Question 1

What is the circular flow diagram?

Accepted Answer

A graphical representation of how goods, services, and money flow through the economy between firms and consumers

Question 2

What are the two markets in the circular flow diagram?

Accepted Answer

The factor/resource market: where factors of production (resources) are exchanged

The product market: where economic goods/services (products) are exchanged

Question 3

Who are the two actors in the circular flow diagram?

Accepted Answer

Firms: businesses and other corporations (supply goods/services, demand inputs/resources)

Consumers: individual people (supply inputs/resources, demand goods/services)

Question 4

Who supplies and demands in the resource market?

Accepted Answer

Firms demand resources (e.g., hiring workers)

Consumers supply resources (e.g., by working for firms)

Question 5

Who supplies and demands in the product market?

Accepted Answer

Consumers demand goods/services (e.g., buying a laptop)

Firms supply goods/services (e.g., a firm making a laptop)

Question 6

What is voluntary exchange?

Accepted Answer

A transaction where people trade freely without being forced to

Question 7

What is GDP?

Accepted Answer

The dollar value of all final goods and services produced within a country within a year

(measures final production within a country's borders)

Question 8

What are some uses of GDP?

Accepted Answer

Compare countries

See the impact of policy changes

Compare growth since previous yearsthe

Question 9

How do you calculate GDP with the expenditures approach?

Accepted Answer

Consumption + Business Investment + Govt. Spending + (Exports - Imports)

Question 10

What is consumer spending?

Accepted Answer

The value of goods/services purchased by consumers

(a new iPhone, haircut, or toothbrush)

Question 11

What is investment spending?

Accepted Answer

Any spending done by businesses

(money spent on tools; not a stock market investment)

Question 12

What is government spending?

Accepted Answer

Any spending by the government?

(military equipment, building highways, etc.; not welfare)

Question 13

What is net export?

Accepted Answer

The value of goods/services exported minus the value of goods/services imported

(exporting 100 pounds of iron ore minus importing 50 pounds of wheat)

Question 14

What are intermediate goods?

Accepted Answer

Goods used to produce a final good

(e.g., sugar; not counted in GDP!)

Question 15

What are non-production transactions?

Accepted Answer

Financial transactions that do not involve the production of a good/service

(social security, gifts, personal investments; not counted in GDP!)

Question 16

What isn't included in GDP?

Accepted Answer

Intermediate goods

Non-production transactions

Illegal or non-market activities

Question 17

What are non-market activities?

Accepted Answer

Goods or services that are created or done but do not receive payment

(making a cake for your friend's birthday, fixing your own car)

Question 18

What is the income approach to calculating GDP?

Accepted Answer

Add up all the income earned from selling all final goods and services produced in a given year

Question 19

What is the value-added approach to calculating GDP?

Accepted Answer

Add up the dollar value added at each stage of the production process

Question 20

What is GDP per capita?

Accepted Answer

GDP divided by a country's population

(more effective at measuring quality of life than GDP)

Question 21

What is unemployment?

Accepted Answer

When someone is actively searching for work, but in unable to get a job

Question 22

What is the labor force?

Accepted Answer

Anyone 16 years or older who is willing and able to work

(cannot be in the military, full-time students, retired, or institutionalized)

Question 23

What is the labor force participation rate?

Accepted Answer

The percent of the population in the labor force

(# of people in the labor force) / (total population)

Question 24

What is the unemployment rate?

Accepted Answer

The percentage of unemployed workers in the labor force

(# of unemployed workers) / (size of labor force)

Question 25

What is frictional unemployment?

Accepted Answer

Workers who are temporarily unemployed or in between jobs

Question 26

What is seasonal unemployment?

Accepted Answer

A type of frictional unemployment where jobs can only be done during certain parts of the year

(lifeguards are typically only hired in the summer)

Question 27

What is structural unemployment?

Accepted Answer

Workers who are unemployed because their skills have become obsolete due to technology

Question 28

What is cyclical unemployment?

Accepted Answer

Workers who are unemployed because their jobs have been lost due to economic recession

(these jobs will return when the economy improves)

Question 29

What is the natural rate of unemployment?

Accepted Answer

The total amount of frictional and structural unemployment

Question 30

What are discouraged workers?

Accepted Answer

People who have given up looking for work

(not counted in the labor force)

Question 31

How does unemployment affect the PPC?

Accepted Answer

Unemployment reflects less efficient points within the PPC

(does not shift the curve!)

Question 32

What is inflation?

Accepted Answer

The general rising of prices in a market or aggregate economy over time

Question 33

What is deflation?

Accepted Answer

The general decrease of prices in a market or aggregate economy over time

Question 34

What is disinflation?

Accepted Answer

A decrease in the rate of inflation

Question 35

What is the inflation rate?

Accepted Answer

The percent change in aggregate price level across an entire economy in one year

Question 36

What are real variables?

Accepted Answer

Variables where the effects of inflation have been factored out

Question 37

What is the consumer price index basket?

Accepted Answer

A sample of goods and services that are typically bought by your average household

(see market basket)

Question 38

What is the difference between inflation and deflation?

Accepted Answer

Inflation is an increase in prices and deflation is a decrease in prices

Question 39

How is the CPI calculated?

Accepted Answer

Divide the cost of the market basket in one year by the cost of the market in the base year and multiply by 100

Question 40

What is a market basket?

Accepted Answer

A market basket is a collection of goods and services used to measure the changes in the cost of living over time

(e.g., CPI basket)

Question 41

How is the CPI used?

Accepted Answer

It measures  changes in the cost of living over time and is often used to adjust wages, Social Security payments, and other income for inflation

It is also used to make international comparisons of inflation rates and to inform policy decisions related to monetary policy

Question 42

What is the CPI (consumer price index)?

Accepted Answer

A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

Question 43

What is substitution bias?

Accepted Answer

When consumers switch to cheaper goods due to inflation

If the CPI does not take into account these substitutions, it may overstate the actual increase in the cost of living

Question 44

What is the purpose of the CPI?

Accepted Answer

The purpose of the CPI is to measure inflation and to provide an indication of the changing cost of living

Question 45

What Is unanticipated inflation?

Accepted Answer

Inflation that is not expected, meaning that consumers and producers could not adjust in advance

Question 46

What are menu costs?

Accepted Answer

Menu costs are costs associated with firms changing prices, such as the cost of reprinting menus or changing prices on a website

(e.g., Walmart hiring worker to replace price tags)

Question 47

What are shoe leather costs?

Accepted Answer

The cost of time and effort that people end up spending to counteract the effects of inflation

(e.g., needing to make more trips to the bank because you have less money with you)

Question 48

What is the loss of purchasing power due to inflation?

Accepted Answer

Inflation decreases a currency's purchasing power (how much it can buy)

This means people must spend more money to buy the same goods and services

Question 49

What is wealth redistribution as a cost of inflation?

Accepted Answer

Some people benefit from inflation, while others are hurt by it

People, who hold assets or have fixed incomes may suffer from inflation, while those who are debtors may benefit

Question 50

What are the costs associated with unanticipated inflation?

Accepted Answer

The costs associated with unanticipated inflation include menu costs, shoe leather costs, loss of purchasing power, and wealth redistribution for some

Question 51

How does inflation affect lending and borrowing?

Accepted Answer

When people are considering lending or borrowing money, they will take into consideration the expected inflation rate. If that inflation rate turns out to be different than anticipated, that affects the amount of interest that is repaid or earned.

Question 52

What is the effect of inflation on wages?

Accepted Answer

Individuals who have the same wage next year as they do currently will not be able to purchase as much due to inflation

Question 53

What happens to borrowers with fixed Interest rates when inflation occurs?

Accepted Answer

Unanticipated inflation can reduce the real value of the debt, benefiting the borrowers

(borrowers with variable interest rates may not be helped because the interest rates will increase to compensate for inflation)

Question 54

How can unanticipated inflation benefit owners of assets?

Accepted Answer

Their assets will have a higher nominal value due to inflation

Question 55

What is the nominal value of an asset?

Accepted Answer

The monetary value of an asset, not adjusted for inflation.

Question 56

What is the real value of an asset?

Accepted Answer

The value of an asset adjusted for inflation.

Question 57

How does unanticipated inflation affect the nominal value of an asset?

Accepted Answer

It can increase the nominal value of the asset even if its real value does not change.

Question 58

What is the difference between nominal and real wages?

Accepted Answer

Nominal wages are the monetary wages paid to workers, while real wages are the purchasing power of those wages after adjusting for inflation.

Question 59

What is the effect of inflation on workers on fixed incomes?

Accepted Answer

It can lead to a decline in their standard of living

(e.g., people living on pensions or disability benefits)

Question 60

What happens if the income of workers on fixed incomes does not increase at the same rate as inflation?

Accepted Answer

They may find it difficult to keep up with rising prices, worsening their economic situation

Question 61

How are savers hurt by inflation?

Accepted Answer

The value of their savings is decreased due to inflation, as money becomes less valuable

(savers may invest in stocks or bonds to combat this)

Question 62

How can inflation hurt borrowers with variable interest rates?

Accepted Answer

Inflation will cause lenders to increase interest rates, hurting the borrowers

Question 63

What is the problem with nominal GDP?

Accepted Answer

We can't compare nominal GDPs because they don't account for changes in prices (inflation)

Question 64

What is real GDP?

Accepted Answer

An adjusted version of nominal GDP that takes into account changes in prices over time (inflation)

Unit 2 - Economic Indicators & the Business Cycle, AP Macroeconomics Flashcards