Final Review Review For Test 2 Introduction to Macroeconomics Neetu Kaushik, Ph.D., M.B.A Assistant Professor of Economics At LaGuardia Community College, CUNY Long Island City, New York Chapter 11...

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Final Review Review For Test 2 Introduction to Macroeconomics Neetu Kaushik, Ph.D., M.B.A Assistant Professor of Economics At LaGuardia Community College, CUNY Long Island City, New York Chapter 11 Measuring the Cost of Living Consumer Price Index: The Consumer Price Index is a measure of the cost of living. The CPI tracks the cost of the typical consumer’s “basket” of goods & services. Problems in computing CPI: Unmeasured quality change, introduction of new goods, Substitution Bias. Producer Price Index: The average change over time in the selling prices received by domestic producers for their output. Imported consumer goods: included in CPI excluded from GDP deflator Contrasting the CPI and GDP Deflator The basket: CPI uses fixed basket GDP deflator uses basket of currently produced goods & services Capital goods: excluded from CPI included in GDP deflator (if produced domestically) 0 3 3 Source: Cengage learning. Correcting Variables for Inflation: Real vs. Nominal Interest Rates The nominal interest rate: the interest rate not corrected for inflation the rate of growth in the dollar value of a deposit or debt The real interest rate: corrected for inflation the rate of growth in the purchasing power of a deposit or debt Real interest rate = (nominal interest rate) – (inflation rate) 0 4 4 Chapter 12 Production and Growth Productivity : The amount of goods and services a worker produce in each hour of work. How Productivity is determined? (Y/L) Physical Capital per worker (K/L) Human capital per worker (H/L) Natural resources per worker (N/L) Technological Knowledge (A) The Production Function A production function describes the relationship between the quantity of input used in production and the quantity of output from production. The production function generally is written as: Y = AF (L,K,H,N) Where; Y is output L is quantity of labor K is quantity of physical capital H is quantity of human capital N is quantity of natural resources A is the available production technology and F is a function that shows how inputs are combined to produce output. Economic Growth and Public Policy It is dependent on the following: Saving and Investment Diminishing Returns and the catch up effect Investment from abroad (FDI and FPI) Education Health and Nutrition Property rights and political Stability Free Trade Research and Development Population Growth Chapter 15 Unemployment Unemployment can be divided into two categories: The economy’s natural rate of unemployment. It is the unemployment which the economy normally experiences. Cyclical Unemployment: It is the year to year fluctuations in unemployment around its natural rate. Note: Natural rate of unemployment is further causes by two reasons: Frictional Unemployment Structural Unemployment How unemployment is measured? It is measured by the data collected by BLS. BLS surveys 60000 households every month. BlS places each adult in to one of the three categories : employed, unemployed or not in the labor force Labor force = Number of employed + Number of unemployed Unemployment Rate: The percentage of the labor force that is unemployed. Unemployment Rate: Number of unemployed x 100 Labor force Labor force Participation rate: The percentage of the adult population that is in the labor force. LFPR = Labor Force x 100 Adult Population Discouraged Workers: Individuals who would like to work but have given up looking for a job. Thus these individuals will not be a part of labor force. Why are there always some people unemployed? Because of : Frictional Unemployment Structural Unemployment Notes: Job Search: The process by which workers find appropriate jobs given the tastes and skills. Why some frictional unemployment is inevitable? Many reasons as some firms may close resulting in lay offs etc. Public policy and job search It is policies made to boost up the job search, employment opportunities, training etc. Unemployment insurance: It is a government program that partially protects workers incomes when they become unemployed. Minimum wage laws Unions and collective bargaining The theory of efficiency wages : It is the wage paid above equilibrium wage to increase workers productivity. Chapter 16 The Monetary System Functions of Money: Medium of exchange, Unit of account, and Store of value Types of Money: Commodity Money Fiat Money Money Supply: Currency Demand Deposits Measures of Money Supply M1 M2 In a fractional reserve banking system, banks create money when they make loans. Bank reserves have a multiplier effect on the money supply. Money multiplier: the amount of money the banking system generates with each dollar of reserves. The money multiplier equals 1/R. The Federal Reserve is the central bank of the U.S., is responsible for regulating the monetary system. The Fed controls the money supply mainly through open-market operations, discount rate and reserve requirements. 14 Chapter 17 The Money Growth and Inflation Quantity Theory of Money. According to this theory, the price level depends on the quantity of money, and the inflation rate depends on the money growth rate. The classical dichotomy : is the division of variables into real and nominal. The neutrality of money is the idea that changes in the money supply affect nominal variables but not real ones. Most economists believe these ideas describe the economy in the long run. The inflation tax is the loss in the real value of people’s money holdings when the government causes inflation by printing money. The Fisher effect is the one-for-one relation between changes in the inflation rate and changes in the nominal interest rate. The costs of inflation include menu costs, shoeleather costs, confusion and inconvenience, distortions in relative prices and the allocation of resources, tax distortions, and arbitrary redistributions of wealth. 16 Week 4 Discussion Board Answers Question 1: In an economy a typical consumer purchases 4 notebooks and 5 pens. The price of these products is given in the table below for three years.  Year Price of Notebook Price of Pen 2017 $4 $3 2018 $5 $3 2019 $6 $5 From the information given in the table above (assuming 2017 as the base year) calculate: · CPI for 2017 · CPI for 2018 · CPI for 2019 · Inflation rate for 2018 · Inflation rate for 2019  Answer: Consumer Price Index (CPI) = (Cost of the basket current year/cost of the basket base year) x 100 As per the formula to calculate CPI we must first calculate cost of the basket which is the product of price and quantity given in the fixed basket. Quantity is given above the table i.e., 4 notebooks and 5 pens. Note that here the quantity will NOT change no matter what the year is. Only the price changes depending on the year. This the reason we call it a fixed basket. Cost of the basket 2017 = (4 notebooks x $4) + (5 pens x $3) = $31 Cost of the basket 2018 = (4 notebooks x $5) + (5 pens x $3) = $35 Cost of the basket 2019 = (4 notebooks x $6) + (5 pens x $5) = $49 Now since we have cost of the basket information, we can plug this information in the CPI formula. Again Consumer Price Index (CPI) = (Cost of the basket current year/cost of the basket base year) x 100 Here base year is 2017 as given in the question. If the question is silent on base year then always take the first year as the base year. CPI for 2017 = ($31/$31) x 100 = 100 CPI for 2018 = ($35/$31) x 100 = 112.90 CPI for 2019 = ($49/$31) x 100 = 158.06 Inflation rate = [(CPI for current year/CPI for previous year)/CPI for previous year] x 100 Inflation rate 2018 = [(112.90-100)/100] x 100 = 12.90% Inflation rate 2019 = [(158.06-112.90)/112.90] x 100 = 40% Note: Make sure in the denominator of inflation rate formula you take the information of previous year NOT the base year. Base year is used in CPI formula. Question 2: How much of the following items would be worth in today's dollars if today's CPI is 260?  · Popcorn that was sold for $7 in 2009 and the CPI in 2009 was 214  · A cup that was sold for $15 in 2015 and the CPI in 2015 was 237 Answer: To answer such questions, you can use the following formula and plug the numbers you have and find the missing value. Please note that question can ask you any value given in the formula so be careful while plugging. Amount in today’s dollar = [Amount in year T x (CPI Today/CPI in year T)] Note: Today is the most recent year and year T is the old year. First part: Amount in today’s dollar = [Amount in year T x (CPI Today/CPI in year T)] = [$7 x (260/214)] = $8.50 Second part: Using the same formula, plugging the information as given in the question. = [15 x (260/237)] = $16.45 Question 3: Refer to the table below for an imaginary economy of Flowerland. Year  Real GDP           Population       2015 60 million 45 million 2016 70 million 50 million Based on the information given in the table calculate; · Real GDP Per Person (or capita) · Percentage increase in the real GDP per person over the time period given and analyze. Answer: Real GDP Per Person = Real GDP/Population 2015 = 60 million/45 million = 1.33 2016 = 70 million/50 million = 1.4 Percentage Increase in Real GDP Per Person = [(Real GDP Per Person in Current Year / Real GDP Per Person in Previous Year)/ Real GDP Per Person in Previous Year)] x 100 = [(1.4 – 1.33)/1.33] x 100 = 5.26% Question 4: In an imaginary economy of Cotton Land, 190,000 tons of cotton were produced in a day. The number of people who were involved in this production was 4500 and each of them worked for 8 hours. Further, there are 50 companies that employed these people in their processing plants. Calculate the productivity of this economy. Answer: Productivity = Output / Number of Labor Hours Note: It is important to take total labor hours not just number of labors. For that multiply the number of labors and numbers of hours each labor worked for. Ignore the number of companies as it is irrelevant to answer this question
Answered 1 days AfterAug 01, 2021

Answer To: Final Review Review For Test 2 Introduction to Macroeconomics Neetu Kaushik, Ph.D., M.B.A Assistant...

Himanshu answered on Aug 02 2021
137 Votes
Sheet1
            ANS 1    Real GDP     Population    GDP per person
            2018    $ 600,000.00    1000    $ 600.00
            201
9    $ 620,000.00    1200    $ 516.67
                Economic growth rate
                -14%
            ANS 2    CPI    (CT/Co) * 100
                Ct    Market basket current year
                C0    Market basket base...
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