Economics Exam 2

What is the Rule of 70? If given numbers, can you figure out the answer?

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* **70/growth rate - > tells you how many years till your GDP will double**
* **Growth rate = 3% - > 70/3=20.33 years for our GDP to double**

Describe inflation and what are 2 main types of inflation?

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*  **inflation is an increase in the general price level of goods and services in an economy.**
* **Demand-pull inflation.**
* **Cost-push inflation.**
* **Built-in inflation.**

What is the business cycle and what are the phases?

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* **The business cycle refers to the increases and decreases in economic activity** 

**caused by factors like interest rates, trade, production costs and investments.** 

* **The four fundamental stages of the business cycle are expansion, peak,** \n **contraction and trough.**

What are characteristics of each of the different business cycle phases?

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* **They feature identifiable phases such as expansion, peak, contraction, depression,** \n **and trough, albeit they do not show the same regularity.** \n **Cycle duration varies greatly, from a minimum of two years to a maximum of 10** \n **to twelve years.**

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How do you calculate unemployment?

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* **Unemployment Rate = Unemployed People / Labor Force * 100**

What are the 3 types of unemployment we talked about? Can you give examples of each one?

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* __***Frictional***__ **-  People who leave their current job to find a better one. People who are** \n **entering the workforce for the first time. People who are reentering the workforce.** \n \n
* __***Structural***__ **- Whose job skills do not match the economy's needs.** \n **Structural unemployment is defined as unemployment in an economy caused** \n **by changes in job needs following a mismatch of the skills needed between the** \n **available jobs and the unemployed.**

**Ex: employees who produce a specialty clothing product that suddenly is no** \n **longer a trend might lose their position producing this specific product** \n \n

* __***Cyclical***__ **- when construction workers were laid off during the Great Recession** \n **following the financial crisis of 2008. With the housing market struggling,** \n **construction of new homes fell dramatically, leading to a rise in cyclical** \n **unemployment for construction workers.**

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What is GDP

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* **GDP measures the monetary value of final goods and services—that is,** \n **those that are bought by the final user—produced in a country in a given** \n **period of time (say a quarter or a year). It counts all of the output generated** \n **within the borders of a country.**

What are the components of the expenditure model for GDP

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* **GDP = Consumption + private investment +Gov. Spending + net exports**

What is included in each part of the expenditure model for GDP?

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* **The expenditure approach to calculating gross domestic product (GDP) takes into** \n **account the sum of all final goods and services purchased in an economy over** \n **a set period of time.** 
* **That includes all consumer spending, government spending, business investment** \n **spending, and net exports.**

In general, what is included and not included in GDP. Can you give examples?

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* **New and FINAL goods-included NOT included-used goods and transfer payments** \n **(transfer payments = not included in GDP ex. Grandma getting social security check,** \n **but if she uses it/ buys with it then it is included)**

How do we show economic growth on the Production Possibilities Curve?

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* **Rightward shift down**

What is inflation and how do you calculate it?

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* **Formula: ((Price in year 2 - price in year 1) / price in year 1) *100**

What is the CPI?

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* **Consumer Price index:**
* **Measures a basket of goods that do not change year to year to see how** \n **the same basket changes**
* **Measure of consumer inflation**
* **Formula: (Basket in current year divided by base year basket) *100**

What is Okun’s Law?

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* **2 to 1 ratio between unemployment and GDP growth/ shrink**
* **Natural rate is 5%, current unemployment is 6% > GDP will decrease by 2%**

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Describe what a GDP Gap is.

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* **the difference between the actual gross domestic product (GDP) and the** \n **potential GDP of an economy as represented by the long-term trend.**

What is our natural rate of unemployment? 

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* **the rate of unemployment that is compatible with a steady inflation rate.** 

What type of unemployment occurs when we are ABOVE the natural rate compared 

to when we are at or below our natural rate?

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* **The natural unemployment rate represents labour movement into and out** \n **of employment for voluntary and non-voluntary reasons.**
*  **Any unemployment** \n **that isn't considered natural is called cyclical unemployment.**

What relationship do unemployment and inflation have?

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* **Inverse relationship - > as one goes up the other goes down**

What do we mean when we refer to “investment”

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* **the production of goods that will be used to produce other goods.** \n \n
*  **the purchase of machinery, tools, etc. that can be used to produce goods and** \n **services in the future.**

Can you calculate GDP growth as a percent from one year to the next?

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*  **Real GDP growth rate = (most recent years real GDP - the last years real GDP) / the previous years real GDP**

Nominal vs. Real GDP

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* **Nominal GDP is the total value of all goods and services produced in a given time** \n **period, usually quarterly or annually.** 
* **Real GDP is nominal GDP adjusted for inflation.**
* **Real GDP is used to measure the actual growth of production without any** 
* **distorting effects from inflation.**

Why are strong property rights essential for economic growth?

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* **They give confidence to individuals and businesses to invest in land, allow** \n **private companies to borrow – using land as a collateral – to expand job** \n **opportunities, and enable governments to collect property taxes, which are** \n **necessary to finance the provision of infrastructure and services to citizens.**

Two primary concerns of Macroeconomics are

**Changes** in output and **Unemployment** and

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long run **Inflation**

How do you avoid double counting when measuring GDP?

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* **GDP is based on the “value added” principle and, therefore, leaves out the value** \n **of goods and services which are used in the production of other products.**

What are “Sticky Prices” and how do they affect the business cycle?

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* **Prices that are slow to adjust to changes in the business cycle and thus GDP**

How is GDP understated?

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*  **The improvement in quality is significantly under-measured so that output is** \n **understated and inflation overstated.**

How can the unemployment rate be understated?

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* **Unemployment may be overstated due to people waiting to take jobs even though** \n **jobs available.** 

**Unemployment may be understated due to discouraged workers, marginally** \n **attached workers and the underemployed.**

What are ways we have become more productive over the last 100 years?

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* **Technological advances.**
* **Improved worker skills.**
* **Improved management practices.**
* **Economies of scale in production.**
* **Increases in the amount of non-labor inputs used.**

Durable vs. Nondurable goods and how consumption is affected when we are in a recession?

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* **Durable goods last (ex. washing machine)**
* **Nondurable goods are short life span (ex. milk, gas, electricity)**
* **In a recession, durable good consumption is hurt more than nondurable goods**

What is the deal with real income when you have increases in nominal income and inflations

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* **If the price index remains constant, the real income will increase with an increase** \n **in nominal income. However, if the price index rises more than the nominal income,** \n **the real income will decrease despite increasing nominal income.** \n \n

both rising at different levels?

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* **If you have increases in inflation and nominal wage your real income will**
* **Increase in wage growth > inflation**
* **Decrease if inflation > wage growth**
* **Real = (nominal - inflation)**

What are demand and supply shocks and can you give examples?

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* **A demand shock is a sudden unexpected event that dramatically increases or** \n **decreases demand for a product or service, usually temporarily.** 
* **A positive demand shock is a sudden increase in demand, while a negative** \n **demand shock is a decrease in demand.**


* **A supply shock is an unexpected event that changes the supply of a product or** \n **commodity, resulting in a sudden change in price.** 
* **A positive supply shock increases output, causing prices to decrease, while a** \n **negative supply shock decreases output, causing prices to increase.** \n \n
* **EX: the imposition of an embargo on trade in oil would cause an adverse supply** \n **shock, since oil is a key factor of production for a wide variety of goods.** \n **A supply shock can cause stagflation due to a combination of rising prices and** \n **falling output.**

Under what type of prices (sticky or flexible) would a firm hold inventory if there was a demand Shock?

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* **Sticky**
* **Inventory levels will tend to stay fairly constant if the unexpected increases and** \n **decreases in demand are roughly the same magnitude**

What is the leader/follower theory?

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*  **social interaction that occurs between leaders and followers as they fulfil** \n **(and occasionally alternate in) these roles.**

What is a price index?

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* **a weighted average of the prices of a selected basket of goods and services** \n **relative to their prices in some base-year.**

How is economic growth best defined or shown? What stat tells up the best way to see economic Growth?

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* **GDP per capita (tells how big your pizza SLICE is)**

Why do improvements in quality understate GDP growth?

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* **Does Not take into account quality improvements**
* **quality understate GDP growth**

If GDP in year one was 150 billion and 175 in year two, what was the growth rate?

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* **(175-150)/150*100 - > gives you the growth rate**

During the Great Recession who was hit the hardest by unemployment?

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* **White male unemployment**

How do unemployment rates for males differ from females?

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* **Generally Female have higher unemployment than males**
* **Generally white males have lowest unemployment**

Durable goods vs. non-durable goods in production/consumption and the business cycle.

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* **Durable goods provide a stream of services or utility over time. In contrast,** \n **non-durable goods and services tend to be consumed immediately. In the case** \n **of consumers, examples of durable goods are motor vehicles and household** \n **furnishings; examples of non-durable goods and services include food and** \n **transport services.**

intermediate goods vs final goods.

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* **Final goods are referred to as those goods which do not require further processing.**
* **These goods are also known as consumer goods and are produced for the purpose of direct consumption by the end consumer.** 
* **Intermediate goods are referred to as those goods that are used by businesses in producing goods or services.**

Unemployed 9

Total Population 175

Employed 105

Discouraged Workers 5

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The table contains information about the hypothetical economy of Norwood. All figures are in

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millions. If the natural rate of unemployment in Norwood is 5 percent, then

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Find the unemployment rate.

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* **find labor force (employed and unemployed)**
* **Unemployed divided by labor force**
* **Labor force = unemployed + employed - > 9+105=114**
* **(9/114( *100 = 7.89%**

Compared to the natural rate of unemployment is their cyclical unemployment?

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* **Yes, because it is above 5% (cyclical = anything above natural rate - 5%)**
* **2.89% is cyclical unemployment  7.89% - 5% = 2.89%**