CFM
Three economic actors of the CFM
households, firms, government
Which of the following IS counted towards GDP? (There may be more than one)
value of a used textbook sold through an online auction in 2006
rent paid in 2006 by residents in an apartment building built in 2000
commissions earned in 2006 by a stockbroker
value of automobiles produced in 2006 entirely in South Korea by a firm fully owned by US citizens
rent payment and commissions
Are discouraged workers included in unemployment?
No
overstate - substitute goods, change in quality
An economy is in a recessionary gap if
actual GDP < potential GDP
The CFM depicts
the flow of money and products
(total expenditure and total income)
True or False: the value of cars produced in Japan in 2018 by a US company would NOT be included in US GDP for 2018.
true
Alice left her job in New York and is moving to Atlanta. What type of unemployment is Alice?
Frictional
Who benefits from unexpected inflation:
retiree living on a fixed pension, a landlord receiving fixed lease payments, a student saving $10 each month in a piggy bank, a creditor lending out $1,000 as a fixed-rate loan, a debtor making payments on existing fixed-rate loans
a debtor making payments on existing fixed-rate loans
Unexpected increases in inventories usually happen before a
recession / contraction
OR
decrease in production (recessionary gap)
Short run increase in national income would be a result of a decrease in which of the following: consumption, investment, government spending, imports, exports
imports
State 3 limitations of GDP
nonmarket transactions, distribution of income, underground activities (black market), environmental damage, quality of life (standard of living)
What types of unemployment are included in the NRU? When is an economy at the NRU?
frictional and structural
equilibrium/full employment output
If a worker's nominal wage increases from $10 to $12 per hour and at the same time, the general price level increases by 10%, what happened to the worker's real wage (percent)?
increased by about 10%
(12-10/10) *100 = 20% increase in nominal wage
if inflation is 10%, 20%-10% = real wage
In an expansionary gap, what happens with inflation, unemployment, and GDP
Unemployment decreases
GDP and inflation increases
State one leakage and one injection of the CFM
Leakage: savings, imports, taxes
Injection: investment, exports, gov spending
CPI in 2006 was 100 and real GDP was $1,000.
CPI in 2010 was 110 and nominal GDP was $2,200.
Calculate the nominal GDP in 2006 and real GDP in 2010. How much did real GPD actually grow?
IF nominal GDP fell and real GDP grew, what is happening with inflation?
Nominal GDP 2006: $1,000
100 = (x/1,000) *100
(100*1,000)/100 = x
Real GDP 2010: $2,000
110 = (2,200/x) * 100
x = [2,200 / (110/100)]
Grew by $1,000
Inflation rate would be negative (deflation)
Canada's civilian working-age population is 60 million, the labor force participation rate in Canada is 75% and the unemployment rate is 20%. What is the number of employed people in Canada?
36 million
20% = x / (75% * 60M)
.2 (.75 * 60M) = x
80% of x = employed
CPI in 2008 is 80, 100 in 2009, and 105 in 2010.
What is the base year? What is the inflation rate for 2010? Did all prices rise from 2009 to 2010?
base year: 2009
inflation rate: 5%
[(105-100) / 100] * 100
all prices did NOT rise
At what point on the business cycle is the economy in equilibrium?
potential GDP = actual GDP
OR
potential GDP and actual GDP intersect
Draw out the CFM and include the following:
all three economic actors, resource and product market, flow of goods, flow of money
Households demand goods in product market and supply labor in the resource market
Firms demand resources in the resource market and supply goods in the product market
Government demand and supply (goods and labor) in both the resource and product markets
For Country X, Consumption Spending is $1 billion Investment Spending is $300 million Government Spending is $400 million, Net Exports is -$100 million, and the GDP Deflator is 160.
What is the nominal GDP? What is the real GDP? If Country X sold all their crops domestically and farmer's sales is now $10million, miller's sales is $25 million, and bakery's sales is $65million, how much would the nominal GDP change?
nominal GDP $1.6 billion
1B +3M +4M -1M = 1.6 B
real GDP $1 billion
160 = 1.6/x
x = 1.6/160
increase in nominal GDP by $65 million (only final goods count)
Zeta's civilian noninstitutional population aged 16 and over is 1,000,000, the labor force participation rate is 70%, the unemployment rate is 9%, and the NRU is 5%.
What is the number of unemployed people? Is the economy in a gap? Explain. What would happen to both the labor force participation rate and the unemployment rate if individuals counted towards unemployed stopped looking for work?
63,000 unemployed
9% = x /70% of 1,000,000
.09 * (.7 * 1,000,000) = x
recessionary gap: current unemployment > NRU
labor force participation rate decrease and unemployment rate decreases
Market Basket in base year is $75. In 2020, 10 dozen eggs were purchased for $2 a dozen, 15 loaves of bread were purchased for $1 each, and 25 gallons of milk were purchased for $4 each.
Calculate the CPI and Inflation rate for 2020.
Market Basket 2020: $135
(15*1) + (25*4) + (10*2) = 135
CPI 2020: 180
(135/75) * 100
Inflation Rate 2020: 80%
[(180-100)/100] *100
x-axis: time
y-axis: output/production
2 peaks (highest part) 2 expansions (upward slopes) 2 contractions (downward slopes) 2 troughs (lowest point)
squiggly line: actual GDP
diagonal upward sloping line: potential GDP
expansionary gap (between peak and potential GDP), recessionary gap (between trough and potential GDP), equilibrium (potential and actual GDP lines intersect)