C2 Looking at Key Questions and Concepts

Question 1

economic growth

Answer 1

when the total amount of goods and services that an economy can produce increases

Question 2

Rule of 70

Answer 2

the number of years it takes for anything to double in value, is equal to 70 divided by the annual growth rate.

Example:

2% growth means 35 years to double

3% growth means 23 years and 4 months to double

10% growth means 7 years to double

Question 3

For the past 50 years the U.S. economy has grown at an average annual rate of 2.8%. What portion of this growth is due to increase in productivity?

Answer 3

1.1% is due to population growth. 1.7% is due to the fact that we get more productive each year

Question 4

given how unemployement is measured what classifies someone as “unemployed”

Answer 4

a) you don’t have a job, and
b) you’ve been looking for one in the last few weeks

Question 5

economist use the term “frictional unemployment” to describe…?

Answer 5

when workers enter the labor force and start searching for employment, the time it takes to match each worker with a specific set of skills, to a firm looking for just those skills, reflects the normal frictions of the job match making process, economist refer to this as frictional unemployment

Question 6

Structural unemployment

Answer 6

is a form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers. Structural unemployment is often brought about by technological changes that make the job skills of many workers obsolete

Question 7

state licensing policies and regulations are estimated to have cost nearly ______ jobs per year.

Answer 7

3 million

Question 8

in the case of frictional and structural unemployment, any solutions lie mainly in policies to improve the functioning of the labor market, that is, in _______ policies.

Answer 8

microeconomic

Question 9

cyclical unemployment reflect purely macroeconomic forces and it is very costly because…?

Answer 9

it means not using resources to produce goods that the economy would produce if it were operating normally

Question 10

inflation

Answer 10

(increasing prices) when the prices rise (on goods and services) on average in an economy

Question 11

deflation

Answer 11

(decreasing prices) falling prices on goods and services

Question 12

inflation means the domestic currency is…?

Answer 12

becoming less valuable

Question 13

what are the two underlying causes of inflation?

Answer 13

1. Printing to much money: Like everything else when supply becomes relatively abundant, money loses value. (it seems that the unit price of currency is being diluted when more units are added because the total value of all units stays the same?)
2. Expectations mechanism: if everyone expects money to lose value everyone will try to get rid of it quickly by spending it on goods or services. Then it becomes a game of hot potato.

Question 14

interest rate is…?

Answer 14

the price of credit

Question 15

Inflation focuses on the value of domestic money. It starts my measuring the amount of currency it takes to buy a small amount of ____.

Answer 15

GDP

Question 16

the fundamental variable of inflation is…?

Answer 16

the rate of exchange between money and goods and services at a single point in time.

Question 17

interest rates are a different kind of price than inflation because it looks at rates of exchange between….?

Answer 17

Different points in time.

e.g. the trade is explicitely between dollars today and dollars in the future. The price is that $1 today “buys” $1.05 dollars in one year.

Question 18

intertemporal

in·ter·tem·po·ral

Answer 18

Adjective

Describing any relationship between past, present and future events or conditions

Question 19

Real interest rate = _____ - _____

Answer 19

Real interest rate = Nominal rate - Inflation rate

Question 20

var·i·a·ble

Answer 20

adjective

1. not consistent or having a fixed pattern; liable to change.
   synonyms: changeable, changing, varying, shifting, fluctuating, irregular, wavering, vacillating, inconstant, inconsistent
2. able to be changed or adapted.

noun

1. an element, feature, or factor that is liable to vary or change.

Question 21

stock and flow

Answer 21

• A stock is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past.
• A flow variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

Question 22

investment meaning in economics

Answer 22

Buying something new today that can be used to produce something in the future. Buying a used machine does not count as an investment, because the total number of machines hasn’t increased.

Question 23

capital meaning in economics

Answer 23

It usually means “capital stock,” meaning all the machines, offices, computers etc.. and so on that are used to produce goods and services.

Captial is usually more durable (not money)

Question 24

Investment and capital stock are closely linked. Investment is the purchase of NEW capital goods. Capital stock is a ____ variable, and investment is the yearly addition to capital stock, so it’s a ____ variable.

Answer 24

Investment and capital stock are closely linked. Investment is the purchase of NEW capital goods. Capital stock is a stock variable, and investment is the yearly addition to capital stock, so it’s a flow variable.

Question 25

for capital stock to rise, investment that year has to be more than...?

Answer 25

the depreciation of the existing capital stock

Question 26

capital goods

Answer 26

goods that can be used to produce other goods and services, rather than being bought by consumers.

Question 27

level of variable versus its growth rate

Answer 27

* **Level:** the _value_ that a variable takes at a particular time * **Growth rate:** the _percentage change_ in a variable over a period of time (usually a year)

Question 28

is the average price of a house in Atlanta a level or a growth rate?

Answer 28

level

Question 29

is the rate of inflation a level or a growth rate

Answer 29

growth rate

Question 30

what is the difference in income and wealth

Answer 30

* Income is a flow variable, it pays a certian amount of money over a period of time e.g. $1M per year. * Wealth is a stock variable. It is the total value of your assets minus your liabilities at any given point in time e.g. $10M at 5-31-19.

Question 32

capital stock is the accummulation of past investment flows...?

Answer 32

less depreciation.

Question 33

wealth is...?

Answer 33

accumulation of a lifetime of income less expenditure

Question 34

* A person's level of debt is a \_\_\_\_\_, whereas his borrowing from year to year is a \_\_\_\_\_. * The weekly number of people finding and losing their jobs is a \_\_\_\_, whereas the total number employed is a \_\_\_\_\_. * The total number of houses built in the U.S. is a \_\_\_\_, whereas the new houses that are built in a year is a \_\_\_\_.

Answer 34

* A person's level of debt is a **_stock_**, whereas his borrowing from year to year is a **_flow_**. * The weekly number of people finding and losing their jobs is a **_flow_**, whereas the total number employed is a **_stock_**. * The total number of houses built in the U.S. is a **_stock_**, whereas the new houses that are built in a year is a **_flow_**.

Question 35

Nominal Variables versus Real Variables

Answer 35

* **Nominal:** Variables quoted in terms of _money_. * **Real:** Variables that are quoted in terms of _quantities_. Number of people employed or how much you are paid in terms of goods.

Question 36

Gross Domestic Product (GDP)

Answer 36

the value of **final** goods and services and economy produces in one year

Question 37

Gross Output (GO)

Answer 37

is the measure of **total economic** activity in the production of new goods and services in an accounting period. It is a much broader measure of the economy than gross domestic product (GDP), which is limited mainly to final output (finished goods and services).

Question 38

Output (economics)

Answer 38

Economists define aggregate output to be the sum of all the goods and services produced in an economy over a certain period of time. In other words, aggregate output is defined as an economy's total productivity, or GDP. GDP (gross domestic product) is the most popular measure of national output

Question 39

Production

Answer 39

The aggregate production of an economy is just the **total value of everything that is produced by firms and the goverment in one year** (same as GDP and Output). Economist call anyone or anything that provides a good or service traded in the market place a firm.

Question 40

Income

Answer 40

Aggregate income is the sum of everyones income in an economy. And income comes from selling the output/productio/GDP of the economy. Income must also be equal to those things; equal to production.

Question 41

Expenditure

Answer 41

Aggregate expenditure is just the sum of everyone's expenditure, that is, their spending on goods and services. This can be different from aggregate income, and the difference is the trade balance, surplus or deficit.

Question 42

surplus

Answer 42

when the aggregate income exceeds aggregate expenditure, the economy is running a surplus in its international accounts.

Question 43

deficit

Answer 43

when the aggregate expenditure exceeds aggregate income, the economy is running a deficit in its international accounts.

Question 44

economic model

Answer 44

An economic model is a simplified representation of the real world. A good model is one that focuses on the particular variables of interest while moving irrelevant (or less relevant) details to one side. Like a map, it includes useful details such as roads and their names, places of interest, and transit stations but not every tree and street sign.