Module 1

Question 1

Goodhart’s Law

Answer 1

When a measure becomes a target, it ceases to be a good measure

Question 2

Calculations of GDP

Answer 2

1. Expenditure: Totals all spending (and who is spending) 2. Income: Totals all of the income (and who is earning)

Question 3

Disaggregation of income GDP

Answer 3

1. Returns to labor 2. Capital income

Question 4

Disaggregation of spending GDP

Answer 4

1. Consumer spending 2. Investors 3. Government 4. Foreign spending

Question 5

National Income Accounting Identity

Answer 5

Y = C + i + G + NX Y = GDP C = Consumption (biggest variable in GDP function) i = Investment G = Government spending NX = Net exports

Question 6

Consumption Variables

Answer 6

C =f(income, taxes, mpc) mpc = marginal propensity to consume

Question 7

Marginal Propensity to Consume

Answer 7

Expressed as a decimal (.7) If you are one more dollar, how much of it are you likely to spend? 1 - mpc = marginal savings rate

Question 8

Determinants of MPC

Answer 8

1. Varies by country 2. Wealth (poorer individuals tend to have higher mpc)

Question 9

What does consumption function include?

Answer 9

New goods: Only count something the first time it was bought (no used cars etc.) Final goods: Count the hamburger, but not McDonald’s buying the beef & bread etc.

Question 10

Investment

Answer 10

Capital formation (factories and land etc.) not financial products Inventory accumulation counts (buying your own products to sell later–but no double counting) I(r) I = investment and r = interest rate. (As interest rate goes up, investment goes down)

Question 11

Government spending

Answer 11

Typically is not predicted in economic models

Question 12

Net exports

Answer 12

NX(e) Net exports are a function of the real exchange rate (e) Cheaper (weak) currency = more exports Know appreciation and depreciation

Question 13

Not in GDP

Answer 13

1. Used goods 2. Intermediate goods 3. Underground markets (black markets) 4. Sales from inventories 5. Imputed value of domestic work (hypothetical pay for uncompensated work)

Question 14

Imputed Rent

Answer 14

Included GDP and is the value of the rent people would pay if they didn’t own their home

Question 15

Nominal GDP

Answer 15

Price times quantity year-over-year

Question 17

Real GDP

Answer 17

Quantity (this year) * prices in the base year = real GDP

(Holds prices constant)

Question 18

GDP Deflator

Answer 18

= Nominal GDP/Real GDP * 100

Question 19

How to calculate inflation (GDP deflator method)

Answer 19

Ne price - old price / old price

Question 20

Consumer price index

Answer 20

Like the GDP deflator, but prices are held constant for a set group of goods

(Tends to overstate inflation)

Question 21

Standardize price levels

Answer 21

Standardize to 100 when calculating inflation

Question 22

Weakness of CPI

Answer 22

Does not allow for any subsititution of goodls in response to price changes

Question 23

Inflation negatives

Answer 23

Menu costs: Literally the cost of reprinting prices

Shoeleather costs: Money loses value, so you want to spend it as quickly as possible

Unpredictability: When and how much should I spend? (Price uncertainty makes everything worse)

Question 24

Inflation and distribution

Answer 24

Makes both money and debts worth less

Can reduce debt and reduce the holdings of the wealthy

Is, broadly speaking, progressive

Question 25

Inflation positives

Answer 25

It’s not deflation! (prices are going dow, so why spend money? — > cand lead to a deflationary spiral)

Question 26

Demand Pull Inflation

Answer 26

Is the good kind!

As people want a thing, it’s price goes up

The healthy inflation that signifies a growing economy

Question 27

Cost Push Inflation

Answer 27

Input drive (oil shocks)

Not the good type of inflation

Question 28

Labor Force Partcipation Rate

Answer 28

Labor force (L) does not include:

1. People not looking for work
   - Students, retirees, homemakers, etc.

– (Longer-term unemployed)

Laborforce participation = L / Population

Question 29

Job Finding Rate (F)

Job Seperation Rate (S)

HEALTHY ECONOMY

Answer 29

F * UR = S * E

If true, than unemployment will not change

S * E goes up = unemployment rate goes up

F * UR goes up = unemployment goes down

Question 30

Frictional unemployment causes

Answer 30

• Changes in economic specialization
• Voluntary job leaving
• Firms failing and starting up (regular business cycle)
• Economic downturns

THESE ARE CYCLICAL CAUSES

Question 31

Structural unemployment causes

Answer 31

THESE DON’T NECESSARILY RESOLVE THEMSELVES

Wage rigidity (wages are too high)

Labor market rigidity (regulations)

Question 32

Phillips Curve & Stagflation

Answer 32

Using inflation to stimulate employment etc.