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Macroeconomics Unit2

QuestionAnswer
Q: What role do households play in the circular flow of the economy? A: They own resources (labor, land, capital) and buy goods and services.
Q: What role do firms (businesses) play in the circular flow of the economy? A: They use resources to produce goods and services and sell them to households.
Q: What is the Market for Goods & Services (Product Market)? A: Where firms sell goods/services and households are buyers.
Q: Who are the buyers and sellers in the Product Market? A: Households are buyers; firms are sellers.
Q: What is the Market for Factors of Production (Resource Market)? A: Where households sell resources like labor and firms buy them.
Q: Who are the buyers and sellers in the Resource Market? A: Firms are buyers; households are sellers.
Q: What happens in the Product Market? A: Households spend money on goods and services from firms.
Q: What does household spending become for firms? A: Revenue.
Q: What happens in the Resource Market? A: Firms pay households for resources such as labor, land, and capital.
Q: What do payments for resources become for households? A: Income (wages, rent, profit).
Q: How do resources and goods flow in the circular flow model? A: Resources flow from households to firms; goods and services flow from firms to households.
Q: What additional components are added in the expanded circular flow model? A: Government, financial markets, and international trade.
Q: How does government act in the circular flow model? A: Collects taxes (leakages) and spends money on public services (injections).
Q: What role do financial markets play in the circular flow? A: Savings are leakages; investments are injections.
Q: How does international trade affect the circular flow? A: Imports are leakages; exports are injections.
Q: Why is the circular flow model important? A: It shows how different parts of the economy depend on each other.
Q: How does the circular flow model relate to GDP? A: Total income earned must equal total spending on goods and services.
Q: What key idea does the circular flow model illustrate about money? A: Every dollar spent by someone becomes income for someone else.
Q: What is the private sector? A: The part of the economy run by individuals and businesses.
Q: What is the public sector? A: The part of the economy controlled by the government.
Q: What are factor payments? A: Payments for factors of production: wages, rent, interest, and profit.
Q: What are transfer payments? A: Government payments that redistribute income (ex: welfare, Social Security).
Q: What are subsidies? A: Government payments made to businesses.
Q: What are leakages in the circular flow model? A: Withdrawals of spending from the economy’s circular flow.
Q: What are injections in the circular flow model? A: Additions of spending to the economy’s circular flow.
Q: What is Gross Domestic Product (GDP)? A: The dollar value of all final goods and services produced within a country’s borders in one year.
Q: What does GDP measure? A: Total economic output of a country.
Q: Why does GDP only count final goods? A: To avoid double counting.
Q: What are intermediate goods? A: Goods used to make final products.
Q: Why are intermediate goods not included in GDP? A: Their value is already included in the final good.
Q: Example of intermediate vs. final goods? A: The price of a finished car is counted, not the radio, tires, or engine.
Q: What are non production transactions? A: Transactions that do not involve the production of new goods or services.
Q: Are financial transactions included in GDP? A: No.
Q: Examples of financial transactions not included in GDP? A: Stocks, bonds, and real estate.
Q: Are used goods included in GDP? A: No.
Q: Why are used goods not included in GDP? A: They were counted when they were first produced.
Q: Are nonmarket activities included in GDP? A: No.
Q: Examples of non market activities? A: Unpaid work (like volunteering or household work).
Q: Are illegal activities included in GDP? A: No.
Q: Example of illegal activities not included in GDP? A: Illegal drugs.
Q: What is a major shortcoming of GDP related to nonmarket activities? A: GDP does not include non market activities like stay-at-home parenting or repairing your own home.
Q: Why does GDP understate well-being when it comes to leisure? A: The value of leisure time is ignored in GDP calculations.
Q: What is the underground economy? A: Economic activity that is unreported, such as tips or cash-only jobs.
Q: Why is the underground economy not counted in GDP? A: It is unreported and therefore difficult to measure.
Q: How does GDP fail to account for environmental issues? A: GDP does not subtract for pollution or environmental damage, even though they reduce well-being.
Q: What is meant by “composition of output” as a shortcoming of GDP? A: GDP treats all output equally, regardless of whether it improves quality of life.
Q: Example of GDP’s composition problem? A: GDP assigns the same value to an assault rifle as it does to a set of encyclopedias.
Q: What does “distribution of output” mean in GDP shortcomings? A: GDP does not show how income and goods are distributed among people.
Q: What are non economic sources of well-being not measured by GDP? A: Reduced crime, peaceful relations, and lower drug and alcohol abuse.
Q: Why doesn’t GDP fully measure standard of living? A: It ignores non market activities, leisure, environmental quality, and social well-being
Q: Who counts as unemployed? A: People without a job who are actively looking for work.
Q: Who is not counted as unemployed? A: People not looking for work (discouraged workers), retirees, students not seeking jobs.
Q: What is the labor force? A: Employed + unemployed people who are actively seeking work.
Q: What is the unemployment rate formula? A: (Unemployed ÷ Labor Force) × 100
Q: What is the Labor Force Participation Rate (LFPR)? A: (Labor force ÷ adult population) × 100
Q: What happens to unemployment when people stop looking for work? A: The unemployment rate decreases, even if no new jobs are created.
Q: What is frictional unemployment? A: Short-term unemployment from people between jobs or entering the workforce.
Q: Examples of frictional unemployment? A: New graduates, people who quit to find a better job.
Q: What is structural unemployment? A: When workers’ skills no longer match available jobs.
Q: Common causes of structural unemployment? A: Technology changes, automation, outsourcing.
Q: Why is structural unemployment long-term? A: Workers need retraining or new skills.
Q: What is cyclical unemployment? A: Unemployment caused by economic downturns or recessions.
Q: What happens to cyclical unemployment during recessions? A: It increases.
Q: What is natural rate of unemployment (NRU)? A: Frictional + structural unemployment.
Q: Is 0% unemployment realistic? A: No, because frictional and structural unemployment always exist.
Q: What are discouraged workers? A: People who stopped looking for work and are not counted in unemployment.
Q: What is underemployment? A: People working part-time or jobs below their skill level.
Q: What is illegal labor? A: People working without authorization; not counted in official unemployment.
Q: What does the income approach measure? A: GDP by adding all incomes earned in production.
Q: Components of the income approach? A: Wages, rent, interest, profits.
Q: What is the value-added approach? A: GDP measured by the value added at each stage of production.
Q: Why use the value-added approach? A: To avoid double counting.
Q: Unemployment rate by race (approximate)? A: White: ~3–4% Black: ~5–6% Latinx: ~5% Asian: ~3–4%
Q: Unemployment rate for ages 16–24? A: ~16–18%
What does GDP measure in current prices? Nominal GDP.
Why is Real GDP more accurate than Nominal GDP? It reflects changes in actual output, not price changes.
What does Nominal GDP NOT account for? Inflation.
What is Real GDP? GDP adjusted for inflation, expressed in constant dollars.
What is the equation for the GDP Deflator? Nominal GDP ÷ Real GDP x 100
What is the business cycle? The pattern of economic expansion and contraction over time.
What happens during an expansion? Output increases and unemployment falls.
What happens during a recession? Output decreases and unemployment rises.
Two major problems during the business cycle? Unemployment and inflation.
Sources of business cycle fluctuations? Innovation Changes in productivity Resource availability Monetary factors (government printing money) Outside influences (political events, wars)
What is recession? A significant, widespread downturn in economic activity, characterized by falling production, rising unemployment, and decreased spending, lasting for several months or longer
How do economists determine if we are a recession? By using indicators like falling GDP, rising unemployment, reduced income, and slowing production
Inflation A rise in the general price level over time.
Deflation A decrease in the general price level (negative inflation).
Why inflation reduces purchasing power Each dollar buys fewer goods and services.
Who benefits from inflation Borrowers and people with fixed-rate loans.
Who is hurt by inflation Lenders, savers, and people with fixed incomes.
Menu costs Costs to businesses of changing prices.
Shoe-leather costs Costs related to increased transactions due to inflation.
Why workers ask for raises during inflation To maintain real purchasing power.
Three levels of inflation Creeping Chronic Hyperinflation
Creeping inflation Slow and predictable inflation.
Chronic inflation Moderate but persistent inflation.
Hyperinflation Extremely rapid and uncontrollable inflation.
CPI A measure of the average price of a market basket of goods.
What CPI tracks Market basket A group of commonly purchased goods and services. CPI formula (Price of market basket ÷ Base year price) × 100 Changes in the cost of living.
Market basket A group of commonly purchased goods and services. CPI formula (Price of market basket ÷ Base year price) × 100
Market basket A group of commonly purchased goods and services.
Inflation rate The percent change in prices year-to-year. Inflation rate formula ( 𝐶 𝑃 𝐼 2 − 𝐶 𝑃 𝐼 1 ) ÷ 𝐶 𝑃 𝐼 1 (CPI 2 ​ −CPI 1 ​ )÷CPI 1 ​ × 100 Example: CPI rises from 100 to 125 Inflation rate = 25%
Inflation rate formula ( 𝐶 𝑃 𝐼 2 − 𝐶 𝑃 𝐼 1 ) ÷ 𝐶 𝑃 𝐼 1 (CPI 2 ​ −CPI 1 ​ Inflation rate formula ​ (CPI(1) ÷ CPI(2)) ÷ CPI(1) x 100
Q: What is GDP mainly determined by? A: Productivity
Q: What is a recession? A: Six months (or two quarters) of decline in real GDP
Q: Why is GDP per capita important? A: It is the best measure of a nation’s standard of living
Q: What is GDP per person (GDP per capita)? A: GDP divided by the population
Q: What is GDP mainly determined by? A: Productivity
Q: What does productivity mean? A: Output per unit of input
Q: How does the economic system affect GDP? A: Capitalism promotes innovation and provides incentives to improve productivity
Q: How does rule of law affect economic growth? A: Countries with strong institutions and political stability have more economic growth
Q: How does specialization impact GDP? A: Countries that produce more maximum goods and services are more productive
Q: Why does India have a relatively low GDP? A: It has a lot of labor but not very much capital
Q: Why does Japan have a high GDP despite few natural resources? A: It uses its resources efficiently and has high productivity
Q: How does human capital affect GDP? A: Countries with better education and training are more productive
Q: How do natural resources affect GDP? A: Countries with access to more natural resources are generally more productive
Q: How does free trade affect productivity? A: It gives countries access to more resources at lower costs
Created by: user-1878450
 



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