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UW-Madison ECON 102 - Exam 1 Study Guide

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PCE = Nominal Consumption Expenditures ÷ Real Chain-weighted Consumption ExpendituresThe CPI over-estimates inflation because of substitution bias:The CPI assumes people buy the same basket of goods as in the base year, but of course actual people will substitute out of goods whose prices have risen since the base year=>The CPI assumes people buy more expensive stuff than they really doThe CPI is a worse estimate of the cost of living the farther away you get from the base yearUsing a base-year basket of goods is less representative the farther away you get from the base year because of introduction of new goods (and obsolescence of old ones). Consider the importance of electronics to average households now compared to 1950 or even 1990.ECON 102 1st EditionExam # 1 Study Guide Lectures: 1 - 8Lecture 1 (September 8)Macroeconomic DataFill in the Simple Circular Flow of Production and IncomeProduct MarketFirms HouseholdsFactor MarketWhat do the green (counter clockwise) arrows represent? What do the red (clockwise) arrows represent?Define Gross Domestic Product:What are Factors of Production?Lecture 2 (September 10)The Components of GDPWhat are the 4 broad categories GDP is divided into?1.2.3.4.Define net investment:What is a trade deficit? What is a trade surplus? Which is the US usually, deficit or surplus?What is the GDP equation? What does each variable represent?Lecture 3 (September 15)Define a GDP trough:What is the decline between a peak and a trough called? What is it called when this is severe?If you clean your home every Saturday, is that considered production?Is the underground economy included in GDP?Lecture 4 (September 17)What is the reason for the large spread between the lower and upper house-hold incomes?What does FRED stand for? How is the data on FRED collected?What are the three main types of Economic Models in the Labor Market?If you do not have a job and are not looking for one, are you unemployed?Define the Labor force participation rate:Lecture 5 (September 22)What are the three types of unemployment?1.2.3.What is the consumer price index formula?What are the two measures of The Price Level?What is one problem with using the first measure?Lecture 6 (September 24)What was learned from the 1970’s recession? Define shoe-leather costs:When is inflation considered “hyperinflation”?When causes a shift to occur in the Production function graph? What about movement along the curve?Lecture 7 (September 29)In the production function graph what are the two assumptions made?Why is the labor supply curve upward sloping?If the population increases, what happens to the Labor supply curve? the la-bor demand curve?Why does a wedge form between Real wages paid and real wages earned when a Tax is imposed?Lecture 8 (October 1)What is “economic growth”?Define crowding out:What is the “Rule of 70”What is “human capital”?**********Solutions to Study Guide*************Lecture 1 (September 8)Macroeconomic DataFill in the Simple Circular Flow of Production and IncomeWhat do the green (counter clockwise) arrows represent? What do the red (clockwise) arrows represent?The green arrows represent moneyThe red arrows represent physical factors of production, intangible servicesDefine Gross Domestic Product:The total market value of final goods and services produced within an econ-omy in a given year “goods sold” the red arrowsWhat are Factors of Production?The workers, capitalists, etc that are used in the production of goods or ser-vices to make a profit by firmsLecture 2 (September 10)The Components of GDPWhat are the 4 broad categories GDP is divided into?1. Consumption expenditures: newly produced goods and services pur-chased by households2. Private Investment expenditures: newly produced goods and services pur-chased by firms that are a factor of production EX: spending on new plants and equipment during the year, newly pro-duced housing is included, increase in inventoryAlso includes gross investment and depreciation3. Government Purchases: purchases by federal, state, and local govern-ments4. Net exports: net purchases by the foreign sector (domestic exports minusdomestic imports)Formula for net investment:Gross investment minus depreciation What is a trade deficit? What is a trade surplus? Which is the US usually, deficit or surplus?Trade deficit: excess of imports over exports (more being purchased into the country rather than sold to foreign countries)Trade surplus: excess of exports over imports(more being sold to foreign countries than being purchased into the country)The US usually has a Trade Deficit, as with most richer countries.Poorer countries usually have a trade surplus.What is the GDP equation? What does each variable represent?Y= C + I + G + NXY: GDPC: ConsumptionI: InvestmentsG: government purchasesNX: net exportsLecture 3 (September 15)Define a GDP trough:The date at which output stops declining during a recession, the most re-cent low point.What is the decline between a peak and a trough called? What is it called when this is severe?A recession, defined as six consecutive months of declining real GDPA severe recession is a depressionIf you clean your home every Saturday, is that considered production?NO. If you do it for yourself it is not considered production or in GDP. How-ever, if you are paid to do it for someone else (Ex: nanny, childcare, house-work) then it is considered production- very often done “underground.”Is the underground economy included in GDP?NO. We cannot account for it. Although it is estimated to be less than 20% of the US’s GDP.Lecture 4 (September 17)What is the reason for the large spread between the lower and upper house-hold incomes?Upper end: Those in the upper end of the income distribution have DUAL INCOME, more than one person in the home working successfully. Usually college educated and living together, married, or a couple.Lower end: Usually only has one income. Often single parents, or recent col-lege graduates.What does FRED stand for? How is the data on FRED collected?FRED: Federal Reserve Economic Database.Data comes from a monthly survey of firms-The business reports how many people they have hired and how many hours each employee has worked.What are the three main types of Economic Models in the Labor Market?Classical ModelNeo-classical ModelNeo-Keynesian ModelIf you do not have a job and are not looking for one, are you unemployed?NO. “The unemployed” is comprised of those who do not


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UW-Madison ECON 102 - Exam 1 Study Guide

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