people worse off by reducing the value of their wealth, leading them to save more and spend less.
c. decrease borrowing, leading to higher interest rates and less investment.
d. decrease borrowing, leading to lower interest rates and more investment.
e. increase borrowing, leading to higher interest rates and less investment. Defined
answer
e. increase borrowing, leading to higher interest rates and less investment. Defined
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Income (Y) Change in
Disposable Income Consumption (C)
0 500
1,000 1,000 1,400
2,000 1,000 2,200
3,000 1,000 2,900
4,000 1,000 3,500
5,000 1,000 4,000
16. In the above exhibit, when disposable income is increased from $2,000 to $3,000 to $4,000,
a. total consumption increases by $1,000.
b. the marginal propensity to consume remains constant.
c. the marginal propensity to consume increases from 0.6 to 0.7.
d. the marginal propensity to consume decreases from 0.8 to 0.7.
e. the marginal propensity to consume decreases from 0.7 to 0.6.
Disposable Income Consumption (C)
0 500
1,000 1,000 1,400
2,000 1,000 2,200
3,000 1,000 2,900
4,000 1,000 3,500
5,000 1,000 4,000
16. In the above exhibit, when disposable income is increased from $2,000 to $3,000 to $4,000,
a. total consumption increases by $1,000.
b. the marginal propensity to consume remains constant.
c. the marginal propensity to consume increases from 0.6 to 0.7.
d. the marginal propensity to consume decreases from 0.8 to 0.7.
e. the marginal propensity to consume decreases from 0.7 to 0.6.
answer
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What is the CPI?
answer
An index that measures changes in the average prices of consumer goods and services.
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