quiz 2 Flashcards
(104 cards)
1
Q
1st Limitation of traditional CPI
A
substitution effect
ppl replace more expensive items w cheaper items
- problem bcuz traditional CPI tends to assume that consumers will buy the same goods despite ↑ $
- overstate
2
Q
2nd Limitation of traditional CPI
A
does not account for quality changes
- bad quality = ↓ demand
3
Q
3rd Limitation of traditional CPI
A
w time, new G/S become available and consumer demand changes
4
Q
Chained CPI
A
BLD adjusts “baskets” every month
5
Q
1st problem with inflation
A
shoe leather costs
reference to wasted resources due to inflation
- ppl change behaviors = ↑ waste
6
Q
2nd problem with inflation
A
menu cost
refer to various cost paid by business as they adjust to inflation
- ex: restaurant change menu price mean they have to put out costs to print new menu
7
Q
3rd problem with inflation
A
tax distortion
inflation can force ppl to pay more tex
- more tax = ↑ tax rate
8
Q
capital gain tax
A
“capital gain” occurs when asset is purchased at one price & sold at higher price
- gov will tax for the amount you benefit from it
ex: brought for 500
sold for 700
will be taxed for the 200
9
Q
4th problem with inflation
A
money illusion
think they are receiving a good raise
ex: raise of 5%
inflation = 3%
real raise = 2% - not good
10
Q
5th problem with inflation
A
price confusion
higher price in the economy scarcity, or inflation
ex: gas $ ↑
11
Q
6th problem with inflation
A
wealth redistribution
w inflation, wealth is redistributed from lenders to borrowers
12
Q
7th problem with inflation
A
price level uncertainty - future
make planning more difficult
13
Q
unemployment rate equation
A
of unemployed / # of ppl in labor force
14
Q
characteristics of the working age population
A
- 16+ yrs of age
- not institutionalized (prison, mental hospital, retirement homes, military
- broken into 2 groups
1. labor force
2. not labor force
15
Q
labor force
A
you are in labor force if you plan to RETURN to work in the next month or actively looking for work
not/ in labor force = employed or unemployed
16
Q
not in labor force
A
if you haven’t looked for work or expecting to return
not in labor force = not considered unemployed
17
Q
how does BLS obtain data for employed,unemployed
A
does monthly survey to find out who is in which group
18
Q
What questions are in BLS survey
A
- r u currently employed?
yes = in LB + employed
no = move to 2nd questions - are you expecting to return to work in the next month
yes = LB + unemployed
no = move to 3rd questions - have u looked for work in the last 4 weeks
yes = LB + unemployed
no = NOT in LB |NOT unemployed | is a discourage worker
19
Q
discourage worker
A
someone who gave up looking for jobs
20
Q
1st problem w unemployment (UE) statistic survey
A
land line phone
- ppl dont use land line anymore
- surveys the same land line household = Bias
21
Q
2nd problem w UE statistic survey
A
day/time issue
- BLS does survey Mon-Fri, 8am-6pm
- ppl work around these time, so ppl who are more likely to pick up the phone would be UE ppl, ↑ UE rate
22
Q
3rd problem w UE statistic survey
A
misunderstanding
- ppl misinterpret the questions
23
Q
4th problem w UE statistic survey
A
language
- survey is only done in english, excludes ppl
24
Q
5th problem w UE statistic survey
A
“discourage workers” category is too board
- qt. 3 “NO” = discourage worker
but some are retired
25
6th problem w UE statistic survey
slow person bias
- ppl who have more time = more likely to participate
26
reason why UE survey aren't fixed
1. data compatibility
2. expensive
3. no perfect survey
27
when was the last time the survey was changed?
-1992 (+30yrs)
- OLD vers. "r u currently WOKRING?"
- caused UE rate ↓ 0.3%
- NEW vers. "r u currently EMPLOYED?"
28
U-3 UE
U-3 report UE who are actively looking for a job
1. always positive
2. continuously fluctuate
3. UE always ↑ during recession
4. UE always ↑ immediately after recession
5. avg N5%
29
U-6 UE
report discourage workers, underemployed unemployment, .. all ppl not working
- rate is always higher than U-3 cuz its more board
30
underemployed
person is working below capacity (skills) or desire (part time vs full time)
31
calculate U-6 UE
1. start w U-3 rate
2. add underemployed and marginally attach workers (not working, not looked for job in 4 wks, but have in last 12 months)
32
short term
< 15 weeks
33
long term
>15 weeks
34
1st type of UE
frictional
short term UE occurs when ppl r transitioning between jobs
- most common + normal
- signal well functioning eco
35
2nd type of UE
structural
skills demanded by employers are different from the skills you have
- require re-training
- last longest-time (longterm)
- most serious
36
3rd type of UE
cyclical
occurs during downturns (recession) in the economy
37
1st influences on UE
status of economy
- good eco = UE ↓
- bad eco = UE ↑
38
2nd influences on UE
information availability
- ↑ info = ↓ UE
39
3rd influences on UE
government policies
- rules on hiring//firing employees
- ex: rule on discriminations
ppl avoid hiring POC or race bcuz firing might violates law --> less hiring = increase UE
40
4th influences on UE
labor force participation rate (LFPR)
measure % of working age
LFPR = # of ppl in LB / # working age population
high LFPR = lots of ppl trying to find job n are in LB
low LFPR = ppl giving up
41
5th influences on UE
trends
1. last 50 yrs, ↑ LFPR when women join workforce
2. ↓ LFPR for men, more are going to get educations
3. last 20 yrs, ↓ overall LFPR -> baby boomers retiring
42
aggregate demand (AD)
total amount of newly produced US final G/S demand by all consumers at various
PL
43
AD equation
AD = consumer spending (C) + investment spending (I) + government spending (G) + export n import (x-m)
44
consumer spending
total amount spent by households on newly produce G/S
45
1st influences on C
change in wealth
wealth = accumulating of asset of value NOT INCOME
↑ wealth ↑ C = (AD →)
46
2nd influences on C
changes in tax rates
↓ tax rate ↑ C = (AD → )
47
3rd influences on C
change in interest rates
↓ interest rate ↑ C = (AD → )
48
4th influences on C
changes in expected PL
household EXPECTS higher PL ↑ C = (AD → )
49
5th influences on C
change in expected national income
household EXPECT ↑ national income ↑ C = (AD → )
50
6th influences on C
changes in population (longterm)
↑ population ↑ C = (AD → )
51
investment spending (I)
total amount that is spent by FIRMS on newly produced G/S & by households on newly built homes
52
1st influence on I
change in interest rate
↓ interest rate ↑ I = (AD → )
53
2nd influence on I
changes in tax rates
↓ tax rate ↑ I = (AD → )
- capital gain tax
54
3rd influence on I
changes in expectations of firms about future business conditions
firm EXPECT IMRPOVE business conditions ↑ current I = (AD → )
55
4th influence on I
technological innovations (new product/improvement to exisiting product)
↑ techno innovation ↑ I = (AD → )
56
Government spending
total amount spent by ALL level of domestic gov. on newly product G/S
57
1st influence on G
changes in political agendas of congress & president
if congress & president want to SPEND MORE, ↑ G = = (AD → )
58
2nd influence on G
status of the economy
if eco needs a stimulus, ↑ G = (AD → )
59
3rd influence on G
War vs peace
if theres a transition from peace to war, this lead to ↑ gov. spending, ↑ G = (AD → )
60
(x-m)
total amount of US newly produced final G/S purchased by all foreign MINUS amount of foreign newly produced final G/S purchased by domestic
61
export (x)
good is produced domestically and ship outside country
money flow: money come in, good go out
62
import (m)
goods made outside US &n ship inside
money flow: money go out, good comes in
63
(x-m) TRADE BALANCE
- trade surplus --> x > m
- trade deficit --> x < m
- balance trade --> x = m
64
How does X-M cause AD to shift left
x↓ m ↑ = AD ←
- x ↓ = means foreign country is not demanding for goods, so suppliers supply less
- m ↑ = means that domestic customers are not buying domestic goods, so domestic supplier supply less
- AD ← = therefore, AD shift left cuz both are not demanding for supplies
65
How does X-M cause AD to shift right
x ↑ m ↓ = AD →
- x ↑ = foreigners demanding for more domestic goods
- m ↓ = domestic buyers are not buying from foreign goods
- AD → = bcuz bother export and import is demanding for domestics supplies
66
1st influence on (x-m)
change of status of the economy a trading partner
if trading partner enjoys high rate of eco growth, (x ↑ - m ↓ ) AD →
67
2nd influence on (x-m)
trade policy - deliberate action that is taken by a gov. to influence trade flows
3 TRADE POLICIES
68
1 trade policy
tariff: tax imposed on imported goods
impose tariff = x (net export) ↑ m ↓ AD→
69
2nd trade policy
quota: restrictions on import units allowed into a country impose on the gov of importing country
70
3rd trade policy
exports subsidy: gov prodivdes financial assistance to firm or industry to encourage export
x ↑ = AD →
71
3rd influence on (x-m)
changes in RELATIVE PL
↓ in relative PL of US (x ↑ m ↓) AD →
- ex: identical goods from US and VN
* Starting at $5
* US ↓ to $3
* VN stays the same
x ↑ m ↓ cuz ppl from VN start buying more goods from the US instead of their country. US also stop importing from VN
72
4th influence on (x-m)
changes in exchange rate
exchange rate = price of 1 currency in terms of another
if US dollar ↓, ( x ↑ m↓) AD→
x ↑ bcuz USD depreciates so US goods becomes cheaper for foreigns
m↓ = weaker $ means foreigns goods are more expensive for US consumers AD→ domestic supply more
73
1st reason why AD curve down
wealth effect/real balance effect
- as PL ↓, purchasing power ↑ and so demand quantities ↑
74
2nd reason why AD curve down
interest rate effect
- as PL ↓, purchasing power of any given amount of money ↑ , purchased quantities ↑ and some ppl save more
- if interest rate ↓, ppl would buy more
75
3rd reason why AD curve down
if PL in US ↓, this cause ↑ spending on US G/S by foreign entities
76
aggregate supply (AS)
total amount of newly produced US final G/S offered for sale at various PL
77
Why AS curve up 1
employer misperception
- as PL ↑ some employers OVERESTIMATE their gains & they offer ↑ amount for sale
78
Why AS curve up 2
employees misperception
- as PL ↑ eventually wages are adjusted upward, some employee overestimate their gain & cause them to work harder.. allowing firm to ↑ amount for sales
79
Why AS curve up 3
sticky prices
"sticky" does not change
- as PL ↑, some firms are reluctant to increase their prices to menu costs
- when firm doesn't ↑ price, ↑ in incurred sold quantity
80
Why AS curve up 4
Sticky Wage
- PL ↑ , wages are slow to adjust
- during this time, wage are not adjusted to real wage
- employer have lower real cost lead to higher real profits --> cause firm to offer ↑Q for sale
81
1st influence on AS
1. changes in wages
- ↓ wage = ↑ AS
82
2nd influence on AS
change in cost of another key inputs
"key inputs" are materials used in multiple industry
- change to these "key input" affect every industry
- ex: gas, water, electricity
* ↓ key input cost = ↑ AS
83
3rd influence on AS
Supply shock - unexpected change in cost/availability of key input
- GOOD supply shock = ↑ input availability ↓ price =↑ AS
- BAD = ↓ input availability ↑ price = ↓ AS
84
4th influence on AS
change in productivity
- productivity ↑ = ↑ AS
85
currency appreciation
US currency increase in value relative to another currency
1 USD can buy more than before
- if you pay less for the same amount
86
currency depreciation
US currency loses value relative to another currency
1 USD buy less than before
- if you pay more for the same amount
87
What happen to net export when USD appreciate
Import = increase
(buying foreign goods)
export = decrease
(foreign buy less from us)
net export = decrease
88
What happen to net export when currency depreciation
Import = decrease
(buying foreign goods)
export = increase
(foreign buy more from us)
net export = increase
89
inflation rate equation
(CPI later yr - CPI earlier yr) / CPI earlier yr
90
adjust price/wage equation
$ amount u want to adjust x (CPI yr adjusting to /
CPI yr adjusting from)
91
Short term vs Long term AS
short term has : sticky wage/price and employee/employer misperception
long term does not
92
potential RGDP
output of economy during good economic times or when eco has natural rate of UE
93
natural rate of unemployment
(NRU)
UE rate of eco when its at potential RGDP
- lowest Ue rate ab eco can have w out having a problem w inflation
94
What is the US NRU
4-6%
(5% between)
any lower mean theres a problem w inflation
UE ↓ = ↑ inflation
95
recessionary gap
occurs when LRAS is to the right of equilibrium
- current actual RGDP U > 5%
96
inflationary gap
occur when LRAS is to the left of equilibrium
- current actual RGDP U < 5%
97
fiscal policy
deliberate gov action that is taken to influence the economy
- has 3 tools
1. change in gov spending
2. change in tax rate
3. change in transfer
98
!st tool of fiscal
change in gov spending "G"
- to "fix" recessionary gap, gov ↑ spending = AD →
explain:
1. to get rid of the gap, AD has to be shift to LRAS
2. gov spends more, shifting AD →
3. AD → moved the equilibrium to LRAS curve so gap is gone
99
2nd tool of fiscal
change in tax rate
- to "fix" recessionary gap, gov ↓ tax rate = AD →
100
3rd tool of fiscal
change in transfer
- to "fix" recessionary gap, gov ↑ transfer = AD →
101
"Transfer"
gove acts as an intermediary redistribute income/wealth from 1 segment of society to another
(take money from the rich & give it to the poor)
102
To fix inflationary gap
the gov actions will reverse
103
autocorrection mechanism
Describe how an eco can eliminate recessionary and inflationary gap automatically
104
Why do fiscal policy exist (if eco can fix itself)
1. political convenient
- make politician looks good
2. autocorrection can take a long time
