Macro Chapter 9 Flashcards
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In sequential order, the four phases of the business cycle are
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peak, recession, trough, and expansion
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The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing nondurables because capital goods and durable good
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last and these purchases can be postponed.
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A financial crisis can lead to a recession because it can cause
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wealth and income to fall, reducing spending and ultimately reducing employment
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A major new invention can lead to an expansion if there are
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increases in investment, consumption, output, and employment
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How is the labor force defined and who measures it?
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The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work
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The unemployment rate is the
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number of unemployed persons divided by the labor force.
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If the unemployment rate increases, the size of the labor force
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could increase or decrease.
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A positive unemployment rate—one more than zero percent—is fully compatible with full employment because at full employment,
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unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs.
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In general, unemployment rates are higher for
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African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers
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The average length of time people are unemployed rises during a recession because
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businesses continue to lay-off workers as a result of the decrease in demand
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A difficult aspect of measuring the unemployment rate is
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determining who is eligible and available to work.
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Unemployment is an economic problem because
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a unit of labor resource that could be engaged in production is sitting idle
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The noneconomic effects of unemployment include
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a sense of failure created in parents and in their children
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The United States has an unemployment compensation program that provides income for those out of work.
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still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs
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The Consumer Price Index (CPI) is constructed by
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comparing the value of a "market basket" of goods that consumers typically purchase to the value of the basket in a base year.
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The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by
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subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4.
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Inflation
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reduces the purchasing power of the dollar
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The nominal interest rate
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minus the inflation rate is the real interest rate.
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T/F Deflation means that the price level is falling, whereas with inflation, overall prices are rising.
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True
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Demand-pull inflation occurs when
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prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
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A negative GDP gap is associated with
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cost-push inflation
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A positive GDP gap is associated with
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demand-pull inflation.
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An increase in your nominal income and a decrease in your real income can occur simultaneously if your
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nominal income increases less than the cost of living increases.
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The losers from inflation are those with
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fixed incomes in nominal terms
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Those who lose the most from unemployment are
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minority groups and those with the least skill
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Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate.
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Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation.
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Hyperinflation might lead to a severe decline in total output if
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everyone starts speculating and searching for ways to avoid inflation
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Place the phases of the business cycle in order.
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Peak, Recession. Trough, Expansion
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Tim just graduated and is looking for a job:
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Frictional Unemployment
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A recession causes a local factory to lay off 30 workers
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Cyclical Unemployment
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Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant: .
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Structural unemployment
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Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India: .
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Structural unemployment
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The unemployment rate that is consistent with full employment is known as
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The natural rate of unemployment.
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A country's current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy's negative GDP gap?
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10%
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Cost-push inflation occurs when there is
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Rising per-unit production costs.
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Jimmer's nominal income will go up by 10 percent next year. Inflation is expected to be - 2 percent next year. By approximately how much will Jimmer's real income change next year?
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12%
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Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?
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7%
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True or False: Lenders are helped by unanticipated inflation
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False
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Economists agree that ________________ inflation reduces real output.
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Cost-push
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Population=500 Under 16/ jailed=120 Not in labor force=100 Unemployed=28 Part time looking for full time=10
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Labor force (500-120-100)=280 Unemployment rate (28/280)*100=10%
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Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 11 percent.
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Use Okun's law (2(unemployment rate-natural unemployment) to determine the size of the GDP gap in percentage-point terms. 2(11-6)=10%
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Suppose that the natural rate of unemployment in a particular year is 6 percent and the actual rate of unemployment is 11 percent
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If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? 500(from above equation)*10%=50
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Suppose the CPI was 110 last year and is 132 this year.
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Suppose the CPI was 110 last year and is 132 this year. (132-110/110*100) do individually on calculator as: 132-100=22 22/110=.02 .02*100=20
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suppose that the CPI was 110 last year and is 106 this year. What is this year's rate of inflation?
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(106-110/110*100) 106-110=-4 -4/110=-0.036363 0.36363*100=-3.6363 ... -3.64 (answer)
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What term do economists use to describe this second outcome?
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Deflation
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How long would it take for the price level to double if inflation persisted at the following percentages?
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(Use the rule of 70) 7 percent per year: 70/7=10 14 percent per year: 70/14=5 2.5 percent per year: 70/2.5=28
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Suppose your nominal income rose by 5.3 percent and the price level rose by 3.3 percent in some year. By what percentage would your real income (approximately) increase?
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(5.3-3.3)=2%
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Suppose your nominal income rose by 2.8 percent and the price level rose by 1.2 percent in some year.
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(2.8-1.2)=1.6
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Suppose that the nominal rate of interest is 5 percent and the inflation premium is 2 percent. What is the real interest rate?
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Nominal interest rate + real interest rate = inflation premium. 5=x(interest rate)+2 Interest rate =3%
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Assume that the real interest rate is 5 percent and the nominal interest rate is 6 percent. What is the inflation premium?
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Nominal interest rate + real interest rate = inflation premium. 6=5+x(inflation premium) Inflation premium=1%
