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Scatter Shot Info for Final Exam

Scatter Shot Info for Final Exam. 1. Describe the rates of unemployment and inflation when the economy is in the recovery phase of the business cyle ?.

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Scatter Shot Info for Final Exam

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  1. Scatter Shot Info for Final Exam

  2. 1. Describe the rates of unemployment and inflation when the economy is inthe recovery phase of the business cyle? The unemployment rate is declining and inflation is increasing. As real GDP (real output) rises, more employees are hired so u% drops. With more income people spend more so the PL rises.

  3. 2. Describe the rates of unemployment and inflation when the economy is at the peak phase of the business cyle? The unemployment rate is at its lowest and inflation is at its highest. With real GDP at its highest, the most employees are needed, so u% is at its lowest level. With the highest amount of people employed there is a maximum amount income to spend, so the PL is at its highest.

  4. 3. Describe the rates of unemployment and inflation when the economy is in the recession phase of the business cylce The unemployment rate is increasing and inflation decreasing. With real GDP declining, the fewer employees are needed, so u% is increasing. With the fewer people employed there is less income, so spending drops and the PL is decreasing.

  5. 4. Describe the rates of unemployment and inflation when the economy is at the trough phase of the business cyle? The unemployment rate is at its highest and inflation is at its lowest. With real GDP at its lowest level, fewer employees are needed, so u% is at its highest level. With the highest amount of people unemployed there is the least amount income to spend, so the PL is at its lowest.

  6. What is a negative supply shock and how does it affect the economy? A negative supply shock is caused by the following items: Energy prices rising (main cause). Monopolies/Oligopolies raising prices on products they sell. Unions growing more powerful and obtaining higher wages, thus causing production costs to increase and prices to rise.

  7. What are the base year price indices for GDP or the CPI? What implications does that involve? The indices for both are 100. GDP Implications: The implication is that in the base year, real GDP and Nominal GDP are equal. The formula to calculate Real GDP from Nominal GDP = Nominal GDP x 100 divided by the base year. For the base year that equals Nominal GDP x 100 divided by 100. The two 100’s cancel out and thus Nominal and Real GDP are the same for that year. GO TO THE NEXT SLIDE FOR CPI IMPLICATIONS

  8. What are the base year price indices for GDP or the CPI? What implications does that involve? CPI Implications: For the CPI, the implications are that if you compare the base year to any year after that to calculate the change in prices, the answer is simply the CPI for the later year minus the CPI of 100 for the base year. For example, if 2017 was the base year and the CPI was 105 in 2018, then 105 minus 100 x 100 = .05 x 100 or a 5% rise in prices. Otherwise if you use a non-base year to compare the change in price, you will use the percentage change formula: New minus Old/Old x 100. For example, if the CPI was 110 in 2018 and 115 in 2020, what is the change in prices. 120 – 115/115 x 100 = 4.35%

  9. Use the data below to calculate the CPI for year 1, CPI for year 2, and percentage change in prices between year 1 and year 2. • ProductPriceQuantityTotal • Year 1 CPI = Apples $1 2 $ 2 • Oranges $2 3 $ 6 • Potatoes $3 4 $12 • $20 = CPI for Year 1 • ProductPriceQuantityTotal • Year 2 CPI = Apples $2 2 $ 4 • Oranges $2 3 $ 6 • Potatoes $4 4 $16 • $26 = CPI for Year 1 • So the change in prices = New-Old/Old x 100 = $26 - $20/$20 x 100 = 30%

  10. What is a budget deficit, budget surplus, balanced budget, and the national debt? • Budget Deficit: When government spending is greater than tax • revenues in one year. • Budget Surplus: When government spending is less than tax • revenues in one year. • Balanced Budget: When government spending equals tax revenues in one • year. • National Debt: The sum of all budget deficits and surpluses since a • nation began. For the U.S. it is over $20 Trillion now.

  11. If expansionary fiscal policy is used when a nation has a balanced budget and no national debt, what would happen to the budget and national debt? • Because government spending would increase and/or taxes cut, the government would collect less tax revenue and spend more. As such, that nation would move into a budget deficit and they would incur a national debt.

  12. What is a subsidy? If the government gave subsidies to companies for the purchase of technology or investment in research and development, what would happen to the economy in the SR and LR ? • Subsidies are payments from the government to a producer which lower production costs. If new technology is purchased because of the subsidy or money is spent for research and investment, AD would increase (SR). Over time, once the new technology is bought, installed, and employees are trained to use that technology or the research and development results in better production methods, the LRAS would shift rightward (LR).

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