EC140 Lecture Notes - Lecture 6: Consumption Function, Real Gross Domestic Product, Gross Domestic Product

13 views7 pages

scarlethornet555

31 Jan 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

meghan78 and 39778 others unlocked

EC140 Full Course Notes

Verified Note

21 documents

Document Summary

Lecture 6 working with the macro model, jan 22nd 2018. Three equivalent concepts: expenditure on output produced this year (or month/quarter, production of output this year. Nominal gross domestic product - value of current output calculated at current prices. Real gross domestic product - value of current output calculated at base year prices. Firms could produce more if the wanted to w/o adjusting prices. Firms were able to produce more but no one was able to purchase. Outcome variables relating to the business cycle: potential gdp and the output gap, unemployment/employment rates. Interest rates (real interest rate vs. nominal interest rate: exchange rates (price of foreign currency in canadian, dollars) Key variable income (gdp: total value of goods and services produced, value added method avoids double counting of, by definition: expenditure = production = income intermediate goods. Measuring gdp income: payments to factors (wages, salaries, interest, business profits) Indirect taxes paid to government net of subsidies paid by government: depreciation.

Related Questions

You're the resident economic expert of Medicine. The CEO, Jeff, is asking you to complete a project that another person, Shawn, had started working on before he retired. The project is time-sensitive. Jeff explains that Medaline has a manufacturing plant that produces a prescription topical cream called DermaPlus, which is used for treating certain skin conditions. Hospitals and pharmacies are the main buyers of DermaPlus. The market for this cream is extremely competitive. Several other firms produce creams that are almost identical to DermaPlus. Medaline's current share of the market for this type of topical cream is so small that it cannot influence the market price. On the other hand, because Medaline is relatively small compared to the size of the market, it can sell as much of the cream as it likes at the prevailing market price. The plant producing DermaPlus has been operating for a little over three years with the same manufacturing equipment. Currently, there are no plans for upgrading or adding to this equipment. Over the last three years, the price of DermaPlus and related creams has been quite volatile and Medaline has tried to react to the changing price by varying its output level to constantly maximize its monthly profit. To date, Medaline has been able to vary monthly production quite easily by taking advantage of a flexible, none union workforce with a large number of part-time workers. However, the workforce at the DermaPlus plant is just about to be unionized. Once that happens, it will become much more difficult to vary the amount of labour used in the short run and therefore much more difficult to vary the monthly production of DermaPlus. Before he left, Shawn had been asked to estimate the short-run cost functions for the DermaPlus manufacturing plant. The goal was to use this information to determine the profit-maximizing output level and use that information to estimate the optimal size for the newly unionized workforce. Jeff tells you that DermaPlus and related products are just about to come under the umbrella of a new reference-based pricing scheme. Under the new scheme, the government will set the price of DermaPlus and competing creams and review that price every two years. Once the price has been set Medaline and other manufacturers simply have to decide how much of the cream, if any, they want to produce and sell. Unfortunately, although the workforce will be unionized in just over a week, the referenced based price for DermaPlus will not be announced for another two months. Consequently, Medaline has to choose the size of its workforce (and therefore its production capacity) before it knows the price it will get for its product. To reduce the uncertainty about this decision, Jeff recently hired a consultant with expertise in the pharmaceutical industry and reference-based pricing to estimate the price that will be announced for DermaPlus. The consultant estimates that there is a 6% chance that the price will be $50 per unit, a 19% chance that the price will be $100 per unit and a 75% chance that the price will be $150 per unit. This is the best estimate the consultant can provide given the lack of information coming from the government about the issue. After giving you this background information, Jeff asks you to complete the following tasks:

1. Determine the profit-maximizing average monthly production capacity for DermaPlus for each of the possible reference-based prices identified by the consultant. Estimate the expected monthly profit in each case.

2. Recommend an average monthly production capacity for the next 12 months given the uncertainty about the price of DermaPlus. Your recommendation will be used to set the size of the manufacturing plant's unionized workforce. (Note: You simply have to determine the best monthly production capacity for the next 12 months, not the number of workers required.)

3. Write a short report summarizing the results of your analysis and any recommendations. Jeff makes it clear to you that he is a risk-neutral person. You only have a week to complete the analysis, interpret the results, and summarize your findings and recommendations in a brief report. When Jeff makes his recommendations about the structure and format of the report you realize that they are much the same for Assignment 1 that you completed at another company. Finally, Jeff gives you a copy of one of Shawn's spreadsheets. This one contains data that Shawn collected on the variables he thought would be needed to estimate the short-run cost functions for DermaPlus and the firm's profit-maximizing output level. Jeff makes it clear that he has complete confidence in Shawn's technical abilities and professional judgment and tells you to take the information in Shawn's spreadsheet at face value and to use it as a starting point for your analysis.

rosehare365

1.
John just bought shares of stock in IBM for $10,000 and paid a $90commission to his broker. How did this affect GDP?
A) It had no impact on GDP.
B) GDP increased by $90.
C) GDP increased by $10,000.
D) GDP increased by $9,990.
E) GDP increased by $10,090.
2.
Opportunity cost is the ____ alternative forfeited when a choice ismade.
A) least-valued
B) most highly-valued
C) most convenient
D) most recently considered
3.
If there is an increase in the amount of good B foregone as everyadditional unit of good A is produced, the PPF between A and Bwould
A) be a straight line.
B) be a bowed-outward curve.
C) be a bowed-inward curve.
D) not exist.
4.
Persons who are retired or engaged in own-home housework areconsidered to be in which of the following categories?
A) in the civilian labor force
B) not in the labor force
C) employed
D) unemployed
5.
A recessionary gap exists if (actual) Real GDP is ____ Natural RealGDP.
A) less than
B) greater than
C) equal to
D) b and c
E) none of the above
6.
Decision making "at the margin" means making a choice based on ____of a decision.
A) the total benefits
B) the total costs
C) comparing the total benefits and costs
D) comparing the additional benefits and costs
7.
When Claudia trades $100 for good X, economists assume that sheis
A) trading something of less value to her for something of morevalue to her.
B) trading something of more value to her for something of lessvalue to her.
C) trading something that gives her less utility for something thatgives her more utility.
D) a and c
E) none of the above
8.
An increase in investment at a given price level
A) shifts the AD curve to the right.
B) shifts the AD curve to the left.
C) causes an upward movement along the existing AD curve.
D) causes a downward movement along the existing AD curve.
E) none of the above
9.
If the demand for a good falls by less than the supply of the goodrises, then equilibrium price will ____ and equilibrium quantitywill ____.
A) rise; fall
B) rise; rise
C) fall; fall
D) fall; rise
10.
The CPI was 140 in one year and 144 the following year.Approximately how much did prices rise between the two years?
A) 2.86 percent
B) 2.78 percent
C) 0.03 percent
D) 1.03 percent
E) none of the above
11.
The expenditure approach to measuring GDP sums
A) consumption, investment, government purchases, and netexports.
B) sales, revenues, income, and wages.
C) profits, compensation of employees, consumption, andinvestment.
D) net exports, consumption, wages, and salaries.
12.
Which of the following would not be included in the calculation ofthis year's GDP?
A) a headlight bulb purchased at Joe's Auto Supply by Susan toreplace a burnt out bulb in her car
B) a headlight bulb purchased by Ford Motor Co. from asupplier
C) a headlight bulb produced but not sold this year and thus endingup as inventory
D) none of the above, i.e., all would be included
13.
Suppose the government decides that every family should own its ownhome. To bring this about, the government decides to subsidize thehome-construction industry by giving the home-constructioncompanies $10,000 for every house that they build. As a result ofthis,
A) the supply curve of new houses would shift leftward, since itnow costs $10,000 more for builders to produce a house.
B) the demand curve for new houses would shift rightward, since nowevery family would want to buy a house.
C) the demand curve for new houses would shift leftward.
D) the supply curve of new houses would shift rightward, sincebuilders would be willing to produce and sell more houses at eachgiven price.
E) c and d
14.
Which set of changes will raise demand?
A) an increase in income (assuming demand is for a normal good), adecline in wage rates, and a rise in the per-unit tax placed on theproduction of a good
B) an increase in the number of buyers, a decline in the price of asubstitute, and an increase in the prices of relevantresources
C) an increase in the price of a substitute, a decrease in theprice of a complement, and an increase in expected (future)price
D) a decline in the number of buyers, an increase in the price of acomplement, and a decline in a per-unit tax placed on theproduction of a good
E) none of the above
15.
Both country 1 and country 2 are located on their respectiveproduction possibilities frontiers (PPFs), but country 1 producestwice the output that country 2 produces. It follows that
A) country 1's PPF lies further to the right than country 2'sPPF.
B) country 1 has a smaller population than country 2.
C) country 1 has a bigger population than country 2.
D) country 1 is efficient and country 2 is inefficient.
E) none of the above
16.
Suppose aggregate demand is too low to bring about the Natural RealGDP level. A Keynesian policy prescription would call for a(n) ____to close this recessionary gap.
A) increase in government spending
B) decrease in government spending
C) increase in taxes
D) decrease in taxes
E) a or d
17.
The structural unemployment rate is 3.1 percent, the frictionalunemployment rate is 2.1 percent, and the current unemployment rateis 4.9 percent. The economy is in
A) a recessionary gap producing less than Natural Real GDP.
B) an inflationary gap producing more than Natural Real GDP.
C) long-run equilibrium.
D) an inflationary gap producing Natural Real GDP.
E) a recessionary gap producing more than Natural Real GDP.
18.
A fall in the price level changes the purchasing power of money.This is relevant to the ____ effect.
A) international trade
B) real balance
C) aggregate demand
D) interest rate
E) aggregate supply
19.
An economic policy initiative results in the AD curve shifting tothe right. As a result,
A) the price level will rise.
B) the price level will stay constant.
C) the price level will fall.
D) Real GDP will rise in the short run.
E) a and d
20.
Which of the following is consistent with the classical position onwages and prices?
A) Wages and prices are sticky in the downward direction.
B) Wages are sticky in the downward direction, but prices areflexible.
C) Wages and prices are flexible.
D) Prices are sticky in the downward direction, but wages areflexible.
21.
If the bottom half of all U.S. income tax payers were allowed tostop paying the income tax entirely and the top 50% continued topay as they do now, tax revenues to the government would drop byabout
A) 3.6 percent.
B) 10.2 percent.
C) 13.9 percent.
D) 33.3 percent.
22.
Which of the following is most nearly consistent with Say'slaw?
A) When a person produces one good, he or she plans to demand othergoods.
B) When a person produces a good, he or she plans to sell it.
C) When a person buys a good, he or she plans to pay for it withmoney.
D) When a person goes to work, he or she plans to produce.
23.
The economy was at point A producing 100X and 200Y. It moved topoint B where it produces 200X and 300Y. It follows that
A) point A may have been a point below the economy's PPF, whilepoint B may lie on the PPF.
B) the economy's PPF could have shifted outward and point A was apoint on the economy's old PPF.
C) the economy has moved from one point on its PPF to another pointon the same PPF.
D) a or b
E) a or c
24.
The condition in an economy that makes a "rationing device" anecessity is the fact that
A) the economy is organized around free markets.
B) the economy is centrally planned by the government.
C) scarcity exists.
D) there are fewer types of goods than there are people in theeconomy.
25.
Expansionary fiscal policy actions include ____ government spendingand/or ____ taxes, while contractionary fiscal policy actionsinclude ____ government spending and/or ____ taxes.
A) increasing; increasing; decreasing; decreasing
B) decreasing; decreasing; increasing; increasing
C) increasing; decreasing; increasing; decreasing
D) decreasing; increasing; increasing; decreasing
E) increasing; decreasing; decreasing; increasing
26.
A price ceiling is a government-mandated
A) minimum price below which legal trades cannot be made.
B) maximum price above which legal trades cannot be made.
C) minimum price above which legal trades cannot be made.
D) maximum price below which legal trades cannot be made.
27.
In year 1 the CPI is 144.1, and in year 2 the CPI is 151. IfSarah's salary was $33,500 in year 1, what salary in year 2 wouldcause her to exactly "keep up with inflation"?
A) $50,585
B) $48,274
C) $40,508
D) $35,104
28.
One measure of the inflation rate is the
A) sum of the CPIs of adjacent years.
B) percentage change in the CPI of adjacent years.
C) percentage change in the Real GDP of adjacent years.
D) GDP minus the Real GDP in a year.
29.
Expansionary fiscal policy is ineffective if
A) there are idle resources in the economy.
B) the MPC is less than 0.60.
C) the government has a budget surplus.
D) there is complete crowding out.
E) a and d
30.
Suppose the economy goes from a point on its unchanging PPF to apoint down and to the left of it. This could be due to
A) a gain of resources.
B) a loss of resources.
C) technological improvement in the production of both goods.
D) a new law that interferes with economic efficiency.
31.
A decrease in the price of electricity will cause
A) a movement down the SRAS curve.
B) a movement up the SRAS curve.
C) a leftward shift in the SRAS curve.
D) a rightward shift in the SRAS curve.
E) no change regarding the SRAS curve
32.
Which of the following is an example of crowding out?
A) A decrease in the rate of growth of the stock of money decreasesGDP.
B) A deficit causes an increase in interest rates, which causes adecrease in investment spending.
C) An increase in tariffs causes a decrease in imports.
D) A decrease in government housing subsidies causes an increase inprivate spending on housing.
33.
A rightward shift in the demand curve for tennis balls could becaused by
A) a fall in the price of tennis balls.
B) a fall in the price of tennis rackets.
C) a rise in the price of tennis lessons.
D) a fall in income, assuming tennis balls are a normal good.
34.
Here is a consumption function: C = C0 + MPC(Yd). If MPC is 0.80,then we know that
A) as Yd rises by $1, Co rises by $0.80.
B) as Yd rises by $1, C rises by $0.80.
C) Yd rises by $0.80.
D) as C0 rises by $0.80, Yd rises by $1.
35.
Suppose a drop in stock prices makes people feel less wealthy. Thiswould cause ____ the economy's AD curve.
A) movement down along
B) movement up along
C) a rightward shift of
D) a leftward shift of
36.
An economy is producing its Natural Real GDP when the rate ofunemployment is equal to the ____ unemployment rate.
A) frictional
B) structural
C) sum of the frictional unemployment rate and the structural
D) seasonal
E) cyclical
37.
Who would be most likely to agree that "People do not always savemore as interest rates rise"?
A) a classical economist
B) John Maynard Keynes
C) an efficiency wage theorist
D) a and b
E) a, b, and c
38.
The U.S. income tax is currently a ____ tax.
A) progressive
B) proportional
C) regressive
D) proactive
39.
The question of U.S. budget deficits and their impact on the U.S.economy is dealt with in the study of
A) microeconomics.
B) managerial economics.
C) macroeconomics.
D) consumer economics.
40.
John Maynard Keynes believed that wages may be inflexible in thedownward direction. Consequently, an economy
A) could get stuck in long-run equilibrium.
B) could get stuck in a recessionary gap.
C) could get stuck in an inflationary gap.
D) would always produce more than Natural Real GDP.
E) b and c

lilacbear730

EC140 Lecture Notes - Lecture 6: Consumption Function, Real Gross Domestic Product, Gross Domestic Product

EC140 Full Course Notes

Document Summary

Get access

Related Documents

EC140 Lecture Notes - Lecture 6: Real Gross Domestic Product, Gross Domestic Product, Nominal Interest Rate

EC140 Lecture Notes - Lecture 6: Consumption Function, Eurocopter Ec120 Colibri, Real Interest Rate

EC140 Lecture Notes - Lecture 6: Real Gross Domestic Product, Nominal Interest Rate, Real Interest Rate

Related Questions