Econ 100b End of Chapter Questions

ECON 100B end of chapter questions
1. what macroeconomic conditions, issues, and events can shape your future?
employment rate - will jobs be plentiful, or will a high unemployment rate make it a challenge to
find work?
overall prices - will they be rising so you need more money to pay for expenses?
value of US dollar - will it decline so it will be more expensive to travel abroad?
gov budget deficits, and economic growth
2. what is the distinction between endogenous variables and exogenous variables in economic
models?
endogenous variables are explained inside the economic model and exogenous variables are
explained outside the variable. Exogenous variables explain the endogenous variables.
3. what is the 5 step process for developing macroeconomic models?

-identify an interesting economic model
-specify variables to be explained
-posit a set of equations to connect exogenous and endogenous variables
-compare conclusions of model w what actually happens
-use model to make further predictions
4. what 3 macroeconomic data series are of particular interest to macroeconomists? why?

real GDP, unemployment rate, and inflation rate
Real GDP: measures output of goods and services produced in economy over a fixed period in
time
The GDP equals the total value of goods and services produced in a country during a year.
Economic growth is, therefore, a sustainable increase in the amount of goods and services
produced in an economy over time.
Unemployment rate: % of workers looking for work, but who do not have a job at a particular
point in time
when unemployment rate is high, households suffer a loss of income and may even find
themselves unable to meet basic needs for food and income.
Inflation rate: how rapidly overall level of prices is raising

The third most important macroeconomic concept is inflation, which is an increase in the overall
level of prices measured by the consumer price index. This index shows how the value of
money changes over time. Inflation is one of the primary concerns of economists and
policymakers because it imposes a variety of costs on the economy. When the inflation rate is
high, the real value of money erodes. People on fixed incomes, such as pensioners who receive
a fixed dollar payment each month, cannot keep up with the rising cost of living. Inflation also
redistributes wealth among the population in a way that has nothing to do with merit.
A changing price level complicates decision making for consumers, businesses, and
governments, and this uncertainty can hamper economic growth
5. what is the business cycle? which part of the business cycle is of particular interest to
macroeconomists? why?
business cycle represents recurrent ups and down movements in economic activity that differ in
how regular they are.
macroeconomists are interested in recessions, when economic activity declines and real GDP
per person falls —> depression = severe recession
6. what happens to the overall level of prices during periods of inflation and deflation?
inflation - they rise
deflation - they fall
7. what is a nation’s savings rate and why is it an important concern for macroeconomists?
national savings rate is percentage of income saved by US citizens
they are important to macroeconomists because higher savings rates translate into higher
investments, which boosts economic growth and long run level of real GDP. when households
have very low savings, they lack a cushion to cope with severe economic downturns
8. what is a government’s budget deficit? why are macroeconomists concerned with budget
deficits?
budget deficits are an excess of government spending, relative to revenue
will government budget deficits lead the government to go broke? will they burden future
generations with higher taxes to repay debt? will the government print money to finance its
spending and cause runaway inflation?
9. explain the difference between fiscal policy and monetary policy. what are some of the
reasons these macroeconomic policies are used?
macroeconomic policies are the careful work necessary to develop economic models, and
analyze key data, the underlying goal is to determine which macroeconomic policies produce
better macroeconomic outcomes
-to cut deficit, some propose tightening the fiscal policy - policymaker’s decision to raise taxes,
cut government spending, or both.
some macroeconomists propose policies to fight inflation, many others argue that these steps
would be too painful — reducing output and triggering unemployment.
others say that budget deficit doesn’t pose a danger and warn that tightening fiscal policy can
do more harm than good.
central banks- government agencies that oversee banking systems, conduct monetary policy* -
management of amount of money in an economy and interest rates
10. what is stabilization policy? what two important debates occur among macroeconomists
regarding its use, and who are the parties to these debates?
stabilization policy is economic policy aimed at stabilizing and minimizing business cycle
fluctuations and stabilizing economic activity
*business cycle fluctuations = BAD
activists versus non activists

activists argue for use of policies to eliminate excessive unemployment
nonactivists argue that economy has self-correcting mechanism that will restore an economy in
recession to a healthy condition, say that activist policies could kick in at the wrong time and
produce undesirable fluctuations in economic activity.
discretionary manner versus rules
11. what are global trade imbalances and why do economists focus on them?
when country purchases far more goods and services from abroad than foreigners are buying
from them.
can leave a country increasingly indebted to foreigners…
Chapter 2: Measuring Macroeconomic Data
1. what is the fundamental identify of the national income accounting? what is its significance?
national accounting identity says:
total production = total expenditure = total income
it is significant because it is a measure of gdp which is one of the 3 main data series. it also
says that the production in an economy equals the money earned by workers which equals the
money spent by consumers; idea of cycle of money - all money is going somewhere
2. how is GDP defined in the production approach to measuring economic activity?

the total market value of all final goods and services produced in a domestic economy during a
specified period of time.
nonmarket goods and services are not usually included
if they are, they are given an imputed value
intermediate goods and services are completely used up
imported goods and services don't count either
3. distinguish between a flow measure and a stock measure. which type of measure is GDP
flow is amount per unit of time and stock is amount at a given point in time
GDP is flow
4. why are capital goods and inventories treated differently than intermediate ones?
because they are not completely used up, so they count in gDP
5. Identify 4 major expenditure components and discuss major subcategories of each one.
Y = C + I + G + NX
gdp = total production = consumption expenditure + investments + government purchases + net
exports
C = consumer durables, consumer nondurables, and services

I = fixed investments, residential investments, and inventory investments
G = government consumption + government investment, doesnt include government transfers
NX = net exports minus net imports
6. what are the main types of income included in national income? why doesn’t national income
= GDP?
national income = compensation of employees, other income -self employed, corporate profits,
depreciation, net factor income
national income doesn’t = GDP because it includes net factor income which is income paid to
domestic citizens by foreigners, and GDP is gross domestic product
7. how do macroeconomists distinguish between nominal and real values of variables? does
nominal or real GDP provide a better picture of changes in economic activity and economic well
being?
nominal variables are measured at current prices, real values are constant - adjusted for
changes in price level
real GDP provides a better picture of economic well being because its changes reflect changes
in quantity of goods and services produced rather than just changes in price. so real GDP is
adjused for changes in inflation.
8. describe the gap deflator and personal consumption expenditure deflator.

both are price indexes, ways to measure inflation
the GDP deflator = nominal GDP/real GDP,
deflates the nominal GDP to get real GDP
PCE deflator for year y = (100) times (nominal PCE in year y / real PCE in year y)
9. what is the consumer price index? who calculates it and how is it calculated and used to
measure inflation rate?
the CPI is a measure of the average prices of consumer goods and services. think of it as a cost
of living index.
the bureau of labor statistics calculates CPI monthly
10. what does the unemployment rate measure, who calculates it, and how is it calculated?
11. explain the difference between nominal and real interest rates and between ex post and ex
ante real interest rate.

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ECON 100B end of chapter questions

3. what is the 5 step process for developing macroeconomic models?

4. what 3 macroeconomic data series are of particular interest to macroeconomists? why?

Inflation rate: how rapidly overall level of prices is raising

activists versus non activists

discretionary manner versus rules

Chapter 2: Measuring Macroeconomic Data

2. how is GDP defined in the production approach to measuring economic activity?

C = consumer durables, consumer nondurables, and services

8. describe the gap deflator and personal consumption expenditure deflator.

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