Econ Final Exam

There are growth miracles and growth ______.

disasters

Everyone used to be _______.

poor

GDP per capita varies enormously ________.

across nations

if a country grows at x% per year, their GDP will double after 70/x years

rule of 70

the market value of all final goods and services produced within a country in a year

gross domestic product (GDP)

What does the GDP not include?

intermediate goods

What is the GDP formula?

GDP = C + I + G + NX

What does each letter in the GDP formula stand for?

C = consumption spending

I = investment spending

G = government purchases

NX = net exports

private spending on final goods and services

consumption spending

private spending on tools, plants and equipment used to produce future output (includes consumers purchasing homes)

investment spending

spending by all levels of government on final goods and services (doesn’t include transfer payments)

government purchases

exports - imports

net exports

What is the factor income approach formula?

Y = employee compensation + rent + interest + profit

Real GDP is a good measure of what?

standard of living of a country

What are some of the problems associated with GDP?

doesn’t count the underground economy, non-priced production, leisure, negative externalities (bads), and distribution of income

GDP is ________ with consumption and investment.

pro-cyclical

What does the GDP being pro-cyclical with consumption and investment mean?

investment is usually greater than real GDP when GDP is increasing and it’s less than GDP when GDP is decreasing

GDP is _______ with the unemployment rate.

counter-cyclical

the market value of all final goods and services produced by a country’s permanent residents, wherever located in a year

gross national product (GNP)

How do you calculate GDP per capita?

GDP/population

How do you calculate the growth rate?

(X2-X1/X1)x100%

nominal variables that are adjusted for inflation

real variables

short-run movements in real GDP around a long-term trend in real GDP

business cycle

shows a relationship between output and the factors of production

production function

What are the factors of production?

capital and labor

How is the production function written?

f(A,K,eL) or f(K) in the solow model

the stock of tools including machines, structures, and equipment

physical capital

productive knowledge and skills that workers acquire through educatio9n, training, and experience

human capital

knowledge about how the world works that’s used to produced goods and services

technological knowledge

increase in output caused by the addition of one more unit of capital

marginal product of capital (MPK)

As output increases, what does the marginal product of capital do?

diminishes

In the Solow Growth Model, when a country is at its steady state, what is happening to the investment?

there is no new net investment

What does being at steady state mean?

depreciation = new investment (replacing the capital that depreciated

If there is a depreciation increase, the country has a ______ level of steady-state capital.

lower

If there is a depreciation decrease, the country has a ______ level of steady-state capital.

higher

If there is a savings increase, the country has a _______ level of steady-state capital.

higher

If there is a savings decrease, the country has a ______ level of steady-state capital.

lower

When do countries grow faster?

when they are farther away from their steady-state level of capital

the tendency for poorer countrues to grow faster than richer countries and thus for poor and rich countries to converge in income

conditional convergence

all countries income will converge, regardless of their steady-state level of capital (little evidence of this)

absolute convergence

What does it mean that ideas are non-rivalrous?

two people can get them at the same time without reducing the other person’s

A person is counted as unemployed if they satisfy these 5 categories…

16 or older

aren’t in prison

aren’t in military

actively looking for a job

don’t have a job

A person is counted as employed if they satisfy all 3 of these conditions…

16 or older

aren’t in prison

have a job

Who is included in the labor force?

unemployed and employed

How do you calculate the labor force participation rate?

(labor force/non-institutionalized working age population)x100%

The unemployment rate doesn’t count who?

discouraged workers and the underemployment rate

workers who have given up looking for work but would still like to have a job

discouraged workers

measures how well matched people are to their jobs

underemployment rate

short-term unemployment caused by difficulties of matching employee to employer

frictional unemployment

persistant, long-term unemployment caused by long-lasting shocks or permanent changes in the economy

structural unemployment

What can cause structural unemployment?

minimum wage, employment laws and unions

short-term unemployment that increases in recessions and declines during expansions

cyclical unemployment

How do you calculate the natural rate?

structural + frictional unemployment

increase in the average level of prices

inflation

percentage change in prices from one period to the next

inflation rate

a decrease in the average level of prices

deflation

reduction in the inflation rate

disinflation

measures the average basket of goods bought by a typical american consumer

consumer price index (CPI)

The consumer price index only counts what?

final goods and services

measures average price recieved by producers

producer price index

The producer price index only counts what?

intermediate and final goods and services

What is the most widely used measure of the change in prices?

CPI

What are two challenges that occur in measuring the CPI?

change in goods

change in the quality of goods

Unexpected inflation benefits who?

the borrower and harms the lender

Less than expected inflation benefits who?

the lenders and harms borrowers

when people mistake changes in nominal prices for changes in real prices

money illusion

The formula for the relationship between the nominal and real rates of return is…

i-pi

What do the symbols in the real rate of return formula stand for?

i = nominal interest rate

pi = inflation rate

tendency of nominal interest rates to rise with expected inflation rates

fisher effect

Fisher effect formula

i = Epi + r

Quantity theory of money formula:

M(→)+v(→)=P(→)+Yr(→)

What do the letters stand for in the quantity theory of money formula?

M = money supply

v = velocity

P = price level

Yr = real GDP

average number of times a dollar is spent on final goods and services in a year

velocity of money

The source of inflation is most of the time…..

money supply

shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

aggregate demand curve

The AD curve has a slope of what?

-1

Shocks to velocity are temporary, so in the long run, what happens to changes in real growth and inflation?

there will be no long run changes

Shocks to the money supply tend to be permanent, so in the long-run, the change in the money supply becomes _____________.

inflation or disinflation

currency + total reserves held at Fed

monetary base

currency + checkable deposits

M1

M1 + savings deposits, money market mutual funds and small time deposits

M2

ratio of reserves to deposits

reserve ratio

What is the formula for the reserve ratio?

1/MM

amount by which the money supply expands with each dollar increase in reserves (inverse of reserve ratio)

money multiplier

What is the formula for the money multiplier?

1/RR

The Fed has 2 jobs…

price stability (low and constant inflation)

full employment (seen through high growth)

The Fed is more effective at dealing with which types of shocks instead of real shocks?

AD shocks

change in reserves x MM

change in the money supply

What happens in an open market purchase?

the Fed buys bonds, increasing the money supply

What happens in an open market sale?

the Fed sells bonds, decreasing the money supply

What does the US government use tax money on?

social security

defense

health care

unemployment insurance

payments on debt

tax that increases when income increases

progressive tax

tax that has a constant tax rate

flat tax

tax that decreases with income

regressive tax

tax rate paid up on an additional dollar of income

marginal tax rate

How do you calculate the average tax rate?

total tax payment/total income

annual difference between federal spending and revenues

deficit

goods and services that a private sector are likely to purchase

substitutable government spending

gods and services that the private sector aren’t likely to purchase

non-substitutable government spending

If a recession occurs after a decrease in AD, it’s more effective for the government to increase spending on what type of goods?

non-substitutable