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Economics Study Guide #2 Unit 2: Macroeconomics 1. ( ____/15 Points) Gross Domestic Product a. Define GDP, identify what is not included, define the four components, and give an example of each (_____/5) b. Explain the difference between nominal GDP and real GDP. Use a simplified numerical example with two different years to show your understanding. (_____/5) c. If someone told you that the nominal GDP increased by 4% in 2004 explain why you would need two additional pieces of information to conclude that the standard of living for the typical person also increased by 4%. ( ____/5) 2. (_____/20 points) Gross Domestic Product Practice (See attached) 3. (_____/15 Points) Unemployment a. Define and give examples of the three types of unemployment discussed in class. (_____/5) b. How is the unemployment rate calculated? What is the Natural Rate of Unemployment? Do we want zero unemployment? (_____/5) 4. (_____/15 points) Unemployment Practice (See attached) 5. (_____/15 Points) Inflation a. Define and identify how to calculate the Consumer Price Index (CPI)? Explain the meaning of the following CPIs relative to a base year. Year 1=90, Year 2=100, Year 3=125, Year 4=150. Lastly explain why the percent change in prices from year 3 to year 4 is NOT 25%. (_____/5) b. Identify how to calculate nominal interest rates and real interest rates. Assume that you put $100 in the bank. Use numeric examples to explain three different scenarios in which your REAL income falls, stays the same, and increases. (_____/5) c. If the actual inflation is greater than the anticipated inflation, fully explain who would benefit and who would be hurt and explain WHY? (_____/5) 6. (_____/20 Points) Inflation Practice (See attached) 7. ( ____/15) Aggregate Demand and Aggregate Supply a. Define and give examples of the determinants of aggregate demand. ( ____/5) b. Define and give examples of the determinants of aggregate supply. ( ____/5) c. Graph the following curves (on the same graph): AD, AS. Make sure to correctly label the axies. ( ____/5) 8. ( _____/8) Macroeconomic Equilibrium What causes (Shifters) each of the following? a. An increase in AD? ( ____/ 2) b. A decrease in AD? ( ____/ 2) c. An increase in AS? ( ____/ 2) d. A decrease in AS? ( ____/ 2) 9. ( ____/20) Fiscal Policy a. Explain the difference between expansionary and contractionary fiscal policies. Explain their goals and give specific examples. ( ____/ 15) b. What are the problems with Fiscal Policy working correctly? ( ____/ 5) 10. ( ____/10) Key Concepts Define and explain each concept and give specific examples not found in the power point. a. Crowding Out ( ____/ 5) b. A Built-in Stabilizer ( ____/ 5) 11. ( ____/20) Money, Banking and Financial Markets Define and give specific examples of each of the following: a. Definition of financial assets: money, stock and bonds ( ____/5) b. Time Value of Money (present and future value). ( ____/5) c. Measures of Money Supply. ( ____/5) d. Money Demand. ( ____/5) 12. ( ____/20) Central Bank and Control of the Money Supply Define and give specific examples of each of the following: a. Tools of Central Bank Policy (All Three!) ( ____ / 5) b. How banks create money. ( ____/10) c. Quantity Theory of Money ( ____/ 5) GDP Practice For each of the following items write one of the following in the space provided: C if the item is counted as consumption spending I if the item is counted as investment spending G if the item is counted as government spending NX if the item is counted as net exports NC if the item is NOT counted in GDP _____ 1. You spend $7.00 to attend a movie. _____ 2. A family pays a contractor $100,000 for a house he built for them this year. _____ 3. A family pays $75,000 for a house built three years ago. _____ 4. An accountant pays a tailor $175 to sew a suit for her. _____ 5. The government increases its defense expenditures by $1,000,000,0000. _____ 6. The government makes a $300 Social Security payment to a retired person. _____ 7. You buy General Motors Corp. stock for $1,000 in the stock market. _____ 8. At the end of the year, a flour-milling firm finds that its inventories of grain are $10,000 above the amounts of its inventories at the beginning of the year. _____ 9. A homemaker works hard caring for her spouse and two children. _____ 10. Ford Motor Co buys new auto-making robots. _____ 11. You pay $300 a month to rent an apartment. _____ 12. Apple Computer Co. builds a new factory in Ohio. _____ 13. RJ Reynolds Co. buys control of Nabisco. _____ 14. You buy a new Toyota that was made in Japan. _____ 15. You pay tuition to attend college Unemployment Practice At full employment, we have frictional and structural unemployment but cyclical unemployment would be at zero. At full employment, the level of unemployment is called the natural rate of unemployment. For each of the following situations, put the appropriate letter before the examples. F if it is an example of frictional unemployment C if it is an example of cyclical unemployment S if it is an example of structural unemployment _____ 1. A computer programmer is laid off because of a recession. _____ 2. A literary editor leaves her job in New York to look for a new job in San Francisco. _____ 3. An unemployed college graduate is looking for his first job. _____ 4. Advances in technology make the assembly-line worker’s job obsolete. _____ 5. Slumping sales lead to the cashier being laid off. _____ 6. An individual refuses to work for minimum wage. _____ 7. A high school graduate lacks the skills necessary for a particular job. _____ 8. Workers are laid off when the local manufacturing plant closes because the product made there isn’t selling. _____ 9. A skilled glass blower becomes unemployed when a new machine does her job faster. Inflation Worksheet Using the following chart figure out the price differences in the items as well as the percentage change in price over the time span stated. Item Past Price (1993) Movie Tickets Soft Drink Gasoline (Gallon) Album (CD or DL) 4.14 1.00 1.07 13.14 Price Today (2011) Price Difference Percentage Change 7.89 1.50 3.63 12.19 Using the following chart calculate the rate of inflation each year. Year CPI 1 2 3 4 5 Percentage Change (Inflation Rate) 100 115 140 175 190 Now fill out the following chart and calculate the Indexes for each product and the overall index. Product Video Games Blue Ray Player MP3 Player Monitor Total Overall Index Price Year 1 40 200 100 50 Index Year 1 100 100 100 100 400/4 100 Price Year 2 60 220 75 60 Index Year 2 150 Who is hurt or helped by inflation? Describe groups that are hurt by inflation and groups that benefit from inflation. For the following scenarios write “Hurts” if they person is hurt by inflation or “Gains” if the person gains by inflation. Include a brief explanation why. 1. Banks extend many fixed-rate loans. 2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10-year period. 3. Your savings from your summer job are in a savings account paying a fixed rate of interest. 4. A widow lives entirely on income derived from fixed-rate corporate bonds. 5. A retired couple lives entirely on income from a pension the woman receives from her former employer. 6. A retired man lives entirely on income from Social Security. 7. The federal government has a $5,000,000,000 debt. 8. A firm signs a contract to provide maintenance services at a fixed rate for the next five years. 9. A local government receives revenue from fixed-rate license fees charged to businesses. 10. Parents are putting savings for their child’s college education in a bank savings account.