ECON 1951 - Principles of Macroeconomics final exam
questions and answers complete Thompson Rivers
University
What are the four macroeconomic markets? What do they determine? - --Good and Services
Market - Determines price level/inflation rate, amount of output produced by economy
Labor Market - Determines wage rate, unemployment
Money Market - Determines interest rate, price of bonds
Exchange Market - Balance of payments, exchange rate
What is GDP? - --Total dollar value of all final goods and services produced in a country during
a year.
Are intermediate or final goods calculated in a country's GDP? - --Final
What accounts for a negative number in inventories in the measure of GDP? - --If people buy
more than what was produced in a given year.
Are used item purchases accounted for in GDP calculations? - --No
In calculating GDP, what solves the issue of purchasing imported goods and services? - --
Imports are substracted from GDP calculations.
What are the four general categories of calculating GDP? - --Consumption (C)
Investment (I)
,Government (G)
Foreign/Net Exports (X-M)
How can GDP measure be deceptive? (6) - --1. Some things are produced but never sold, so
not included in GDP (ex: work of homeowners)
2. Some expenditures are hidden from data gatherers (ex: illegal activities, black market)
3. Some items included in GDP do not reflect net benefits to society (ex: Exxon oil spill)
4. Gov spending valued at cost, even though people might think its a waste etc.
5. GDP does not account for nonrenewable resources
6. Hard to compare cross-country.
What is the formula to calculate real GDP? - --Nominal GDP/GDP deflator (P)
What is inflation? - --Persistent rise in the general price level.
How is the consumer price index (CPI) calculated? - --Current cost of bundle/Base year cost of
bundle x 100
What does the CPI reflect? - --Growth in prices of consumer goods and services.
Why does the CPI have a high profile? - --Main measure of inflation.
What are two main problems with CPI? - --1. Changes in relative prices (changes in prices of
bundles, overestimate and underestimate)
2. Quality changes (improvements in quality vs. rise in price, purchasing power of dollar for
certain items ex: computer)
,What is the labor force? - --People that want a job.
What is the formula for unemployment? - --Unemployed/Labor force
How can workers become discouraged? Why is this bad for the measure of the
unemployment rate? - --People looking for work have looked for so long that they become
convinced there is no job out there for them.
They aren't part of the labor force anymore, unemployment drops, causing an
underestimation
How can workers become encouraged? Why is this bad for the measure of the
unemployment rate? - --When economy recovers from a recession, or workers notice others
getting jobs, discouraged workers become encouraged.
They suddenly become unemployed, causing rise in unemployment.
What is the participation rate? - --Labor force / Adult population
What is frictional unemployment? - --Unemployment corresponding to the ongoing process
of improving the occupational and geographical match of workers and jobs.
Why is zero unemployment unrealistic? (3) - --1. Frictional unemployment
2. Structural unemployment
3. Institutional phenomena (minimum wage too costly for extra labor, discrimination,
unemployment benefits etc.)
, What is structural unemployment? - --Retraining to obtain jobs, because of technological
advances or changing demand.
What is cyclical unemployment? What does it measure? - --Unemployment above the NRU in
a business cycle, measures the cost to society of unemployment.
When is a economy said to be producing its potential GDP? - --When its operating at the
nature rate of unemployment (full employment).
What is Okun's Law? - --One point increase in cyclical unemployment rate is associated with
two percentage points of negative growth in GDP.
What is the connection between potential output at the NRU? - --Potential output defined as
the output produced by an economy operating at its NRU.
According to Keynes, what are the four major types of demand? - --Consumption demand (C)
Investment demand (I)
Government demand (G)
Exports (X)
What must be subtracted from the sum of C, I, G and X in the calculation of aggregate
demand? - --Imports
What is disposable income? - --Income after taxes.
What is marginal propensity to consume (MPC)? - --The fraction of an additional dollar of
disposable income will be spent on consumption.
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