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Macroeconomics > Unit 2 Exam > Flashcards

Unit 2 Exam Flashcards

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1
Q

GDP equation and definition

A 
C + I + G + Xn(Exports - imports)
C = Consumption
I = Investments
G = Government Expenditures
X = Exports minus Imports
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2
Q

Why do we need to measure and understand GDP?

A

GDP is a measurement that indicates the health of your economy.

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3
Q

What is excluded from GDP?

A

1.)intermediate goods - an intermediate good has not yet reached its final user, but rather is an input in the production of another good.
Ex: When krispy kreme buys flour for their donuts it doesnt count for GDP until they sell the donut to the customer purchases the donuts because only then is it in its final stage.
2.)used goods - used goods were included in GDP when they were first produced, they are not included in GDP when they are exchanged as used goods, because no new production takes place.
3.) Financial transactions - money gifts, loans, and purchases of stocks and bonds are examples of financial transactions where money changes hands but no new production takes place.
4.)Government transfer payments - Transfer payments are transfers of income from the gov’t to households or businesses, not in exchange for goods, services, or resources. No new production takes place.
5.)nonmarket production - in non market production new production is taking place but this is no market transaction to reveal an objective market value for the production.
Ex: do it yourself jobs
6.) underground production - this is unreported production. Production may be unreported because it is illegal (ex: the output of a meth lab) or because the producer is evading taxation. ( ex: unreported cash income)
Ex: drugs, gambling, prostitution, lawn service, maid service.

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4
Q

Three macroeconomic goals for society?

A
  1. ) price level stability
  2. )full employment
  3. )economic growth
    - A nations success in achieving these goals is measured by its inflation rate, and Real GDP growth rate.
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5
Q

US GDP relates to the rest of the world?

A

The US is a high per capita GDP country but there is a significant variation in the standard of living in the different states.
Consumption is the driver of GDP in America - in China the driver is exports.

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6
Q

Per Capita GDP = GDP/Population

A

When comparing different economies, per capita output numbers may be more informative than total output numbers. (per capita means per person)

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7
Q

What is consumption?

A

Household consumption of goods and services is the largest component of GDP. In 2010, consumption made up about 70% of GDP
Ex: groceries, hair, nails, boats, etc.
Consumption is the using up of a resource

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8
Q

What is investment? 3 things.

A

Investment is the acquisition of new physical capital

  1. ) new capital goods
  2. ) changes in business inventory
  3. ) new residential housing
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9
Q

What does G stand for? What does it include? What does it exclude? Why?

A

G = Government
- Includes federal, state, and local governments on goods and services. but does not include transfer payments. The market value of government purchases is usually detrmined by the amount of the governments expenditures, since government production is usually not sold in the market place.
Ex: bridges and roads

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10
Q

What is Xn? What are imports and exports?

A

Xn = (Exports - Imports) In America we have more exports so this is a negative number when we calculate GDP.
Exports - Foreign purchases of domestic goods
Imports - Domestic purchases of foreign goods

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11
Q

Nominal GDP, inflation, real GDP?

A

Nominal GDP is GDP.
Inflation is change in price levels
Real GDP - is nominal GDP -(minus) inflation *Real GDP measures true growth.

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12
Q

Why compute real GDP?

A

It measures true economic growth.

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13
Q

GDP, depreciation, Net Domestic Product (NDP)

A

GDP - (minus) depreciation = Net Domestic Product
Net Domestic Product(NDP = GDP less
capital consumption allowance

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14
Q

Why do we want to factor out depreciation?

A

Depreciation allowances - would be paid in taxes but instead you deduct the depreciation from your taxes.
Actual* The tax deductible funds have been set aside to replace worn out or obsolete plant and equipment.
Why??? It makes people want to invest in new.

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15
Q

Define Gross investment and Net Investment

A

Gross investment - It is the total amount we invest in new capital. Net Investment - It is the additional plant and equipment we end up with at the year end.

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16
Q

Why s consumption so important to GDP?

A

It is the driver of GDP in the U.S.

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17
Q

What is Consumption Function?

A

Consumption Function is the curve showing the relationship between disposable income and consumption.
Also - As income rises consumption rises but not as quickly. - If your income keeps rising @ an increasing rate it is hard to spend all that money.

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18
Q

What is saving?

A

Saving is simply not spending.

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19
Q

Define Autonomous consumption and induced consumption.

A

Autonomous consumption - even when disposable income is zero we still have consumption. Ex: toilet paper, food, and bread
Induced Consumption - Consumption that varies with income.

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20
Q

Determinants of the level of consumption.

A

1) disposable income - spend more or less based on income.
2)credit availability - if you don’t have the money you whip out the
plastic and consume.
3)Stock of liquid Assets in Consumers - Things that can be turned
to cash quickly - silver, gold, heirlooms, jewelry…
4) Stock of durable goods - washers, dryers, cars…
5) Keeping up with the Joneses - social determinant - I saw it and
I want it!!
6) Consumer expectations - If price is going to increase then you
will buy it now if its going to decrease then you will wait
***Ebay has increased the ability for many assets to be liquid.

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21
Q

Define Permanent Income Hypothesis

A

It is a theory of consumption that was developed by Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are largely determined by a change in permanent income, rather than a change in temporary income.

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22
Q

Business/ Investment

A

This is the I in the GDP equation. Investment does not react as quickly as consumption.

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23
Q

Define Investment

A

Investment is the acquisition of new physical capital it consists of;
1) new capital goods
2)changes in business inventories
3) new residential housing
EX: any new plant/factory equipment, office buildings, retail/shopping centers, computer software, residential housing, additional inventory.

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24
Q

3 types of businesses

A

proprietership - go into business for yourself
partnership - two or more people
corporation - limited liability, pay corp. income tax can sell stock to raise money

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25
Define stockholders
owners of a corporation
26
bondholders
creditors of a corporation
27
Define corporate capitalization
the process of converting retained earnings into capital by issuing new stock.
28
How do stocks and bonds relate to GDP?
Stocks and bonds not calculated in GDP but give the company money to immediately spend it on whatever they want.
29
Calculating Inventory
Business inventories only matter year to year not month to month.
30
How does savings get invested?
Through retained earnings and depreciation allowances.
31
Corporations investment - define retained earnings and depreciation allowances.
Retained Earnings - portion of the profits that are not paid out to owners. Depreciation Allowances - Would be paid in taxes but instead you deduct the depreciation from your taxes. **Actual - The tax deductible funds that have been set aside to replace wornout or obsolete plant and equipment. $$$ The outcome is that people want to invest in new.
32
Formula for Net Investment??
Gross investment - depreciation = Net Investment
33
Why do firms invest?
1) Their sales outlook is good 2)Their capacity utilization rate is high - meaning large output. If production is @ its highest with lowest amount of resources used. 3) Interest rates are low. 4) Expected rate of profit is high.
34
How has the economic role of government changed?
Economic role of gov't has changed significantly - it has increased in the last 100 years.
35
4 main government economic influences
1) spends trillions 2) levels trillions in taxes 3) redistributes billions 4) regulates
36
4 Economic roles of government
1) Provision of public goods and services. Ex: airports, defense, sewers, and highways 2) Redistribution of wealth - Ex: welfare and health care = money taken away from some and given to others. 3) Stabilization - Ex: low unemployment, stable price, stimulus 4) Economic Regulation - Ex: Child labor laws, environment (environmental protection) competition, and court system.
37
Define aspects of Federal Government Revenue and Spending
1) Great society programs - or entitlement programs, medicare, medicaid, food stamps. 2) We spend as much in defense as the rest of the world combined. 3) Interest on debt is the fastest growing area. $$ US is paying interest on 16 TRILLION!!
38
Defense Spending - what is significant about ours?
We spent as much as the rest of the world combined in defense.
39
State and local government spending?
1) education 2) health and welfare 3) police and fire - growing expense, fast/highly growing.
40
How do transfer payments relate to GDP?
They are transfers of income from the government to households or businesses, not in exchange for goods, services, or resources. Since no new production takes place, transfer payments are excluded from GDP.
41
Direct Taxes - Define and give example
Direct taxes - are taxes with your name on it Ex: personal income tax, social security, and property tax.
42
Define Indirect taxes and give example
Indirect taxes - are taxes not on people but on goods, sales tax, excise tax(such as cigarette tax)
43
Progressive taxes
Progressive taxes impose higher tax rates on higher levels of income - fall on those best able to pay and they provide little to no burden on the poor. Ex: Federal personal income tax.
44
Define Proportional Taxes
Proportional taxes impose the same tax rate on all levels of income - its equal it places equal burden on rich. Middle class, and poor. Ex: Property tax is the best example we have of this and its only because it plays out that way but other than property tax there are none. We pay the same tax on our groceries, beer, and cigarettes as Anjelina Jolie.
45
Regressive Taxes - define
Regressive taxes impose higher tax rates on lower levels of income. Ex: The amount of taxes I pay out equals 30% of my income and Anjelina Jolie pays out 10% of her income in taxes.
46
Define payroll taxes
social security and medicare your employer matches
47
define excise tax
specific goods that are taxed Ex: gas, liquor, cigarettes
48
Sources of state and local revenue? 3.
1) personal income 2) sales tax 3) property tax
49
Personal income, sales tax and property tax.
These are the sources of state and local revenue.
50
What are indirect business taxes? How do they relate to GDP? National Income?
Indirect business taxes are taxes not on people but on goods such as sales tax and excise tax. They affect GDP to the extent that sales taxes increase the demand price above the supply price, GDP is greater than national income.
51
Define imports and exports
Imports - total domestic purchases of foreign goods | Exports - total foreign purchases of domestic goods
52
Basis for international trade
What works for people also works for nations. | *Specialization is better than generalization
53
What do we import?
All kinds of stuff.
54
What do we export?
Historically - Cotton, tobacco, steel, oil, airplanes, agricultural equipment, auto, soy beans. Now - Computer software and entertainment
55
How has our imports and exports changed in recent decades?
1976 - the switch to America being self sufficient and are dependent on imports.
56
Positive balance of trade?
export more than import
57
Negative balance of trade?
Import more than export. | *In America we have a negative balance of trade. Our dependency on exports is huge and growing.
58
What services are we exporting?
Banking, financial accounting, law, inspection, higher education, farm planning and tourism. *We currently have a positive balance on trade where services are concerned.
59
Trade??
It is more efficient, breeds competition and it also allows consumers to have more buying power. This is a far better alternative to shutting out imports and exports as seen in commanding heights.
60
What has happened in the US since 1970?
5 million factory jobs have left the US - auto, steel, clothing - Today nearly 85% of people in labor force are in the service industry.
61
NAFTA
North America Free Trade Agreement | It reduced or eliminated trade barriers with mexico, US, and Canada.
62
US import/export relationship with Mexico and Canada - describe.
US absorbs 80% of Mexico's exports. | Canada trade is still considered the most important.
63
European Union - EU | Some Facts?
400 Million 1992 Economic Union 27 Nations 1999 United Currency
64
GATT
Generally Accepted Trade Tariffs Since 1947 - 150 Nations participate in GATT because they see that it helps incentive and competition in different nations to decrease or remove tariffs.
65
WTO
``` World Trade Organization 1995 - 1) liberalization and trade 2) nondiscrimination - no favored nation 3) no unfair encouragement of exports. ```
66
Define Quota
Limit on the amount of goods imported.
67
Define Tariff
A fee taxed by government on particular goods imported. **Tariffs are barriers on trade - they protect the domestic industry - able to get fewer goods @ higher prices which is inefficient (remember what our little friend from India said) - tariffs also allow domestic industries to not be held as accountable
68
Agriculture
each year they subsidize
69
Sources of federal revenue
1) Personal income tax - 46% of $ Fed gov't earns comes from taxing personal income and 40% of people arent paying. 2) Payroll taxes - social security and medicare your employer matches. 3) corporate income tax - tax on corporate profits of 35% 4) excise tax - specific sales tax - gasoline, liquor, and cigarettes 5) estate tax - death taxes could force you to pay taxes on everything you own.
70
``` Make sure to Know: All 6 goods that aren't included in GDP Consumption Function definition Determinants of consumption. 6 3 macroeconomic goals for society ```
Answers are on other note cards should be able to spout them off easily.
71
Listen to lectures about Agriculture on 10/10 and EU - European Union - check notes for the date on that.
Notes are incomplete and these aren't located in the book.
72
Nominal GDP numbers will change from year to year due to: a. changes in production b. changes in the price level c. both of the above d. neither of the above
c. both of the above
73
Which of the following would directly affect GDP? a. General Motors purchases 2 million car batteries from battery suppliers b. General Motors purchases 8 million car tires from tire suppliers c. General Motors builds a new factory for manufacturing cars d. All of the above
c. General Motors builds a new factory for manufacturing cars
74
Which of the following would directly affect GDP? a. floodwaters damage a bridge b. the government spends money to repair the damaged bridge c. both of the above d. neither of the above
d. neither of the above
75
Which of the following would directly affect GDP? a. Homer receives an unemployment compensation check b. Homer borrows $300 from Moe c. Homer gives Marge $100 as a birthday present d. None of the above
d. neither of the above
76
For GDP purposes, which of the following would be investment spending? a. Moe buys a used jukebox for his bar b. Moe increases his bar's inventory of Duff beer c. Moe purchases 100 shares of Burns Corporation common stock d. All of the above
b. Moe increases his bar's inventory of Duff beer
77
Which of the following statements is true? a. exports are added to GDP b. imports are added to GDP c. net exports is the largest component of GDP d. all of the above e. $14,786 billion
a. exports are added to GDP
78
Comparisons of GDP between developed countries and less developed countries will tend to overstate the difference in standard of living because: a. GDP does not include non market production b. GDP does not include differences in leisure time c. Both of the above d. Neither of the above
a. GDP does not include non market production
79
As a measure of standard of living, GDP contains a number of flaws, including: a. GDP does not include underground production b. GDP does not adjust for economic bads c. Both of the above d. Neither of the above
c. Both of the above
80
Define GDP
The market value of all final goods and services produced annually.
81
Name 4 things excluded from GDP and why.
1) intermediate goods - it has not reached its final use but is an input in the production of another good. 2) used goods - No new production has taken place and its already been counted for 3) financial transactions - money, gifts, loans, stocks and bonds purchases. Money changes hands but no new production takes place, therefore, it is excluded from GDP. 4) underground production - drugs, gambling, prostitution, lawn service, maid service.... Does not get included in GDP possibly because production is illegal or because the producer is evading taxation.
82
Gross __________ __________ is the market value of all final goods and services produced annually.
domestic product
83
A(n) ___________ good is an input in the production of another good.
intermediate good
84
___________ ____________ are transfers of income from government to households or businesses, not in exchange for goods, services, or resources.
Transfer payments
85
___________ is the acquisition of new physical capital.
Investment
86
_____________ is total foreign purchases of domestic goods.
exports
87
__________ is total domestic purchases of foreign goods.
imports
88
__________ GDP is GDP adjusted for changes in the price level.
Real
89
Absolute __________ ___________ refers to an increase in Real GDP.
economic growth
90
which of the following would directly affect GDP? a. a refinery buys crude oil b. a refinery takes out a large loan from a bank c. a refinery emits pollution into the air d. none of the above
d. none of the above
91
For GDP purposes, which of the following would be investment spending? a. Warren buys 100 shares of common stock for $60,000 b. Charlie buys a used lawn mower for his lawn service business c. Lynda buys a new display case for her jewelry store d. All of the above
c. Lynda buys a new display case for her jewelry store
92
Which of the following would directly affect GDP? a. Aunt Lucille receives her Social Security check b. Aunt Lucille spends all day Saturday cleaning her house c. Aunt Lucille's house is destroyed by a tornado d. None of the above
d. None of the above
93
Which of the following statements if false? a. investment does not include new residential housing b. consumption is the largest component of GDP c. government purchases does not include transfer payments d. net exports equals exports minus imports
a. investment does not include new residential housing
94
When total output is measured as the sum of all payments to resource owners, the result is: a. gross domestic product b. national income c. gross national product d. gross resource product
b. national income
95
Nominal GDP may increase: a. if there is an increase in the price level b. if there is an increase in production c. even if Real GDP decreases d. All of the above
d. all of the above
96
The phase of the business cycle when Real GDP is increasing is called: a. Trough b. Peak c. Expansion d. Contraction
c. expansion
97
Comparisons of GDP between developed countries and less developed countries will tend to overstate the difference in standard of living because. a. GDP does not include nonmarket production b. nonmarket production is typically a larger share of total output in developed countries than in less developed countries c. both of the above d. none of the above
a. GDP does not include nonmarket production
98
In which of the following years was the inflation rate the highest? a. 1933 b. 1975 c. 1980 d. 2005
c. 1980
99
In which of the following years was unemployment rate the lowest? a. 1930 b. 1967 c. 1973 d. 2006
b. 1975
100
In which of the following years was the Real GDP growth rate the highest? a. 1966 b. 1973 c. 1984 d. 2004
c. 1984
101
Explain what an intermediate good is nd why intermediate goods are excluded from GDP.
An intermediate good has not yet reached its final user, but rather is an input in the production of another good. If intermediate goods were included in GDP, they would overstate GDP by double counting.
102
Explain what non production transactions are and list three examples.
``` Non production transactions are transactions that do not directly result in production. Examples Include: 1) Used goods 2) Financial transactions 3) Transfer payments ```
103
List the four types of spending making up Total Expenditures.
Total Expenditures consist of four types of spending: 1) consumption 2) investment 3) government purchases 4) net exports
104
Explain why it is necessary to compute Real GDP in order to get a fair comparison of GDP numbers from different years.
Nominal GDP numbers may change from one year to the next either because production has changed, or because of a change in the price level. If GDP numbers from different years are to be fairly compared, and adjustment must be made for changes in the price level. Nominal GDP must be adjusted to Real GDP.
105
List four flaws in GDP as a measure of standard of living.
As a measure of standard of living, GDP contains a number of flaws, including: 1) GDP does not include non market production 2) GDP does not include underground (unreported) production 3) GDP does not include differences in leisure time 4) GDP does not adjust for economic bads
106
A _________ tax imposes the same tax rate on all levels of income.
proportional
107
A ________ tax imposes higher tax rates on higher levels of income.
progressive
108
A ________ tax imposes higher tax rates on lower levels of income.
regressive
109
A budget ___________ occurs when government expenditures are greater than tax revenues.
deficit
110
The _________ debt is the total amount the federal government owes its creditors.
national
111
Which type of tax causes the distribution of income to be unchanged? a. proportional b. progressive c. regressive
a. proportional
112
Which of the following taxes is regressive? a. sales tax b. property tax c. lottery tax d. all of the above
d. all of the above
113
The federal personal income tax: a. is the largest source of federal tax revenue b. is a progressive tax c. may hurt productivity d. all of the above
d. all of the above
114
The social security tax: a. is the largest source of federal tax revenue b. is a progressive tax c. is partially hidden from taxpayers d. all of the above
c. is partially hidden from tax payers
115
The corporate income tax: a. is the largest source of federal tax revenue b. is a progressive tax c. has no effect on consumers d. none of the above
d. none of the above
116
The social security system: a. encorages retirement b. redistributes income from groups with a shorter average life expectancy to groups with a longer average life expectancy c. both of the above d. neither of the above
c. both of the above
117
To minmize the deadweight loss, a tax should: a be narrowly-based, so as to affect only in few goods b. have low rates, so as to minimize the affect on private market decisions c. both of the above d. neither of the above
b. have low rates, so as to minimize the effect on private market decisions
118
The federal personal income tax: a. is extremely complicated b. imposes a large deadweight loss c. has little effect on decisions made in private markets d. both a. and b. above
d. both a. and b. above
119
Making the federal personal income tax less progressive: a. would increase the size of the deadweight loss b. would help in achieving the goal of equalizing the distribution of income c. both of the aboe d. neither of them above.
d. neither of the above
120
Of which of the following is the largest federal spending program. a. Interest on the National Debt b. National Defense c. Social Security d. Medicare
c. social security
121
The federal personal income tax: a. was authorized in 1863 by the Thirteenth Amendment b. initially had a top marginal tax rate of 20% c. has much higher tax rates today than it initially had d. All of the above
c. has much higher tax rates today than it initially did.
122
What is a progressive tax and how does a progressive tax affect the distribution of income?
A progressive tax impses higher tax rates on higher levels of income. A progressive tax changes the distribution of income by making it more equal.

Macroeconomics (2 decks)

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