question
Investment includes
answer
-Capital purchases,
-changes in business inventories, housing,
-changes in business inventories, housing,
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Government spending
answer
-Spending by local, state,and federal governments, goods and services for the gov't,
-Transfer payments NOT included
-Transfer payments NOT included
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Trade deficit
answer
when a nation imports more goods and services than exports
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Trade surplus
answer
when a nation exports more goods and services than it imports
question
GDP equation
answer
y=C+I+G+NX
question
Per capita GDP Equation
answer
Nominal GDP/ Population
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Real GDP equation
answer
Nominal GDP/ Price level (100)
question
Growth rates formula
answer
new-old/old (100)
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Structural unemployment
answer
-Structure of economy changes
-industry creation and destruction is often a sign of a growing economy
-industry creation and destruction is often a sign of a growing economy
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Frictional unemployment
answer
caused by time delays
Type of unemployment that occurs when people take time to find a job
Type of unemployment that occurs when people take time to find a job
question
Cyclical unemployment
answer
unemployment that rises during economic downturns and falls when the economy improves
question
Frictional unemployment (desirable)
answer
-helps to find best candidate for a job
-makes sure the person is right
-makes sure the person is right
question
Labor force participation rate equation
answer
Labor force population/ Work eligible population (100)
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Structural unemployment desirable
answer
-Sign of a growing economy
- gets rid of inefficient jobs
- gets rid of inefficient jobs
question
Why does inflation continue to happen?
answer
-Countries think they can pay off their debts by printing more money
question
What causes inflation?
answer
-printing money
question
Inflation
answer
-gradual increase in price level
question
Inflation equation
answer
CPI-CPI(old)/CPI old (100)
question
Consumer Price Index
answer
-measures price level based in the consumption of typical consumers
-Goal: measure the cost of living
-Goal: measure the cost of living
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Price Conversion Formula
answer
Price x=price y (PLx/PLy)
question
percent change growth rate formula
answer
%M+%V=%P+%Y
question
What consumer expense has the highest weight?
answer
housing
question
3 reasons CPI overstates inflation
answer
-substitution bias
-changes in quality
-new products/locations
-changes in quality
-new products/locations
question
7 costs of inflation
answer
-Shoe leather costs
-Money illusion
-Menu costs
-Future price level uncertainty
-Wealth redistribution
-Price confusion
-Tax distortions
-Money illusion
-Menu costs
-Future price level uncertainty
-Wealth redistribution
-Price confusion
-Tax distortions
question
Shoe Leather Costs
answer
Resources people waste in order to avoid holding money
question
Money illusion
answer
Thinking you have more money than you really do
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Menu Costs
answer
Costs of changing prices
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Future Price Level Uncertainty
answer
Fear of being under paid next year
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Wealth redistribution
answer
Between borrowers and lenders
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Price confusion
answer
Price changed as a result demands shifts or inflation
question
Tax Distortions
answer
Capital gain taxes are taxes on gains realized by selling assets for more than purchasing price
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Real wage
answer
Wage adjusted for inflation
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Nominal wage
answer
Wage not adjusted for inflation
question
3 uses of GDP
answer
-Estimates living standards across times and nations
-Measures economic growth (long term)
-determine whether an economy is experiencing a short run expansion or recession
-Measures economic growth (long term)
-determine whether an economy is experiencing a short run expansion or recession
question
GDP
answer
-Measure of production of everything in a specific economy
-used to analyze growth
-can be used to compare regions to nations
-The market value of all final goods and services produced in a period of time
-used to analyze growth
-can be used to compare regions to nations
-The market value of all final goods and services produced in a period of time
question
What goods count as C,I, NX
answer
-C: anything consumed
-I: Investments (housing)
-NX: exports- imports
-I: Investments (housing)
-NX: exports- imports
question
Intermediate goods
answer
-Not counted in GDP because possibility of double counting i.e tires on a car
question
Durable good
answer
-A consumer good with an expected life (use) of three or more years.
question
Non-durable good
answer
-A consumer good with an expected life of less than 3 years
question
Final good
answer
-goods sold to a final user or consumer i.e car
question
Consumption
answer
-Non-durable goods, durable goods, and services
question
Short-comings of GDP what it doesn't adjust for...
answer
-Non-market goods
-Underground economy
-Environment Equality
-Leisure Time
-Underground economy
-Environment Equality
-Leisure Time
question
Real GDP
answer
-Measured with prices held constant over time
question
Nominal GDP
answer
-Measured in current prices
question
Which is the largest category?
answer
Consumption
question
Time Preferences
answer
-refers to how patient people are; a decrease in time preferences shifts supply curve right
- an increase shifts the curve left
- an increase shifts the curve left
question
Factors that shift supply
answer
-Changes in income
-Changes in wealth
-Time preferences
-Consumption smoothing
-Changes in wealth
-Time preferences
-Consumption smoothing
question
Savings
answer
savers house holds into Loanable funds market
question
Interest rate
answer
-Prices for loanable funds
-savers reward for saving
-borrowers:cost for borrowing
-rises and falls like other prices
-affected by supply and demand
-examine like any other market
-savers reward for saving
-borrowers:cost for borrowing
-rises and falls like other prices
-affected by supply and demand
-examine like any other market
question
Loanable Funds Market
answer
-Stock exchanges
-Investment bank
-Mutual fund firms
-Commercial banks
-borrowers use funds for business
- Savers lend to businesses
-Investment bank
-Mutual fund firms
-Commercial banks
-borrowers use funds for business
- Savers lend to businesses
question
CPI Equation
answer
(basket price/basket price in base year)(100)
question
Full Unemployment Rate
answer
Y*
question
Price Level
answer
-An index to measure prices of goods and services in an economy
question
Employed
answer
-Have a full time or part-time job
question
Discouraged Workers
answer
-People who want a job but gave up looking
-Not included in Labor Force and not considered unemployed
-Not included in Labor Force and not considered unemployed
question
What do discouraged workers do to the unemployment rate when they leave or return?
answer
-The rate fluctuates up or down depending on whether they leave or return
question
Underemployed Workers
answer
- Overqualified for their job
question
Labor force equation
answer
employed + unemployed
question
Work-Eligible Population Equation
answer
Population- institutionalized-military- less than 16 yrs old
question
Unemployment Rate Equation
answer
# of unemployed/labor force X 100
question
Actual Unemployment (U) Equation
answer
Structural+Cyclical+Frictional
question
Unemployed
answer
- Don't have a job but actively looking for one
question
Not Included in the Labor force
answer
-Military
-Retired
-Students
-Imprisoned
-Children under 16 years old
-Homemakers
-Retired
-Students
-Imprisoned
-Children under 16 years old
-Homemakers
question
Labor Force
answer
-Unemployed workers and employed workers
question
Natural Unemployment Rate equation (U*)
answer
Structural unemployment + Frictional Unemployment
question
Factors that shirt demand for Labor Force
answer
-Productivity of capital (right)
-Investor confidence (right)
-Investor confidence (right)
question
Equilibrium
answer
-Savings = Investment
- Relationship between saving and borrowing
- Relationship between saving and borrowing
question
Fisher Equation
answer
Real interest rate = nominal interest rate - inflation rate
question
When should a firm borrow?
answer
-Expected return > Interest rate on loan
question
Economic Growth
answer
- The growth rate of real GDP per capita
question
Industrial Revolution
answer
-More efficient technology to help produce faster
question
3 causes of economic growth
answer
-Resources
-Technology
-Institutions
-Technology
-Institutions
question
Technology
answer
-Knowledge available for use in production more/ more valuable output with the same resources
question
Institutions
answer
-Political Stability and Rule of Law
- Stable money and prices
-Competitive Markets
-Efficient Taxes
-Private property rights
-International trade
-Flow of Funds across borders
- Stable money and prices
-Competitive Markets
-Efficient Taxes
-Private property rights
-International trade
-Flow of Funds across borders
question
Political Stability and Rule of Law
answer
-Liberia 1980-2003
-Nothing was done to eliminate instability to create a good environment
-Nothing was done to eliminate instability to create a good environment
question
Private property rights
answer
-Can own property and resources and resulting output created by those resources
-best incentive for voluntary production
-Great example: Xiaogang, China, 1978
-best incentive for voluntary production
-Great example: Xiaogang, China, 1978
question
Stable Money
answer
-Makes people reluctant to invest
-Decreases future growth possibility
-Decreases future growth possibility
question
Characteristics of Competitive Markets
answer
-It is easy for firms to enter and exit with few licensing or regulatory hurdles.
-Buyers can expect to find low prices and wide availability of goods.
-Buyers can expect to find low prices and wide availability of goods.
question
Benefits of Competitive Markets
answer
-Creative destruction occurs and new technologies replace outdated methods. This fuels economic growth.
-Only the fittest firms survive, so inefficiency is eliminated over time.
-Innovation is encouraged.
-Only the fittest firms survive, so inefficiency is eliminated over time.
-Innovation is encouraged.
question
Efficient Taxes
answer
-Taxes represent a trade-off
-They must be high enough to support effective government.
-Taxes change our incentives by doing less of the activity that is taxed. Often, wages and outputs are taxed.
-Import tariffs also impede growth.
-They must be high enough to support effective government.
-Taxes change our incentives by doing less of the activity that is taxed. Often, wages and outputs are taxed.
-Import tariffs also impede growth.
question
International Trade (Specialization Trade)
answer
-Creates value and allows countries to consume goods they cannot produce on their own.
-Output (GDP) increases when countries produce goods in which they have the comparative advantage (lowest opportunity cost).
-Output (GDP) increases when countries produce goods in which they have the comparative advantage (lowest opportunity cost).
question
Without Trade?
answer
-Many countries would not be able to produce many resources necessary for production, and growth would stop.
question
Flows of Funds across borders
answer
-Investments require savings
question
Economic Growth Formula
answer
% Per Capita Real GDP = Nominal GDP - Prices-Population
question
Rule of 70 equation
answer
70/ growth rate
question
Resources ( Factors of Production)
answer
-Land (natural resources)
-Labor (human capital)
- Capital ( physical capital)
-Labor (human capital)
- Capital ( physical capital)
question
Investment
answer
- the act of putting money, effort, time, etc. into something to make a profit
question
Consumption Smoothing
answer
-No large changes in consumption with changes in income
-income changes over the course of a typical lifetime
-income changes over the course of a typical lifetime
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