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Econ Test 1

What event was a major influence on the development of macroeconomics?
the great depression
A business cycle is?
the periodic fluctuation of economic activity
U.S. business cycles since 1950 have shown
expansions to be longer than recessions
Which organization determines the beginning and end dates of a recession?
the National Bureau of Economic Research
The idea that all income ultimately goes to households, which then use it to buy goods and services from firms, is a central idea of the
circular flow diagram
GDP can be found either by adding up all of the __________ or all of the __________ in the economy.
spending; income
The U.S. gross domestic product is equal to the total market value of all
final goods and services produced by resources in the United States
The largest component of GDP is
consumption expenditure
GDP Expenditures for 2010
Expenditure
Billions
Personal consumption
$10,353.5
Gross private domestic investment
1,769.1
Exports
1,746.1
Imports
2,251.5
Government purchases
2,975.1
Capital consumption allowance
1,030.2
$14,592.3 billion
The value of the cars that the Ford Motor Company produces in a German plant
is a part of U.S. GNP
The U.S. median household income in 2013 was about
$55,000
The twin evils of the modern macroeconomy are said to be
inflation and unemployment
Which one of the following would NOT lead to higher prices?
increases in the supply of food
Arlina got a 5% raise while the rate of inflation was 6%. Arlina’s standard of living
fell by about 1%
_____ is a reduction in the rate of inflation.
disinflation
If nominal GDP in 2014 is $20,000 billion while real GDP is $16,000 billion, then the GDP deflator in 2014 is
125
Core inflation is found by removing _________ from the consumer price index.
food and energy
If the current year’s consumer price index is 214 and last year’s was 209, then the rate of inflation is
2.4%
If your salary was $50,000 last year and this year you receive a cost-of-living increase tied to the consumer price index (CPI), what will your salary be, assuming the CPI has risen from 110 to 114?
$51,818
Which of the following persons is considered to be unemployed
Tiffany, who is going on interviews, hoping to get her first job
Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as
discouraged workers
If a product becomes obsolete and the workers who produced that product will need additional training to find new jobs, then they are experiencing
structural unemployment
Full employment:
occurs if cyclical unemployment is zero
If actual unemployment is at its natural rate:
inflation is very low
If an economy’s GDP will double in 25 years, then its growth rate must be about
2.8%
If a country’s population increases at a higher rate than the growth in its real GDP
the standard of living in the country has declined
If the Bureau of Economic Analysis reports that the annualized U.S. growth rate was 2.5% for the second quarter, then the actual growth rate from the first quarter to the second quarter was
0.625%
The ability to use physical resources in creative ways to produce goods and services is known as
entrepreneurial ability, technology, and ideas
According to Joseph Schumpeter, what is the driving force behind business cycles?
waves of innovations
Developed nations tend to have
limited labor supplies but lots of capital
What is the primary explanation for the rapid growth of the U.S. economy over the last century?
technological progress
Over the past century, when worker productivity rose:
real wages rose
Developing countries can achieve higher productivity per unit of capital because they can use technologies developed by other countries. This is known as the:
catch-up effect
The government decides to subsidize the development of a new communications network. It is acting in its role to promote economic growth by
enhancing physical and human capital
Which of the following factors is NOT generally viewed by economists as critical to economic growth?
access to large amounts of natural resources
The relationship between economic freedom and per capita GDP is:
positive
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.
disposable income; consumption
If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?
0.6
In the Keynesian model, the principal determinant of saving is:
income
_____ is the change in consumption associated with a change in income.
The marginal propensity to consume
If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?
$900
The slope of the saving schedule is:
1 minus the marginal propensity to consume
After the acceptance of Keynesian analysis, government:
actions toward macroeconomic policy grew significantly
The 45-degree line in the Keynesian model represents
AE = Y
If AE = $7,600 and Y = $8,000, businesses will produce
less, lowering both employment and income
If the marginal propensity to consume is 0.85, how much is the spending multiplier?
6.67
If $1,000 of additional spending occurs (from investment, say) and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.
$5,000
If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income
decreases by $10 billion
Which of the following illustrates the paradox of thrift?
Consumer uncertainty causes people to save more; consumption drops; equilibrium income and production drop; savings drop because income is lower.
Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is:
$0.1 trillion
Components of spending in GDP
-consumption
-investment spending
-government spending
-net exports (exports-imports)
stabilization policy as compared to economic growth
stabilization policy: how can we make the GDP line smoother
economic growth: how can we make the GDP line steeper over the course
phases of business cycle
the peak, recession(contraction),
Circular flow diagram
business+ households
Current value of US GDP
17 trillion
What is inflation?
generalized in price increase
what causes inflation?
demand side factors(people have money to spend)
supply side factors(higher costs of production)
government factors(controlling the money supply)
why is inflation a bad thing?
interferes with the communicative ability of the price
deflation
general decrease in price
disinflation
decreasing rate of inflation
hyperinflation
inflation over 100%
who benefits from unexpected inflation?
borrower’s
what is economic growth?
-a sustained rise in the standard of living
-an increase in real GDP per capita
-an economy producing make of many different types of goods
*Did not exist in the past but sustained to our living today
How does economic growth occur?
1. acquiring more resources
2. finding ways to make better use of resources we have
total factor productivity
tied to entrepreneurship
the increase in output no explained by the increase in inputs
rule of 70
the number of years for a value to double =70/annual percentage increase
catch up effect
It’s easier for relatively poor countries to grow more quickly why?
1.diminishing marginal returns to capital
2.poor countries can free ride on others innovation
The role of government in promotion economic growth
infrastructure
subsidize education
subsidize scientific research
provide a good legal system-> contracts property rights stable financial system
competitive market
economic freedom
Thomas Malthus’ predictions
that short-term gains in living standards would inevitably be undermined as human population growth outstripped food production, and thereby drive living standards back toward subsistence
keynes’ motivation for using this framework known as the keynesian cross
shows that an economy will reach an equilibrium level of income, but it may not be the full employment level of income.
aggregate expenditure line
embodies the key Keynesian principle of effective demand, shows the relation between aggregate expenditures and the actual level of aggregate income or production in the domestic economy.
MPC,MPS,APC,APS
MPC-Marginal propensity to consume
MPS-Marginal propensity to save
APC-Average propensity to consume
APS-Average propensity to save
Multiplier
a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.
Balanced-budget multiplier
The balanced-budget multiplier measures the change in aggregate production triggered by an autonomous change in government taxes.
Paradox of thrift
It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Renowned economist John Maynard Keynes.
GDP Gap
difference between actual GDP and full employment
Inflationary gap
the cut in government spending needed to decrease GDP to its full employment level
Recessionary gap
the amount of government spending needed to increase GDP to its full-employment level

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