Macro Basics
GDP
Sales Tax
Unemployment, CPI, PCE
EQ Output cases
100
Define and draw the business cycle on the board!
Business cycle: recurring fluctuations in economic activity – recession, recovery, growth, decline
100
1. Uses current prices to value the economy’s production of goods and services. 2. Uses constant base-year prices to value the economy’s production of goods and services. 3. Measures the level of prices in the economy. (Nominal GDP/Real GDP)*100 4. Total income earned by a nation’s permanent residents: Includes income that U.S. citizens make while abroad and Excludes income that foreigners make in U.S. (that is a part of other countries GNP)
What is Nominal GDP (1); Real GDP (2); GDP Deflator (3); Gross National Product (4)
100
Qs=-10+P Qd=590-9P What is the equilibrium price?
Qs=Qd P*=60
100
1. A measure of the overall cost of the goods and services bought by a typical consumer 2. A measure of the cost of a basket of goods and services bought by firms
What is CPI (1); PPI (2)
100
At Y* what should be equal?
national savings = desired investment
200
Your college bookstore receives a shipment of new economics texts for $60,000. This transaction is: a. Not included in GDP calculation, since books bought by the bookstore are intermediate goods. b. included in GDP calculation under consumption. c. not included in GDP since books are exempt of GDP calculation d. Included in GDP under investment since the bookstore earns a profit by selling these books to students.
Your college bookstore receives a shipment of new economics texts for $60,000. This transaction is: a. Not included in GDP calculation, since books bought by the bookstore are intermediate goods.
200
TRUE OR FALSE: 1. GDP includes everything that is produced and sold legally in the economy. 2. Only includes tangible products. 3. Includes intermediate goods 4. Does not include sale of used goods.
What is True (1), False (2), False (3), True (4)
200
Qs=-10+P Qd=590-9P What are the equilibrium quantities (Qs* and Qd*)?
Insert P* back into equations Qs=50 Qd=50
200
PICK THE BEST ANSWER, EXPLAIN WHY OTHERS ARE WRONG: CPI tends to 1. estimate inflation because it uses fixed weights and ignores substitution of lower priced items for higher priced items 2. estimate inflation correctly 3. overstate inflation by excluding priced of the intermediate products 4. underestimate the extent of inflation when prices increase rapidly
CPI tend to overstimate inflation because it uses fixed weights and ignores substitution of lower priced items for higher priced items
200
1. Budget Deficit: Definition, and formula 2. During the 1990’s the federal gov. budget went from deficit to surplus. Opposite in 2001… what contributes to recent budget deficit???
1. Difference between what a government spends and what it collects in taxes (G-T) 2. Lower tax rates. Increased medicare payments. War in Iraq.
300
Which of the following describes the economic system in the US? a. Laissez-faire capitalism b. Pure communism c. Mixed Economy d. Socialism
Mixed Economy
300
BACKWARDS JEOPARDY What are the 3 components of Consumption, 3 components of Investment, components of Government Spending, and 2 components of Net Exports. Bonus - Which is the big mover in the cycle?
C: Durable goods, Nondurable goods, Services I: Business Investment, Residential Construction, Changes in Inventory G:Government purchases of goods and services are the purchases of goods and services by federal, state, and local governments. NX: Exports - Imports Investment is the big mover! Inventories are VOLATILE!
300
Assume a $10 per unit sales tax! Qs=-10+P Qd=590-9P What is the new Qs after the sales tax? What has changed and what has remained constant?
ONLY ADD TO Qs! Qs=-10+P new Qs=-20+P
300
In the country of Economica, in 2009 the consumer price index was 221.00. In 2010 the index increased to 234.26. Calculate the rate of inflation between 2009 and 2010.
The rate of inflation = 6.00 percent EQUATION: (CPIy2-CPIy1)/(CPIy1) * 100
300
C=200+4/5Y I=100 Assume no taxes or government spending. 1. What is MPC? 2. What is MPS? Definition and answer. 3. What is the equilibrium level of income and output? 4. What is the simple spending multiplier? 5. By how much will equilibrium output (Y) increase if Investment increases by 40? 6. What will equilibrium savings equal at the (highest) new level of equilibrium income?
1. 4/5 2. 1/5 3. Y = 1500 4. 5 5. 200 6. 140
400
WHAT IS CONSUMER SURPLUS
The difference between the maximum amount a person is WTP for a good and its current market place
400
Consider the following example and explain the effect on US GDP THIS YEAR, if there is any. 1) A '96 Chevy was purchased by John Johnson today. 2) A Microsoft computer product 2 months ago but no one has bought it yet. 3) Tulips from the Netherlands arrived at Walmart yesterday, but no one has bought any yet.
1) NO - not produced in 2016 2) NO - produced last year, not this year, and no one has bought it so it's not consumption 3) YES! Imports!
400
Qs=-10+P Qd=590-9P Sales tax=$10 per unit What is the new P*? New Q*? What are the
Qs=Qd P*=61 Q*=Qs=Qd=41
400
United States: 2000 Labor Force is 140.0 million and employment is 131.6 million. 2010 Labor Force is 156.8 million and employment is 142.1 million. CALCULATE: Unemployment rate for 2000 and 2010.
2000=6.0% AND 2010=9.4% [((LF-E)/(LF)) * 100]
400
C= 200 + 4/5 Yd Id= 100 constant desired investment G= 200, constant government spending T= 200, constant tax receipts Government is introduced! 1. Find Y* 2. By how much will equilibrium output rise if G increases by 40? 3. What is the simple tax multiplier? 4. So if taxes change by -40 how much will equilibrium Y increase? 5. By how much will equilibrium output increase if government spending and taxation increase by 40?
1. Y* = 1700 2. 200 3. -4 4. 160 5. 40
500
In Macroeconomics we study the interactions of three markets, WHAT ARE THEY?
Goods and services market, labor market, money market
500
LOOK AT BOARD! Find Nominal in Year 1, 2, 3 Using Year 1 as Base Year, find real GDP in Year 1, 2, 3 What is the GDP Deflator for Year 1, 2, 3?
Answers on Jessie's paper
500
Qs=-10+P Qd=590-9P Sales tax=$10 per unit Who does the newly-imposed sales tax affect more? Graph it on the board for a bonus of 100 points!
Change in P/Change in Tax = 1/10 Supply is less elastic, so it bears 9/10 of the tax.
500
Explain ALL the differences between U3 and U6 unemployment. What is U3 and U6 in the USA? What is considered natural (full employment) U3 and U6 unemployment?
U6 contains disgruntled workers, marginally attached, part-time looking for full time. U3 = 5.5% U6 = 10? U3=5% U6=9%
500
C= 100 + 3/4Yd, MPC=3/4 | Id= 300 constant desired investment | G= 2000 constant government spending | T= 500+1/3Y, | Assume that the GDP gap is 600 at your initial equilibrium. | THIS IS A FISCAL POLICY WITH FRACTIONAL TAXATION PROBLEM : 1. Find Y* 2. Find the Spending Multiplier 3. Suppose economy is operating below potential output by the amount of the GDP gap. By how much must government spending rise in order to bring the economy to full employment output? 4. What is the tax multiplier? 5. How large a change in taxes is needed to bring economy into full employment?
1. Y* = 4050 2. 2 3. 300 4. -1.5 It’s always negative! 5. -400 ; We need a tax break of 400 to bring the economy to full employment.
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