Macroeconomics: GDP, Unemployment, and Inflation

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Questions and Answers

A country's central bank lowers interest rates to stimulate the economy. Which macroeconomic issue is this policy MOST directly addressing?

  • Unemployment, by encouraging businesses to hire more workers due to cheaper borrowing costs. (correct)
  • Consumer preferences, attempting to shift demand towards domestically produced goods.
  • Productivity growth, aiming to increase the long-term production capacity of the economy.
  • Income inequality, by redistributing wealth through adjusted tax policies.

During an economic recession, which of the following scenarios is MOST likely to occur?

  • Increased government spending on infrastructure projects to boost demand and create jobs.
  • Stable prices and full employment indicate a healthy and balanced economy.
  • Decreased business investment and increased unemployment, leading to a contraction in overall economic activity. (correct)
  • Increased consumer spending and business investment lead to rapid economic expansion.

If a government implements a fiscal policy that involves increased spending on infrastructure projects and reduced taxes. What is a likely intended outcome?

  • A decrease in overall demand due to higher savings rates.
  • A shift in consumer preferences towards imported goods.
  • An increase in aggregate demand and economic growth. (correct)
  • A contraction of the money supply, leading to deflation.

A car manufacturer purchases steel to use in its production process. How is this steel categorized in GDP accounting?

<p>It is not directly counted in GDP as it is an intermediate good. (D)</p> Signup and view all the answers

In the expenditure approach to calculating GDP, which of the following transactions is included under the 'Investment' component?

<p>A company's purchase of new equipment to expand its production capacity. (A)</p> Signup and view all the answers

Assume an economy's GDP is $10 trillion. Consumption is $6 trillion, government purchases are $2 trillion, and gross investment is $3 trillion. What is the value of net exports?

<p>$-1$ trillion (D)</p> Signup and view all the answers

A country experiences a surge in exports due to increased demand for its products overseas. Which of the following is the most likely short-term effect on the country's GDP?

<p>An increase in GDP as exports directly contribute to national income. (B)</p> Signup and view all the answers

What is the MOST direct impact of an increase in the unemployment rate on a country's GDP, assuming all other factors remain constant?

<p>GDP will likely decrease as there is less overall production of goods and services. (D)</p> Signup and view all the answers

If nominal GDP increased by 5% and inflation was 2%, approximately what was the real GDP growth?

<p>3% (C)</p> Signup and view all the answers

Which of the following individuals would be classified as unemployed?

<p>A person who quit their job and is actively searching for a new one (C)</p> Signup and view all the answers

A country's labor force consists of 150 million people, and 6 million are unemployed. What is the unemployment rate?

<p>4% (B)</p> Signup and view all the answers

How does the Consumer Price Index (CPI) primarily affect consumers and the economy?

<p>By influencing wage negotiations and adjustments in social security benefits (A)</p> Signup and view all the answers

If the price of gasoline increases significantly, and consumers start using public transportation more often, which bias in CPI is most evident?

<p>Substitution bias (C)</p> Signup and view all the answers

How does unexpected inflation typically impact fixed-rate mortgage holders?

<p>It benefits them because their real interest rate effectively decreases (B)</p> Signup and view all the answers

Which economic condition is most closely associated with individuals needing to make frequent trips to the bank, reducing their overall productivity?

<p>Shoe-leather costs (A)</p> Signup and view all the answers

If the nominal interest rate is 7% and the inflation rate is 3%, what is the approximate real interest rate?

<p>4% (D)</p> Signup and view all the answers

Which scenario exemplifies bracket creep?

<p>Rising nominal income pushes taxpayers into higher tax brackets despite no real income increase (C)</p> Signup and view all the answers

According to the Fisher Effect, what happens to nominal interest rates when inflation expectations increase?

<p>Nominal interest rates increase to compensate lenders for the loss of purchasing power (C)</p> Signup and view all the answers

Which of the following scenarios is an investment according to GDP accounting rules?

<p>A small business buys new computer equipment to improve productivity. (B)</p> Signup and view all the answers

How does using current year prices to calculate nominal GDP affect its interpretation?

<p>It can be misleading when comparing GDP across different years due to price changes. (D)</p> Signup and view all the answers

An automotive worker is laid off during a recession as car sales decline nationwide. What type of unemployment is this an example of?

<p>Cyclical unemployment (A)</p> Signup and view all the answers

If the CPI in Year 1 is 150 and in Year 2 is 165, what is the inflation rate between these two years?

<p>$10%$ (D)</p> Signup and view all the answers

Which of the following best describes the effect of inflation on the tax system in a country with progressive income taxes?

<p>It can lead to bracket creep, increasing taxes without real income growth. (C)</p> Signup and view all the answers

Flashcards

Macroeconomics

Issues affecting the entire economy, like economic growth, unemployment, and inflation.

Unemployment Rate

The percentage of the labor force that is unemployed and actively seeking work.

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months.

Monetary Policy

Actions taken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.

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Fiscal Policy

Government's use of spending and taxation to influence the economy.

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Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a country's borders in a specific time period.

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Final Good

Goods and services that are purchased by the end user and not used in the production of other goods.

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GDP Expenditure Approach

GDP = Consumption + Investment + Government Purchases + Net Exports (Exports - Imports).

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GDP Investment

Spending on new plants, equipment, or buildings.

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Nominal GDP

GDP measured in current prices.

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Real GDP

GDP adjusted for changes in prices (inflation).

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Labor Force

People who are employed or actively seeking employment.

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Structural Unemployment

Unemployment due to technological change or industry shifts.

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What is CPI?

Consumer Price Index.

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CPI Measures

Measures changes in the cost of a fixed basket of goods and services.

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Inflation

A general increase in prices across an economy.

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Nominal Wage

Wages measured in current dollars.

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Quality Bias

CPI overstates inflation because it doesn't fully account for improvements.

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Substitution Bias

Arises when consumers switch to relatively cheaper goods.

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Unexpected Inflation and Borrowers

Those who owe money benefit from unexpected inflation.

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Shoe-Leather Costs

Costs of frequent trips to the bank during high inflation.

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Real Interest Rate

The nominal interest rate minus the inflation rate.

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Study Notes

  • These notes cover macroeconomics, GDP measurement, unemployment, price levels, inflation, and related concepts

Macroeconomics Overview

  • Consumer preferences are not a major macroeconomic issue.
  • The unemployment rate measures the percentage of people who want to work but cannot find a job.
  • A recession signifies a period of declining economic activity.
  • Managing the nation’s money supply is the primary goal of monetary policy.
  • Fiscal policy involves changes to government spending and taxes.

GDP and Measuring Economic Activity

  • Gross Domestic Product (GDP) measures the market value of all final goods and services produced within a country.
  • Bread purchased by a consumer is considered a final good.
  • Savings is not part of the expenditure approach to GDP.
  • The applicable formula for GDP using the expenditure approach is GDP = C + I + G + NX.
  • Building a new factory is considered an investment in GDP calculations.

Real GDP and Unemployment

  • Nominal GDP uses current year prices for measurement.
  • Real GDP accounts for changes in prices, or inflation.
  • Retired individuals are not considered part of the labor force.
  • The rate of unemployment is calculated as Unemployed / Labor Force.
  • A factory worker losing their job due to automation exemplifies structural unemployment.

Price Level and Inflation

  • CPI stands for Consumer Price Index.
  • The CPI measures changes in the cost of a standard basket of goods.
  • Inflation describes a general rise in prices over time.
  • A CPI increase from 100 to 110 indicates a 10% inflation rate.
  • Nominal wage exemplifies a nominal quantity.

Inflation and Its Costs

  • The quality adjustment bias causes CPI to overstate inflation by not accounting for improved product quality.
  • The substitution bias arises when consumers switch to cheaper goods as prices rise.
  • Unexpected inflation benefits borrowers.
  • High inflation can result in shoe-leather costs.
  • The real interest rate is calculated as Nominal interest rate - Inflation rate.
  • Hyperinflation is characterized by inflation rates exceeding 500%.
  • Indexing is geared towards adjusting wages or benefits for inflation.
  • Bracket creep is caused by rising nominal income pushing taxpayers into higher tax brackets.
  • The Fisher Effect describes how nominal interest rates move with inflation.
  • Inflation can distort tax system incentives.

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