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Unit 2 Study Guide

by: Lori Holte

Unit 2 Study Guide

Lori Holte
Virginia Tech

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This study guide covers the basic topics that Mike stated would be in the unit 2 exam. ** The person who advised FDR in the New Deal is actually John Maynard Keynes. Mike clarified that in class o...
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This 5 page Study Guide was uploaded by Lori Holte on Thursday October 6, 2016. The Study Guide belongs to at Virginia Polytechnic Institute and State University taught by in Fall 2016. Since its upload, it has received 268 views.


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Date Created: 10/06/16
Macroeconomics Unit 2 Study Guide Test date: 10/10/16 On the test: 33 questions o 3 Q’s: double counting o 4 Q’s: current vs. constant GNP o 2 Q’s: circular flow of income o 2 Q’s: what’s in the GNP o 3 Q’s: types of unemployment o 4 Q’s: unemployment graph o 1 Q: multiplier o 1 Q: who advised FDR in the New Deal? o 1 Q: Keynesian/ classic o 2 Q’s: types of income o 10 Q’s: GNP o Who is helped/hurt by inflation/deflation Double counting (3): Double counting – use value added approach Sector Sales Value Added Wheat farmer $50,000 50,000 (assuming 0 costs) Miller 80,000 30,000 Baker 100,000 20,000 Retail grocer 160,000 60,000 Total 390,000 160,000 Sum of added values = total Current vs. constant GNP (4): Inflation – distinguish current vs. constant value (/nominal vs. real) 2004 – assume as base year - 100 tractors produced and sold for $10,000 each  $1,000,000 contribution to GNP 2005: - 120 identical tractors produced and sold for $13,000 each  (120)*(13,000) = $1,560,000 current/nominal GNP 2004 -  (120)*(10,000) = $1,200,000 constant/real GNP 1,560,000 13,000 1,200,000 = 10,000 = 1.3 30% rate of inflation*  Base year – stick with it for 18 years (as constant GNP) Inflation = increase in prices Circular flow of income (2):  Circular flow of income o Households sell labor  paid wages o Pay taxes  government provides police/fire protection o Businesses pay taxes  get services  Circular flow of income: we can track money in both directions (sell to each other, buy  from each other) o *spending = earnings What’s in the GNP (2):  GNP = C + I + G + (x – M) = Y  Y = consumption + investors + government + (exports – imports)  GNP = Gross National Product = sum value of all goods and services produced in a  country in a year, whether or not it has been sold at the final retail level  Underemployment  GNP not as big as it could be Types of unemployment (3):   Types of unemployment o Frictional = people between jobs; recent college graduates; switching companies o Cyclical = unemployed due to business cycle:  weather, seasonal, holidays,  construction o Structural = skills no longer demanded by the structure of the economy;  typewriter repairman; economy does not have the job anymore o Natural = minimum rate that will always exist; include people who want a job, but can’t get one  *test: as citizens, we should be most concerned with structural unemployment o Example: if natural rate is 3%, then full employment is 97% (if we keep it down  to natural rate) Unemployment graph (4):  a. Wage rate is flexible b. wage rate is flexible  Every point on the supply curve tells how many people are willing to work for that wage or salary  How many are willing to work at $10/hour? = 94M o Actual # working = 87M  Flexible wages  only voluntary unemployment Multiplier (1):   Multiplier effect: federal government needs to add just enough $  MPC = marginal propensity to consume o *we are spending $0.56 (MPC) on every dollar for American- made goods and services (products)  MPW = marginal propensity to withdraw 1 1 1  (for previous problem) M = multiplier = MPW = 1−MPC = 0.44 = 2.27 GAP 200B  G = G + = 4.50B + = $538.11B 2 1 M 2.27 Who advised FDR in the New Deal (1):  John Maynard Keynes Keynesian / Classical (1):  Keynesian Solution: 1 M = = 2.33 0.43 GAP 107 B G 2 G + 1 M = 300B + 2.33 = 300B + 45.92 =$345.92B Classical Solution: Yf= 2,200B = 900B + n * (2,220B) 1,300B = n * 22,200B) n2= 0.59 = MPC 2 Recall: n 1 =0.57 = 0.7 * 0.82 n = 0.59 = 0.7 * (x) where x = 1 - TR 2 2 x = 0.84 ∴ TR 2 1 - .84 = 0.16 = 16% (new tax rate) Types of income (2):   Y = gross (before taxes taken out)  Y d= disposable (after taxes taken out)  Y de discretionary (after you pay mandatory bills)  Y  = equilibrium (suppliers produce the exact amount of  e services that consumers want to buy  Y = full employment (how much income all Americans  f would earn this year if everyone who wants a job has a job) GNP (10):   GNP = Gross National Product = sum value of all goods and services produced in a  country in a year, whether or not it has been sold at the final retail level  GNP is a measure of production (even the things not sold) o Involves money changing hands o Investors look at sectors of GNP o Does not reflect quality of products o If we produce junk, and someone buys it, GNP still goes up o Money has to change hands legally o NOT in GNP: quality of product, volunteer work, bartering  GNP = C + I + G + (x – M) = Y Who is helped / hurt by inflation / deflation?   Inflation: major problem o Affects everyone o Business owners benefit


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