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Test 2 Flashcards

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1
Q

What is a business cycle?

A

Reoccurring upswings and downswings in an economy’s GDP over time

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2
Q

What are the 4-phases of the business cycle?

A

PRTE - peak, recession, trough, expansion

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3
Q

What happens to income, employment, and output in each phase of the business cycle?

A

Peak - total income, output and employment are at a temporary maximum
Recession - real GDP, employment, and total income decline
Trough - output, income and employment bottom out at their lowest level
Expansion - real GDP, income, and employment rise

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4
Q

What are several possible sources of shocks that can cause business cycles?

A

Irregular innovation, technology advancements, monetary factors, political events, productivity, financial instability

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5
Q

What do most economist agree that the immediate cause of cyclical changes in the level of output and employment is?

A

Unexpected change in total spending (shock) (can be good or bad)
Firms do not want to start ‘price wars’ so prices are unlikely to be flexible downwards

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6
Q

Which industries and/or sectors are most likely and least likely to be affected by business cycles?

A

Most - capital and durable consumer goods
Least - survive industries and companies that produce non-durable goods

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7
Q

How do we measure the labor force?

A

Labor force = # unemployed + # employed
Labor force = population - individuals under 16 y/o - retired individuals - military personnel - institutionalized - homemakers

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8
Q

How do we measure unemployment rate?

A

Unemployment rate = (# of unemployed / labor force) * 100

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9
Q

What are types of unemployment?

A

Frictional
Structural
Cyclical

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10
Q

What is frictional unemployment?

A

Workers who are searching for jobs or waiting to take jobs in the near future (people will be unemployed for a shirt period of time) (ex: people who voluntarily quit jobs to search for high-paying, high-productivity positions, new college graduates looking for their first jobs)

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11
Q

What is structural umployment?

A

Changes over time in consumer demand and in technology that alter the ‘structure’ of total demand for labor (long spells of unemployment) (ex: typewriter builders are no longer needed)

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12
Q

What is cyclical unemployment?

A

Unemployment caused by a decline in total spending in the economy which typically begins in the recessionary phase fo the business cycle (people may never find jobs)

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13
Q

What is the formula for GDP gap and Okun’s law?

A

GDP gap = potential GDP - actual GDP
Okun’s law = (current unemployment - natural rate of unemployment) * 2

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14
Q

What is the measurement of inflation in the United States?

A

Consumer price index (CPI)

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15
Q

What is inflation?

A

General rise in the price level which reduces the ‘purchasing power’ of money

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16
Q

How do we measure the rate of inflation (or deflation)?

A

Rate of Inflation = [(CPI current year - CPI last year) / CPI last year ] * 100

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17
Q

What is the rule of 70?

A

How long it would take for a variable (like inflation) to double in value
Rule of 70 = 70/percentage of inflation

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18
Q

What are types of inflation?

A

Cost-push inflation
Demand pull inflation

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19
Q

Define cost-push inflation

A

Initiated by increases in resource price, as well as increases in per-unit production costs; ends in recession

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20
Q

Define demand pull inflation

A

Caused by too much spending relative to output in the economy; likely to occur at the peak phase of the business cycle when business activity is at a temporary maximum; continues as long as excess spending continues

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21
Q

How do we measure per-unit production cost?

A

Per unit production cost = total input cost / units of output

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22
Q

What is the difference between real income and nominal income?

A

Real income is a measure of the amount of goods and services nominal income can buy; the purchasing power of nominal income or income adjusted for inflation
Nominal income is the number of dollars received as wages, rents, interest & profit

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23
Q

Who is hurt by unanticipated inflation and how?

A

fixed-income receivers, savers, creditors/lenders

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24
Q

Who is not hurt by unanticipated inflation?

A

Flexible income earners, spenders, borrowers

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25
How are fixed-income receivers hurt during unanticipated inflation?
Because why recieve a fixed amount of nominal income each month - the dollars they have will decline over time EX: elderly on private pension or annuity; landlords who recieve lease payments
26
How are savers hurt during unanticipated inflation?
As prices rise, the real value/purchasing power of an accumulation of savings deteriorates - paper assets decline in real value during inflation
27
How are creditors/lenders harmed by unanticipated inflation?
Since each dollar they receive back form the borrower would purchase less and less goods and services when prices rise
28
If inflation is anticipated, what can lenders do to avoid the loss in real value of money?
Lenders can increase the nominal interest rate by the expected rate of inflation
29
What is the difference between nominal and real interest rate?
Nominal interest rate = real interest rate + inflation premium (expected inflation in the economy) [observable in market] Real interest rate = nominal interest rate - inflation premium [not observable in market]
30
What is the income-consumption and income-saving relationship?
Positive relationship An increase in disposable income would cause a movement upward along an economy’s savings schedule When income increases (decreases) consumption increases (decreases)
31
Consumption and savings decisions are made with?
disposable income
32
How do we measure average propensity to consume (APC) and save (APS) as well as marginal propensity to consume (MPC) and save (MPS)?
APC = consumption/disposable income APS=savings/disposable income MPC= change in consumption/change in disposable income MPS=change in savings/change in disposable income
33
What does APC and APS mean?
APC = what percentage of disposable income are we consuming? APS = what percentage of disposable income are we saving?
34
What does MPS and MPS mean?
MPC = how much consumption will change MPS = how much savings will change
35
What is the sum of APC and APS as well as the sum of MPC and MPS?
1
36
What are determinants of consumption and savings? (wealth, borrowing, expectations, etc.) What is the wealth effect?
Wealth; borrowing; expectations; real interest rates; wealth effect is a sudden increase in wealth would shift the consumption schedule upwards and saving schedule downward
37
How would a shift in consumption schedule in one direction affect the shift in saving schedule? (Figure 10.4)
Shift in consumption schedule in one direction
38
How would a change in taxes shift the consumption and savings schedules?
A change in taxes would shift the consumption and savings schedules because a change in taxes shifts the consumption and saving schedules in the same direction
39
What are economic investment decisions based on?
Based on marginal benefit and marginal cost analysis
40
What is the marginal benefit of an investment? And what is the marginal cost of an investment? How do we calculate expected rate of return of an investment?
MB = expected rate of return MC= real interest rate Expected rate of return of an investment ={ net expected revenue - cost of investment / cost of investment} * 100
41
Is the investment demand curve positively or negatively sloped and why? (Figure 10.5)
Investment demand curve is negatively sloped; as real interest rises, the amount of investment spending declines
42
What are determinants of investment demand curve (i.e., factors that increase/decrease investment demand)?
Acquisition, maintenance, and operating costs; business taxes; technological change; s ck of capital goods on hand; planned inventory changes; expectations
43
Why is investment spending unstable in the United States?
Profits are highly variable, capital goods are durable, innovation occurs at an irregular pace and expectations vary quickly
44
What is the multiplier effect?
Useful in determining the change in GDP resulting from an initial change in spending Multiplier = change in GDP / change in initial spending
45
What is the relationship between MPC and multiplier? MPS and multiplier? What is the multiplier process? (Figure 10.8)
They are opposites As MPS increases (decreases), the size of the multiplier decreases (increases)
46
What is the assumption regarding investment spending in the economy in the aggregate expenditure model? (Figure 11.1) – Note the difference between investment demand curve and investment schedule.
Investment does not change when real GDP changes Investment demand curve - stays the same but the amount of investment in the economy would decline (so the investment schedule would shift down)
47
When the closed-economy is in equilibrium, what can we say about savings and planned investment?
Two components - private closed economy and consumption spending + planned investment spending (gross investment)
48
What is an injection?
Injection - an addition of spending to the economy’s circular flow of income and expenditures (investment would be considered an injection)
49
What is a leakage?
Leakage - a withdrawal of spending from the economy’s circular flow of income and expenditures (saving is considered a leakage)
50
How do we calculate actual investment given planned investment and unplanned changes in inventories?
Actual investment = planned investment + unplanned changes in inventories
51
What does the aggregate demand curve show?
Real GDP; various amounts of real domestic output that domestic and foreign buyers desire to purchase at each possible price level
52
What are reasons for the negative slope of the aggregate demand curve?
Real-balance effect, interest- rate effect, and foreign-purchases effect
53
What is real-balance effect?
A higher (lower) price level will decrease (increase) the real value of many financial assets and therefore reduce (raise) spending
54
What is the interest-rate effect?
An increase (decrease) in the price level will increase (decrease) the demand for money
55
What is the foreign-purchases effect?
An increase (decrease) in the US price level relative to other countries will increase (decrease) US imports and decrease (increase) US exports
56
What are factors that would shift the aggregate demand curve, either to the right or to the left? (Figure 12.2)
Changes in consumer spending, changes in investment spending, changes in government spending, and changes in net export spending
57
What is aggregate supply?
A schedule or curve showing the level of rela domestic output available at each possible prive level
58
How many time horizons are there in economics?
3; immediate short run, short run, long run
59
What are the characteristics of immediate short run horizon?
Immediate short run horizon - when both input & output prices are fixed; it is also horizontal or perfectly elastic
60
What are the characteristic of the long run horizon?
Long run horizon - when both input and output prices can vary
61
How does aggregate supply look like in the short-run and why? (Figure 12.4)
Horizontal because whenever the aggregate demand curve shifts in the immediate short run, only the economy’s output changes but not the price level
62
What is per-unit production cost?
Per unit production cost = total input cost/units of output
63
How does aggregate supply look like in the long-run and why? (Figure 12.5)
Aggregate supply is vertical at the full employment level of real GDP because in the long run wages and other un-out prices rise and fall to match changes in the price level
64
What are the determinants of aggregate supply? (Figure 12.6) How do we measure productivity?
Changes in input prices, changes in productivity and changes in legal- institutional environment
65
What are some reasons for price stickiness (or inflexibility) in the U.S.?
Fear of price wars, menu costs, minimum wage, morale, effort and productivity and wage contracts
66
What are efficiency wages?
Wages that elicit maximum work effort and thus minimize labor costs per unit of output
67
What happens to employment, output and income when the economy is in disequilibrium? When aggregate expenditures are greater than GDP and when aggregate expenditures are less than GDP?
When AEs are greater (less) than GDP, employment, output and income will increase (decrease).
68
What is the relationship between the expected rate of return, interest rate, investment, consumption, and GDP?
If expected rate of return increases or the interest rate decreases then investment spending in the economy will rise, so consumption, investment and GDP would rise
69
How would a change (decrease or increase) in investment spending, change equilibrium GDP?
A (an) decrease (increase) in investment spending would should the AEs schedule downwards (upwards) and therefore lower (raise) the amount of output, GDP.
70
What is the difference between closed-economy and open-economy?
Open economy - includes trade with other nations; imports and exports are included in the aggregate expenditures model Closed economy - does not include trade with other nations; imports and exports are not included in the aggregate expenditures model
71
What happens to equilibrium GDP when net exports are positive and when net exports are negative?
Positive net exports, elevate the aggregate expenditures schedule from the closed-economy level of C + lg to the open- economy level of C + lg + Xn1. Negative net exports, lower the aggregate expenditures schedule in from the closed-economy level of C+ lg to the open-economy level of C + 1g + Xnz.
72
How would a change in net exports (positive and negative), change equilibrium GDP?
Positive - increase economy’s GDP Negative - decrease economy’s GDP
73
What are some determinants of net exports?
prosperity abroad, exchange rates, tariffs & devaluations
74
If a nation imposes tariffs on foreign products, what would be the immediate effect on domestic production and employment?
An increase in domestic output and unemployment until the other nation retaliates
75
How would adding the public sector (government) alter the aggregate expenditures model? (Table 11.4, Figure 11.5)
The GDP will rise which implies a multiplayer effect since the rise in GDP is greater than the money from additional aggregate expenditures
76
How does taxation effect equilibrium GDP? (Table 11.5)
A (an) decrease (increase) in taxes would increase (decrease) consumption spending, shift the AEs schedule upwards (downwards) and increase (decrease) equilibrium GDP.
77
How does taxation effect consumption? (Figure 11.6)
A (an) decrease (increase) in taxes would increase (decrease) consumption spending, shift the AEs schedule upwards (downwards) and increase (decrease) equilibrium GDP.
78
What are further examples of injections and leakages?
Injections - investment Leakages - saving
79
What is a recessionary gap?
The amount by which aggregate expenditures at the full-employment GDP fall short of those needed to to achieve full-employment GDP
80
What is an inflationary expenditure gaps? (Figure 11.7)
The amount by which aggregate expenditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP
81
How can the government fix the recessionary and inflationary gaps? What are the policy options? How do these policies numerically work?
Fix Recessionary expenditure gap - increase governments spending, decrease taxes Fix inflationary gap - reduce government spending or raise taxes Recessionary gaps: Increase government spending and/or decrease taxes. Inflationary gaps: decrease government spending and/or increase taxes.
82
What is special about immediate short run aggregate supply? What is the shape of it? (Figure 12.3)
The immediate short-run supply schedule is horizontal. Therefore, any change in aggregate demand only leads to a change in real output but no change in the price level.

Economics (4 decks)

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