Unit 2

Question 1

GDP

Answer 1

All final goods and services produced in a given year. It includes all goods and services (citizens or foreign) supplied in the USA.

Question 2

Limits of GDP

Answer 2

Doesn’t measure quality of life, leisure time, crime and economic variables.

Question 3

National production

Answer 3

Opened by US companies

Question 4

Domestic Production

Answer 4

In the US even if foreign owned.

Question 5

Gross-total

Answer 5

Before adjustments

Question 6

GDP per capita

Answer 6

GDP per person. It identifies on a average how many products each person makes.
Best measurement of standard of living of a nation.

Real GDP/Population

Question 7

What is not included in GDP?

Answer 7

1) Intermediate Goods
2) Nonproduction Transactions
3) Non market and Illegal activities

Question 8

Intermediate goods

Answer 8

Goods inside the final goods don’t count.

Ex) price of finished car, not the stock of tires

Question 9

Nonproduction Transactions

Answer 9

Stocks, bonds, real estate

Used goods

Question 10

Non market activities

Answer 10

Items made at home- household production.

Question 11

Factor payments

Answer 11

Labor earns wages land earns rent, etc.

Question 12

Leakages

Answer 12

Use of household income not used for consumption in the GDP

Taxes, savings, Imports (incomes created by one economy to purchase output from another)

Question 13

Fluctuations in GDP

Answer 13

Injections ($ in economy) expenditures by either govt, business or foreign sectors on domestic goods and services.

Question 14

Not considered unemployed (6)

Answer 14

Retired, Disabled, In hospital or jail, stay at home parents, high school and college students, armed forces.

Question 15

Discouraged workers

Answer 15

Want work, look for it, gives up

Question 16

Marginally attached workers

Answer 16

In and out of work force

Question 17

Labor force

Answer 17

Above 16, able and willing to work, sum of employed and unemployed

Question 18

Frictional unemployment

Answer 18

Temporary unemployment (can’t control)

Question 19

Structural unemployment

Answer 19

When jobs disappear because the economy changes
Ex) blockbuster
Normal but if it changes too quickly it creates an economic and political problem.

Question 20

Seasonal unemployment

Answer 20

Lose the jobs during the winter
Ex) lifeguards
Technically part of frictional

Question 21

Cyclical unemployment

Answer 21

Unemployment caused by a recession in the business cycle called “demand deficient unemployment”
Ex) great depression

Question 22

Natural rate of unemployment (nru)

Answer 22

Frictional + structural unemployment = the amount of unemployment when economy is healthy.

Question 23

Actual employment

Answer 23

Natural employment + cyclical unemployment

Question 24

Full employment

Answer 24

Economy is doing great with only frictional and structural unemployment.
Typically 4-5% in US
NO CYCLICAL

Question 25

Criticisms of the unemployment rate

Answer 25

Can misdiagnose the actual unemployment rate

1) Discouraged works not included so rate falls but they are still not working
2) underemployed workers want more hours but can’t get them. U6 rate does count them but is not used by politicians.

Question 26

Consumer Price index

Answer 26

CPI
measures prices of a fixed market basket of 300 goods and services
CPI is always 100 in base year
Market basket updated every 2 years
CPI TENDS TO OVERSTATE INFLATION DUE TO BIAS

Question 27

Substitution Bias (CPI)

Answer 27

Price increase in 1 item leads to the substitution of a lower priced product

Question 28

Quality Bias

Answer 28

Over time technological advances increase the life and usefulness of products
Ex) quality of tires

Question 29

New product bias(CPI)

Answer 29

New products are not introduced into the index until they have become common, so dramatic price decrease with new tech is not reflected

Question 30

Problems with hyper focus

Answer 30

Focuses too much on preventing inflation and slows down the economy
Focuses too much on unemployment and inflates the economy

Question 31

Deflation

Answer 31

Decrease in general prices or a negative inflation

Question 32

Disintlation

Answer 32

When prices are increasing but inflation is down. (PL rising at a slow rate) still have inflation just slow

Question 33

Costs of Inflation

Answer 33

1) shoe-leather cost: people buy more
2) menu cost: changing prices in stores
3) unit of account: makes $ a less reliable source of currency

Question 34

Anticipated Inflation

Answer 34

Is the % increase in the level of prices over a given period that is expected in an economy
GOOD THING (country needs prep)

Question 35

Anticipated Inflation Effects

Answer 35

Banks can charge premium raise interest rates (better for banks)
May he able to avoid or lessen the effects of inflation on real income

Question 36

Fixed Interest Rate

Answer 36

Interest rate that DOESNT change

Question 37

Variable Interest Rate

Answer 37

If market interest rates are high or low the interest rate will adjust with inflation (be careful)

Question 38

Unanticipated inflation hurts…

Answer 38

Creditor, saver, fixed income receiver

Question 39

Unanticipated inflation helps…

Answer 39

Borrower, flexible income earner, payer of fixed amounts (bank loans)

Question 40

Nominal wages

Answer 40

Wages measure by $ instead of purchasing power

FIXED INCOME

Question 41

Real wage

Answer 41

Wage adjusted for inflation (prices fall your richer and vice verca)

Question 42

Real Interest rate

Answer 42

Nominal interest rate adjusted for inflation

Question 43

Nominal interest rates

Answer 43

Normal interest rate lenders charge on your statements

Question 44

Demand Pull Inflation

Answer 44

An overheated economy with excessive spending but same amount of goods (easy to control)

Question 45

Cost push inflation

Answer 45

A negative supply shock increase the costs of production and forced prices to up prices
Supply curve shifts left
Hard to control