Unit 2

Question 1

What are the 3 macroeconomic goals?

Answer 1

1. promote economic goods
2. limit unemployment
3. keep prices stable (limit inflation)

Question 2

GDP (definition)

Answer 2

dollar (US) value of all final goods and services produced within a country in 1 year.

Question 3

what does GDP measure?

Answer 3

How well a nation is doing financially

Question 4

Ways to use GDP

Answer 4

1. compare to previous years (is there growth)
2. compare policy changes (did a new policy work)
3. Compare to other countries (are we better off)

Question 5

what is the best tool to measure a nation’s standard of living?

Answer 5

GDP

Question 6

reasons why countries have higher/lower GDPs

Answer 6

1. economic system
2. Rule of law
3. capital stock
4. human capital
5. natural resources

Question 7

productivity (definition)

Answer 7

output per unit of input

Question 8

Items not included in GDP

Answer 8

1. Intermediate goods
2. nonproduction transactions
3. used goods
4. nonmarket/illegal goods

Question 9

the three ways of calculating GDP

Answer 9

1. expedenture approach
2. income approach
3. value (added approach)
   all methods should generate the same number

Question 10

equation for calculating GDP

Answer 10

C+I+G+Xn=GDP
(consumer spending, business investment, government spending, net exports)

Question 11

Consumer spending includes…

Answer 11

1. durable goods
2. non-durable goods
3. services

Question 12

business Investment

Answer 12

Businesses buying capital such as machines and tools

Question 13

Government spending (def)

Answer 13

payments made by the govt. for goods/services (NOT transfer payments)

Question 13

transfer payments

Answer 13

when the govt. redistributes income (welfare, SS). Nothing is returned, and subsidies count as transfer payments

Question 13

Unemployment

Answer 13

Workers are actively looking for a job, but are not currently working

Question 13

What is included in the unemployment rate

Answer 13

people in the labor force who want a job but are not working

Question 14

Frictional unemployment

Answer 14

temporary unemployment/being between jobs

Question 15

structural unemployment

Answer 15

changes in labor force that make some skills obsolete (eg. technology)

Question 16

cyclical unemployment

Answer 16

caused by a recession

Question 17

Nominal GDP

Answer 17

not adjusted for inflation

Question 18

Real GDP

Answer 18

adjusted for inflation

Question 19

Stagflation

Answer 19

both unemployment and inflation are increasing

Question 20

why is high inflation bad?

Answer 20

banks don’t loan out money and people don’t save, which decreases investment and GDP

Question 21

why is deflation bad?

Answer 21

people hoard money and assets

Question 22

how is inflation measured?

Answer 22

the govt. tracks market baskets

Question 23

what is the inflation rate? (def)

Answer 23

Percent change in prices from year to year

Question 24

disinflation

Answer 24

prices increasing at slower rates

Question 25

price indices/indexes

Answer 25

index numbers assigned each year that demonstrate how prices have changed relative to a specific base year

Question 26

how to calculate CPI (equation)

Answer 26

price of market basket/price of market basket in base year *100

Question 27

Problems with CPI

Answer 27

1. many substitutes are not part of the market basket 2. might not include new products 3. ignores improvements and declines in quality

Question 28

nominal wage

Answer 28

wage measured by dollars rather than purchasing power

Question 29

real wage

Answer 29

wage adjusted for inflation

Question 30

menu costs

Answer 30

costs money to change listed prices

Question 31

shoe leather costs

Answer 31

the cost of transactions increases

Question 32

unit of account costs (def)

Answer 32

money doesn't reliably measure the value of goods/services

Question 33

GDP Deflator (def)

Answer 33

measures the prices of all goods domestically

Question 34

What is the ONLY thing CPI measures?

Answer 34

services/goods consumers purchase

Question 35

Where does in increase in goods/services bought by firms/ the govt. show up? (what tool)

Answer 35

GDP Delflator

Question 36

Quantity Theory (inflation)

Answer 36

govt keeps printing money to pay debts; causes hyperinflation

Question 37

Demand-Pull Inflation

Answer 37

Demand pulls prices up; there is the same amount of goods, but excessive spending on these goods

Question 38

How do higher production costs increase prices?

Answer 38

It leads to a negative supply shock, resulting in producers increasing prices

Question 39

quantitative theory of money equation

Answer 39

MV=PY

Question 40

Velocity of money (definition)

Answer 40

average times a dollar is spent and re-spent in a year