Economics Exam 2

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

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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

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%