Chapter 7
Economic growth is best defined as an
increase in:
• either real GDP or real GDP per capita.
Which best measures improvements in
the standard of living?
• growth of real GDP per capita
For comparing changes in a nation’s
power, the most meaningful measure
of economic growth would be:
• changes in total real output.
The number of years required for real
GDP to double can be found by:
• dividing 70 by the annual growth rate.
• About ________ of U.S. economic growth
comes from improved productivity (as
opposed to added inputs).
• two-thirds.
The phase of the business cycle in
which real GDP declines is called:
• a recession/contraction
Market economies have been
characterized by:
• occasional instability of employment and price
levels.
A recession is a period in which:
• real domestic output falls (2 consecutive
quarters).
• In which phase of the business cycle will the
economy most likely experience rising real
output and falling unemployment rates?
• expansion
The sectors in which output is likely to
be most strongly affected by the
business cycle are:
• capital goods and durable consumer goods.
The production of durable goods
varies more than the production of
nondurable goods because:
• durables purchases are postponable.
The labor force:
• # Employed + # Unemployed
unemployment rate:
#Unemployed
#Labor Force
To be officially unemployed a person
must:
• be in the labor force.
Part-time workers are counted as:
fully employed
• therefore the official unemployment rate may
understate the level of unemployment.
• If members of the underground economy are
presently counted as part of the unemployed
when in fact they are employed, the official
unemployment rate is:
• overstated
The natural rate of unemployment:
• that rate of unemployment occurring when
the economy is at its potential output.
• If the unemployment rate is 7 percent and the
natural rate of unemployment is 5 percent,
then the:
cyclical unemployment rate is ?
Discouraged workers:
• may cause the official unemployment rate to
understate the amount of unemployment.
• Unemployment involving a mismatch of the
skills of unemployed workers and the skills
required for available jobs is called:
structural unemployment.
The type of unemployment associated
with recessions is called:
• cyclical unemployment.
The GDP gap measures the difference
between:
• actual GDP and potential GDP.
Okun's law:
• for every 1% increase in the unemployment
rate, a country's GDP will be roughly an
additional 2% lower than its potential GDP
• In the United States, business cycles have
occurred against a backdrop of a long-run
trend of:
rising real GDP.
Inflation means:
• prices in the aggregate are rising, although
some particular prices may be falling.
The rate of inflation can be found by
subtracting:
• last year's price index from this year's price
index and dividing the difference by last year's
price index.
Demand-pull inflation:
• occurs when total spending exceeds the
economy's ability to provide output at the
existing price level.
Cost-push inflation:
• may be caused by a negative supply shock, i.e.
oil and gas prices sharply rising
Real income is found by:
• dividing nominal income by the price index (in
hundredths).
real income:
• nominal income – price level increase
(inflation)
Inflation:
• arbitrarily redistributes real income and
wealth.
Who can best adapt to unanticipated
inflation?
• an owner of a small business
• Why?
Cost-push inflation:
• reduces real output.
During hyperinflation:
• people tend to hold goods rather than
money.
The price index in the base year is
• 100.
• If your wages triple at the same time as the
consumer price index goes from 100 to 400,
you real wage
• falls
• If the cost of a market basket of goods
increases from $100 in year 1 to $110 in year
2, the CPI in year 2 equals
if year 1
is the base year.
• 110
Consumer Price Index (CPI):
• the most common measure of the price level
• measures the price of a typical market basket
of goods
• does NOT measure the cost of all goods and
services in an economy