Chapter 7

Economic growth is best defined as an increase in:

• either real GDP or real GDP per capita.

Which best measures improvements in the standard of living?

• growth of real GDP per capita

For comparing changes in a nation’s power, the most meaningful measure of economic growth would be:

• changes in total real output.

The number of years required for real GDP to double can be found by:

• dividing 70 by the annual growth rate.

• About ________ of U.S. economic growth comes from improved productivity (as opposed to added inputs).

• two-thirds.

The phase of the business cycle in which real GDP declines is called:

• a recession/contraction

Market economies have been characterized by:

• occasional instability of employment and price levels.

A recession is a period in which:

• real domestic output falls (2 consecutive quarters).

• In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

• expansion

The sectors in which output is likely to be most strongly affected by the business cycle are:

• capital goods and durable consumer goods.

The production of durable goods varies more than the production of nondurable goods because:

• durables purchases are postponable.

The labor force:

• # Employed + # Unemployed

unemployment rate:

#Unemployed#Labor Force

To be officially unemployed a person must:

• be in the labor force.

Part-time workers are counted as: fully employed

• therefore the official unemployment rate may understate the level of unemployment.

• If members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is:

• overstated

The natural rate of unemployment:

• that rate of unemployment occurring when the economy is at its potential output.

• If the unemployment rate is 7 percent and the natural rate of unemployment is 5 percent, then the:

cyclical unemployment rate is ?

Discouraged workers:

• may cause the official unemployment rate to understate the amount of unemployment.

• Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called:

structural unemployment.

The type of unemployment associated with recessions is called:

• cyclical unemployment.

The GDP gap measures the difference between:

• actual GDP and potential GDP.

Okun's law:

• for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP

• In the United States, business cycles have occurred against a backdrop of a long-run trend of:

rising real GDP.

Inflation means:

• prices in the aggregate are rising, although some particular prices may be falling.

The rate of inflation can be found by subtracting:

• last year's price index from this year's price index and dividing the difference by last year's price index.

Demand-pull inflation:

• occurs when total spending exceeds the economy's ability to provide output at the existing price level.

Cost-push inflation:

• may be caused by a negative supply shock, i.e. oil and gas prices sharply rising

Real income is found by:

• dividing nominal income by the price index (in hundredths).

real income:

• nominal income – price level increase (inflation)

Inflation:

• arbitrarily redistributes real income and wealth.

Who can best adapt to unanticipated inflation?

• an owner of a small business• Why?

Cost-push inflation:

• reduces real output.

During hyperinflation:

• people tend to hold goods rather than money.

The price index in the base year is

• 100.

• If your wages triple at the same time as the consumer price index goes from 100 to 400, you real wage

• falls

• If the cost of a market basket of goods increases from $100 in year 1 to $110 in year 2, the CPI in year 2 equals if year 1 is the base year.

• 110

Consumer Price Index (CPI):

• the most common measure of the price level• measures the price of a typical market basket

of goods• does NOT measure the cost of all goods and

services in an economy