1.

To calculate how long it will take GDP per capita to double, divide the number 70 by the annual growth rate 2. Adam Smiths theory of scale of the market suggests that the size of a market is important for economic development 3. Joseph Schumpeters theory of creative destruction suggests that firms will try to innovate to earn higher profit 4. The organization that officially dates recessions is the National Bureau of Economic Research 5. The largest component of national income is compensation of employees (wages and benefits) 6. The government department that produces the national income and product accounts is the Department of Commerce 7. Natural rate of unemployment consists of frictional and structural unemployment 8. The chain-weighted price index for GDP does not include used goods or imported goods 9. Creditors do not gain from unanticipated inflation 10. Robert Solow- Technological progress 11. Saving and depreciation are the two factors that determine how the stock of capital changes over time 12. New growth theory suggests that investment in comprehensive education in a developing country will lead to permanent increases in the rate of technological progress 13. Gross investment is the total amount of new private investment purchases 14. Transfer payments are excluded from government purchases in GDP accounting because they are already included as an investment 15. If a good is produced last year and sold this year we include it in last years GDP because it increases C this year. However, inventories fall by the same amount this year so there is no change in GDP. 16. Types of unemployment a. Structural- Occurs due to a mismatch between the jobs that are available and the skills of workers seeking jobs b. Cyclical- Unemployment that occurs during fluctuations in real GDP. c. Frictional- Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees. d. Seasonal- Unemployment that occurs because of jobs only being during certain seasons such as a snow truck driver. 17. Real wages are the wages paid to employees after being adjusted for the price level 18. Nominal wage = p*mpl is the marginal condition equating marginal cost to the marginal benefit to the firm of an additional unit of labor (1/2 point). Dividing through both sides by P, we get w/p=mpl (1/2 point). Under the assumption of diminishing returns, mpl falls (w/p falls) as L rises, thus Labor demand rises as L falls. (1 point)

19. An increase in consumption, investment, or net exports is considered crowding in 20. Depression: There was a drought so the farmers couldnt pay the banks back so the banks went broke and went out of business couldnt give people their money back so went out of business. Everyone ends up screwed. 21. Recession: In 2007 banks were thrown off because people were getting major increases in salaries and they were led to believe that everyone would be able to pay them back so they were more likely to lend out money. But not everything wiped out because at this point we had bank insurance provided by the government. People who took out too many loans now have destroyed credit. Younger people are now screwed over because banks will not fund their new ventures. We are worried that this is about to happen again because the job market is starting to get worse and the government has been borrowing far too much money internationally. 22. Consumption makes up about 2/3 of GDP and typically only changes up or down about 2%. The thing that really affects GDP is private investment, which fluctuates but makes up about 15% of GDP. 23. A lot of inventory in an audit doesnt tell us much. Either a company is doing poorly and unable to get rid of inventory, or they are doing so well that they need a lot more inventory on hand. 24. Only about a quarter of the quantity data used for GDP is actually based on quantities. All others are the government making educated guesses. These are called revisions to the data (revisions to GDP are in the news all the time). On average revisions to the date tend to be downward revisions whenever we are going into recessions. When they get additional information, it is normally bad news. 25. GDP Deflator= Nominal GDP/Real GDP X 100 26. A recession is not announced until at least two quarters of negative growth 27. Labor Force Participation Rate= labor force/population 16 years and older X 100 28. If we are borrowing from foreigners, what does that mean for GDP today? What does it mean for GDP in the future? If borrowing from foreigners, it means S<I in the US SO NX<0 (trade deficit) Impact on todays GDP? Falls because NX (net exports) is going down either C or U or G is going up 29. Trade Deficits a. Good if we are borrowing in order to invest because when we pay back in the future we will most likely have a higher GDP b. Bad if we are borrowing for consumption because then when we pay back our GDP is the same