Discussion handouts

Question 1

Movement along the supply curve

Answer 1

A change in the quantity supplied of a good that is the result of a change in that good’s price

Question 2

Law of Demand

Answer 2

Price goes up

Quantity demanded goes down

*creates downward sloping demand curve

Question 3

Substitution effect

Answer 3

If the price of good A falls relative to price of good B (substitute)

then quantity demanded for good A increases relative to quantity demanded for good B

Question 4

Income effect

Answer 4

If the price of good A (normal) falls

then Quantity demanded for good A increases as the purchasing power of consmers has increased

Question 5

Possible demand shifters

Answer 5

Income

Price of related goods

Preferences

Population

Expectations

Question 6

GDP defintion

Answer 6

the market value of all final goods and services produced in a country during a period of time, typically over one year

Question 7

GDP is measured using ____________

Answer 7

market values, not quantities

Question 8

GDP includes only ______________

Answer 8

final goods, not intermediate goods

Question 9

final good/service

Answer 9

Purchased by its final user and is not included in the production of any other good or service

Question 10

Intermediate good/service

Answer 10

A good or service used as an input into the production of another good or service

Question 11

GDP formula

Answer 11

GDP (Y) = C + I + G + NX

Consumption

Investment

Government purchases

Net exports (exports - imports)

Question 12

Value added

Answer 12

Refers to the additional market values a firm gives to a product

GDP calculation: (price for which the firm sells a good) - (price it paid other firms for intermediate goods)

Question 13

Income approach: GDP calculation

Answer 13

GDP = Wages + Interest + Rent + Profits

Question 14

Real GDP

Answer 14

Real GDP = Quantities (current) x Price (base year)

Question 15

Nominal GDP

Answer 15

Nominal GDP = Quantities (current) x Prices (current)

Question 16

GDP deflator

Answer 16

A measure of price level

_Nominal GDP _

Real GDP X100

*Used to describe inflation vs. deflation

Question 17

Gross National Product (GNP)

Answer 17

The value of final goods and services produced by residents of the U.S, even if the production takes place outside of the US

*does not include domestic production by non U.S firms

Question 18

Personal Income

Answer 18

Income received by households, not earned by the firms, add transfer payments

Question 19

Disposable personal income

Answer 19

Personal income - tax

Question 20

Unemployment rate

Answer 20

Measures the percentage of the labor force that is unemployed

number of unemployed

labor force X100

Question 21

Labor force includes:

Answer 21

employed + unemployed

Question 22

Underemployed

Answer 22

People who have a part time job but are looking for a full time job

Question 23

Employed includes:

Answer 23

Full time + part time

Question 24

Labor force participation rate

Answer 24

Measures the percentage of the working age population that is in the labor force

labor force

working age population X100

Question 25

Note: Labor Force

Answer 25

Refers to the employed and unemployed individuals of working age People not included in labor force: students, retirees, prisoners, stay-at-home parents, discouraged workers, etc.

Question 26

Frictional unemployment

Answer 26

Imperfect information and temporary periods of unemployment while workers are changing jobs

Question 27

Structural unemployment

Answer 27

Arises from a persistent mismatch between the job skills or attributes of workers and the requirement of jobs "retraining"

Question 28

Cyclical unemployment

Answer 28

Caused by changes in the business cycle

Question 29

Full unemployment

Answer 29

frictional unemployment + structural unemployment

Question 31

Real GDP =

Answer 31

_Nominal GDP_ GDP deflator X 100

Question 32

CPI

Answer 32

Average of the prices of some commonly consumed goods and services _Value basket current year_ Value basket base year X100

Question 33

Value basket in CPI

Answer 33

Hold quantities the same to see the change in price of the basket

Question 34

Inflation =

Answer 34

_Change in deflator_ Deflator base _Change in CPI_ CPI base

Question 35

Real interest rate

Answer 35

Real interest rate = Nominal interest rate - Inflation rate

Question 36

Unanticipated inflation

Answer 36

An increase in the price level that comes as a surprise, at least for most individuals

Question 37

Anticipated inflation

Answer 37

A widely excepted change in the price level

Question 38

Introduction of new goods and services into the economy

Answer 38

causes the CPI to overestimate the cost of living because: New goods cost less than existing goods Consumers start switching to new goods

Question 39

Adjusting for effects of inflation:

Answer 39

Value (Y2) = Value (Y1) x _CPI (Y2)_ CPI (Y1)