Economic Indicators Flashcards

Which component of GDP measures the value of goods produced but not yet sold?

Answer: Inventory investment

Inventory investment, part of the investment (I) component, captures changes in unsold goods produced during the period.

If nominal GDP grows by 6% and the GDP deflator rises by 4%, real GDP growth is approximately:

Answer: 2%

Real GDP growth ≈ nominal GDP growth minus inflation, so 6% − 4% = 2%.

The Consumer Price Index (CPI) is criticized for overstating inflation primarily because it:

Answer: Does not account for consumer substitution toward cheaper goods

The substitution bias occurs because the CPI uses a fixed basket, ignoring consumers' shift to relatively cheaper substitutes when prices rise.

A country's labor force participation rate would DECREASE if:

Answer: College enrollments surge and students stop seeking employment

Students who leave the labor force reduce both the numerator and denominator of the participation rate, causing it to fall.

Which measure of the money supply includes savings deposits and small time deposits in addition to M1?

Answer: M2

M2 expands M1 by adding savings accounts, money market accounts, and small time deposits.

The Producer Price Index (PPI) is considered a leading indicator of CPI because:

Answer: Rising production costs are often passed on to consumers later

When input costs rise for producers, they typically pass those costs downstream, causing consumer prices to rise with a lag.

Okun's Law states that for every 1 percentage point the unemployment rate falls below the natural rate, real GDP is approximately:

Answer: 2% above potential

Okun's Law estimates that a 1 percentage point drop in unemployment below the natural rate is associated with roughly 2% more real GDP than potential.