GDP is not a perfect measure of well-being; for example,
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GDP excludes the value of volunteer work, GDP does not address the distribution of income, and GDP does not address environmental quality.
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In the economy of Talikastan in 2015, consumption was $1000, GDP was $1950, government purchases were $500, and investment was $700. What were Tajikistan's net exports in 2015?
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-$250
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Beth, an American citizen, travels to Italy on vacation and buys an espresso machine to bring home. Her purchase increases
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Italy's GDP
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The following table shows some values of the Consumer Price Index and the corresponding inflation rates for 2012-2015. The inflation rate in 2013 was approximately
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1.5%
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Economists use the term inflation to describe a situation in which
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The economy's overall price level is rising
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The table below shows the prices of baseballs and baseball bats for three years. Assume the typical consumer's basket consists of 6 baseballs and 2 baseball bats. If 2008 is the base year, then the consumer price index was
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100.00 in 2008, 110.03 in 2009, and 129.20 in 2010
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With respect to the consumer price index, the substitution bias arises because
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Prices of goods and services do not change in the same proportion from year to year
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In order to promote growth in living standards, policymakers must
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Courage the accumulation of factors of production, maintain political stability, and protect property rights.
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Other things equal, relatively poor countries tend to grow
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Faster than relatively rich countries, this is called the catch up effect
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The one variable that stands out as the most significant explanation of large variations in living standards around the world is
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Productivity
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Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?
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The company should construct the new facility because the present value of the future playoff is $1,043,652.53
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A risk-averse person has
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A utility function whose slope gets flatter as wealth rises. This means they have diminishing marginal utility of wealth
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Which of the following actions best illustrates moral hazard?
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A person purchasing homeowners insurance and then checks his smoke detectors batteries less frequently
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Which of the following is adverse selection?
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High-risk person being more likely to apply for insurance
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Efficiency wages
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Increase productivity but increase unemployment
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In June 2009 the Bureau of Labor Statistics reported an adult population of 234.9 million, a labor force of 154 million and employment of 141.6 million. Based on these numbers the unemployment rate was
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12.4/154
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Some individuals would like to have a job, but they have given up looking for a job after an unsuccessful search. These individuals are called
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Discouraged workers, and they are not classified by the bureau of labor statistics as unemployed
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Which of the following policies can the Fed follow to increase the money supply?
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Reduce the interest rate on reserves
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An open-market purchase
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Increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public
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If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier
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Decreases from 20 to 8
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If M = 2,000, P = 2.25, and Y= 6,000, what is velocity?
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6.75
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The Fisher effect
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Says there is a one for adjustment of the nominal interest rate to the inflation rate
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Other things the same, as the price level rises,
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People feel less wealthy
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The aggregate supply curve is upward sloping in
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The short run, but not the long run
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In which case can we be sure aggregate demand shifts left overall?
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People want to save more for retirement and the fed decreases the money supply
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GDP (gross domestic product) is the
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MARKET VALUE of all final goods and services provided within a country in a given period of time
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FINAL GDP
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these are good are that are completed, where intermediate goods are the goods that are used to produce the final goods
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Goods are all valued at their
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market price and they are all measured in the same units
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GDP is an important __________ ___________ but not a
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economic measure, perfect measure of well-being
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GDP doesnt measure
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environment quality, leisure time, child care-time, etc.
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NOMINAL GDP
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values are outputted using current prices and NOT corrected for inflation
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REAL GDP
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values are output using the prices of the base year and IS corrected for inflation
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What is CPI
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an index that shows the general price level of the average consumer basket (not necessarily accurate)
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Calculating CPI
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1. Fix the Basket
2. Find the prices
3. Compute the basket's cost
4. Chose a base year and
5. Compute the inflation rate
Inflation rate in year 2=(CPI in year 2-CPI in year 1/CPI in year 1)x100
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Calculating inflation rate from CPI
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(CPI this year- CPI last year)/CPI last year
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Problems with the CPI
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Substitution Bias, Introduction of New Goods and Change in Quality
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A country's standard of living depends on
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productivity
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the most important variable when calculating the country's standard of living is
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productivity
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the country's standard of living depends on the ability to
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produce goods and services
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Productivity =
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Y/L
Y= real GDP
L = quantity of labor
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Determinants of productivity
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physical capital, physical capital per worker, human capital, human capital per worker, natural resources natural resources per worker, technological knowledge
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The catch up effect is when
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the poor countries try to catch up to the richer countries
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Because of diminishing returns to captail, growth from investment will _____ ______ so that poor countries can "catch up" and that is the catch up effect
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slow down
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How is unemployment measured
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employed, unemployed, not in labor force
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3 reasons for Structural Unemployment
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minimum-wage laws, unions, efficiency wages
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Inflation drives up _______ and drives down the value of __________
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prices, money
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Increasing money supply causes
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P to rise
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Fisher effect equation
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Real interest rate = Nominal interest rate - Inflation rate
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Change in P
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moves along the AD curve
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Change in C, I, G or NX will
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shift the AD curve
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The AS curve is ____ in the long run
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vertical
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The AS curve is ______ in the short run
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upward-sloping
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Components of GDP
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Y=C+I+G+NX
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