Prerequisite Economics Flashcards

Question

What are the components of GDP?

Answer 1

* Consumption * Investment * Government Spending * Net Exports

Answer 2

the increase in a country's output of goods and services.

Answer 3

Consumers' income (in •1,000s per household annually) ## Footnote 'I' is a variable used to denote the income level affecting demand.

Answer 4

The price of a liter of gasoline ## Footnote 'Px' is a key variable that influences the quantity demanded of gasoline.

Answer 5

The average price of an automobile (in •1,000s) ## Footnote 'Py' can be considered a related good that affects gasoline demand.

Answer 6

Q x d = 84.5 - 6.39Px + 0.25I - 2Py ## Footnote This equation illustrates how quantity demanded varies with price, income, and the price of automobiles.

Answer 7

As the price of gasoline rises, the quantity demanded decreases ## Footnote This reflects the law of demand, where higher prices typically lead to lower demand.

Answer 8

As consumers' income increases, the quantity of gasoline demanded increases ## Footnote This indicates that gasoline is a normal good.

Answer 9

If automobile prices increase, the quantity of gasoline demanded decreases ## Footnote This suggests that gasoline and automobiles are complementary goods.

Answer 10

Using Q x d = 84.5 - 6.39(1.48) + 0.25(50) - 2(20) ## Footnote This calculation shows how specific values of Px, I, and Py affect the quantity demanded.

Answer 11

The price of the good itself ## Footnote 'Own price' emphasizes that the focus is on the good in question, not another good.

Answer 12

Px = f(Q x d) ## Footnote This function expresses price as a function of quantity demanded.

Answer 13

The highest quantity willingly purchased at each price ## Footnote It also indicates the highest price consumers are willing to pay for a given quantity.

Answer 14

The change in price divided by the change in quantity (ΔP/ΔQ) ## Footnote The slope indicates how responsive the quantity demanded is to changes in price.

Answer 15

The sensitivity of quantity demanded to changes in the own price ## Footnote It measures how much the quantity demanded responds to price changes.

Answer 16

* Availability of substitutes* * Necessity vs luxury* * Proportion of income spent on the good* * Time period considered ## Footnote These factors determine how sensitive consumers are to price changes.

Answer 17

It decreases by 6.39 liters per month ## Footnote This is derived from the coefficient of Px in the demand equation.

Answer 18

They may be non-linear in some or all parts of their domain ## Footnote Linear functions are often used for simplicity and approximation.

Answer 19

It allows for analysis of the relationship between the dependent variable and one independent variable ## Footnote This simplification helps isolate effects for clearer understanding.

Answer 20

The highest price consumers are willing to pay for a given quantity ## Footnote It provides insight into consumer behavior at varying price points.

Answer 21

The coefficient measures sensitivity, indicating that whenever price changes by one unit, quantity changes by 6.39 units in the opposite direction. ## Footnote For example, if price rises by €1, quantity demanded falls by 6.39 liters per month.

Answer 22

Elasticity ## Footnote Elasticity is expressed as the ratio of percentage changes in variables.

Answer 23

E_p^d = %ΔQ^d / %ΔP ## Footnote This equation expresses the sensitivity of quantity demanded to a change in price.

Answer 24

-0.8 ## Footnote The elasticity of demand is calculated as the ratio of the percentage changes.

Answer 25

Demand is inelastic.

Answer 26

Demand is elastic.

Answer 27

Demand is unit elastic.

Answer 28

Demand becomes elastic.

Answer 29

Elasticity varies depending on the point on the demand curve.

Answer 30

Inelastic.

Answer 31

Unit elastic.

Answer 32

A vertical demand curve with zero elasticity.

Answer 33

A horizontal demand curve with infinite elasticity.

Answer 34

* Availability of close substitutes * Portion of the budget spent on the good * Time allowed to respond to price changes * Necessity versus optional status of the good

Answer 35

Long-run demand is more elastic than short-run demand.

Answer 36

Non-discretionary goods tend to have less elastic demand.

Answer 37

E_I^d = %ΔQ^d / %ΔI

Answer 38

As income rises, quantity demanded also rises.

Answer 39

When income rises, quantity demanded decreases.

Answer 40

* Less than one: inelastic * Greater than one: elastic * Equal to zero: no change in quantity demanded

Answer 41

Whenever income rises by 1%, the quantity demanded at each price would rise by 0.8%

Answer 42

As income rises, quantity demanded also rises

Answer 43

When income rises, quantity demanded decreases; when income falls, quantity demanded increases

Answer 44

Normal goods have positive income elasticity

Answer 45

Inferior goods have negative income elasticity

Answer 46

The entire demand curve shifts upward and to the right

Answer 47

The entire demand curve shifts downward and to the left

Answer 48

It measures how sensitive the demand for good X is to changes in the price of another good Y

Answer 49

The goods are substitutes

Answer 50

The goods are complements

Answer 51

Two brands of beer

Answer 52

Gasoline and automobiles

Answer 53

E_p_x_d = (ΔQ_x_d / ΔP_x) * (P_x / Q_x_d)

Answer 54

E_I_d = (ΔQ_x_d / ΔI) * (I / Q_x_d)

Answer 55

E_p_y_d = (ΔQ_x_d / ΔP_y) * (P_y / Q_x_d)

Answer 56

Demand is inelastic at that price

Answer 57

A 1% increase in income would result in an increase of 0.26% in quantity demanded

Answer 58

Gasoline and automobiles are complements

Answer 59

Total expenditure increases

Answer 60

It is the sum of all individual demand functions

Answer 61

Approximately -2.046, indicating elastic demand

Answer 62

0.551, indicating e-books are a normal good

Answer 63

(ˇQeb/ˇPhb)(Phb/Qeb) ## Footnote Where ˇQeb/ˇPhb represents the change in quantity demanded of e-books with respect to the change in price of hardbound books

Answer 64

They are substitutes ## Footnote A positive cross-price elasticity indicates that as the price of one good increases, the quantity demanded of the other good also increases

Answer 65

A decrease in the price of a good will result in a greater quantity purchased ## Footnote This is represented by a negatively sloped demand curve

Answer 66

* Substitution effect * Income effect

Answer 67

When the price of a good falls, consumers tend to purchase more of that good instead of its substitutes

Answer 68

The change in quantity demanded of a good resulting from a change in a consumer's real income due to a price change

Answer 69

Consumers buy more of the good ## Footnote Both substitution and income effects contribute to this increase

Answer 70

Consumers buy less of them when their income rises ## Footnote Conversely, they buy more when their income falls

Answer 71

An increase in income leads to an increase in the quantity demanded

Answer 72

Consumers buy more of the good due to the substitution effect but may buy less overall due to the income effect

Answer 73

They both reinforce each other to increase demand when the price falls

Answer 74

The decrease in the marginal product of labor as more workers are added to a fixed capital base

Answer 75

It determines the firm's willingness to offer a given quantity for sale

Answer 76

Marginal returns are directly related to input productivity, which measures output per unit of input

Answer 77

* Labor * Capital

Answer 78

In labor hours per time period

Answer 79

Substitution effect

Answer 80

False ## Footnote Consumers buy less of inferior goods as their income rises

Answer 81

Demand increases

Answer 82

70 labor hours per week

Answer 83

36 machine hours per week

Answer 84

Flows of services: labor hours and machine hours

Answer 85

TC = (w)(L) + (r)(K)

Answer 86

Production cost per time period to the number of units of output produced

Answer 87

Decrease in input prices or increase in input productivity

Answer 88

Maximizes output per unit of input and minimizes costs

Answer 89

* Lower business costs * Increased market value of equity * Increased worker rewards

Answer 90

Competitive disadvantage and potential decreases in earnings

Answer 91

Sum of the output from all inputs during a time period

Answer 92

Total product divided by the quantity of a given input (Q/L)

Answer 93

Additional output from using one more unit of input

Answer 94

Aggregate sum of production for a firm during a time period

Answer 95

Productivity of labor on average

Answer 96

Total product divided by total number of worker hours used

Answer 97

More efficient in producing output

Answer 98

The productivity of each additional unit of input

Answer 99

By observing the difference in total product when adding another unit of input

Answer 100

Total product increases with each additional hour of labor until the seventh hour, after which it declines

Answer 101

80 units (400/5)

Answer 102

40 units [(400 - 360)/(5 - 4)]

Answer 103

The decrease in marginal product as more units of labor are added to a fixed amount of capital

Answer 104

The additional revenue realized from increasing output by one unit

Answer 105

MR equals price per unit of output

Answer 106

The increase to total cost from increasing output by one additional unit

Answer 107

SMC is the additional cost of variable input, while LMC includes all inputs and allows for flexibility

Answer 108

The relationship between short-run marginal cost, wage rate, and marginal product of labor

Answer 109

AVC = TVC/Q

Answer 110

AFC declines as total fixed costs are spread over a larger number of units

Answer 111

Produce output where MR = MC

Answer 112

At the level of output where MR = MC, MC cannot be falling

Answer 113

The summation of all costs, classified as fixed or variable

Answer 114

All expenses that do not change as production levels vary

Answer 115

TC equals TFC because TVC is zero at this output level

Answer 116

They initially decline, reach a minimum, and then increase

Answer 117

At the lowest point on the AVC curve

Answer 118

An increase in return when employee hours are added to the production process

Answer 119

AVC will be increasing ## Footnote This indicates that as production increases, the average variable cost starts to rise.

Answer 120

At point S, the lowest point on the AVC curve ## Footnote Beyond quantity QAVC, MC is greater than AVC, causing the AVC curve to rise.

Answer 121

At point T, the lowest point on the ATC curve ## Footnote Beyond quantity QATC, MC is greater than ATC, leading to an increase in the ATC curve.

Answer 122

The difference between ATC and AVC at output quantity Q1 ## Footnote This amount represents the average fixed cost at that output level.

Answer 123

The lowest point on the MC curve ## Footnote Beyond this point, fixed input constraints reduce the productivity of labor.

Answer 124

If MC is less than average cost, average cost must fall; if MC is greater than average cost, average cost must rise ## Footnote This relationship is fundamental in cost analysis.

Answer 125

ATC is minimized and corresponds to the profit-maximizing quantity ## Footnote However, profit-maximizing quantity may not align with the minimum ATC point.

Answer 126

TC is calculated by summing Total Fixed Cost (TFC) and Total Variable Cost (TVC) ## Footnote This provides insight into overall production costs.

Answer 127

Fixed costs typically remain constant regardless of production levels ## Footnote Examples include debt service and lease agreements.

Answer 128

TVC increases with quantity and is zero at zero production ## Footnote Variable costs include labor, raw materials, and supplies.

Answer 129

The marginal cost curve begins to increase due to diminishing marginal returns ## Footnote Initially, the MC curve may decline due to increasing marginal returns.

Answer 130

ATC is calculated by dividing Total Cost (TC) by quantity ## Footnote Alternatively, ATC can be calculated by summing Average Fixed Cost (AFC) and Average Variable Cost (AVC).

Answer 131

At 3 units of production ## Footnote This corresponds to the minimum point on the ATC curve.

Answer 132

TC equals TFC at zero output ## Footnote At this point, the firm incurs no variable costs but must cover fixed costs.

Answer 133

False ## Footnote Fixed costs are often the last expenses to be cut during downsizing.

Answer 134

Both AVC and MC increase beyond 3 units ## Footnote This indicates the diminishing returns as production scales up.

Answer 135

A measure of how sensitive quantity demanded is to changes in various variables

Answer 136

The ratio of percentage change in quantity demanded to percentage change in a good or service’s own price

Answer 137

Demand is elastic and a decline in price will result in higher total expenditure on that good

Answer 138

Demand is inelastic and a decline in price will result in lower total expenditure on that good

Answer 139

Demand is unit elastic and total expenditure on that good is independent of price

Answer 140

The ratio of the percentage change in quantity demanded to the percentage change in consumer income

Answer 141

The phenomenon where, as a good's price falls, more of this good is substituted for other, more expensive goods

Answer 142

The phenomenon where, as a good's price falls, real income rises, and if this good is normal, more of it will be purchased

Answer 143

Normal good

Answer 144

Inferior good

Answer 145

The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of a related good

Answer 146

They are substitutes

Answer 147

They are complements

Answer 148

A decrease in price will cause an increase in quantity demanded

Answer 149

The total quantity that is able to be produced for each level of labor input, holding all other inputs constant

Answer 150

Total product of labor divided by number of labor hours

Answer 151

The change in total product divided by the change in labor hours

Answer 152

Additional output must fall as more and more labor is added to a fixed amount of capital

Answer 153

Total expenditure on fixed capital plus total expenditure on labor

Answer 154

The ratio of wage to marginal product of labor (MPL)

Answer 155

The ratio of wage to average product of labor (APL)

Answer 156

Total cost (TC) divided by the number of units produced

Answer 157

The ratio of change in revenue to change in output

Answer 158

Price is identical to marginal revenue (MR)

Answer 159

Total revenue (TR) minus total economic cost

Answer 160

The next best alternative forgone in making a decision

Answer 161

Occurs when total revenue (TR) equals total cost (TC)

Answer 162

Decreasing long-run cost per unit as output increases

Answer 163

Increasing long-run cost per unit as output increases

Answer 164

The minimum point on the long-run average total cost curve

Answer 165

Greater ## Footnote Price elasticity of demand measures how sensitive quantity demanded is to price changes.

Answer 166

How sensitive quantity demanded is to a change in income ## Footnote If the income elasticity of demand for a product is -0.6, a 1% increase in income leads to a 0.6% decrease in quantity demanded.

Answer 167

Measures the responsiveness of the demand for one good in response to a change in the price of another good ## Footnote Example: The demand for onions in response to a change in the price of tomatoes.

Answer 168

Quantity demanded as a function of own price only.

Answer 169

When the company needs to raise prices to clear the market.

Answer 170

Increases ## Footnote This is due to reinforcing income and substitution effects.

Answer 171

Occurs when additional output falls as more labor is added to a fixed amount of capital.

Answer 172

Occurs when the marginal product of a resource decreases as additional units of that input are employed.

Answer 173

Perfect competition, monopolistic competition, oligopoly, monopoly.

Answer 174

Many firms, homogeneous product, very low barriers to entry.

Answer 175

Many firms, differentiated product, low barriers to entry, some pricing power.

Answer 176

Few firms, homogeneous or differentiated products, high barriers to entry, considerable pricing power.

Answer 177

One firm, unique product, very high barriers to entry, significant pricing power.

Answer 178

* The number and relative size of firms supplying the product * The degree of product differentiation * The power of the seller over pricing decisions * The relative strength of the barriers to market entry and exit * The degree of non-price competition

Answer 179

They will be driven down by competition.

Answer 180

Yes, even in the long run.

Answer 181

Determines the choices facing a firm's decision makers regarding pricing and profitability.

Answer 182

No close substitute exists for the product or service.

Answer 183

The market structure with the most control over price, typically monopoly or oligopoly. ## Footnote This control can lead to large profits for firms.

Answer 184

The greatest degree of competition, leading to generally lower prices. ## Footnote Consumers prefer competitive markets for a wider variety of goods and services.

Answer 185

Perfect competition yields the lowest prices but may limit innovation; other market forms may encourage it due to higher potential profits. ## Footnote High costs of research and development can be better absorbed in oligopoly markets.

Answer 186

* Threat of entry * Power of suppliers * Power of buyers (customers) * Threat of substitutes * Rivalry among existing competitors ## Footnote These forces help analyze market conditions and profitability.

Answer 187

* Large number of potential buyers and sellers * Identical products offered by sellers * Few or easily surmountable barriers to entry and exit * No market-pricing power for sellers * Absence of non-price competition ## Footnote Few markets achieve perfect competition; agriculture is a common example.

Answer 188

The responsiveness of demand to changes in income, calculated as (% change in QD) ÷ (% change in Y). ## Footnote For normal goods, the value of income elasticity is positive.

Answer 189

As consumer income increases, the demand for normal goods increases. ## Footnote Luxury items have an income elasticity greater than one.

Answer 190

Goods for which demand decreases as consumer income increases, resulting in negative income elasticity. ## Footnote An example is a shift from watching television to attending live events as income rises.

Answer 191

The responsiveness of the demand for product A associated with the change in price of product B, expressed as (% change in QDA) ÷ (% change in PB). ## Footnote Positive cross-price elasticity indicates substitutes; negative indicates complements.

Answer 192

The difference between the value a consumer places on purchased units and the amount paid for them. ## Footnote It reflects the extra value gained by the buyer from a transaction.

Answer 193

The area under the demand curve and above the price paid represents consumer surplus. ## Footnote It indicates the value consumers place on the units consumed compared to what they paid.

Answer 194

Total revenue is maximized. ## Footnote Beyond this point, increasing output will decrease total revenue.

Answer 195

If demand is elastic, increasing price decreases total revenue; if inelastic, increasing price increases total revenue. ## Footnote Understanding this relationship helps firms strategize pricing.

Answer 196

As the area beneath the demand curve and above the price paid. ## Footnote This area indicates the total extra value received by consumers from their purchases.

Answer 197

Consumer surplus = Area under the demand curve - Total expenditure. ## Footnote Total expenditure is calculated as price multiplied by quantity.

Answer 198

QD = 180 - 2P

Answer 199

By finding the area of the triangle above the price and below the demand curve.

Answer 200

P = 90 - 0.5QD

Answer 201

* Price intercept: 90 * Quantity intercept: 180

Answer 202

Area = ½ (Base)(Height) = ½ (50)(25) = 625

Answer 203

Opportunity costs

Answer 204

The next best alternative use of that resource

Answer 205

Economic profit = Total Revenue (TR) - Total Cost (TC)

Answer 206

Economic profit includes opportunity costs, while accounting profit does not.

Answer 207

QS = 10 + 5P

Answer 208

The point where supply equals demand.

Answer 209

Area = ½ (Base)(Height)

Answer 210

Firms supply greater quantities of the product.

Answer 211

Positive slope.

Answer 212

Almost 39 units.

Answer 213

Average revenue is equivalent to the firm's demand function.

Answer 214

Marginal revenue is the incremental increase in total revenue associated with each additional unit sold.

Answer 215

Total revenue is calculated by multiplying average revenue (AR) by the quantity of products sold.

Answer 216

Average cost begins to decline as production expands.

Answer 217

The law of diminishing returns states that each additional unit of input produces a progressively smaller increase in output.

Answer 218

Average cost (AC) is total cost (TC) divided by output (Q).

Answer 219

Marginal cost reflects changes in variable costs.

Answer 220

The overall average cost begins to increase.

Answer 221

A firm maximizes profit at an output level where marginal revenue (MR) equals marginal cost (MC).

Answer 222

In long-run equilibrium, price equals both marginal cost and minimum average cost.

Answer 223

Economic profits will attract other entrepreneurs, increasing supply and lowering equilibrium price.

Answer 224

A monopoly has a single seller of a highly differentiated product.

Answer 225

High costs and significant barriers to competition.

Answer 226

They prevent other firms from entering the market, creating barriers to entry.

Answer 227

Utilities like water and electricity services.

Answer 228

A monopolist faces the same demand function as the market demand.

Answer 229

Strong brand loyalty can create barriers to entry for competitors.

Answer 230

Network effects arise when increased market penetration enhances the value of a product or service to users.

Answer 231

By setting the price where marginal cost equals marginal revenue.

Answer 232

minimum average cost.

Answer 233

It is cheaper to adopt than other programs due to widespread proficiency among new hires. ## Footnote Most new hires will need no further training in Microsoft Word.

Answer 234

It is the aggregate demand for the product in the relevant market.

Answer 235

Demand is negatively related to price due to the income effect and substitution effect.

Answer 236

QD = a - bP.

Answer 237

The change in revenue given a change in the quantity demanded.

Answer 238

The marginal revenue schedule is steeper than the demand schedule.

Answer 239

The marginal revenue curve is twice as steep as the demand schedule.

Answer 240

The next 50 percentage points are cheaper to promote.

Answer 241

By taking the derivative of the total revenue function: MR = dTR/dQ.

Answer 242

TR = P × Q = 800QD - 2QD².

Answer 243

MR = 800 - 4QD.

Answer 244

AR = TR/QD, which is the same as the demand function.

Answer 245

It occurs where marginal revenue equals marginal cost (MR = MC).

Answer 246

TC = 20,000 + 50Q + 3Q².

Answer 247

MC = dTC/dQ = 50 + 6Q.

Answer 248

By finding the intersection of MR and MC.

Answer 249

Profit = TR - TC.

Answer 250

It must occur in the elastic portion of the demand curve.

Answer 251

marginal revenue.

Answer 252

Demand is elastic ## Footnote This occurs at the point where MC = MR.

Answer 253

MR = PEP ## Footnote In monopoly, MR = MC.

Answer 254

By knowing its cost structure and the price elasticity of demand, EP ## Footnote Example: If marginal cost is constant at 75 and price elasticity is estimated at 1.5, the optimal price can be calculated.

Answer 255

Significant economies of scale and declining cost structure ## Footnote Examples include electric power generation and water distribution.

Answer 256

LRMC = MR ## Footnote The monopolist would maximize profits by raising the price to the level the demand curve will accept.

Answer 257

Price equals marginal cost ## Footnote The quantity produced would be higher and the price lower compared to monopoly.

Answer 258

The price may not cover the average cost of production ## Footnote This may require subsidizing the difference.

Answer 259

Charging each customer the highest price they are willing to pay ## Footnote This allows monopolists to capture the entire consumer surplus.

Answer 260

Offering a menu of quantity-based pricing options ## Footnote Examples include volume discounts and product bundling.

Answer 261

Segregating customers by demographic or other traits ## Footnote Examples include different pricing for student and professional software licenses.

Answer 262

Sellers can extract consumer surplus through creative pricing schemes ## Footnote For example, two-part tariff pricing.

Answer 263

Substantial and ongoing barriers to entry ## Footnote This may include patents that need to be continuously added.

Answer 264

Set price equal to long-run average cost, PR = LRAC ## Footnote This assures a normal return for investors.

Answer 265

National ownership ## Footnote This has been popular in Europe but avoided in the U.S.

Answer 266

Importance of strategic behavior ## Footnote Firms can change price, quantity, quality, and advertisement to gain an advantage.

Answer 267

They do not earn economic profit ## Footnote The lack of pricing power leads to no extra margins.

Answer 268

They shrink as new entrants push out the least efficient firms ## Footnote This occurs as extra profits fade.

Answer 269

Through econometric estimates of the elasticity of demand and supply ## Footnote Reliable data is often lacking, and elasticity changes over time.

Answer 270

The importance of strategic behavior, where firms can change price, quantity, quality, and advertisement to gain an advantage over competitors.

Answer 271

The lack of reliable data and the changing elasticity of demand and supply over time.

Answer 272

Elasticity of demand and elasticity of supply.

Answer 273

monopolistic competition.

Answer 274

oligopoly.

Answer 275

P = 93 - 1.5Q (for Q ≤ 62).

Answer 276

shift to the right.

Answer 277

perfect competition.

Answer 278

marginal cost.

Answer 279

expand capacity.

Answer 280

advertising or any other means.

Answer 281

* Calculate and explain gross domestic product (GDP) using expenditure and income approaches. * Compare the sum-of-value-added and value-of-final-output methods of calculating GDP. * Compare nominal and real GDP and calculate and interpret the GDP deflator. * Compare GDP, national income, personal income, and personal disposable income. * Explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance.

Answer 282

How the aggregate demand curve is generated.

Answer 283

* Long-run full employment. * Short-run recessionary gap. * Short-run inflationary gap. * Short-run stagnation.

Answer 284

Fluctuations in aggregate demand and aggregate supply.

Answer 285

short run, long run.

Answer 286

To address fundamental questions about aggregate output, income, demand, supply, price levels, unemployment, and household spending.

Answer 287

* Compensation of employees * Rent * Interest * Profits

Answer 288

The value of all goods and services produced during a specified period.

Answer 289

The value of all payments earned by the suppliers of factors used in production.

Answer 290

They must be equal, as the value of output produced accrues to the factors of production.

Answer 291

The total amount spent on the goods and services produced in the economy during a period.

Answer 292

* The market value of all final goods and services produced within the economy during a given period (output definition) * The aggregate income earned by all households, companies, and the government within the economy during a given period (income definition)

Answer 293

* Value of final output * Sum of value added

Answer 294

Produced during the measurement period.

Answer 295

* Transfer payments from the government * Capital gains from asset appreciation * Value of intermediate goods

Answer 296

Only the market value of final goods and services is included to avoid double counting.

Answer 297

It provides a standardized methodology for measuring GDP and reports national accounts for many developed nations.

Answer 298

The official US government accounting of all income and expenditure flows in the US economy.

Answer 299

[nominal GDP]

Answer 300

The value added would be reduced by the amount paid for the imports.

Answer 301

* Owner-occupied housing * Government services

Answer 302

The flow of inputs, output, income, and expenditures in an economy.

Answer 303

Total income must equal total expenditures.

Answer 304

Summing the value added at each stage of production.

Answer 305

* Non-domestic goods * Savings * Taxes * International sales and investments

Answer 306

Owner-occupied housing and government services ## Footnote These services are valued and included in GDP despite not having a market price.

Answer 307

It is included in the calculation of GDP as it represents the purchase of housing services.

Answer 308

Estimate (impute) a value for the owner-occupied rent.

Answer 309

They are not sold in a market, making it hard to determine how much consumers are willing to pay.

Answer 310

At their cost (e.g., wages paid) with no value added attributed to the production process.

Answer 311

Activities performed for one's own benefit, underground economy activities, and barter transactions ## Footnote Examples include cooking, cleaning, home repair, and services exchanged without monetary transactions.

Answer 312

8% ## Footnote This indicates the portion of economic activity not captured in official GDP data.

Answer 313

60% ## Footnote This suggests a significant discrepancy in economic activity reporting.

Answer 314

They fail to account for a significant portion of economic activity, often missing 12%-20% of the economy.

Answer 315

Nominal GDP is measured at current prices, while real GDP is adjusted for changes in price levels.

Answer 316

Total expenditures on output of goods and services if prices were unchanged.

Answer 317

Real GDP divided by the size of the population.

Answer 318

€5,625,000,000.

Answer 319

€6,018,750,000.

Answer 320

Inflation rather than actual economic growth.

Answer 321

Nominal GDPt = Pt × Qt.

Answer 322

Real GDPt = PB × Qt.

Answer 323

Value of current year output at current year prices divided by value of current year output at base year prices, scaled by 100.

Answer 324

Aggregate changes in prices across the overall economy.

Answer 325

Real GDP = Nominal GDP / (GDP deflator / 100).

Answer 326

Real GDP2020 = 5,793,750,000 ## Footnote This figure indicates that real GDP for 2020 is 3% higher than in 2019.

Answer 327

Nominal GDP would increase by 10.2% ## Footnote This is calculated as (1.07 × 1.03) - 1, approximately 10%.

Answer 328

The real growth rate is more informative ## Footnote Real growth captures increases in output, while nominal growth blends price changes with output changes.

Answer 329

Real economic growth ## Footnote Real GDP and real GDP growth reflect the quantity of output available for consumption and investment.

Answer 330

A measure of the overall price level in the economy ## Footnote Changes in the deflator gauge inflation within the economy.

Answer 331

As the ratio of nominal to real GDP ## Footnote It is reported as an index number with the base year deflator equal to 100.

Answer 332

113.9 ## Footnote This was calculated as (2,035,506 / 1,786,677) × 100.

Answer 333

The domestic economy is spending more on international goods than it produces ## Footnote It also implies that domestic saving is insufficient to finance domestic investment plus the government’s fiscal balance.

Answer 334

GDP = C + I + G + (XM) ## Footnote Where C = Consumption, I = Investment, G = Government Spending, XM = Net Exports.

Answer 335

The relationship among domestic saving, investment, fiscal balance, and trade balance ## Footnote It shows how domestic private saving is absorbed in investment, financing government deficits, or building financial claims against overseas economies.

Answer 336

The proportion of an additional unit of disposable income that is consumed ## Footnote It complements the marginal propensity to save (MPS), where MPS = 1 - MPC.

Answer 337

The ratio C/Y ## Footnote It reflects household consumption expenditures as a percentage of GDP.

Answer 338

Household sector, business sector, government sector, external sector ## Footnote These sectors participate in the flows of expenditures, income, and financing.

Answer 339

The government has a fiscal deficit and must borrow in financial markets ## Footnote This can lead to competition for funds generated by household saving.

Answer 340

False ## Footnote Transfer payments represent a monetary transfer with no corresponding receipt of goods or services.

Answer 341

0.62 percent ## Footnote This was calculated as [(113.9 / 113.2) - 1].

Answer 342

Household saving flows into financial markets, providing funding for businesses ## Footnote It supports businesses that need to borrow or raise equity capital.

Answer 343

It is an important determinant of long-term growth rate ## Footnote Investment spending is also the most volatile component of the economy.

Answer 344

net exports (X - M) ## Footnote This highlights the importance of international trade in the economy.

Answer 345

68.0% ## Footnote APC is the ratio of consumption (C) to income (Y), reflecting consumer spending behavior.

Answer 346

United States ## Footnote The APC of the United States was 68.0%, indicating a higher sensitivity to disposable income changes.

Answer 347

The Mexican economy is more sensitive to changes in disposable household income than the German economy ## Footnote Higher APC suggests greater responsiveness to income changes.

Answer 348

* Gross investment * Net investment ## Footnote Gross investment includes total spending, while net investment reflects only new capacity additions.

Answer 349

* Level of interest rates * Aggregate output/income ## Footnote These factors influence the cost of financing and expected profitability of investments.

Answer 350

I = I(r, Y) ## Footnote Where I is investment spending, r is the real interest rate, and Y is aggregate income.

Answer 351

The level of government spending on goods and services (G) ## Footnote Government spending is treated as determined outside the macroeconomic model.

Answer 352

Net taxes rise and fall with aggregate income ## Footnote Income taxes and transfer payments are typically tied to economic activity.

Answer 353

It decreases the fiscal balance (smaller deficit or larger surplus) ## Footnote This is due to net taxes being an increasing function of income.

Answer 354

Factors that mitigate changes in aggregate output ## Footnote These include net taxes that adjust with income changes.

Answer 355

* Domestic income * Income in the rest of the world * Relative prices of goods and services ## Footnote Changes in these factors affect demand for imports and exports.

Answer 356

They decline ## Footnote Increased domestic demand often leads to higher imports.

Answer 357

It increases net exports ## Footnote This shift in demand may result from a depreciation of the domestic currency.

Answer 358

By the total demand for goods and services in the economy at various price levels ## Footnote It reflects consumer spending, investment, government spending, and net exports.

Answer 359

Short-run aggregate supply can be influenced by price levels, while long-run aggregate supply is vertical at full employment output ## Footnote The long run reflects all resources being fully employed.

Answer 360

* Changes in price levels * Changes in economic factors (like income and expectations) ## Footnote Shifts can result from external economic events or policy changes.

Answer 361

* Long-run full employment * Short-run recessionary gap * Short-run inflationary gap * Short-run stagflation ## Footnote Each type indicates different economic conditions and levels of output.

Answer 362

It may occur when demand exceeds the economy's capacity ## Footnote This can lead to inflationary pressures.

Answer 363

They can lead to complex outcomes affecting price levels and output ## Footnote The interaction between supply and demand shifts can influence inflation and recession dynamics.

Answer 364

Multiple reasons affecting output and price levels.

Answer 365

The quantity of goods and services that households, businesses, government, and international customers want to buy at any given price level.

Answer 366

The quantity of goods and services that producers are willing to supply at any given price level.

Answer 367

Quantity demanded increases as the price level declines.

Answer 368

GDP = C + I + G + (X - M) where C = consumption, I = investment, G = government spending, X = exports, M = imports.

Answer 369

* Aggregate expenditure equals aggregate income. * The available real money supply is willingly held.

Answer 370

The change in real wealth due to fluctuations in the price level affecting purchasing power.

Answer 371

It decreases real wealth, leading consumers to demand fewer goods and services.

Answer 372

Changes in the price level affect the demand for money, which in turn affects interest rates and thereby influences investment and consumption.

Answer 373

The demand for money decreases.

Answer 374

Changes in the domestic price level affect the real exchange rate, impacting exports and imports.

Answer 375

Exports decrease.

Answer 376

It causes appreciation of the real exchange rate.

Answer 377

It is upward sloping due to inflexible wages and input prices.

Answer 378

A period long enough for wages, prices, and expectations to adjust, but physical capital remains fixed.

Answer 379

Companies adjust output without changing prices.

Answer 380

They catch up with changes in the price level.

Answer 381

It increases the quantity demanded.

Answer 382

Higher interest rates lead to lower consumption, especially for large purchases.

Answer 383

An increase in the price level increases the quantity of aggregate output supplied.

Answer 384

It leads to a higher interest rate.

Answer 385

To represent the level of domestic output that companies will produce at each price level.

Answer 386

The quantity of aggregate output supplied increases from Y1 to Y2.

Answer 387

Profit margins are squeezed, causing companies to reduce production.

Answer 388

They tend to catch up with the prices of final goods and services.

Answer 389

In the long run, when the aggregate price level changes, the quantity of output supplied remains constant.

Answer 390

The potential output of the economy, which depends on fixed capital, labor, and available technology.

Answer 391

Y = F(K, L) = Y, where K is fixed capital and L is labor supply.

Answer 392

The full employment or natural level of output.

Answer 393

It operates at an efficient and unconstrained level of production.

Answer 394

* What causes an economy to expand or contract? * What causes inflation and changes in the level of unemployment? * What determines an economy's rate of sustainable growth, and how can it be measured?

Answer 395

It consists of periods of economic expansion and contraction.

Answer 396

Real GDP is increasing, the unemployment rate is declining, and capacity utilization is rising.

Answer 397

An increase in aggregate demand at any price level.

Answer 398

* Changes in household wealth * Consumer and business expectations * Capacity utilization * Monetary policy * The exchange rate * Growth in the global economy * Fiscal policy (government spending and taxes)

Answer 399

* Financial assets (cash, savings accounts, investment securities, pensions) * Real assets (real estate)

Answer 400

To accumulate wealth for future consumption.

Answer 401

Consumer spending increases, shifting the aggregate demand curve to the right.

Answer 402

Changes in equity prices affect economic activity by altering consumer spending based on wealth changes.

Answer 403

By 3%-7% of the change in wealth.

Answer 404

The Wealth Effect refers to the impact of changes in housing prices on consumer spending, where a decline in housing prices leads to reduced spending and increased saving.

Answer 405

Housing prices rose by nearly 111% during this period.

Answer 406

The saving rate rose dramatically from 7.2% in 2008 to 12.4% in 2010.

Answer 407

Capacity utilization is a measure of how fully an economy's production capacity is being used.

Answer 408

They need to increase investment spending to expand production.

Answer 409

Fiscal policy is the use of taxes and government spending to affect the level of aggregate expenditures.

Answer 410

It shifts the AD curve to the right.

Answer 411

Monetary policy refers to actions taken by a nation's central bank to affect aggregate output and prices.

Answer 412

By buying securities from banks, lowering the required reserve ratio, or reducing its target interest rate.

Answer 413

It shifts the AD curve to the right.

Answer 414

A rightward shift in the AD curve typically increases interest rates at each price level.

Answer 415

It shifts to the right due to increased exports and decreased imports.

Answer 416

It links countries together and creates a global economy, increasing exports when foreign markets grow.

Answer 417

The AD curve shifts to the left due to lower exports.

Answer 418

An increase in stock prices shifts the AD curve to the right due to higher consumption.

Answer 419

Lower taxes shift the AD curve to the right by increasing consumption and investment.

Answer 420

It shifts to the right due to higher consumption.

Answer 421

It raises investment spending and shifts the AD curve to the right.

Answer 422

Higher taxes leading to lower consumption and investment.

Answer 423

Interest rates generally rise.

Answer 424

Higher capacity utilization leads to increased investment spending.

Answer 425

It raises the level of investment spending and increases aggregate demand, shifting the AD curve to the right.

Answer 426

It should have a positive effect on equities.

Answer 427

Interest rates face upward pressure and prices of fixed-income securities face downward pressure.

Answer 428

Higher government spending increases AD and shifts the AD curve to the right.

Answer 429

It decreases demand for Brazilian exports and shifts the AD curve to the left.

Answer 430

Changes in nominal wages, input prices, expectations about future output prices, business taxes and subsidies, and the exchange rate.

Answer 431

An increase in nominal wages shifts the SRAS curve to the left; a decrease shifts it to the right.

Answer 432

Unit labor cost is defined as the total labor cost divided by the number of units produced.

Answer 433

Lower input prices shift the SRAS curve to the right; higher input prices shift it to the left.

Answer 434

The SRAS curve shifts to the right.

Answer 435

Higher business taxes shift the SRAS curve to the left.

Answer 436

Subsidies lower production costs and shift the SRAS curve to the right.

Answer 437

Potential GDP measures the productive capacity of the economy at full employment.

Answer 438

* Supply of labor and quality of labor forces (human capital) * Supply of natural resources * Supply of physical capital * Productivity and technology

Answer 439

It shifts the LRAS curve to the right.

Answer 440

Growth in population, labor force participation rate, and net immigration.

Answer 441

Natural resources are essential inputs, including land, oil, and water.

Answer 442

It shifts the LRAS curve to the right.

Answer 443

Investment in new property, plant, equipment, and software increases the capacity to produce goods and services.

Answer 444

It shifts the LRAS curve to the right.

Answer 445

The quality of the labor force, enhanced through training, skills development, and education.

Answer 446

It shifts the LRAS curve to the right.

Answer 447

The efficiency of labor, specifically output produced per worker during a given period.

Answer 448

* Physical capital per worker * Quality of the workforce * Technology

Answer 449

It decreases labor costs, improves profitability, and results in higher output.

Answer 450

Advances in technology shift the LRAS curve to the right.

Answer 451

Labor cost per unit declines.

Answer 452

It is defined as an increase in supply.

Answer 453

* Long-run full employment * Short-run recessionary gap * Short-run inflationary gap * Short-run stagflation

Answer 454

The quantity of aggregate output demanded equals the quantity of aggregate output supplied.

Answer 455

A period during which real GDP decreases for at least two consecutive quarters.

Answer 456

The difference between potential GDP and equilibrium output when the economy is below potential GDP.

Answer 457

It results in lower GDP and lower prices.

Answer 458

Equilibrium occurs where the AD curve intersects the SRAS curve at a point on the LRAS curve.

Answer 459

The maximum output an economy can produce when both labor and capital are fully employed.

Answer 460

It determines the real level of GDP and the price level.

Answer 461

No effect on LRAS.

Answer 462

Increased input prices, such as energy.

Answer 463

It indicates that the capital stock is growing at a fast rate.

Answer 464

It lowers the cost of imported raw materials.

Answer 465

A positive effect.

Answer 466

A recessionary gap occurs when the AD curve intersects the short-run AS curve at a short-run equilibrium level of GDP below potential GDP.

Answer 467

Equilibrium GDP is below potential GDP.

Answer 468

* Tightening of monetary policy * Higher taxes * More pessimistic consumers and businesses * Lower equity and housing prices

Answer 469

Through an automatic, self-correcting mechanism that adjusts wages and prices.

Answer 470

Lower nominal wages increase purchasing power, shifting the SRAS curve to the right and pushing the economy back to full employment.

Answer 471

* Reducing taxes * Increasing government spending

Answer 472

* Lowering interest rates * Increasing the money supply

Answer 473

Policy adjustments may reinforce rather than counteract underlying shifts in the economy.

Answer 474

* Consumer sentiment * Factory orders for durable and nondurable goods * Value of unfilled orders * Number of new housing starts * Number of hours worked * Changes in inventories

Answer 475

Corporate profits will decline.

Answer 476

* Reduce investments in cyclical companies * Reduce investments in commodities * Increase investments in defensive companies * Increase investments in investment-grade or government-issued fixed-income securities * Increase investments in long-maturity fixed-income securities * Reduce investments in speculative equity securities

Answer 477

The decline in US consumption spending lowered their AD and shifted the AD curve to the left.

Answer 478

housing construction

Answer 479

It slows revenue growth and reduces profit margins.

Answer 480

Increase investments in long-maturity fixed-income securities.

Answer 481

From around US$30 a barrel to nearly US$150 a barrel

Answer 482

Increased input cost and shifted the short-run AS curve to the left

Answer 483

Eastern Asian economies

Answer 484

Dramatic reduction in credit availability following the collapse of major financial institutions

Answer 485

Decline in housing prices

Answer 486

It became difficult to obtain credit

Answer 487

AD fell, increasing the severity of the recession

Answer 488

When an economy's short-run equilibrium GDP is above potential GDP

Answer 489

*Higher government spending *Lower taxes *Optimistic consumer outlook *Weaker domestic currency *Rising equity and housing prices *Increase in the money supply

Answer 490

Shifts from Point A to Point B, increasing real output and aggregate price level

Answer 491

Higher wages and input prices shift the SRAS curve to the left

Answer 492

*Raise taxes *Cut government spending

Answer 493

Reduce bank reserves, resulting in a decrease in the growth of the money supply and higher interest rates

Answer 494

*Corporate profits will rise *Commodity prices will increase *Interest rates will rise *Inflationary pressures will build

Answer 495

*Increase investment in cyclical companies *Reduce investments in defensive companies *Increase investments in commodities *Reduce investments in fixed-income securities

Answer 496

High inflation and high unemployment

Answer 497

Declines in aggregate supply

Answer 498

High unemployment and inflation due to a sharp decline in aggregate supply

Answer 499

Lower economic growth and higher prices

Answer 500

Higher economic growth and lower aggregate price level

Answer 501

Associated with lower inflation and interest rates

Answer 502

*Reduce investment in fixed income *Reduce investment in most equity securities *Increase investment in commodities

Answer 503

An increase in AD raises real GDP; a decrease lowers it

Answer 504

Raises real GDP, lowers unemployment, and lowers aggregate price level

Answer 505

Associated with lower inflation and interest rates

Answer 506

Describes sources, measurement, and sustainability of economic growth

Answer 507

Annual percentage change in real GDP or annual change in real per capita GDP ## Footnote Real GDP measures how rapidly the total economy is expanding, while per capita GDP measures the standard of living.

Answer 508

Real GDP divided by population ## Footnote It measures the standard of living in each country and the ability of the average person to buy goods and services.

Answer 509

It can transform a poor nation into a wealthy one ## Footnote Small differences in growth rates, if sustained, can significantly affect an economy's standard of living.

Answer 510

* Higher inflation * Potential environmental damage * Lower consumption and higher savings needed to finance growth

Answer 511

The level of real GDP that an economy could produce if capital and labor are fully employed ## Footnote It measures the economy's productive capacity.

Answer 512

By the rate of increase in the economy's productive capacity or potential GDP

Answer 513

A framework used to understand and analyze the underlying sources of economic growth

Answer 514

* Accumulation of inputs (capital, labor, raw materials) * Discovery and application of new technologies

Answer 515

The quantitative link between levels of output and the inputs used in the production process, given the state of technology

Answer 516

Y = AF(L,K) ## Footnote Where Y is aggregate output, L is labor, K is capital stock, and A is total factor productivity.

Answer 517

A scale factor that captures the exogenous effect of technological change and other factors that raise output beyond the measured contribution of capital and labor inputs

Answer 518

* Constant returns to scale * Diminishing marginal productivity with respect to any individual input * No positive or negative externalities associated with the use of inputs

Answer 519

If all inputs are increased by the same percentage, output will rise by that percentage

Answer 520

The extra output produced from a one-unit increase in an input decreases as more of that input is used

Answer 521

False ## Footnote Potential output is estimated using various techniques.

Answer 522

It helps in valuing a variety of assets and forecasting demand for commodities

Answer 523

The decline in additional output obtained from each additional unit of input.

Answer 524

* Long-term sustainable growth cannot rely solely on capital deepening investment. * Developing countries should have higher growth rates than developed countries.

Answer 525

Y = AF(L, K)

Answer 526

Total Factor Productivity; it indicates improvements in the production process.

Answer 527

The rate of growth of potential output equals growth in TFP plus the weighted average growth rate of labor and capital.

Answer 528

* WL: Relative share of labor in national income. * WC: Relative share of capital in national income.

Answer 529

An increase in the growth rate of labor has a significantly larger effect on potential GDP growth.

Answer 530

* Capital * Labor * Total Factor Productivity (TFP)

Answer 531

Technology

Answer 532

The accumulated knowledge and skill that workers acquire from education, training, and life experience.

Answer 533

It creates externalities that boost the productivity of private capital.

Answer 534

Resources that can be replenished, such as forests.

Answer 535

Finite resources that are depleted once consumed, such as oil and coal.

Answer 536

Higher investment as a percentage of GDP correlates with higher economic growth.

Answer 537

The information technology (IT) sector.

Answer 538

Increased spending on R&D benefits not just the individual firm but raises potential GDP growth for all firms.

Answer 539

Carbon dioxide emissions rise with economic growth, imposing costs on the global economy.

Answer 540

There is a strong negative correlation between per capita GDP and pollution.

Answer 541

Without government action, individuals and firms may lack incentives to reduce emissions.

Answer 542

Carbon dioxide emissions rise with economic growth and impose costs on the global economy in terms of economic activity, food production, health, and habitability.

Answer 543

Without government action, individuals and firms may have no incentive to reduce negative externalities.

Answer 544

Reducing emissions today may lead to lower short-term growth, while not reducing emissions can negatively affect long-term sustainable GDP growth.

Answer 545

Policy measures that create incentives to reduce the carbon intensity of output.

Answer 546

A poor legal and political environment and lack of appropriate institutions can restrain growth, especially in developing countries.

Answer 547

* Internal competitive structure * Poorly developed financial markets * Openness to trade * Political stability * Property rights * Rule of law

Answer 548

Westerland is an advanced economy with a high capital-to-labor ratio and near-zero working-age population growth.

Answer 549

More than 70% of Westerland's electricity is produced by renewable energy resources.

Answer 550

Westerland has reduced carbon dioxide emissions by 25%.

Answer 551

Tax reductions could incentivize increased R&D expenditures, raising the growth rate of TFP and technological change.

Answer 552

Westerland is facing slow population growth, which limits its potential growth rate.

Answer 553

By encouraging immigration and increasing its workforce participation rate.

Answer 554

To raise the labor force participation rate.

Answer 555

Working age population × Participation rate × Average hours worked.

Answer 556

Long-term economic growth will not increase sustainable growth if labor input remains unchanged. ## Footnote This highlights the importance of labor productivity in achieving sustainable growth.

Answer 557

Global carbon dioxide emissions are expected to rise significantly as global GDP growth accelerates. ## Footnote Despite efforts by countries like Westerland to reduce emissions, the overall trend indicates an increase.

Answer 558

Potential GDP is an unobserved concept approximated using various methods to forecast sustainable growth. ## Footnote Understanding potential GDP is crucial for financial analysts as it affects long-term forecasts for cash flows.

Answer 559

Labor productivity is the quantity of goods and services (real GDP) that a worker can produce in one hour of work. ## Footnote It is calculated as real GDP divided by total hours worked in a year.

Answer 560

* Education and skill of workers (human capital) * Investments in physical and public capital * Natural resources * Improvements in technology * Other factors ## Footnote An increase in any of these factors will enhance labor productivity.

Answer 561

YL = AF(1,KL) ## Footnote This formula indicates that labor productivity depends on physical capital per worker and total factor productivity.

Answer 562

TFP is a scale factor that measures technological change and does not depend on the mix of inputs. ## Footnote Changes in TFP capture growth that cannot be attributed to labor supply and physical capital.

Answer 563

It helps explain differences in living standards and is critical for estimating long-term sustainable growth rates. ## Footnote Analysts focus on labor productivity data to assess growth prospects.

Answer 564

The level of productivity refers to the amount produced per worker, while the growth rate indicates the percentage increase in productivity over time. ## Footnote High growth rates are typically observed in developing countries where capital is scarce.

Answer 565

It allows companies to afford higher future wages while still making a profit. ## Footnote This can lead to rising profits and potentially higher stock prices.

Answer 566

Businesses may have to cut wages or increase prices to maintain profit margins. ## Footnote Low productivity growth is associated with slow profit growth and flat or declining stock prices.

Answer 567

It is the sum of the growth rates of aggregate hours worked and labor productivity. ## Footnote If aggregate hours worked grow at 1% and productivity at 2%, potential GDP grows at 3%.

Answer 568

* Population growth rate * Changes in labor force participation rate * Changes in hours worked per person ## Footnote These factors are essential for estimating potential GDP.

Answer 569

It signals growing inflationary pressures and a likelihood of interest rate increases by the central bank. ## Footnote This situation often leads to a tightening of monetary policy.

Answer 570

It signals growing resource slack and less inflationary pressure, increasing the likelihood of unchanged or reduced interest rates. ## Footnote This environment is typically more favorable for fixed-income investments.

Answer 571

Not favorable, as bond prices are likely to decline.

Answer 572

Inflation should neither rise nor fall.

Answer 573

European Central Bank (ECB).

Answer 574

Interest (coupon) income received from the bond.

Answer 575

Put downward pressure on inflation.

Answer 576

The market value of all final goods and services produced within a country during a given period.

Answer 577

Only final purchases of newly produced goods and services during the current period.

Answer 578

Intermediate goods.

Answer 579

From the value of final output or by summing the value added at each stage of production.

Answer 580

The value of production using the prices of the current year.

Answer 581

Production using the constant prices of a base year.

Answer 582

The ratio of nominal GDP to real GDP.

Answer 583

Providing factors of production (labor, capital, natural resources).

Answer 584

Produce output/income and invest to maintain and expand productive capacity.

Answer 585

Collects taxes and purchases goods and services from the private sector.

Answer 586

The difference between exports and imports.

Answer 587

Saving and investment in the economy.

Answer 588

* Personal consumption (C) * Gross private domestic investment (I) * Government spending (G) * Net exports (X - M)

Answer 589

* Investment in fixed assets (plant and equipment) * Change in inventories

Answer 590

Income received by all factors of production used in generating final output.

Answer 591

Pre-tax income received by households.

Answer 592

Personal income minus personal taxes.

Answer 593

Investment plus the fiscal and trade deficits.

Answer 594

Disposable income.

Answer 595

The fraction of an additional unit of disposable income that is spent.

Answer 596

Exogenous variables.

Answer 597

Income, making them endogenous.

Answer 598

Aggregate demand and aggregate supply.

Answer 599

* Wealth effect * Interest rate effect * Real exchange rate effect

Answer 600

It shifts.

Answer 601

The quantity of real GDP supplied and the price level.

Answer 602

Higher prices result in higher profits, inducing more production.

Answer 603

All prices are flexible.

Answer 604

The economy's level of potential GDP.

Answer 605

An efficient and unconstrained level of production.

Answer 606

* Changes in labor supply * Supply of physical and human capital * Productivity/technology

Answer 607

Shifts in aggregate demand and aggregate supply.

Answer 608

Exerts downward pressure on the aggregate price level.

Answer 609

It puts upward pressure on the aggregate price level.

Answer 610

A combination of high inflation and weak economic growth caused by a decline in short-run aggregate supply.

Answer 611

It measures how rapidly the total economy is expanding.

Answer 612

A country's standard of living.

Answer 613

* Supply of labor * Supply of physical and human capital * Raw materials * Technological knowledge

Answer 614

Y is output, A is total factor productivity, L is labor, and K is capital stock.

Answer 615

A scale factor reflecting the portion of output growth not accounted for by changes in capital and labor inputs.

Answer 616

Potential GDP growth = Growth in TFP + WL (Growth in labor) + WC (Growth in capital).

Answer 617

Increasing the supply of some inputs relative to others will lead to diminishing returns.

Answer 618

Measured by the rate of increase in the economy's productive capacity or potential GDP.

Answer 619

Both population growth (including immigration) and the labor force participation rate.

Answer 620

Through investment.

Answer 621

* Human capital * Natural resources * State of public infrastructure * Institutional, legal and political environment

Answer 622

Discoveries that allow production of more and/or higher-quality goods and services with the same resources.

Answer 623

Positive externalities are associated with research and development and public education; negative externalities like pollution have a negative effect on growth.

Answer 624

Carbon dioxide emissions rise with economic growth, imposing costs on the global economy.

Answer 625

The sustainable rate of growth is determined by the growth rate of the labor supply plus the growth rate of labor productivity.

Answer 626

The total amount spent on all final goods and services produced within the economy during a given period.

Answer 627

Environmental damage caused by production.

Answer 628

Wine grown in Canada by US citizens.

Answer 629

Increased government transfer payments.

Answer 630

A measure of total expenditures at current prices.

Answer 631

The value of current year output at current prices.

Answer 632

Growth in the labor force plus growth of labor productivity.

Answer 633

A decline in productivity.

Answer 634

Output for given inputs.

Answer 635

The level at which all available workers have jobs consistent with their skills.

Answer 636

Upward sloping because input prices do not fully adjust to the price level in the short run.

Answer 637

It indicates that an economy has experienced deflation.

Answer 638

Household sector has increased the fraction of disposable income that it saves.

Answer 639

A weak domestic currency.

Answer 640

An increase in nominal GDP.

Answer 641

A recessionary gap.

Answer 642

The overall price level will rise.

Answer 643

Technology.

Answer 644

Labor productivity.

Answer 645

Diminishing marginal productivity of capital.

Answer 646

Government transfer payments, such as unemployment compensation or welfare benefits. ## Footnote These payments do not reflect the production of goods and services.

Answer 647

The value of goods and services measured at current prices. ## Footnote It is synonymous with expenditure as aggregate expenditures must equal aggregate output.

Answer 648

Real GDP is calculated by adjusting nominal GDP for inflation using a price index. ## Footnote For example, in the first year: £100 billion/1.11 = £90 billion.

Answer 649

GDP = Consumption + Gross private domestic investment + Government spending + (Exports - Imports) ## Footnote Example: GDP = 15 + 4 + 3.8 + (1.5 - 1.7) = 22.6.

Answer 650

Unincorporated business net income included in personal income. ## Footnote It reflects earnings from self-employment.

Answer 651

S = I + (G - T) + (X - M) ## Footnote This shows how private saving funds investment expenditures, the government fiscal balance, and net exports.

Answer 652

Decreased efficiency, increased labor costs, decreased profitability, and lower output at each price level. ## Footnote This results in a leftward shift in both short-run and long-run aggregate supply curves.

Answer 653

A situation where output is declining and prices are rising. ## Footnote This typically results from a decline in aggregate supply.

Answer 654

It results in an increase in aggregate demand at each price level. ## Footnote A weaker currency makes exports cheaper and imports more expensive.

Answer 655

The ratio of nominal GDP to real GDP. ## Footnote A ratio less than 1 indicates deflation.

Answer 656

It shifts the SRAS to the left, reducing output and increasing prices.

Answer 657

The amount of output produced by workers during a given period, measured as output per hour. ## Footnote A decline in productivity indicates decreased efficiency.

Answer 658

A scale factor primarily reflecting technology. ## Footnote An increase in TFP means that output increases for any level of factor inputs.

Answer 659

As a country accumulates more capital per worker, the incremental boost to output declines. ## Footnote This leads to slower growth in capital-intensive economies.

Answer 660

economic activity.

Answer 661

It must be offset by an increase in the fiscal deficit or an increase in net exports.

Answer 662

The economy operates at an efficient and unconstrained level of production with a stable pool of unemployed workers.

Answer 663

The SRAS curve would be steeper, as firms would not adjust output as much in response to changing output prices.

Answer 664

Expansions and contractions in economic activity that affect broad segments of the economy

Answer 665

Changes in population, technology, and capital

Answer 666

A measure reflecting expectations of future incomes and employment prospects

Answer 667

* Retail sales (physical and online) * Broad-based indicators of consumer spending

Answer 668

Durable goods

Answer 669

Disposable income

Answer 670

Temporary income and unsustainable losses and gains

Answer 671

Saving rates

Answer 672

Households usually postpone such purchases

Answer 673

It experiences dramatic swings that count more in overall economic movements

Answer 674

Changing property values are closely related to consumer wealth and confidence

Answer 675

* Inventory of unsold homes * Average or median price of homes

Answer 676

Housing activity expands with lower loan interest rates and contracts with higher rates

Answer 677

Family and household formation rates

Answer 678

It can quickly reverse cyclical weakness in the economy

Answer 679

Imports rise with the pace of domestic GDP growth due to increased demand

Answer 680

Exports depend on cycles in the rest of the world, not just domestic growth

Answer 681

Interest rates and demographics

Answer 682

They are usually delayed

Answer 683

* Durable goods * Non-durable goods * Services

Answer 684

Lower income in the future

Answer 685

Strong external cycles ## Footnote The strength of major trading partners influences export growth.

Answer 686

It may offset cyclical weakness or erase it altogether ## Footnote This depends on the importance of exports to the economy.

Answer 687

* Recovery * Expansion * Slowdown * Contraction ## Footnote These phases affect the behavior of exports and imports.

Answer 688

Imports decline to below-average levels ## Footnote This indicates a decrease in domestic demand for foreign goods.

Answer 689

It prompts a relative rise in imports ## Footnote Foreign goods become cheaper compared to domestic goods.

Answer 690

It makes exports cheaper in global markets ## Footnote This can lead to an increase in exports.

Answer 691

They must cumulate in a single direction for some time ## Footnote Short-term fluctuations have minimal effects until they persist.

Answer 692

* Domestic economy variables * Foreign economy variables * Currency considerations ## Footnote These factors help determine if GDP growth is reinforced or counteracted.

Answer 693

They raise or reduce imports and exports ## Footnote Domestic activity affects imports, while foreign activity affects exports.

Answer 694

[domestic GDP growth rate]

Answer 695

Global GDP growth rates ## Footnote Exports reflect foreign demand on domestic output.

Answer 696

The company focused on consumer goods sold in the local market ## Footnote This is because its performance is directly tied to domestic economic conditions.

Answer 697

The condition of being without a job while actively seeking employment. ## Footnote Includes various subcategories such as long-term, frictional, and voluntary unemployment.

Answer 698

* Long-term unemployed * Frictionally unemployed * Discouraged workers * Voluntarily unemployed ## Footnote These categories help in understanding different reasons for joblessness.

Answer 699

The ratio of unemployed individuals to the labor force, expressed as a percentage. ## Footnote It is a key indicator of economic health.

Answer 700

The number of people who have a job or are actively looking for a job. ## Footnote Excludes retirees, children, and others not seeking employment.

Answer 701

The ratio of labor force to the total population of working age. ## Footnote Typically includes individuals between 16 and 64 years of age.

Answer 702

A situation where a person has a job but is either overqualified for it or desires a full-time position while only working part-time. ## Footnote For example, a lawyer working in a bookstore.

Answer 703

A person who has stopped looking for a job due to a weak economy. ## Footnote Discouraged workers are not counted in the official unemployment rate.

Answer 704

False ## Footnote The unemployment rate is considered a lagging indicator of the business cycle.

Answer 705

* Payroll growth * Hours worked * Use of temporary workers ## Footnote These measures provide insights into economic strength or weakness.

Answer 706

Individuals who are temporarily without work while seeking a job that better matches their skills or interests. ## Footnote This type of unemployment is usually short-term.

Answer 707

The rate at which the general level of prices for goods and services rises, eroding purchasing power. ## Footnote Measured through various indexes, including the Consumer Price Index (CPI).

Answer 708

* Cost-push inflation: Occurs when production costs increase, leading to higher prices. * Demand-pull inflation: Occurs when demand for goods exceeds supply, pushing prices up. ## Footnote Both types of inflation have different causes and implications for the economy.

Answer 709

An extremely high and typically accelerating inflation rate, often exceeding 50% per month. ## Footnote This scenario can lead to a collapse of the currency.

Answer 710

A reduction in the rate of inflation, indicating that prices are still rising but at a slower rate. ## Footnote It is different from deflation, where prices actually fall.

Answer 711

A decrease in the general price level of goods and services, leading to an increase in the real value of money. ## Footnote Can lead to reduced consumer spending and economic stagnation.

Answer 712

Central banks act to slow down the economy and reset inflationary expectations by adjusting interest rates. ## Footnote These actions can sometimes trigger a recession.

Answer 713

Leads to inflation as workers demand higher wages due to expectations of rising prices. ## Footnote This creates a price-wage inflationary spiral.

Answer 714

A sustained rise in the overall level of prices in an economy ## Footnote Inflation indicates that the same amount of money can purchase less goods or services over time.

Answer 715

The percentage change in a price index ## Footnote It reflects the speed of overall price level movements.

Answer 716

Inflation is pro-cyclical, going up and down with the cycle, but with a lag of a year or more.

Answer 717

* Hyperinflation * Deflation * Disinflation ## Footnote These terms describe different levels and changes of the inflation rate.

Answer 718

An extremely fast increase in aggregate price level, corresponding to an extremely high inflation rate (e.g., 500% to 1,000% per year).

Answer 719

A sustained decrease in aggregate price level, corresponding to a negative inflation rate (less than 0%).

Answer 720

A decline in the inflation rate, such as from around 15% or 20% to 5% or 6%.

Answer 721

A combination of high inflation and high unemployment with a slowdown of the economy.

Answer 722

Around 2% per year.

Answer 723

Social unrest or shifts of political power, which constitutes political risk for investments.

Answer 724

The value of money increases.

Answer 725

When large-scale government spending is not backed by real tax revenue and the money supply is increased.

Answer 726

Represents the average prices of a basket of goods and services.

Answer 727

Regaining control of the money supply.

Answer 728

price index.

Answer 729

A high inflation rate combined with fast economic growth and low unemployment.

Answer 730

Revenue typically falls during a recession.

Answer 731

The liability of a borrower rises in real terms.

Answer 732

Unexpected changes in the inflation rate.

Answer 733

Extremely high frequency.

Answer 734

They monitor domestic inflation rates closely when conducting monetary policy.

Answer 735

¥458 ## Footnote Calculated as (50 kg × ¥3/kg) + (70 liters × ¥4.4/liter)

Answer 736

112.45 ## Footnote Calculated as (¥515 / ¥458) × 100

Answer 737

Laspeyres index

Answer 738

* Substitution bias * Quality bias * New product bias

Answer 739

Hedonic pricing

Answer 740

Inflation specific to the domestic economy

Answer 741

Price changes experienced by domestic producers

Answer 742

CPI covers consumer prices, while PPI covers producer prices

Answer 743

Wholesale Price Index (WPI)

Answer 744

Inflation rate based on the price index including all goods and services

Answer 745

Food and energy prices

Answer 746

To eliminate the price effect in nominal GDP data

Answer 747

Personal Consumption Expenditures (PCE) index

Answer 748

It results in an upward bias

Answer 749

Harmonised Index of Consumer Prices (HICP)

Answer 750

Stagflation

Answer 751

It rises in real terms

Answer 752

Short-term market conditions

Answer 753

Upward bias in the measured inflation rate

Answer 754

It does not include new products

Answer 755

Weights on various categories of goods and services vary significantly

Answer 756

Industry needs and markups ## Footnote The WPI may not consider the markups set by the industry.

Answer 757

Headline inflation has an upward bias and is more subject to short-term market conditions ## Footnote Headline inflation is heavily influenced by food and energy price fluctuations.

Answer 758

Excessive demands for raw materials, finished goods, or labor ## Footnote This leads to price increases in the economy.

Answer 759

Cost-push inflation and demand-pull inflation

Answer 760

Rising costs, usually wages, compel businesses to raise prices generally

Answer 761

Increasing demand raises prices generally, which are reflected in business costs

Answer 762

Unemployment rate

Answer 763

The effective unemployment rate below which pressure emerges in labor markets

Answer 764

The unemployment rate that determines when an economy will experience bottlenecks

Answer 765

Lower likelihood of labor shortages

Answer 766

Greater likelihood of labor shortages

Answer 767

Output per hour determines how businesses can spread labor costs

Answer 768

Unit costs to a business rise, leading to upward pressure on prices

Answer 769

Hourly wage gauges, weekly earnings, overall labor costs

Answer 770

ULC = W/O ## Footnote Where W is the total wage and O is the output.

Answer 771

* Cyclical swings * Technology * Training * Development pace

Answer 772

Higher capacity utilization indicates potential shortages and price increases

Answer 773

The relationship between actual and potential real GDP

Answer 774

Cost-push inflation

Answer 775

Demand-pull

Answer 776

Global economic conditions more than those in an individual economy ## Footnote This suggests that local observations may not provide an accurate picture of economic health.

Answer 777

A surplus of money ## Footnote This means that when there is too much money in circulation, its value declines, leading to inflation.

Answer 778

Inflation results when too much money chases too few goods ## Footnote This phrase encapsulates the relationship between money supply and inflation.

Answer 779

By examining monetary growth based on past trends ## Footnote They look for acceleration or deceleration in money supply growth.

Answer 780

The potential for inflationary pressure ## Footnote This is especially relevant if it has accelerated from its trend.

Answer 781

The ratio of nominal GDP to money supply ## Footnote A stable velocity suggests price stability, while a falling velocity may indicate inflationary potential.

Answer 782

Prospects are more likely to lead to a cyclical upswing ## Footnote This indicates recovery rather than inflationary pressure.

Answer 783

Inflation expectations embedded in the economy ## Footnote This leads to persistent inflation even after its initial cause has disappeared.

Answer 784

By using past inflation trends and surveys of inflation expectations ## Footnote They also analyze inflation-linked securities.

Answer 785

The general level of inflation expectations among market participants ## Footnote Comparing yields on these bonds helps analysts forecast inflation.

Answer 786

Rising costs ## Footnote Analysts examine data like unemployment rates and productivity growth to evaluate this.

Answer 787

A combination of hourly wages and output ## Footnote It reflects the labor cost in each unit of output.

Answer 788

The state of economic activity relative to potential ## Footnote It occurs when the economy operates above its potential capacity.

Answer 789

It reflects the growth of money ## Footnote This means that money supply growth is a key determinant of inflation.

Answer 790

The economy's NAI RU or NARU ## Footnote This reflects the labor force's skill set relative to the economy's industrial mix.

Answer 791

They work only in monetarist models ## Footnote This statement is incorrect; they reflect potential economic conditions and change over time.

Answer 792

Recurrent expansions and contractions in economic activity ## Footnote They affect broad segments of the economy.

Answer 793

Four phases: recovery, expansion, slowdown, and contraction ## Footnote The peak occurs during the slowdown phase.

Answer 794

The changing availability and pricing of credit ## Footnote They are important due to the financing of construction and property purchases.

Answer 795

The inventories available for sale to the level of sales ## Footnote Analysts monitor this to gauge the economy's position in the cycle.

Answer 796

Fluctuations of aggregate supply (AS) ## Footnote They suggest that government intervention may worsen fluctuations.

Answer 797

Government intervention to restore full employment ## Footnote This is to avoid a deflationary spiral.

Answer 798

Statistics that suggest where the economy is likely to be in the near future ## Footnote They are crucial for understanding the business cycle stage.

Answer 799

Government intervention to avoid a deflationary spiral ## Footnote Keynesian economics emphasizes active government policy to manage economic cycles.

Answer 800

The timing of the impact is uncertain; better to let the economy find equilibrium unassisted while maintaining money supply growth ## Footnote Monetarism focuses on the role of governments in controlling the amount of money in circulation.

Answer 801

Statistics on macroeconomic variables that help understand the business cycle stage ## Footnote Economic indicators are critical for assessing economic performance and trends.

Answer 802

Indicators suggesting where the economy is likely to be in the near future ## Footnote Examples include ISM, new orders, and consumer expectations.

Answer 803

They have turning points close to those of the overall economy ## Footnote They reflect the current state of the economy.

Answer 804

Indicators that change after a trend has been established ## Footnote Examples include average duration of unemployment and inventory-sales ratio.

Answer 805

An estimate of the present state of the economy based on real-time monitoring ## Footnote Useful because actual data on GDP is published with delay.

Answer 806

People actively seeking employment but currently without a job ## Footnote This definition excludes those not seeking work.

Answer 807

Those out of work for more than three to four months but still looking for a job ## Footnote This group faces significant challenges in re-entering the job market.

Answer 808

Individuals not currently working while searching for a better job match or transitioning between jobs ## Footnote This type of unemployment is often temporary.

Answer 809

A high and increasing rate of inflation, e.g., 100% annual ## Footnote Hyperinflation can lead to severe economic instability.

Answer 810

A negative inflation rate where prices decrease ## Footnote Deflation can lead to reduced consumer spending and economic stagnation.

Answer 811

Inflation associated with increasing costs of imported inputs ## Footnote This can occur due to exchange rate fluctuations or supply chain disruptions.

Answer 812

Constraints in production that prevent companies from meeting market demand ## Footnote Often observed during wartime when goods are rationed.

Answer 813

Using indexes like Consumer Price Index, Producer Price Index, and GDP deflators ## Footnote Each index reflects different aspects of price changes in the economy.

Answer 814

Volatile items such as agricultural products and energy ## Footnote This helps provide a clearer view of underlying inflation trends.

Answer 815

* Aggregate supply * Aggregate demand ## Footnote An increase in supply generally leads to lower prices, while increased demand raises them.

Answer 816

* Supply of money * Velocity of money ## Footnote More money circulating can lead to higher prices if the economy is in equilibrium.

Answer 817

* Cost-push inflation * Demand-pull inflation ## Footnote Cost-push inflation is driven by rising costs, while demand-pull inflation is driven by increased demand.

Answer 818

A decline in inflation rates while remaining at a positive level ## Footnote Disinflation indicates a slowing rate of price increase.

Answer 819

Reduced velocity of money ## Footnote Hyperinflation typically leads to increased money supply and potential social unrest.

Answer 820

In periods of low inflation, slow economic growth, and high unemployment ## Footnote This reflects a cautious approach to economic intervention.

Answer 821

A decrease in the inflation rate ## Footnote Negative inflation indicates a situation where prices are falling.

Answer 822

The weights they place on covered goods and services ## Footnote This refers to the relative importance assigned to different items in the index.

Answer 823

It is used more frequently than CPI as a benchmark for adjusting labor contract payments ## Footnote Typically, CPI is more commonly used for this purpose.

Answer 824

One that uses a current consumption basket ## Footnote Current consumption baskets reflect recent price changes more accurately.

Answer 825

Core inflation ## Footnote Core inflation excludes volatile items like food and energy.

Answer 826

As productivity growth proportionately exceeds wage increases, product price increases are less likely ## Footnote Rising productivity can mitigate inflationary pressures.

Answer 827

Biased upward ## Footnote Quality improvements can lead to higher perceived value, influencing inflation measures.

Answer 828

Core inflation ## Footnote Core inflation provides a clearer view of long-term inflation trends.

Answer 829

Cost-push inflation ## Footnote Cost-push inflation occurs when rising costs compel businesses to increase prices.

Answer 830

* Monetary policy * Fiscal policy ## Footnote Monetary policy involves the central bank's actions, while fiscal policy relates to government spending and taxation.

Answer 831

Central bank activities that are directed toward influencing the quantity of money and credit in an economy ## Footnote Monetary policy aims to manage inflation and stabilize currency.

Answer 832

Government decisions about taxation and spending ## Footnote Fiscal policy is used to influence economic conditions and redistribute income.

Answer 833

* Stable and positive growth * Stable and low inflation ## Footnote Achieving these goals helps ensure economic security for households and businesses.

Answer 834

A reduction of inflation from a higher to a lower, but still above zero, level ## Footnote Disinflation indicates a slowing inflation rate.

Answer 835

A vicious cycle of reduced spending and higher unemployment ## Footnote Deflation can lead to decreased economic activity and further economic challenges.

Answer 836

Consumers accelerate their spending to be at price increases ## Footnote Hyperinflation leads to rapid price increases and diminished currency value.

Answer 837

Calculated using a fixed consumption bundle ## Footnote It measures inflation based on a consistent set of goods over time.

Answer 838

To monitor inflation and evaluate monetary policies ## Footnote CPI is a key indicator of price changes in a basket of consumer goods and services.

Answer 839

Decreases the labor force participation ratio ## Footnote Discouraged workers are not counted in the official unemployment rate.

Answer 840

People who are temporarily unemployed while transitioning between jobs ## Footnote Frictional unemployment is a normal part of the labor market dynamics.

Answer 841

A fixed amount of money buys fewer goods and services ## Footnote Inflation erodes the value of money over time.

Answer 842

The relationship between inflation and interest rates ## Footnote The Fisher effect suggests that real interest rates are equal to nominal interest rates minus the expected inflation rate.

Answer 843

To influence the macro economy by influencing the quantity of money and credit in the economy ## Footnote Monetary policy can be implemented independently of government influence or as an agent of the government.

Answer 844

To influence economic activity through government spending and taxation ## Footnote Fiscal policy can also redistribute wealth and balance budgets.

Answer 845

An economy where goods and services are exchanged directly for other goods and services ## Footnote This type of economy lacks a common measure of value.

Answer 846

Any generally accepted medium of exchange ## Footnote A medium of exchange is an asset used to purchase goods and services or repay debts.

Answer 847

* Readily acceptable * Have a known value * Easily divisible * High value relative to its weight * Difficult to counterfeit

Answer 848

They served as a medium of exchange and a store of wealth ## Footnote Their value depended on demand for them in ornaments and jewelry.

Answer 849

* Acts as a medium of exchange * Provides a way of storing wealth * Provides a convenient measure of value

Answer 850

The promissory note ## Footnote This development began with goldsmiths issuing receipts for deposited gold.

Answer 851

They took in excess wealth and issued promissory notes that could be used in commerce ## Footnote Not all gold would be withdrawn at once, allowing for the issuance of more notes than the physical gold held.

Answer 852

[readily acceptable]

Answer 853

False ## Footnote Money also serves as a store of wealth and a unit of account.

Answer 854

Fractional reserve banking ## Footnote This process involves banks lending out a portion of deposits while keeping a fraction in reserve to meet withdrawals.

Answer 855

The percentage of deposits that banks are required to keep in reserve ## Footnote In the example, the reserve requirement is 10 percent.

Answer 856

The bank retains £10 and loans out £90 ## Footnote This process continues through multiple banks, creating further money in the economy.

Answer 857

The amount of money that the banking system creates, calculated as 1 divided by the reserve requirement ## Footnote In the example, with a 10% reserve requirement, the money multiplier is 10.

Answer 858

By setting reserve requirements and purchasing government securities ## Footnote This can increase the money supply by affecting the reserves banks hold.

Answer 859

* Transactions-related * Precautionary * Speculative ## Footnote Each motive reflects different reasons why individuals or businesses prefer to hold money rather than invest in other assets.

Answer 860

The total of notes and coins in circulation plus very highly liquid deposits ## Footnote Narrow money is used to measure liquidity in an economy.

Answer 861

Narrow money plus all liquid assets that can be used to make purchases ## Footnote Broad money includes various forms of money, providing a comprehensive view of the money supply.

Answer 862

Total spending is proportional to the quantity of money ## Footnote This relationship is expressed by the equation M × V = P × Y.

Answer 863

The relationship between inflation and the nominal interest rate ## Footnote It suggests that real interest rates remain stable over time.

Answer 864

The demand to hold money for the purpose of purchasing goods and services ## Footnote This is a key aspect of how individuals manage their liquidity.

Answer 865

Money held as a buffer against unforeseen events ## Footnote This type of demand increases with the volume of transactions in the economy.

Answer 866

The demand to hold money based on potential risks and returns of other financial instruments ## Footnote This demand tends to rise when perceived risks in other assets increase.

Answer 867

False ## Footnote Money is more broadly defined to include all forms of currency and bank deposits.

Answer 868

It increases the money multiplier ## Footnote A smaller reserve requirement allows banks to lend out more money, thus expanding the money supply.

Answer 869

1 divided by the reserve requirement ## Footnote This calculation shows how much money can be generated in the banking system from a single deposit.

Answer 870

Broad money encompasses narrow money and refers to the stock of the entire range of liquid assets that can be used to make purchases. ## Footnote Broad money can be used to purchase a wider range of goods and services than narrow money.

Answer 871

The nominal interest rate that could be earned by lending it to others.

Answer 872

A fixed nominal amount of money circulating at any one time.

Answer 873

It is downward sloping because as interest rates rise, the speculative demand for money falls.

Answer 874

There would be excess supply of money (M0 - M1), leading economic agents to buy bonds, forcing the price of bonds up and the interest rate down to I0.

Answer 875

There would be excess demand for money (M2 - M0), prompting individuals to sell bonds, causing the price of bonds to fall and interest rates to rise until reaching I0.

Answer 876

The interest rate falls as the price level rises.

Answer 877

Excess supply of cash.

Answer 878

The Fisher effect states that the real rate of interest in an economy is stable over time, and changes in nominal interest rates are due to changes in expected inflation.

Answer 879

Rnom = Rreal + e.

Answer 880

The money supply and/or growth rate should not affect the real rate of interest (Rreal) but will affect inflation and inflation expectations.

Answer 881

expected inflation; risk.

Answer 882

It leads to a decline in nominal interest rates. ## Footnote This occurs because increasing the supply of money reduces its price, which is reflected in lower interest rates.

Answer 883

Expected inflation and unexpected inflation. ## Footnote Expected inflation is what economic agents anticipate, while unexpected inflation is the difference between actual inflation and what was anticipated.

Answer 884

They would likely be indifferent to inflation. ## Footnote If wages and prices rise equally, the purchasing power remains unchanged.

Answer 885

They need to think carefully about inflation. ## Footnote Unpredictable inflation can affect their financial planning and decision-making.

Answer 886

Borrowers benefit at the expense of lenders. ## Footnote This is because the real value of the borrowed amount declines due to unexpected inflation.

Answer 887

The degree to which economic agents find future inflation rates hard to forecast. ## Footnote High inflation uncertainty can lead to higher borrowing costs and reduced economic activity.

Answer 888

* Transactions-related * Precautionary * Speculative

Answer 889

It decreases the money multiplier. ## Footnote The money multiplier is inversely related to the reserve requirement.

Answer 890

* Real required rate of return * Compensation for future inflation * Risk premium

Answer 891

Price stability. ## Footnote Central banks aim to control inflation and maintain stable prices.

Answer 892

* Monetary policy * Fiscal policy

Answer 893

Central bank activities aimed at influencing the quantity of money and credit in an economy. ## Footnote It includes actions like setting interest rates and controlling inflation.

Answer 894

Government decisions about taxation and spending. ## Footnote Fiscal policy affects aggregate demand and economic activity.

Answer 895

The amount of wealth citizens choose to hold in the form of money. ## Footnote This contrasts with holding assets like bonds or equities.

Answer 896

It can increase economic activity. ## Footnote This can involve raising government expenditure without offsetting tax increases.

Answer 897

Reduced economic activity. ## Footnote Higher costs can discourage investment and spending.

Answer 898

False. ## Footnote Money neutrality suggests that real variables are unaffected in the long run.

Answer 899

A theory that states the nominal interest rate reflects changes in expected inflation. ## Footnote It is expressed as: Nominal interest rate = Real interest rate + Expected rate of inflation.

Answer 900

Government reduces expenditure while maintaining tax revenues. ## Footnote This can decrease economic activity.

Answer 901

Unexpected inflation. ## Footnote It disrupts financial planning and can lead to economic instability.

Answer 902

The market value of all final goods and services produced by factors of production located within a country during a given period of time ## Footnote Generally measured over a year or a quarter.

Answer 903

The market value of all final goods and services produced by factors of production supplied by citizens of a country, regardless of location ## Footnote Includes production by citizens outside the country.

Answer 904

GDP includes production by foreigners within the country, whereas GNP includes production by citizens outside the country.

Answer 905

Goods and services that a domestic economy purchases from other countries.

Answer 906

Goods and services that a domestic economy sells to other countries.

Answer 907

The ratio of the price of exports to the price of imports, represented by export and import price indexes.

Answer 908

A country's ability to produce a good at a relatively lower cost than other goods it produces, compared with another country.

Answer 909

Factors such as expected GDP growth rates, monetary and fiscal policies, trade policies, and competitiveness.

Answer 910

Economic growth by increasing efficiency of resource allocation, providing access to larger capital and product markets, and facilitating specialization.

Answer 911

A summary of a country's economic transactions with the rest of the world.

Answer 912

To increase liquidity, raise output, and lower the cost of capital.

Answer 913

Current account, capital account, and financial account.

Answer 914

To identify markets expected to provide attractive investment opportunities.

Answer 915

Comparative advantage based on opportunity costs.

Answer 916

Comparative advantage based on factor endowments.

Answer 917

Net exports is the difference between the value of a country's exports and the value of its imports ## Footnote It is calculated as value of exports minus value of imports.

Answer 918

A trade surplus indicates that the value of exports is greater than the value of imports.

Answer 919

An autarky is a state in which a country does not trade with other countries.

Answer 920

The autarkic price.

Answer 921

An open economy.

Answer 922

Free trade occurs when there are no government restrictions on a country's ability to trade.

Answer 923

Global aggregate demand and supply.

Answer 924

It increased from less than 20 percent of GDP in 1970 to more than 70 percent of GDP in 2006.

Answer 925

The relative price of imports and exports in real terms: units of imports per unit of exports.

Answer 926

FDI refers to direct investment by a firm in one country in productive assets in a foreign country.

Answer 927

FDI involves long-term investment in productive assets, while FPI refers to shorter-term investments in foreign financial instruments.

Answer 928

It affirmed the link between trade and growth, indicating that all rich and emerging economies are oriented to being open to trade.

Answer 929

The opportunity cost is the amount of another good that must be forgone to produce an additional unit of the first good.

Answer 930

A country has an absolute advantage if it can produce a good at a lower cost or use fewer resources than its trading partner.

Answer 931

A country has a comparative advantage if its opportunity cost of producing a good is less than that of its trading partner.

Answer 932

Globalization of production has increased the productive efficiency of manufacturing firms by allowing them to outsource production.

Answer 933

Intra-firm trade refers to trade between multinational firms and their subsidiaries.

Answer 934

opportunity

Answer 935

It increased from 39 percent in 1990 to 57 percent in 2010.

Answer 936

Manufacturers can take advantage of economies of scale because they have access to a much larger market.

Answer 937

1/6th of a pen ## Footnote This indicates Vietnam's lower opportunity cost in pencil production compared to Brazil.

Answer 938

1/2 of a pen ## Footnote This higher opportunity cost in Brazil signifies its comparative disadvantage in pencil production.

Answer 939

United Kingdom ## Footnote The UK produces more machinery per worker per day than India.

Answer 940

India ## Footnote India produces more cloth per worker per day than the United Kingdom.

Answer 941

2 yards of cloth ## Footnote This is calculated as 8 ÷ 4, indicating the trade-off for producing machinery.

Answer 942

8 yards of cloth ## Footnote This indicates a higher trade-off for producing machinery in India compared to the UK.

Answer 943

1/2 of a machine ## Footnote This shows the trade-off for producing cloth in the UK.

Answer 944

1/8 of a machine ## Footnote This lower cost highlights India's comparative advantage in cloth production.

Answer 945

True ## Footnote Countries can still benefit by exporting goods in which they have a comparative advantage.

Answer 946

Between 2 and 8 yards ## Footnote This range is based on the respective autarkic prices of both countries.

Answer 947

Structural shifts in the economy ## Footnote Other factors include accumulation of capital, new technology, and discovery of resources.

Answer 948

1960s ## Footnote This strategy significantly impacted South Korea's comparative advantage over time.

Answer 949

6.8% ## Footnote This figure decreased to 2.0% by 2015, reflecting a shift in export focus.

Answer 950

Almost 60% ## Footnote This represents a substantial increase from approximately 16% in 1980.

Answer 951

Created a self-reinforcing virtuous circle ## Footnote Success in export markets led to increased productivity and technological adoption.

Answer 952

9.8% ## Footnote This percentage decreased significantly by 2015, indicating changing export dynamics.

Answer 953

0.4% ## Footnote This shows limited growth in this sector compared to machinery and chemicals.

Answer 954

Factors include: * Government policy * An increasingly skilled and productive workforce * Proactive firms that learned and adapted new technology ## Footnote These factors contributed to South Korea's evolving economic landscape and competitiveness in international trade.

Answer 955

It is critical for analysts to examine changes in: * Government policy and regulations * Demographics * Human capital * Demand conditions * Other influencing factors ## Footnote This analysis helps identify sectors and industries that may benefit from changing economic conditions.

Answer 956

Ricardian model focuses on: * Cross-country differences in technology * Labor as the only variable factor of production Heckscher-Ohlin model focuses on: * Cross-country differences in factor endowments * Both labor and capital as variable factors ## Footnote These models provide insights into the determinants and patterns of trade.

Answer 957

A country has a comparative advantage if it has a lower opportunity cost in the production of a good. ## Footnote This model emphasizes the role of labor productivity differences driven by technology.

Answer 958

A country has a comparative advantage in goods whose production is intensive in the factor it has in relative abundance. ## Footnote This model assumes uniform technology across countries but varying technology between industries.

Answer 959

Derived demand refers to the demand for an input that arises from the demand for the product it produces. ## Footnote Changes in trade can positively impact the abundant factor and negatively impact the scarce factor.

Answer 960

The BOP consists of: * Current account * Capital account * Financial account ## Footnote Each component reflects different types of economic transactions with the rest of the world.

Answer 961

The current account includes: * Merchandise trade * Services * Income receipts * Unilateral transfers ## Footnote These transactions capture the flow of goods, services, and income between a country and the rest of the world.

Answer 962

The capital account measures: * Capital transfers * Sales and purchases of non-produced, non-financial assets ## Footnote This includes debt forgiveness and intangible asset transactions.

Answer 963

The financial account includes: * Financial assets abroad * Foreign-owned financial assets within the reporting country ## Footnote This section captures investment flows and ownership of financial assets.

Answer 964

True ## Footnote This principle reflects the double-entry bookkeeping nature of the BOP, though discrepancies may arise in practice.

Answer 965

[double-entry] ## Footnote This system tracks all economic flows and changes in ownership of goods and services.

Answer 966

Trade impacts factor incomes by: * Favoring the abundant factor * Negatively impacting the scarce factor ## Footnote This occurs due to changes in output prices resulting from trade.

Answer 967

Japan shifted from a comparative advantage in unskilled-labor-intensive goods to skill-intensive products. ## Footnote This change was driven by an increase in skilled labor availability.

Answer 968

Unilateral transfers include: * Worker remittances * Foreign direct aid or gifts ## Footnote These are one-way transfers of assets without reciprocal exchange.

Answer 969

Official assets and other foreign assets ## Footnote Official assets include securities issued by the government, while other foreign assets cover private sector securities.

Answer 970

Goods and financial assets ## Footnote These goods are imported on grounds other than commercial transactions.

Answer 971

The difference between exports and imports ## Footnote It indicates whether a country has a current account surplus or deficit.

Answer 972

Y = C + I + G ## Footnote Where Y is GDP, C is private consumption, I is investment, and G is government purchases.

Answer 973

Y = C + I + G + X - M ## Footnote X denotes exports and M denotes imports.

Answer 974

The current account is in deficit.

Answer 975

Exports exceed imports.

Answer 976

It can decrease GDP and employment.

Answer 977

An opposite balance in the capital and financial accounts.

Answer 978

Run current account deficits while accumulating net foreign liabilities.

Answer 979

They finance the current account deficit of their trading partners by lending.

Answer 980

Japan, Germany, and China.

Answer 981

Net exports are equivalent to the current account balance from a BOP perspective.

Answer 982

Securities issued by the government and private sectors.

Answer 983

They are reported by the banking sector and affect the financial account.

Answer 984

Strong import growth.

Answer 985

Net capital inflows or outflows.

Answer 986

It earns more from exports than it spends on imports.

Answer 987

CA = X - M = Y - (C + I + G) ## Footnote This equation defines the current account balance from the perspective of national income accounts.

Answer 988

By borrowing money from foreigners to consume more output than it produces.

Answer 989

A country consumes less output than it produces and lends the surplus to foreigners.

Answer 990

Yd = Y + R - T ## Footnote Where Y is income, R is net transfers, and T is taxes.

Answer 991

Yd = C + Sp ## Footnote Where C is consumption and Sp is private sector saving.

Answer 992

C = Yd - Sp = Y + R - T - Sp

Answer 993

It highlights the relationship between private savings (Sp), government savings (Sg), investment (I), and the current account (CA).

Answer 994

An open economy can use savings for domestic or foreign investment, while a closed economy can use it only for domestic investment.

Answer 995

It increases domestic investment and results in a current account deficit by an amount equal to the increase in investment.

Answer 996

Sp can be used for: * Investment in domestic capital (I) * Purchases of assets from foreigners (CA) * Net purchases or redemptions of government debt (−Sg)

Answer 997

Low private savings, high private investment, a government deficit, or a combination of these factors.

Answer 998

The deficit country’s capacity to repay its liabilities from future production remains unchanged.

Answer 999

It often reflects a strong domestic economy with elevated consumer, government, and investment spending.

Answer 1000

It leads to a permanent increase in claims against the deficit country, possibly requiring rising risk premiums.

Answer 1001

They will likely lead to an improvement in the UK current account position.

Answer 1002

* Current account balance * Capital account balance * Financial account

Answer 1003

Decisions by consumers, firms, and governments.

Answer 1004

It produces a current account deficit.

Answer 1005

A rise in the risk premium for financial assets of the deficit country.

Answer 1006

The ability to produce a good at a lower absolute cost than a trading partner.

Answer 1007

The opportunity cost of producing a good is less than that of a trading partner.

Answer 1008

They prevent the free flow of goods and services among countries.

Answer 1009

It allows free movement of goods and services among members and creates a common trade policy against non-members.

Answer 1010

It requires common economic institutions and coordination of policies among members.

Answer 1011

If the gain from better terms of trade offsets the loss from distorted resource allocations.

Answer 1012

A country has a comparative advantage in producing a good if its opportunity cost of producing the good is less than that of its trading partner. ## Footnote This concept helps explain trade patterns between countries.

Answer 1013

Mexico ## Footnote The opportunity cost of vegetables in Mexico is lower than in Brazil.

Answer 1014

1/3 flashlight per vegetable ## Footnote This indicates how many flashlights must be foregone to produce one vegetable.

Answer 1015

Mexico ## Footnote The opportunity cost of bananas is lower in Mexico compared to Brazil and Canada.

Answer 1016

the terms of trade are closer to its autarkic prices than to its partner's autarkic prices. ## Footnote This means favorable terms of trade increase a country's benefits from trade.

Answer 1017

The abundant factor gains relative to the scarce factor in each country. ## Footnote This reflects the changes in factor demand due to trade.

Answer 1018

Capital account ## Footnote The capital account records capital transfers and sales of non-produced, non-financial assets.

Answer 1019

Current account ## Footnote The current account measures flows of goods and services, including income from foreign investments.

Answer 1020

Low private savings ## Footnote Other factors may include high private investment or government deficits.

Answer 1021

High private investment ## Footnote High private investment can indicate growth potential, making it less concerning for creditors.

Answer 1022

abundantly endowed.

Answer 1023

False ## Footnote Germany has a comparative advantage in machine tools due to its capital abundance.

Answer 1024

Increased demand for the factor used intensively in its production. ## Footnote This leads to a gain for the abundant factor in the exporting country.

Answer 1025

The price at which one currency can be exchanged for another currency.

Answer 1026

Nominal exchange rates are the rates quoted in the market, while real exchange rates adjust nominal rates for inflation differences between countries.

Answer 1027

Spot exchange rates are for immediate currency delivery, while forward exchange rates are agreed upon today for future delivery.

Answer 1028

Approximately USD 5.1 trillion.

Answer 1029

To facilitate international trade and capital flows by allowing currency exchange.

Answer 1030

About 30 percent.

Answer 1031

The exchange of currencies for immediate delivery, typically settled two business days after the trade.

Answer 1032

Agreements to exchange currencies at a future date at an exchange rate agreed upon today.

Answer 1033

spot exchange rate.

Answer 1034

T + 2 days.

Answer 1035

A combination of a spot transaction and a forward contract to roll over an existing position.

Answer 1036

Futures contracts are traded on exchanges and have fixed amounts and dates, while forwards are OTC and flexible.

Answer 1037

To extend an existing forward position to a new future date by closing the expiring contract and entering a new one.

Answer 1038

The exchange rate agreed upon today for a currency transaction to occur at a future date.

Answer 1039

The settlement date is adjusted to the closest good business day.

Answer 1040

It is calculated based on the difference in exchange rates between the forward contract and the spot rate at the time of settlement.

Answer 1041

It connects financial markets globally and influences investment performance through currency valuations.

Answer 1042

To convert currencies for the purpose of moving funds into or out of foreign assets.

Answer 1043

USD 5.1 trillion.

Answer 1044

To eliminate FX risk from foreign borrowing

Answer 1045

Typically close, usually within a few basis points

Answer 1046

Contracts that give the purchaser the right to make an FX transaction at a future date at an agreed exchange rate

Answer 1047

Exercises the option if the agreed exchange rate is better than the market rate at expiry

Answer 1048

No, they are often used concurrently

Answer 1049

An extremely flexible way to manage FX risk exposures

Answer 1050

Foreign exchange risk

Answer 1051

AUD/HKD spot rate one year from now

Answer 1052

Sell HKD forward

Answer 1053

One-year HKD-denominated zero coupon bond

Answer 1054

Exchange AUD for HKD in the spot market and use a one-year forward contract

Answer 1055

Interest rate risk

Answer 1056

It can improve the trade balance if demand for imports and exports is sufficiently price-sensitive ## Footnote The effectiveness of devaluation or depreciation depends on the well-behaved demand and supply curves for goods and services.

Answer 1057

The Marshall-Lerner condition ## Footnote This condition assumes that trade is initially balanced and can be generalized to allow for initial trade imbalances.

Answer 1058

It is the percentage change in quantity demanded divided by the percentage change in price ## Footnote A demand elasticity of 0.6 means quantity demanded increases by 6% if price declines by 10%.

Answer 1059

X * e_x + M * e_m > 1, where X and M are the shares of exports and imports, and e_x and e_m are the price elasticities of demand ## Footnote This condition implies that a devaluation will improve the trade balance if it holds true.

Answer 1060

The trade balance will definitely improve ## Footnote This occurs if the elasticity of demand for imports (M) is greater than 1.

Answer 1061

It's the phenomenon where the trade balance worsens initially after a devaluation before improving ## Footnote This happens due to order delivery lags in import and export transactions.

Answer 1062

It is a macroeconomic view that focuses on the relationship between income and domestic expenditure ## Footnote It emphasizes that devaluation must increase income relative to expenditure to improve the trade balance.

Answer 1063

Through a wealth effect, where purchasing power decreases, leading households to reduce expenditure ## Footnote This can result in a temporary improvement in the trade balance.

Answer 1064

It must induce a corresponding change in the capital account ## Footnote Domestic saving must increase and be channeled into buying financial assets from foreigners.

Answer 1065

Exports: 0.3; Imports: 0.6 ## Footnote This indicates how responsive the demand for these goods is to changes in price.

Answer 1066

Imports become 10% more expensive; exports increase in quantity demanded due to lower foreign currency price ## Footnote For example, with an import elasticity of 0.65, imports would reduce by 6.5%.

Answer 1067

It is equal to the elasticity of export demand ## Footnote If elasticity is x, then the revenue change is simply x.

Answer 1068

* Goods with good substitutes * Goods that trade in competitive markets * Luxury goods * Goods that account for a large portion of consumer expenditures ## Footnote These factors are associated with higher demand elasticities.

Answer 1069

The trade balance cannot improve unless domestic expenditure declines ## Footnote If expenditure does not decline, higher prices will negate any stimulative effects of depreciation.

Answer 1070

It is likely to decrease the trade balance ## Footnote As the AUD appreciates, export prices increase, leading to decreased demand for exports, thus lowering export revenue.

Answer 1071

The proportion of Australian exports accounted for by fine wines is increasing ## Footnote Fine wines are considered luxury goods and must compete with exports from regions like Chile and New Zealand.

Answer 1072

For exchange rate movements to rebalance trade, the demands for imports and exports must be sufficiently price-sensitive ## Footnote This means they must have sufficiently high elasticities.

Answer 1073

False ## Footnote Although import prices decline with AUD appreciation, Australians do not increase their import purchases enough to lead to higher expenditures.

Answer 1074

It declines ## Footnote The price of imports decreases, but demand does not increase sufficiently.

Answer 1075

%RM = (1 Œ M)%PM ## Footnote Where %PM is negative due to declining import prices and import demand is inelastic.

Answer 1076

Exports are 53% and imports are 47% of total trade ## Footnote This ratio is used in the Marshall-Lerner equation.

Answer 1077

Australia must save less, invest more, or decrease its fiscal balance ## Footnote This means combinations of lower savings, higher investments, or decreased government surpluses.

Answer 1078

It is likely to decrease the trade balance ## Footnote Higher private investment means less saving relative to investment.

Answer 1079

It is likely to increase ## Footnote This increase makes the trade surplus more responsive to an AUD appreciation.

Answer 1080

It tends to make the expression smaller ## Footnote This implies a decrease in the trade balance.

Answer 1081

The trade balance will be less responsive to exchange rate movements ## Footnote This means changes in the exchange rate will have a smaller impact on the trade balance.

Answer 1082

Import elasticity will most likely increase. ## Footnote This increase is due to luxury goods becoming a larger proportion of household expenditure.

Answer 1083

The trade balance would go to zero. ## Footnote A trade deficit must be matched by a corresponding capital account surplus.

Answer 1084

Both must be zero.

Answer 1085

It will decrease the trade surplus. ## Footnote A decrease in saving reflects a decline in national income.

Answer 1086

The foreign exchange market.

Answer 1087

They define exchange rates (the price of one currency in terms of another).

Answer 1088

The domestic currency is appreciating.

Answer 1089

The relative purchasing power of the currencies.

Answer 1090

Spot rates are for immediate settlement, while forward rates are for future settlement.

Answer 1091

An arbitrage relationship that equates the investment return on two equivalent investments.

Answer 1092

The forward rate is above the spot rate.

Answer 1093

An excess of domestic saving over investment spending.

Answer 1094

The elasticities approach and the absorption approach.

Answer 1095

Combinations of export and import demand elasticities affecting the trade balance.

Answer 1096

Domestic expenditure must reduce.

Answer 1097

The wealth effect.

Answer 1098

Forward contract.

Answer 1099

Luxury cars.

Answer 1100

Domestic investment must decline relative to saving.

Prerequisite Economics Flashcards

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