ECON 101 Macroeconomics Exam Questions with Verified Solutions Graded A+
Macroeconomics - Answers The study of the economy as a whole; total employment in a country, total
output by all businesses, total spending by all the businesses, people, and governments in a country; this
is opposed to microeconomics where you focus on individual jobs, individual business outputs, or
individual spending
Economic growth - Answers The ability of societies, nations, the whole world to produce more over
time; this is the macroeconomic version of making the economic pie BIGGER
Business Cycles - Answers periods of economic growth and economic decline;
runs from a peak, through a recession, to a trough, and into expansion
Interdependence Principle - Answers Your best choice depends on your other choices, the choices
others make, developments in other markets, and expectations about the future. When any of these
factors changes, your best choice might change.
Circular Flow - Answers a simple model showing how the households and business in an economy are
linked; flow of goods and services in one direction, money/GDP in another
GDP - Answers The market value of all final goods and services produced within a country in a given
year; the goal of this is tally up ALL of the goods and services that are produced (all the good things
happening from art to food to education to production of cars). Measures 3 things:
1) Total Spending (Ask everyone how much they spent)
2) Total Output (Ask everyone how much they produced) -> value added
3) Total Income (Ask everyone how much they have earned)
GDP per capita - Answers GDP/Total population => if we divided all the money we get from making and
selling things between the whole population, how much money would each person have?
The market value - Answers the amount for which something can be sold on a given market.; we value
everything that goes into GDP at it's market price (bc prices in an economy is supposed to reflect VALUE)
ex. Iphone 15 costs $800, and a NFL Jersey costs $80; these prices tell us that an iPhone 15 is ten times
more VALUABLE to society as an NFL jersey (this is why GDP is measured in dollars)
,Final goods - Answers goods and services that have been purchased for final use and not for resale or
further processing or manufacturing; when calculate GDP we include sale of final goods not any
intermediate goods/services
e. every iPhone 15 sold is a final product, so the materials software and labor are NOT included in GDP;
this is because the PRICE to buy the iPhone INCLUDES all of the costs that Apple had to pay to make it
also, GDP only includes the NEW final goods (aka a used car isn't counted in GDP)
Factors to calculate GDP - Answers -Goods and services that occur in market, final goods, goods
produced within country, yearly measurement
Y (GDP) = - Answers Consumption + Investment + Government Purchases + Net Exports
Consumption - Answers Household spending on new final goods and services; this is a big way that
households contribute to GDP:
-food, gas, consumables we buy
- services
-rent
Investment - Answers Spending on assets that improve the economy's productive capacity; whenever
anyone spends money purchasing /producing stuff that makes the economy more productive (office
buildings, buying airplanes, research, new homes, extra INVENTORY)
Particularly vulnerable to crowding out, because too much government spending could also the Fed to
raise interest rates
Government Purchases - Answers Govt purchases on goods and assets;
-maintaining roads/bridges
spending on schools
paying teachers or military members for services they produce
,BUT when the govt provides a transfer payment, it DOES NOT add to GDP:
- Social Security
- Unemployment insurance
- Medicare/Medicaid
- Food stamps
The person who receives the benefit will spend it anyway (consumption), and this is double counts GDP
Net Exports - Answers Spending on exports minus spending on imports
exports - Answers goods or services produced domestically and then purchased by foreign buyers
imports - Answers goods or services produce in another country, then purchased by domestic buyers;
these are subtracted from GDP, but it doesn't make GDP smaller
Value added - Answers the amount by which the value of an item is increased at each stage of
production
value added = total sales - cost of intermediate inputs
Total outputs - Answers The entire productive measures/value
Total income - Answers whenever we buy something, the money we spent go somewhere --> income for
people and businesses
profits - Answers The share of money we spend going to businesses
wages - Answers the share of the money we spend going to workers
What GDP can't tell us - Answers 1) Prices are not values (we know in a competitive market, prices
reflect marginal benefits; ex. water --> value is high, but price is low)
2) Nonmarket activities are not included (GDP can only measure goods and services sold in markets;
what about child care or doing your own chores?)
3) Externalities are missing (if externalities are present, then market prices aren't equal to the marginal
benefits /costs of society)
4) Shadow economy is missing
, Shadow Economy - Answers Economic activity involving illicit goods, banned services, or under the table
transactions
Nominal GDP - Answers the production of goods and services valued at current prices; how much stuff
did we make in 2022, and how much was it worth in 2022;; not so useful for making comparisons over
time because prices CHANGE
Real GDP - Answers GDP expressed in constant, or unchanging, prices; How much stuff did we make in
2023, and how much more valuable is it compared to all the stuff we made in 2022:
1) for everything produced in these two years, find the average price level
2) compute GDP for both years using these average prices
- This is how we account for price changes
How to calculate GDP growth - Answers % change in real GDP = % change in nominal - % change in price
Rule of 70 - Answers Doubling time (in years) = 70/(percentage growth rate).
Industrial Revolution - Answers period of rapid growth in economy; world GDP per capita increased
production function - Answers the methods by which inputs are transformed into output; tells us how to
make output
ex. how labor and parts turn into a car
aggregate production function - Answers how much of EVERYTHING a country can produce
Y = f(labor, human capital, physical capital)
Population growth - Answers boosts GDP, but not GDP per capita!!
You have more people to make stuff (labor), but each person has to get less (we consume just about as
much as we make
Not a good way to promote growth
Human capital - Answers the accumulated knowledge and skills that make a worker more productive
