Macroeconomics test 1

What is the definition of economics?

The study of the allocation of scarce resources to meet objectives.

What do economists do and what are their tools?

Study how society uses its scarce resources, gathering and analyzing data to research production, consumption, and market trends. They use data, models, and policy.

What is the difference between a positive and normative statement?

Positive statements are objective claims based on facts and data that can be tested, while normative statements are subjective opinions based on value judgments and what ought to be.

What is macroeconomics?

The study of economy wide phenomenon/events, including inflation, the labor market, and economic growth.

What is microeconomics?

The study of how individuals, households/firms, make decisions and interact in markets.

What are the “Three Pillars of Macroeconomics”?

Overall economic activity, the labor market, and inflation.

What are the primary measures for each of the Three Pillars?

Real GDP growth, Unemployment rate, and consumer price index.

Why does the economy typically face a tradeoff between efficiency and equality?

The true cost of something is what you give up to get it (opportunity cost).

What is the definition of opportunity cost?

The value of the next-best alternative you give up when making a choice.

How should rational people make decisions?

By thinking on the margin, making small incremental changes to a plan.

What is a marginal change and marginal analysis?

Marginal change is a small, incremental adjustment to an existing plan of action, while marginal analysis is the decision-making process of comparing the additional benefits and additional costs of that change.

As economist, what do we believe people respond to?

Incentives

Why do economist believe that trade can make everyone better off?

Specialization and comparative advantage causes cheaper goods and services.

What is meant by “organize economic activity”?

What goods and services to produce, how to produce them, how much to produce, and who gets them.

What concept did Adam Smith outline in his book The Wealth of Nations?

The foundational concepts of modern economics, including the division of labor, the invisible hand, and free-market capitalism

What are important roles of the government?

Improving market outcomes and property rights.

Do market forces guarantee eqality?

No

What is productivity and what does it determine for a country?

The quantity of goods and services produced from one unit of labor.

What influences a country’s productivity?

Equipment, skills, and innovation/technological advancement.

What is inflation and what determines inflation in the long run?

The overall rise in prices, it increases in the long run by design when the government prints to much money.

What is the Federal Reserve and what they responsible for?

The central bank of America, they conduct the nations monetary policy.

What is the short-run economic tradeoff faced by society (and the Fed)?

Theres a tradeoff between inflation and unemployment.

What does the Circular Flow diagram represent?

A visual economic model that shows how money, goods, services, and resources move continuously between households, businesses, and markets.

What are the factors of production in an economy?

Land, labor, capital, and entrepreneurship.

What are factor payments?

The income or compensation paid to owners of the factors of production in return for their productive services.

What role do households play in an economy?

What role do firms play in an economy?

The primary engines of production, turning raw resources and labor into the goods and services consumers need.

What are two ways to measure GDP?

The total expenditures on U.S. goods and services and the total income paid by firms in the U.S.

What is the definition of GDP?

The market value of all final goods and services produced in a country in a given period of time.

What is not included in GDP?

Production not traded in a legal market, intermediate goods, transfers of previously produced goods.

How is housing accounted for in GDP?

Rent is included in consumption but new houses are an investment.

Why do we not include intermediate goods production in GDP?

Because they are not final goods.

Why do we not include secondary markets when calculating GDP?

They would have already been accounted in a previous years GDP.

What is the current size of the U.S. economy?

$32.49 Trillion

What are the four components of GDP?

Consumption, Investment, government spending, and net exports.

What is included in the investment portion of GDP?

Business fixed investments, residential fixed investments, inventory investments.

What is included in the government spending portion of GDP?

Spending on goods and services by local, state, and federal governments.

What are net exports?

Exports - Imports

What are exports and imports?

Exports are purchases of the U.S. goods and services by foreigners and imports are purchases of foreign goods and services by U.S.

What is the differnce between real and nominal GDP?

Real GDP is the production of goods and services at constant prices, and nominal GDP is the production of goods and services at current prices.

What does real GDP correct for?

Inflation

How do you calculate nominal GDP and real GDP given prices and quantities across time?

Compute real GDP using a base year, percent change for growth= (new - old)/old (100)

What is the GDP deflator and what does it measure?

Measures aggregate price level in U.S. economy. Nominal GDP/Real GDP (100) = GDP Deflator

What does GDP not measure in terms of economic well-being?

Environmental quality, leisure time, non market activities, and income/wealth distribution

Why is GDP our best measure for standard of living?

It indicates the ability to produce/purchase things we care about: education, cleaner environment, healthcare, and infrastructure.

What is inflation?

The general increase in the prices of goods and services across an economy over time.

What is CPI?

A measure of goods and services bought by households.

Who measures CPI?

The bureau of labor statistics.

How is CPI calculated?

CPI in period t= ((cost of basket in period t)/ (cost of basket in base period)) x 100

How is inflation calculated?

((CPI new - CPI old)/(CPI old)) x 100

How is the producer price index different than the CPI?

Its a measure of the goods and services bought by firms.

What are the problems with the CPI?

It has a substitution bias, doesn’t account for the introduction of new goods, and there are unmeasured changed in quality.

Does CPI tend to overstate or understate inflation? By how much?

Overstate by 0.5-1 percentage point

What are the main differences between CPI and the GDP deflator?

CPI includes imported goods, GDP includes government purchased and capital goods, and CPI uses fixed weight and GDP deflator used change based on production.

Why can we not directly compare dollar figures from across time?

The worth of a dollar changes overtime.

What is the formula for converting dollar figures across time?

amount in year t dollars x ((price level today)/(price level year t))

What is the difference between nominal interest rate and the real interest rate?

the nominal interest rate is the unadjusted, stated rate on a loan or savings account, while the real interest rate adjusts that number to account for inflation.

What is the equation to calculate the real interest rate?

nominal interest rate - inflation