Study Questions Exam 1 Econ 1002 b

8/13/2019 Study Questions Exam 1 Econ 1002 b

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Study Questions Circular Flow Model

Definitions

Consumption Expenditures - a measure of price changes in consumer goods and services.

Personal consumption expenditures consist of the actual and imputed expenditures of

households; it is essentially a measure of goods and services targeted toward individuals and

consumed by individuals.

Investment the purchase of final goods by businesses that are used in the production of other

goods plus the purchase of new homes by individuals.

Private saving the income that households have left after paying for taxes and consumption.

Public saving the tax revenue that the government has left after paying for its spending.

!ational "aving public savings plus private savings

!et #axes taxes minus transfer payments; the net flow of cash from household to government

!et Exports the value of exports minus the value of imports

Lists

#he three uses of income by households private savings$ tax payments$ and consumption

expenditures.

#he four sectors in the complete circular flow model households$ firms$ government$ and rest of

the world.

#he four types of expenditures in the complete circular flow model government spending$

investment$ net exports$ consumer.

Visual Representation

%rawa two sector circular flow model a four sector circular flow model

Househol Firms Househol Firms

Go

R.O.W


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Explanations

Why are expenditures and income equal to each other?

&hen one receives income$ they either spend it or save it. #he firms do not hold onto

any of the money in the economy since all things are owned by the household. #hus$ if money is

spent on something in the economy$ that money serves as income for someone else$ not as

savings by a firm. #hus$ expenditure always e'uals income.

If net taxes increase, must government spending increase? Why or Why not?

!ot necessarily; government has two options when net taxes are positive either uses it

for expenditure or public savings. #hus$ if net taxes were to increase$ government can either

spend the money (expenditure) or use it towards public savings.

Study Questions Price Level !nflation

Definitions

Price *evel the change of prices in general

Price Index an index allows one to measure changes in a numerical series. + price index

shows how prices$ in general$ change from a reference year.

Inflation a sustained increase in the general level of prices.

%eflation a sustained decrease in the general level of prices.

!ominal Price a price expressed in current dollars.

,elative (,eal) Price the relative price of a good is its nominal price adusted for changes in the

general level of prices.

Consumer Price Index (CPI) #he CPI is a type of price index. It measures the change in prices

for goods and services fre'uently bought by households. It is reported monthly by the "

government/s 0ureau of *abor "tatistics.

Core Consumer Price Index the section of the CPI that measures all items less food and energy;

provides a better depiction of the CPI from a consumer point of view.

Chained 1%P Price Index measures the value of new stuff produced in economy.

Lists

#hree price indices

2 #he gross domestic product (1%P) chain-type price indexes measure changes in the

.". economy


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Explanations

When would it be more appropriate to use the CPI for all items and when would it be

appropriate to use the CPI for all items less food and energy?

It is better to use the CPI for all items when evaluating income or household ability to

buy. #his is because households re'uire all items for daily life (usually). If one wanted to

evaluate the economy$ one would use the core CPI. #his is because the core CPI measures items

that tend to not fluctuate as much (e.g. gas and agricultural products)$ and thus gives a less

deviated depiction of the economy as a whole.

Explain why a general decline in the purchasing power of income is not a cost of inflation

1eneral decline in purchasing power of income doesn/t leave economy$ changes in

distribution; not a cost of inflation since no currency leaves the economy and thus economy as a

whole does not lose income.Data

*oo3 at #able + in the most recent consumer price index news release (there is a lin3 to this

news release on the Hy1ateway site for this course).

&hat is the inflation rate for all items for the 45 months ending %ecember 5744 " #

&hat is the inflation rate for all items less food and energy for the 45 months ending

%ecember 5744 $%$ #

(Jou may want to print out a copy of the data table from the Hy1ateway site for this course and

add these numbers to this table.)

Examine the graph of the inflation rate based on the CPI for all items (there is a lin3 to this graph

on the Hy1ateway site for this course).

&ould you consider the current inflation rate to be high$ moderate$ or low compared to

inflation rates since 48= Moderate

&hen was the inflation rate high &hat were the approximate inflation rates during these

time periods

!id"#ate $%&'s ( %)* Early"!id $%+'s ( %)* -oughly. $%/' ( 0)* !id $%/'s ( $')

1this inflation fluctuated between +) and $+) through the early 2's3* Early $%%'s (

++)* roughly. 4''2 ( +)


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Study Questions &ross Do'estic Product

Definitions

1ross %omestic Product #he mar3et value of all final goods and services produced in an

economy during a given period.

!ominal 1ross %omestic Product - + gross domestic product (1%P) figure that has not been

adusted for inflation. +lso 3nown as current dollar 1%P or chained dollar 1%P. +ny 1%P

figure that does not account for inflation can be misleading because 1%P will appear higher than

it actually is.

,eal 1ross %omestic Product ,eal 1%P is calculated by adusting nominal 1%P by changes in

price level.

Lists

*ist the = maor expenditure categories of 1%P. &hich is the largestConsumption expenditures$ Investment expenditures$ 1overnment expenditures$ !et exports;

consumption expenditures (roughly ?4K of all 1%P).

&hich of the following items would be included in measuring the .". 1%P for 5778

+ household/s purchase of a new domestic car.

o + household/s purchase of a new imported car.

o + household/s purchase of a used domestic car. + firmLs purchase of new Hicrosoft word processing software.

o + firmLs purchase of 57 reams of paper for their printers.

o #he value of teaching services produced by a public school teacher measured using

their salary.

o #he value of painting services when a homeowner paints a room in their house.

#he value of painting services when a homeowner hires a painter to paint a room in their

house.


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!1%P57789 P78F789 4$75>$777

!1%P57479 4$7=$>77

!1%P57449 4$46$777

1,57479 D((P47F47) x (P78F47)) < ((P78F78) x (P47F78))G 9 4.75>@

1,57449 4.765>

,1%P57789 !1%P47< 1,57479 4$7>?$=67

,1%P57479 4$7=$>77

,1%P57449 !1%P47x 1,57479 4$455$5@7


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,1%P7=9 !1%P7> < 1,7>9 =$64>$55>$7@.=>

,1%P7=9 !1%P7>9 46$6??$577$777

,1%P7=9 !1%P7> x 1,7>-7@9 44$@>4$478$@??.=4

Explanations

Explain the difference between nominal 56P and real 56P

!ominal 1%P is the sum value of all produced goods and services at current prices#his

is the 1%P that is explained in the sections above. !ominal 1%P is more useful than real 1%P

when comparing sheer output$ rather than the value of output$ over time.

,eal 1%P is the sum value of all produced goods and services at constant prices#he

prices used in the computation of real 1%P are gleaned from a specified base year. 0y 3eeping

the prices constant in the computation of real 1%P$ it is possible to compare the economic

growth from one year to the next in terms of production of goods and services rather than the

mar3et value of these goods and services. In this way$ real 1%P frees year-to-year comparisons

of output from the effects of changes in the price level.

Explain why real 56P in preferred when comparing 56P across time

!ominal 1%P uses current prices and thus may over-or under-state true changes in output. ,eal1%P ta3es into account the inflation rate and thus is more accurate at recording the actual increase in

production activities. ,eal 1%P is a better measure of economic well-being. 0ecause ,eal 1%P is not

affected by changes in prices$ changes in real 1%P reflects only changes in the amount being produced.


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Potential Output


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Explanations

Explain the natural rate of unemployment changes over time

Post-&orld &ar II historical data show that while the unemployment rate rises in recessions

and falls during expansions$ it also has a significant noncyclical component that has varied over time$

rising in the late 48@7s and throughout the 48?7s and declining after the early 487s. Cyclical trends

occur during the 87s up to the recession in 577. #his caused a significant ump in the rate; however$

the rate has recently steadily fallen from its pea3 of roughly 47K.

Data

*oo3 at the most recent employment situation news release (there is a lin3 to this news release

on the Hy1ateway site for this course).

&hat is the seasonally adusted civilian unemployment rate for Sanuary 5745 (%" #

(Jou may want to add this number to the data table from the Hy1ateway site for this course.)&hat is the seasonally adusted civilian labor force participation rate for Sanuary 5745 ,"%) #

&hat is the seasonally adusted employment-population ratio for Sanuary 5745 1(%1 #

+ccording to what I said in class$ the natural rate of unemployment is currently in what range

#he natural rate of unemployment is in the 1%1-,%+#range; In the .".$ some

mainstream economists have placed the natural rate of unemployment in the 1# to ,#range$

though other economists have placed it as low as 2#and as /i3/ as )#. 8his variability and

lac9 of precision in the natural rate of unemployment represents a source of uncertainty with

which policy ma9ers must deal

Is the current unemployment rate above$ near$ or below the current natural rate of

unemployment 04ove

Examine the graph of the civilian unemployment rate Nor the past two years$ has the

unemployment rate been rising$ falling$ or staying about the same Fallin3

Examine the graph of the civilian labor force participation rate Nor the past 47 years$ has the

labor force participation rate been rising$ falling$ or staying about the same Fallin3

Examine the graph of the civilian employment-population ratio Nor the past two years$ has theemployment-population ratio been rising$ falling$ or staying about the same Stayin3 t/e sa'e

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Study Questions Exam 1 Econ 1002 b