Macro Exam 2

price index shows

how the price of the market basket changes through time

consumer price index is the

average level of the prices of goods consumed by an urban family

cpi is published monthly by the

bureau of labor

step one of calculating the cpi

find the cost of the basket at base period prices

step two of calculating the cpi

find the cost of the basket at current period prices

step three in calculating the cpi

calculate the cpi for the current period

cpi equation is

basket in current year / basket at base prices x 100

the inflation rate is the

percentage change in price level from year to year

first stage of constructing the cpi

selecting the cpi basket

second stage of constructing the cpi

conducting a monthly price survey

third stage of constructing the cpi

using the prices and the basket to calculate the cpi

4 cpi biases

new goods bias, quality change bias, commodity substitution bias, outlet substitution bias

money illusion is

using nominal dollars rather than real dollars to gauge income or wealth

the inflation formula is

(cpi this year - cpi last year) / cpi last year x 100

pure inflation is when

prices of all goods rise by the same percentage over the year

hyperinflation is an

extremely rapid inflation rate with devastating impact

disinflation

declining inflation rate

deflation

rate of downward movement in price level

two sources of pressure on the price level and inflation

demand pull and cost push

demand pull inflation starts because

aggregate demand increases by any factor

cost push inflation results from

an initial increase in resource costs

cost push inflation occurs when AS shifts

left

cost push inflation is

self limiting

self limiting means it will

die out or cure itself

stagflation is the combination of a

rise in price level and drop in real GDP

purchasing power

measure of how much dollar can buy

nominal income

actual number of dollars received over a year

real income

purchasing power of nominal income

inflation does what to borrowers, including the government

helps them

inflation does what to real income

redistributes it

2 main effects of inflation are

redistribution of income and departure from full employment

the nominal interest rate is the price a borrower pays for

the amount loaned and the devaluing of the money

the real interest rate is the

price paid by a borrower to compensate only for the amount loaned

the core inflation rate attempts to

reveal the underlying inflation trend

rational expectation is

the forecast that is based on all relevant information

recession is a period during which

real gdp decreases for at least 2 successive quarters

deflation

falling price level

the phillips curve shows the relationship between

inflation and unemployment

two types of phillips curves

short run and long run

the phillips curve seeks

price level stability

in the phillips cure, the rate of inflation and unemployment are

inversely related

4 phases of the business cycle

peak, trough, recession, expansion

a peak is when the economy is

at full employment and highest level of real gdp

recession is when real gdp

decreases

trough is where real domestic output and unemployment

bottom out at lowest levels

expansion is a period during which

real gdp increases

secular trend

expansion or contraction over a long period of time

the population is divided into two groups

the working age population and people too young to work or in institutional care

the working age population consists of

people aged 16 or older who are not in jail, hospital, or institutional care

the working age population is divided into two groups

people in the labor force and people not in the labor force

the labor force is the sum of

employed and unemployed workers

labor force is the number of people who are

over 16 and employed or actively seeking a job

job separation

when a worker quits or is fired or is laid off

job search

process of looking for a job

job finding

when unemployed worker accepts new job

entrants

people who are entering the labor force

reentrants

people who have previously withdrawn from the labor force

the unemployment rate is the percentage of people

in the labor force who are unemployed

equation for unemployment rate

number of people employed / labor force x 100

marginally attached worker

a person who is neither working nor looking for a job but has indicated that they want and are available for a job and has looked for work in the past

discourage worker

a marginally attached worker who has stopped looking after repeated failure

the labor force participation rate is the percentage of

the working age populating who are members of the labor force

equation for labor force participation rate

labor force / working age population x 100

employment to population ratio is the percentage of

people of working age who have jobs

equation for employment to population ratio

number of people employed / working age population x 100

aggregate hours

total hours worked by all people employed during a year

real wage rate

quantity of goods that can be purchased with an hour’s work

three types of unemployment

frictional, structural, cyclical

frictional unemployment arises from

people entering and leaving the labor force and the creation and destruction of jobs

frictional unemployment increases when

more people enter the labor market or when unemployment compensation payments increase

structural unemployment arises when

changes in technology or change in skills or location necessary for a job

cyclical unemployment arises from

fluctuations in the business cycle

cyclical unemployment increases during a

recession

cyclical unemployment decreases during an

expansion

is cyclical unemployment included in the natural rate of unemployment?

no

full employment

unemployment rate = natural rate of unemployment

classical theory believes the the economy is

self regulating and always at full employment

in classical theory, government interference

is not needed

classical theory takes which viewpoint

long run

in classical theory, the most significant influence on both AD and AS is

technological change

in classical theory, taxes

blunt people’s incentives to work

say’s law states that

supply creates it own demand

say’s law states that overproduction

is not possible

Keynesian theory is based on the

herd instincts

in the keynesian theory, when the economy is left alone

it would operate at full employment

K theory says that to achieve and maintain full employment

fiscal and monetary policy is required

fiscal policy

help from the government

monetary policy

help from the central bank

in keynesian theory, money wages are

sticky, especially downward

monetarist theory says the economy is

self regulating and will normally operate at full employment

monetarist theory says the most significant influence on AD is

the quantity of money

in monetarist theory, all recessions result from

inappropriate monetary policy

in monetarist theory, tax rates should

be kept low

real business cycle theory states the main source of economic fluctuations are

random fluctuations in productivity and resource availability

RBC cycles are just variations in growth because of

change of pace in technology change

other sources of changes in rates in RBC are

international disturbances, climate fluctuations, natural disasters

theory of creative destruction

monopolies are destroyed by new industries

theory of contestable markets

there are barriers to enter

in the theory of contestable markets, there is difficulty

switching resources

theory of creative destruction is basically: “if you don’t

change, you will die