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PSU ECON 104 - Review Questions

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1. When the economy is at potential () is unemployment zero?No, even with full PPF unemployment is not at zero2. What is a discouraged worker?A discouraged worker is someone who is available for work, but has not looked for it in the past month. This underestimates the unemployment rate.3. How do we calculate: Labor Force, Unemployment Rate, Labor Force Participation Rate?Labor Force = Unemployed + EmployedUnemployed = 16 years old or more and are looking for work4. Why did policy makers come up with U6?This number counts discouraged workers and workers who are working less than their preferred amount in the unemployed number.5. A price level is a measure of the average level of prices. Two price levels: CPI, GDP deflator. How do these differ. (Packet page 66)6. The CPI stands for Consumer _______PRICE_____ ____INDEX____. How do we calculate the CPI? Which component of the consumption basket in the CPI has the greatest weight?CPI = (Cost of Basket in Current Year)/ (Cost of Basket in Base Year) X 100The greatest weight comes from the price of the goods in that year7. What is the CPI equal to in the base year?Base year CPI is always 1008. Suppose the CPI = 120. This says prices have risen by 20% since the ___base____ year.9. If the CPI > 100, has the real purchasing power of the dollar (i.e., amount of goods and services that a dollar can buy) increased or decreased since the base year?Real Purchasing power has decreased10. If the CPI < 100, has the real purchasing power of the dollar increased or decreased since the base year?Real purchasing power has increased11. Babe Ruth’s salary in 1932 was $80,000. What is his salary in 2014 dollars if the CPI (1932) = 12.9 and CPI (2014) = 236.7? Answer: $1,467,90712. How do we calculate inflation (π)?13. How do we calculate real income? How is real income different from nominal income?15. What is the simplified way of calculating expected real income growth when you have the growth in nominal income (salary increase) and expected inflation (πe)?Real Income = (Nominal IncomeYearX / (CPI YearX/100)16. What is the impact of inflation on income? If your nominal wage or income grows at a rate that is greater than or equal to the inflation rate, are you better off?17. What is the formula for calculating the real interest rate (r)? the nominal interest rate (i)?17. If Merrill bank says they will give you an education loan with an interest rate of 10% are they quoting the nominal interest rate or the real interest rate?They are quoting the nominal interest rate18. How does inflation affect savers? How does inflation affect a borrower? A lender?Inflation causes your money to decrease in purchasing powerPeople who borrow will have to pay back the same amount nominally, but it will be worth less in real terms.People who save will hold on to the money and when they decide to spend it will be worth lessA lender will give away money and receive the same back nominally, but it will be less in real terms19. Inflation hurts mainly when it is anticipated or unanticipated?Inflation hurts the most when it is unanticipated because people did not account for the decrease in purchasing power20. Why do you think banks (lenders) came up with adjustable rate mortgages (ARMs)?Banks came up with ARMs so that if there is unexpected inflation, they do not lose money.21. What is a business cycle? What are the four phases of a business cycle?22. When was the last recession in the U.S.?Dec. 07 –Jun. 0923. Who decides when a business cycle begins and ends?NBER ( National Bureau of Economic Research)24. What are the challenges confronting forecasters, businesses and policymakers with respect to the business cycle? What do we mean by “economic indicators”? Why do we look at the other economic indicators besides real GDP?25. What do we mean by leading, coincident, lagging indicators? Which of the following are leading, lagging, or coincident indicators:Coincident: occurs at the same time as Real GDPLagging: Happens after Real GDPLeading: Happens before RGDPStock Prices New Orders ConsumptionEmployment Average Labor Productivity Business Fixed InvestmentIndustrial Production Consumer Confidence Personal IncomeInflation Index of Leading Indicators UnemploymentRed = CoincidentGreen= LeadingPurple= Lagging26. What is the difference between a procyclical economic indicator and a countercyclical indicator?Procylcical = positively correlatedCountercyclical= negatively correlated27. When RGDP reaches a trough in the business cycle, stock prices will __________ while employment will __________. Answer: continue to rise; start to rise28. What causes business cycles?Shocks to aggregate demand and aggregate supply29. Suppose the economy is in equilibrium where: LRAS = SRAS = AD. What is the impact on AD (aggregate demand), output (Y) and the price level (P) of pessimism on the part of households and firms? What happens to the GDP gap? (packet p. 90) This will cause the aggregate-demand curve to shift to the left.Price level will decreaseOutput will decreaseThe GDP gap will increase30. Suppose the economy is in equilibrium where: LRAS = SRAS = AD. What is the impact of a spike in oil prices on SRAS (short-run aggregate supply), output (Y) and the price level (P)? What happens to the GDP gap? (packet p. 90)SRAS shifts to the leftOutput decreasesPrice Level IncreasesGDP gap grows31. How can AD and AS shocks be transmitted to the ROW (rest of the world)? For example, how did the dramatic decline in wealth (drop in home prices (and values) and the drop in stock prices) in the U.S. contribute to the spread of the Great Recession to the rest of the world?34. How was household wealth affected by the financial crisis and Great Recession (2007-2009)?There was a decrease in HH wealth which decreased consumption and decreased incomeCHAPTER 10 (pages 311 – 314), Loanable Funds, packet 95 - 9735. The demand for loanable funds represents ___Net Borrowers. The supply of loanable funds represents Savers/Lenders36. How does an increase in RGDP affect the loanable funds market? Why? How does an increase in RGDP affect the real interest rate?The demand for loanable funds increases, because firms and HH both have an improved outlook and want to borrow to investThis increase the interest rate37. Can the Federal Reserve increase the supply of loanable funds?38. Define: Government Budget = _____Taxes______- ______Government Spending______39. How does an increase in the government budget


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PSU ECON 104 - Review Questions

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