Test 1 - Study Guide

Question 1

What is a recession?

Answer 1

Some define a recession as a decline in the GDP for two or more consecutive quarters. However, modern economists define a recession and the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out.

Question 2

Briefly state the effect of a recession on the unemployment rate.

Answer 2

As a recession begins, business income declines and businesses may have to reduce their labor force. Therefore, as the recession continues, the unemployment rate will continue to rise. As the unemployment increases, discretionary income also decreases and lowers the available funds for businesses, furthering the cycle.

Question 3

Testing a theory by comparing the theory’s implications with data obtained in the real world is called _____ _____?

Answer 3

Empirical Analysis

Question 4

The principal distinction between positive analysis and normative analysis is that ….?

Answer 4

positive analysis tells us “what is,” but normative analysis tells us “what ought to be.”

Question 5

“The distribution of income in the United States should be more equal than it is.” - This is primarily a _________ statement.

Answer 5

This is a normative statement, because it is mostly opinion.

Question 6

Classical economists who assume the ‘invisible hand’ works reasonably well DO NOT argue that …..

Answer 6

Classical economists (who believe in the tooth fairy) DO NOT argue that the gov’t should actively intervene in the economy to eliminate business cycles.

Question 7

The classical approach assumes ……

Answer 7

Classical approach assumes wages and prices adjust quickly to balance quantities supplied and demanded in markets.

Question 8

John Maynard Keynes disagreed with the classical economist because he believed …..

Answer 8

wages and prices adjust slowly.

Question 9

Fundamental identity of national accounting:

Answer 9

total production = total income = total expenditure

Question 10

Capital goods are …

Answer 10

Capital goods are goods used to produce other goods.

Question 11

In the expenditure approach to GDP, consumption includes

Answer 11

Consumption (C) includes all final goods consumed by domestic households produced at home and abroad.

Question 12

Private savings is defined as ….

Answer 12

Private savings is defined as private disposable income minus consumption.

Question 13

2 main disagreements between classical approach and Keynesian approach to macroeconomics

Answer 13

1) Keynesian approach suggest gov’t step-in to help market adjust to reduce unemployment. Classical approach believes gov’t should have a very limited role in the economy.
2) Classical: economy functions in which wages and prices adjust quickly as if lead by an ‘invisible hand.’ Keynesian: wages and prices adjust slowly, ‘invisible hand’ doesn’t work, and markets stay out of equilibrium without gov’t assistance.

Question 14

State fundamental identity of national income (NI).

Answer 14

NI = compensation of employees + proprietors’ income + rental income + corporate profits + net interest + taxes on production & imports + bus. current transfer payments + current surplus of govt enterprises

Question 15

Give examples of a consumer durable good

Answer 15

car, appliances, furniture

Question 16

Give examples of non-durable goods

Answer 16

food, clothing, fuel

Question 17

Give examples of services

Answer 17

healthcare, education

Question 18

Why are net exports (NX) added into the expenditures calculation of GDP?

Answer 18

Exports are added to total spending because they represent spending by foreigners on final goods and services produced in the country. NX are exports minus import. NX are positive if exports > imports, negative if exports < imports.

Question 19

What the fuck is the ‘use-of-savings-identity,’ and what the fuck does it mean?

Answer 19

‘Use-of-Saving Identity’ states the economy’s private saving is used in three ways: 1) investments, 2) gov’t budget deficit (gov’t borrows to cover d/f b/w outlays and receipts), 3) current account balance (CA)

Question 20

What is the current account (CA) balance?

Answer 20

CA balance is net exports + net income from foreigners + net unilateral transfers

Question 21

Give income-expenditure identity

Answer 21

Y = C + I + G + NX
Y = GDP
C = Consumption
I = Investments
G = govt purchases
NX = net exports

Question 22

How the hell do you compute GDP according the the income-expenditure

Answer 22

Y=C+I+G+NX, income equals total expenditure