The nominal rate of interest is defined as _________________.
The real rate of interest plus inflation rate.
The concept of the total value of all final goods and services produced by U.S. firms regardless of their locations is called _________.
GNP (Gross National Product)
Which of the following items would not be included in the counting of a country's GDP?
An automobile tire on a new car.
All of the following would be excluded from GDP except ___________.
The production of this software package
The allocation approach to measuring Gross Domestic Product would include accounting for all of the following except _____________.
Investment
The price index used to deflate nominal GDP is called ________________.
GDP deflator
If the price of a basket was $19 in 1980, and the same basket of goods was $57 in 1991, the price indexes for 1980 and 1991 would be ____________.
100 and 300
Formula:
Exp. for base yr shopping basket on current yr
___________________________________________ x 100 Exp. for base yr shopping basket on base yr
If nominal GDP is $660 billion and the GDP Price index for the current year is 110, then real GDP is ___________.
$600.
Formula:
Nominal GDP
______________ = Real
GDP Deflator/100
The phase of the business cycle in which real domestic output decreases is called _____________.
the recession
The US economy is generally considered to be at full employment when ______________.
About 5 to 6 of the labor force is unemployed
The slight increase in the natural rate of unemployment during the 1970s resulted from ___________________.
Baby boom generation
Assume natural rate of unemployment in our economy is 5% and the actual rate of unememployment is 9.5%. How much percent does unemployment rate decrease to allow this economy to achieve full-employment production?
4.5%
Anne Brown works in her own home as a part-time caretaker and homemaker, and works in Burger King as part-time. Officially she is _____________.
Employed
If the natural rate of unemployment is 5% and the cyclical unemployment rate if 4%, then the _______________.
Unemployment rate is 9%
Assume Smith is unemployed because his job skill does not match the skill that employers of his concern require. Smith would be considered as _________________.
Structurally unemployed
Suppose that a person's nominal income rises from $10,000 to $15,000 and the Consumer Price Index rises from 100 to 150. The person's real income will _____________.
Remain unchanged
Cost-push inflation __________________.
Is caused by the increase in the cost of production factors.
The natural rate of unemployment roughly equals _____________ unemployment.
The sum of frictional and structural
Which of the following groups would not tend to lose from unexpected inflation?
Those whose wages have cost of living adjustment clauses in their contracts.
A price index can fall from one year to the next ____________.
Even when the nominal and real GDP fall and when some individual goods prices rise.
The three major macroeconomic goals of nearly every society are _____________.
Maintaining stable prices, maintaining high levels of employment, and achieving high rates of economic growth.
The labor force consists of ___________________.
Discouraged workers, employed workers, plus those actively seeking work.
The official unemployment rate may not reflect the trust state of unemployment except for the fact that ______________________.
Workers laid off from their jobs but looking for new ones are not counted among the unemployed.
Kathryn chooses to go to college full-time rather than to work. Kathryn ____________.
Is not part of the labor force.
Hometown, USA, has a labor force of 78,567 persons and employment of 74,382. The unemployment rate for the city is ______.
5.3%
Formula:
Subtract employed from labor force to get unemployed.
Unemployed / Labor force x 100
Luke has lent his friend Mitch some money. However, he underestimated the rate of inflation when they agreed to a repayment and interest schedule. Mitch will benefit from the inflation: True/False?
True
Unemployment rises and falls in the same direction as output over the business cycle: True/False?
False
What is it called when inflation comes from rising prices in terms of production factors?
Cost-push inflation
The effects of inflation
A) Employed: wage follows to increase -> has benefits or no problems
Unemployed: -> victimized
B) Lenders/Borrowers: Under inflation, lenders are worse-off and borrowers are better-off
C) Rich: price of asset goes up, benefits/no problems
Poor: Victimized
Irving Fisher Effect
*Nominal Interest Rate = Real Interested Rate + Rate of inflation
i = r + f
What is the increase in general price level over the period of time?
Inflation.
What is price level measured by?
GDP deflator or CPI
What is the rule of 70?
If we divide the number 70 by the annual rate of inflation, the quotient is the number of years it takes for inflation to double the price level
Approx year for doubling price = 70 / annual inflation rate
Consumer price index weight (The base for CPI)
Housing = 42%
Transportation = 17%
Food/Beverages = 15%
Education/Communication = 6%
Medical care = 6%
Recreation = 6%
Apparel = 4%
Other = 4%
Oil is the highest weight. When oil prices go up, it affects housing (heating oil/electricity), transportation (
CPI converts ___________ into ___________.
Nominal value into real value
Changes in the price level are attributed to an excess of total spending beyond the economy's capacity to produce.
Demand-pull inflation
Range 1
Output is very low relative to economy's full employment output. The price does not rise as the economy increases its output because of idle workers and idle production facilities.
Range 2
The price level began to rise as the output level goes on to increase
Range 3
Firms cannoy increase output by responding to the increase in demand because all the production resources are already in use. Price rises rapidly.
What is the formula for labor force participation rate?
Labor force / total adult population * 100
The unemployment rate that would exist in the absence of cyclical unemployment rate. Thus, the normal rate of unemployment around which the unemployment rate fluctuates.
Natural rate of unemployment rate
What is frictional unemployment?
Consists of search unemployment (searching for jobs) and wait unemployment (waiting to take jobs in the near future)
What is structural unemployment?
Changes over time in consumer demand and in technology alter the structure of the total demand for labor
What is cyclical unemployment?
it occurs in the recession phase of the business cycle. It is casused by a deficiency of total spending
What is full employment?
Frictional and structural unemployment are unavoidable, so that fullemployment is achieved when the cyclical rate is zero.
Why is some frictional unemployment inevitable?
Unemployment insurance
Minimum wage law
Labor union
Efficiency wage
What is Okun's law? (Change in GDP and change in unemployment rate)
For every 1% change in unemployment, a change in GDP is about 2%
y=3-2x
y = % annual growth in GDP and
x = change in unemployment rate