Output Questions
What is potential output?
It is the maximum amount that an economy can produce in the long run on a sustained basis.
Why does potential output matter?
Forecasts the longer-term direction of the economy as well as the fiscal and monetary policies needed in the future.
Since actual output tends to fall in-line with potential, it is crucial to have potential output as an estimation to show where the economy is heading.
What is the name of the curve that measures inflation and (short run) output?
A Phillips Curve.
What is Christopher Nolan's latest film called?
Oppenheimer
What are the differences of the long-run and short-run models?
Long run measures potential output and long run inflation whereas short-run model measures current output and current inflation.
Short run captures fluctuations in the GDP.
Which US office prepares and updates estimates of potential output?
The Congressional Budget Office.
What are the three premises the short run model is based on?
1. The economy is constantly being hit by shocks
2. Monetary and fiscal policy affect output
3. There is a dynamic between trade-off between output and inflation.
Who was the 15th President of the United States?
James Buchanan
What are the differences between inflationary and recessionary shocks?
Recessionary shocks are when the actual output of the economy is lower than predicted. It would mean that inflationary is lower and would suggest that the supply side of the economy should be lowered.
Inflationary shocks mean that economic output is higher than predicted, resulting in a higher inflation level.
What did the 2008 financial crisis cause the CBO to change for its future predictions?
It caused the CBO to lower its future predictions. Even doing so, the CBO still overestimating the trajectory and recovery time of the financial crisis.
Do we capture short-run fluctuations in percentage terms or in dollars? Why?
Percentage. The GDP from 50 years ago is no where near the size of the GDP today, so percentage terms show us this growth.
What is the speed of light?
300 million meters/second
It would bring actual output above the level of potential output.
What other alternative can be a key indicator of the cyclical state of the economy. What are the pros and cons of using this alternative?
The unemployment rate.
Pro: provides an estimation that doesn't rely on the supply side of the economy.
Con: the structure of the labor market changes over time and measuring full-employment level of unemployment has proven extremely difficult.
In 1979, how did Paul Volcker reduce inflation?
He tightened monetary policy by raising interest rates. As a result, output was reduced.
When did World War II start and end?
September 1939 - September 1945
According to the Phillips Curve, when is an economy slumping or booming?
It is slumping when the change in inflation and change in short run output are less than zero. When the changes are greater than zero, it is booming.
Describe the difference between bottom-up and top-down approach for taking estimations.
Bottom-up focusses on longer term movements in supply side factors that produce a smoother estimate. Starts narrow and expands.
Top-down approach uses data on inflation, GDP, and interest rates to infer potential output. Starts general and narrows.
Describe Okun's Law...
Bonus 100 points if you remember the equation.
Another 100 if you can remember Okun's full name.
Measures cyclical unemployment (the difference between current rate and natural rate of unemployment) and short run output.
u - ubar = -1/2 x Y
Arthur Okun
What day did Apollo 11 land on the moon?
July 20, 1969