Economics Concepts: Surplus, GDP, and Inflation

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Questions and Answers

What is the formula for calculating the unemployment rate?

Labour Force / Employed Population X 100

Unemployed / Working Age Population X 100

Unemployed / Labour Force X 100 (correct)

Labour Force Participation Rate / Active Jobs X 100

Which type of unemployment occurs as a result of economic fluctuations?

Frictional Unemployment

Seasonal Unemployment

Cyclical Unemployment (correct)

Structural Unemployment

What does the Core Consumer Price Index (CPI) exclude?

Durable goods

Consumer goods

Capital goods

Food and energy (correct)

The GDP deflator compares the current year's prices to those of which year?

A selected base year Signup and view all the answers

Which among the following is included in the labor force?

People actively looking for work Signup and view all the answers

Which of the following best describes the Natural Rate of Unemployment (NRU)?

The unemployment rate when the economy is at full employment Signup and view all the answers

What is the primary purpose of calculating the Consumer Price Index (CPI)?

To assess the overall price level for consumer goods and services Signup and view all the answers

What components make up the formula for Aggregate Demand (AD)?

C + I + G + (X - M) Signup and view all the answers

What does the aggregate demand (AD) curve illustrate?

The relationship between price levels and the quantity of output demanded Signup and view all the answers

Which factor leads to a rightward shift in the aggregate demand (AD) curve?

Increase in consumer confidence Signup and view all the answers

What effect does a decrease in price levels have on consumer spending, according to the wealth effect?

Consumers feel richer and spend more Signup and view all the answers

Which of the following factors does NOT impact aggregate demand?

Wage levels Signup and view all the answers

What is indicated by a steep aggregate supply (AS) curve above potential output?

A large increase in price is required for increased output Signup and view all the answers

Which of the following factors would decrease aggregate demand (AD)?

Decrease in foreign incomes Signup and view all the answers

What impact do higher interest rates typically have on borrowing?

Discourage borrowing and spending Signup and view all the answers

Which of the following best describes the foreign trade effect on aggregate demand?

Lower local prices reduce exports and increase imports Signup and view all the answers

How is consumer surplus calculated?

Total benefit minus consumer expenditure Signup and view all the answers

What does producer surplus represent?

The difference between the market price and the highest price sellers are willing to accept Signup and view all the answers

Which of the following is included in the calculation of GDP?

Government purchases of goods and services Signup and view all the answers

What is the formula for calculating Real GDP?

Nominal GDP divided by GDP deflator Signup and view all the answers

Which statement is true about perfect competition?

There is easy entry and exit in the market Signup and view all the answers

What does the income approach to GDP account for?

Wages, rent, and profit from production Signup and view all the answers

What is the definition of per capita GDP?

Real GDP divided by population Signup and view all the answers

What does marginal cost refer to in production?

The additional cost of producing one more unit of a product Signup and view all the answers

What primarily causes short-run changes in aggregate supply?

Variations in input prices Signup and view all the answers

Which of the following is a key characteristic of an economic expansion?

Increased consumer spending Signup and view all the answers

What occurs during a contraction phase of the business cycle?

Falling investment levels Signup and view all the answers

What indicates a recessionary gap in the economy?

Equilibrium output is below potential output Signup and view all the answers

Which factor can cause a leftward shift in short-run aggregate supply?

Rising oil prices Signup and view all the answers

What is a characteristic of an inflationary gap?

Increased pressure on prices Signup and view all the answers

Which type of policy is primarily controlled by the central bank?

Monetary policy Signup and view all the answers

What typically happens to unemployment during an economic expansion?

It falls as businesses hire more workers Signup and view all the answers

What is the primary goal of expansionary fiscal policy?

To stimulate the economy during recessions Signup and view all the answers

Which of the following best describes contractionary monetary policy?

Raises interest rates to reduce inflation Signup and view all the answers

What does the multiplier effect illustrate in fiscal policy?

The increase in AD from initial government spending Signup and view all the answers

What do chartered banks provide that near banks typically do not?

Wide range of financial services Signup and view all the answers

In a recession, what action is typically taken through expansionary monetary policy?

Lower interest rates Signup and view all the answers

Which of the following best describes the fractional reserve system?

Banks keep some deposits as reserves and lend out the rest. Signup and view all the answers

How is the money multiplier calculated?

One divided by the desired reserve ratio Signup and view all the answers

What is the marginal propensity to consume (MPC)?

The change in consumption divided by change in income Signup and view all the answers

What does excess reserves refer to in banking?

Reserves held beyond the desired level Signup and view all the answers

Which of the following does NOT describe a function of money?

Increase in consumption Signup and view all the answers

What component makes up M2 in the measurement of money supply?

M1 plus non-chequable deposits Signup and view all the answers

What does the term 'marginal propensity to withdraw' (MPW) indicate?

The change in total withdrawals relative to change in income Signup and view all the answers

Which of the following is a primary function of deposit-taking institutions?

Lend funds to borrowers using deposited funds Signup and view all the answers

Which of the following factors does not shift the demand for money curve?

Interest rate Signup and view all the answers

What is the desired reserve ratio in a bank?

The optimal fraction of deposits a bank would retain as reserves Signup and view all the answers

What is one way commercial banks create money?

By lending out excess reserves Signup and view all the answers

Study Notes

Consumer Surplus

Consumer surplus is calculated by subtracting consumer expenditure from total benefit.
Consumer expenditure is the market price multiplied by the quantity purchased.

Producer Surplus

Producer surplus is the difference between the price a seller received and their willingness to sell.
In the example provided, a seller would be willing to sell a unit for 20,butthemarketpriceis20, but the market price is 20,butthemarketpriceis60. The producer surplus for that first unit is $40.
Marginal cost/benefit equals supply and demand.
Producer surplus can be calculated using the formula 1/2BH or BH/2 from a graph.

GDP

GDP is the dollar value of final goods and services produced within a country in one year.
Expenditure method calculates GDP by adding up all spending on goods and services (C+I+G+(X-M)).
GDP excludes intermediate goods, used goods, and financial transactions.

Inflation

Inflation is an increase in the price level over a period of time.
Two ways to calculate inflation are using the Consumer Price Index (CPI) and GDP deflator.
Inflation rate = (CPI in Year 2 - CPI in Year 1) / CPI in Year 1 * 100
CPI is a measure of overall price level for consumer goods and services that tracks the cost of living.
CPI is calculated by summing up the price changes for a basket of goods weighed by their importance to a typical household.
Core CPI excludes volatile items like food and energy.
GDP deflator compares prices in the current year to those in a base year.
It includes all goods and services produced in an economy, including capital goods.
GDP deflator = Nominal GDP / Real GDP * 100

Labour Force

The labor force includes employed and unemployed people.
Unemployment rate is calculated by dividing unemployment by the labor force.
The unemployment rate includes those who are unemployed but looking for work.

Four Types of Unemployment

Frictional Unemployment: Temporary between jobs, or a first time job seeker.
Structural Unemployment: Mismatch between workers and jobs due to structural economic changes.
Cyclical Unemployment: Due to economic fluctuations.
Seasonal Unemployment: Due to seasonal changes in job markets.

Aggregate Demand

Aggregate demand is the total quantity of goods and services demanded in an economy, at a given price level.
It slopes downward due to wealth effect, interest rate effect, and foreign trade effect.
Shifts in AD are caused by changes in consumption, investment, government spending, and net exports.

Aggregate Supply

Aggregate supply is the total quantity of goods and services producers are able to supply.
AS curve becomes steep above potential output because a larger price increase is required to increase output.
Short-run changes in aggregate supply are caused by changes in input prices.
Long-run changes in aggregate supply are caused by changes in resource supply and productivity.
Business cycles include phases of expansion and contraction.
Key characteristics of expansionary phases include: rising GDP, falling unemployment, and increased consumer spending.
Key characteristics of contractionary phases include: falling GDP, rising unemployment, and reduced consumer spending.
A recessionary gap is when equilibrium output is below potential output.

Short-Run Aggregate Supply (Shifters)

Input Costs: Changes in wages, raw material prices, or energy costs impact the AS curve.
Productivity: Improved technology or processes shift the AS curve right. Natural disasters or unexpected events shift AS left.

Stabilization Policies

Fiscal policy involves changes in government spending and taxes to influence Aggregate Demand.
Monetary Policy involves changes in interest rates and money supply to influence Aggregate Demand.

Multiplier Effect

Fiscal policy's initial spending leads to increased spending by many people.
MPC represents the change in consumption relative to a change in income.
MPW represents the effect of a change in income on withdrawals.
Multiplier = 1 / (1 - MPC)

Money

Money serves as a medium of exchange, unit of account, and store of value.
Money demand is the amount of money people want to hold at any time.
Determinants of money demand include: interest rates, real GDP, and price level.

Money Supply

Money supply consists of currency and bank deposits.
Commercial banks create money through lending.
Fractional reserve banking means banks keep a fraction of deposits as reserves and use the rest for loans.
The reserve ratio divides reserves by total deposits.
Money multiplier = 1/reserve ratio
Changes in money supply depend on change in excess reserves and money multiplier.

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Description

Test your understanding of key economic concepts such as consumer surplus, producer surplus, GDP, and inflation. This quiz covers formulas, calculations, and fundamental definitions that are essential for grasping economic principles. Perfect for students studying introductory economics.