ECON 1202: EXAM 2
146 Cards in this Set
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Production possibility frontier (PPF)
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illustrates the trade offs facing an economy that produces only two goods. IT shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.
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Efficient
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if there is no way to make anyone better off without making at least one person worse off
- On the ppf curve = efficient
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Opportunity cost
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what you give up
__________________
what you gain
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feasible
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Possible to do easily or conveniently
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With in the PPF curve
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Feasible but not efficient
- shows that there are more output possible to produce
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Outside of the PPF curve
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Not feasible and not efficient
- there are not enough resources to create the amount of output outside of the PPF curve
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if an economy has to sacrifice only one unit of good x for each unit of good y produced throughout the relevant range, then its PPF has a:
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Constant, negative slope
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The production possibility frontier is bowed out from the origin because:
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resources are not equally suited fro the production of both goods
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an inward shift in the US economy's PPF could represent which of the following?
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US workers moving to canda
- the PPF is decreasing
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If the PPF is a straight line, then
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Opportunity costs are constant
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This is not true:
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Most opportunity costs are zero.
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The phrase "gains from trade" refers to
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increase in total output that is realized when individuals specialize in particular tasks and trade with each other
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One parent picks up the kid from day care while the other parent goes to the grocery store and begins to make dinner, this is an example of which principle at work?
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There are gains from trade
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Abe starts exercising regularly, and after a few months discovers he can now do twice as much of everything, He can make 10 hamburgers or 8 milkshakes rather than 5 hamburgers and 4 milkshakes we now know that abe's PPF has
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shifted right (increased) but the opportunity cost of making milkshakes are unchanged (10/8 = 5/4)
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Khalil is offered a free ticket to the opera. His opportunity cost of going to the opera is:
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whatever Khalil would have done had he not gone to the opera.
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National accounts
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keep track of the flows of money between different sectors of the economy
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Household
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a person or group of people who share income
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firm
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an organization that produces goods and services for sale
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product markets
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where goods and services are bought and sold
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factor markets
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where resources especially capital and labor are brought and sold
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Consumer spending
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household spending on goods and services
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stock
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a share in the ownership of a company held by a shareholder
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bond
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a loan in the form of an IOU that pays interest
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Government transfers
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payments that the government makes to individuals without expecting a good or service
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Disposable income
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equal to income plus government transfers minus taxes is the total amount of household income available to spend on consumption and to save
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Private savings
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equal to disposable income minus consumer spending, is disposable income that is not spend on consumption
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Financial market
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the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing and foreign borrowing
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Government borrowing
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the amount of funds borrowed by the government in the financial markets
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Exports
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goods and services SOLD to other countries
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Imports
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Goods and services PURCHASED from other countries
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Inventories
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stocks of good and raw material held to facilitate business operations
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Investment spending
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spending on new productive phsyical capital such as machinery and structures, and on changes in inventories
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GDP (Gross Domestic Product)
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The total value of all final goods and services prodcued in the economy during a GIVEN year
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Aggregated spending
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the total spending on domestically produced final goods in the economy. The sum of consumer spending (C) investment spending (I) , government purchases (G), and exports minus imports (X-IM)
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Net exports
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the difference between the value of exports and value of imports
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Aggregate output
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the total quantity of final goods and services produced within an economy
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Real GDP
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The total value of all final goods produced in the economy during a given year, calculated using the prices of a selected base year.
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Nominal GDP
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total value of all final goods produced in the economy during a given year, calculated with the prices current in the year in which the output is produced
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GDP per capita
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GDP divided by the size of the population, equivalent of the average GDP per person,
- to see labor productivity
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Which of economic agents engages in consumer spending?
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Households
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Total income households have after paying taxes and receiving government transfers is called
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disposable income
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private savings is
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disposable income minus consumption
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a stock in a company is
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a share of owernship of a compnay held by a share holder
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a bond is
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an iou that pays interest
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The market that channel excess savings of households into investment spending by firms are known as
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the financial markets
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an example of investment spending would be
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purchase of a new productive machine
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best definition of GDP
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the total dollar value of all final goods and services produced in the economy during a given year
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GDP equation
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GDP=C+I+G+(X-IM)
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An intermediate good would be
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lumber used in building a house
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Intermediate good
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a good used in the production of another good
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Inventory investment is counted as investment because
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inventory is a source of future sales
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GDP excludes
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the value of leisure, damage done to the environment, the value of house work
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Is japanese auto producer Honda builds a factory in Indiana considered GDP of the US?
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Yes, in USA so in our economy
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Is you buying a new pair of pants produced at a factory in honduras a GDP of the US?
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No, they were imported in
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If you mow your uncle's yard and he gives you $10 for a job well done, is that considered GDP in the US?
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no, because you weren't hired. it was more like a gift
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A woman once had a gardener and then got married so her husband does it now. What happened to the GDP in the economy?
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The GDP decrease because the service went to is not used anymore
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Why do economist bother to compute Real GDP? Instead of comparing nominal GDP from one year to the next?
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Real GDP can be used to find per capita of the population crate a more accurate representation of our economy. Real GDP accounts for the price changes from one year to the next
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Nominal GDP equation
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Nominal GDP = quantity produced x Price of current year
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Real GDP equation
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Real GDP = Quantity produced x Price of base year
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GDP per capita equation
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Real GDP
__________
Population
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when a gpd per capita goes from 200 to 183 then standard of living has
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decreased
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If nominal GDP decrease from one year ot the next, we can conlude that
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prices fell from one year to the next, real GDP fell from one year to the next or that prices and real GDP fell from one year to the next
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Employed
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people are currently holding a job in the economy, either full tie or part time
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Unemployed
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People are actively looking for work but aren't currently employed
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Labor force
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equal the sum of employed and the unemployed
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Labor force participation rate
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the percentage of the population aged 16 or older int he labor force
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unemployment rate
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the percentage of the total number of people in the labor force who are unemployed
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discouraged worker
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non working people who are capable of working but have given up looking for a job due to the sate of the job market
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marginally attached workers
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would like to be employed and have looked for a job in the recent past but are not currently looking for work
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Underemployed
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are people who work part time because they can not find full time jobs
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Employment is
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the total number of people actively working
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the unemployment rate is
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the percent of the labor force that is unemployed
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to be counted as unemployed, one must
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be out of work and actively looking for a job
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If a country has a working age population of 200 million, 135 million people with jobs and 15 million people unemployed and seeking, then the unemployment rate is:
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10%
(15/ (135+15)) = .1
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The labor demand curve is negatively sloped because
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employers are willing to hire more people at lower wages
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The labor supply curve is positively sloped because
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more people are willing to work at higher wages than at lower wages
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If the economy invest in education such that the average level rises by 2 the new aggregate production function will
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increase GDP per worker with education because it is human capital
- B shifts up
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Economist say that long run economic growth is almost entirely due to
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rising productivity
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Factor that contributes to a nation's rapid long run economic growth
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Faster technological progress
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The term "Human capital" describes
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improvement in the worker made possible by education, training, and knowledge
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Over the course of the 20th century, the real GDP per capital in the US rose mostly as a result of
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rising productivity
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Technological progress allows workers to produce more
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even when the amount of physical capital and human capital do not change
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if technology advances then
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more output can be obtained from the same inputs
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Physical capital would include
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the tools a worker has to work with
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When tracking economic growth, why do economist prefer real GDP per capita?
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Real GDp is preferred because it controls the price change from one year to the next, but setting a base year price. And with per capita real GDP accounts for population size which better determines how productive an economy is
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Diminishing returns to physical capital means that, when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to
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a smaller increase in productivity (not efficient anymore)
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What describes what is happening along a typical aggregated production function?
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Due to diminishing returns, at some point increasing the amount of physical capital per worker will bring small increases in productivity
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With improvement of technology then the point on the productivity curve
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moves up, B to C
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10 million people who did not have jobs were actively looking and 85 million had full time or part time jobs. The unemployment rate in 2007 was:
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10/ (85+10) = .105
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If the population of the US is 260 and the labor force is 130 and 120 are employed, the rate of the unemployment is:
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130-120=10
10/130=.0769
= 7.7%
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Frictional unemployment
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unemployment due to the time workers spend in job search
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Structural unemployment
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Unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate
- D > S
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Efficiency wages
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wages that employers set above the equilibrium wage rate as an incentive for better employee performance
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Natural rate of unemployment
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The unemployment rate that arises from the effects of frictional plus structural unemployment
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Cyclical unemployment
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the deviation of the actual rate of unemployment from the natural rate
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Employment is
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the total number of people actively working
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The unemployment rate is the ratio of anyone
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unemployed to those in the labor force
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120 with jobs and 30 looking, then the unemployment rate is
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30/(120+3) = .2
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135 with jobs, 10 looking but have given up, 5 seeking, then the number of discouraged workers is:
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10 million
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the labor force is equal to the
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sum of employment and unemployment
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amount people counted as unemployed by the government are
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people without a job who are actively seeking a job
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to classified as unemployed, a person must be
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not working and actively looking for a job in the last four weeks
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Discouraged workers are those individuals
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who have given up looking for a job
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Debbie works 20 hours a week at an accounting for and would like to work full time, she is considered
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a underemployed worker
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In calculating the unemployment rate, discouraged workers are
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no included in the labor force
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the presence of discouraged workers in the economy tends to
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lower the official unemployment rate
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an example of frictional unemployment is
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real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California
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an example of structural unemployment is
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geologist who is permanently laid off from an oil company due to an increase in wages won by labor unions
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If the actual unemployment rate is 7% and the cyclical unemployment rate is 2% then the natural rate of unemployment is
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5%
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Deviation from the natural rate of unemployment is known as
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cyclical unemployment
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Natural unemployment rate equation
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Natural unemployment = frictional unemployment + Structural unemployment
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Inflation rate
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Price level in year 2 - Price level in year 1
_____________________________ X 100
Price level in price 1
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Circular-flow diagram
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a visual model of the economy, shows howdollars flow through markets among households and firms
Two types of “actors”:
households
firms
Two markets:
the market for goods and services
the market for “factors of production”
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Income equation
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I = W - tw + T
W(wages)
tw(tax rate)
T(govt transfer)
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Saving equation
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S = I - C
I (disposable income)
C (consumption)
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GDP equation
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Y = C + I + G + (X-IM)
Y (GDP)
C (Consumption)
I (Investment)
G (Government spending)
X (Exports)
IM (Imports) > not produced here
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Labor force does not include
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retired people, Disabled workers, Discouraged workers
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Why is the unemployment rate underestimated then the true level?
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Doesn't include discourage workers
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Labor
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a factor in production, in other words, input
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What causes the supply of labor to increase?
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Population growth, Unions (place less restrictions on union members)
- Minimum wage above the equilibrium point
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What causes the labor supply to decrease?
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Population decline, Unions (Can restrict number of labor entrance into the union labor market)
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What causes the demand of labor to increase?
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- the price of the firms output increases
- The price of the substitute labor rises (machines)
- the price of a complement of labor falls
- a new technology or new capital increases the marginal product of labor
- increases in government spending
- increase in the number of firms i…
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What causes the demand of labor to decrease?
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- price of firms output decreases
- the price of substitute for labor falls
- The price of a complement of labor rises
- a new technology or new capital decreases to the marginal product for labor (the per unit output a laborer produces)
- Decrease in government spending
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Why can the unemployment never be zero?
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people still transition in between jobs (at one point or another you will be unemployed to find a new job)
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Why is real gdp preferred over nominal GDP?
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Real gdp controls for price changes from one year to the next by setting a base year price
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Why is Real GDP per capita preferred?
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It accounts for population size to see how productive an economy is
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Aggregate
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entire economy
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Per worker
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the average of a worker produces in the economy
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GDP per worker equation
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GDPerworker = T x K^.04 x H ^.6
T= technology
K = physical capital
H = Human capital
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Why does the production function exhibit diminishing returns?
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as each human capital increases, the amount of physical capital leads to a smaller increase in productivity
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What is the most important element to economic growth?
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Technology, can shift the GDPerworker curve out and increases all productivity
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Total factor productivity
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the amount of output that can be achieved with a given amount of inputs
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One reason why frictional unemployment exisit
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Constant process of job creation and Job destruction
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Two reason why frictional unemployment exist
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New workers are constantly entering the labor market
ex. recent college/Highschool graduates
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Low levels of frictional unemployment is
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good for the economy
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what would cause wage to be above the equilibrum wage?
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1. minimum wage laws
2. Labor unions
3. Efficiency wages
4. Externalities from the government policies
ex. welfare
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Natural rate of employment
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= Frictional + Structural
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Cyclical unemployment
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the deviation of the actual unemployment from the natural rate
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Actual unemployment rate
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= cyclical rate + Natural rate
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Is the natural rate constant?
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no it fluctuates
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Factors that can change natural rate
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1. changes in the characteristic of the labor force
2. Changes in labor market institution
3. Changes in govt policies
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Does inflation always make someone worse off?
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no
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Real wage =
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wage rate
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Price level
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Inflation rate
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the percentage change per year in a price index
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Inflation equation
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W = CPI2- CPI1
______________ x100
CPI1
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index of a basket in year t
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= cost of market basket in time t
_________________________________
Cost of market basket in base year
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