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