Chapter 14

Question 1

What is Nominal GDP?

Answer 1

It is the value at current prices of all final products and services produced annually in a country

Question 2

Calculating Nominal GDP

Answer 2

Calculated by taking the Price and Quantity of a good and adding them all up together for how ever many goods you have.

Question 3

What is Flow?

Answer 3

Flow is an amount per unit of time, examples include income and stock

Question 4

GDP includes:

Answer 4

products and services produced within a country no matter what the nationality of the business doing the producing

Question 5

What is real GDP?

Answer 5

It is the value at constant prices of all final products and services produced annually in a country

Question 6

How do your calculate Real GDP?

Answer 6

Using a base year, you multiply the price of the year you are in to the base year quantity for each product and add all the products together (P^A 20002 multiplied by Q^A 1935, ext)

Question 7

Differences in real GDP between years show only changes is:

Answer 7

quantities

Question 8

Real GDP per Person

Answer 8

Is real GDP divided by population, best measure of material standard of living

Question 9

What do consumers do in input markets?

Answer 9

They sell inputs to businesses in input markets in exchange for wages, interest, rent, and profits

Question 10

What do businesses do in input markets?

Answer 10

They use the consumers inputs or produce products and services, which are then sold in the output markets

Question 11

What is value added?

Answer 11

It is the value of output minus the value of intermediate products and services bought from other businesses, solves the problem of double counting

Question 12

The value of final products and services equal…

Answer 12

inputs income

Question 13

Spending on final products and services equals…

Answer 13

Payments to input owners

Question 14

What equation equals aggregate income (Y)?

Answer 14

C+I+G+X-IM=Y

Question 15

Consumer choices in the GDP circular flow of income and spending with Banking System

Answer 15

-Spend or save
-Disopsable income (aggregate income minus net taxes)
-Net taxes(taxes minus transfer payments)

Question 16

Business choices in GDP circular flow of income and spending with Banking System

Answer 16

-hiring inputs and producing products and services
-investment spending(often financed by borrowing)

Question 17

Government choices in GDP circular flow of income and spending with Banking System

Answer 17

-Collect taxes, make transfer payments
-Spending on products and services
-Policy choices

Question 18

R.O.W choices in GDP circular flow of income and spending with Banking System

Answer 18

-buy Canadian exports or products and services from elsewhere
-Sell imports to Canada or elsewhere
-Invest and borrow money in canada or elsewhere

Question 19

Bank choices in GDP circular flow of income and spending with Banking System

Answer 19

-take deposits and make loans

Question 20

What is potential GDP?

Answer 20

It is real GDP when all inputs, labour, capital, land/resources, and entrepreneurship are fully employed, short run goal for economic performance

Question 21

What is Potential GDP per Person?

Answer 21

Potential GDP divided by the population, short run maximum possible for living standards for an economy

Question 22

A Production Possibilities frontier shows what?

Answer 22

Shows the max combination of products and services that a country can produce when all inputs(Labour, capital, land/resources, and entrepreneurship) are fully employed
-on the PPF all inputs are fully employed, economy is producing at potential GDP
-Inside the PPF some inputs are unemployed, economy is producing below potential GDP

Question 23

Economic growth is caused by?

Answer 23

It is caused by increases in the quantity or quality of a country’s inputs, including technological change, labour, capital, land/resources, and entrepreneurship

Question 24

Increases of Labour come from:

Answer 24

Quantity: population growth, immigration, increase in labor force participation rate
Quality: Increases in human capital, increased earning potential from work experience, on the job training, and education

Question 25

Increases in Capital come from:

Answer 25

Quantity: from more factories and equipment Quality: from tech changes(improvements in quality of capital through innovation, research, and development

Question 26

Increases in land and resources are caused by

Answer 26

Quantity: by brining land and resources not connected to markets into the circular flow Quality: Increases usually due to increases in capital used with land (better land means more resources)

Question 27

Increases in entrepreneurship are caused by:

Answer 27

Quantity and quality: improvements from better management techniques, organization, and worker/management relations (how people work together)

Question 28

A stock as a measure of time is:

Answer 28

A fixed amount at a moment in time

Question 29

Economic growth rate equals

Answer 29

the annual percentage change in real GDP per person (real GDP per person growth rate) =(Real GDP per person this year)- (Real GDP per person last year) divided by (Real GDP per person last year) times 100 n

Question 30

What is the rule of 70?

Answer 30

It is the number of years it takes fro an amount of money to double is roughly 70 divided by annual percentage growth rate (70/ annual percent growth rate) -due to compounding small differences in annual growth rates have large consequences over time

Question 31

What is creative destruction?

Answer 31

It is competitive business innovations generate profits for winners, improving living standards for all, but destroy less productive or less desirable products and production methods

Question 32

What are business cycles?

Answer 32

They are up and down fluctuations of real GDP around potential GDP

Question 33

What is the process of business cycles:

Answer 33

Expansion(GDP increases), Peak(highest point of an expansion), Contraction(when real GDP decreases), trough(lowest point of a contraction), recession(two or more successive quarters of contraction of real GDP)

Question 34

Output Gap is

Answer 34

Real GDP minus potential GDP

Question 35

What is a a recessionary gap?

Answer 35

When real GDP is below potential GDP, gap is a negative number

Question 36

What is an inflationary gap?

Answer 36

when real GDP is above potential GDP, the gap is a positive number

Question 37

Real GDP per person is a limited measure of well being because:

Answer 37

Non market production(household production), underground economy(illegal activities), environmental damage(resource depletion and environmental damage), leisure(more leisure lowers GDP), and political freedoms and social justice(limited political freedoms and unequal distributions of income)