1. Introduction to macroeconomics Flashcards

1
Q

What is macroeconomics?

A

The study of the economy as a whole
Concerned with the aggregated economy

Macroeconomics gives us the tools to understand how changes in the macro variables occur and how they impact the fabric of society

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2
Q

Macroeconomic issues

A

Output
Economic growth
Inflation
Unemployment

These are areas of interest of the economist but also of the policymaker

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3
Q

Output

A

Sum of all production

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4
Q

Economic growth

A

The change in production

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5
Q

Unemployment rate

A

Percentage of the workforce without work

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6
Q

Inflation rate

A

Measures the change in the cost of living

Difficult to measure - we cannot keep track of the changes in all prices all the time

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7
Q

International trade

A

The exchange of products to and from aboard

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8
Q

Aggregated variable

A

Average value

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9
Q

Time series data

A

Time series data is a collection of observations obtained through repeated measurements over time
Can be useful for tracking changes in GDP over time

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10
Q

Preliminary data analysis

A

An analysis that comes from the observation of a basic presentation of economic data
Can be in the form of summary statistics or from the profiles and directions of the times series data itself

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11
Q

Economic modelling

A

A simplification of the economy that we use to explain economic linkages
Helps predict reaction of economy to shocks and economic policy
Include certain assumptions we must make
Models assume that all other factors outside of our analysis remain constant (ceteris paribus)
Models are considered static - they do not account for changes in time
Come in the forms of words, mathematical equations, or diagrams

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12
Q

Schedule

A
A line or curve in an economic module
Reflects the behaviour of an agent inside the model
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13
Q

Equilibrium

A

A specific state where the agents of a model share the same behaviour in terms of the variable of interest

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14
Q

Exogenous changes

A

Changes that happen outside of the model

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15
Q

GDP

A

Output method: Sum of all production in economy - final goods or added value
Income method: Sum of income including wages for workers and dividends for shareholders
Expenditure method: Sum of all money spent in the economy - can be split into different components

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16
Q

Nominal GDP

A

Sum of production using current quantities and current prices
Can change if quantities or prices change

17
Q

Real GDP

A

Sum of production holding prices constant at some base year

Changes only if quantities change

18
Q

GDP deflator

A

Measure of inflation
Measure of the level of prices of all new, domestically produced final goods and services in an economy in a year
Takes into account ALL goods (food, clothes, military weapons…)
Calculated by dividing Nominal GDP by Real GDP
Weights can change in the GDP deflator - the composition of the basket of goods can change over time
Issue is it does not account for imported goods purchased by consumers

19
Q

Consumer Price Index (CPI)

A

Weighted average of prices faced by consumers (does not include housing costs)
Uses a fixed basket of goods - we look at the change in prices of the goods over a period of time
ONLY includes goods that a consumer would purchase
Weights are fixed for prices of different goods

20
Q

Retail Price Index (RPI)

A

Measures the change in the cost of a representative sample of goods and services
Uses a basket of goods like CPI but more directed towards families
Includes housing costs - reason it is often higher than CPI

21
Q

Money

A

Any item or verifiable record that is generally accepted as a means of payment for goods and services

Money can be an asset and a liability at the same time

22
Q

Economic Policy

A

An economic policy is a course of action that is intended to influence or control the behaviour of the economy.
Implemented and administered by the government

23
Q

Balance of Payment

A

Records international flows of money and goods (like a balance sheet)
Current accounts and Financial accounts should balance out - be equal
-inflows (+ve)
-outflows (-ve)
- goods exported out (+ve)
-goods in (-ve)

24
Q

What does macroeconomics try to answer?

A

Why some countries grow faster than others?
Why some countries experience high inflation while others keep prices
stable?
Why all countries experience recessions - periods of falling incomes and
rising unemployment?

25
Mathematical models
Help measure the success of models | Make quantifiable predictions
26
Schools of thought
Classical Macroeconomics: completely against intervention by policymakers - belief in flexible prices Keynesian Economics: Sticky prices, argues the effectiveness of fiscal and monetary policies
27
Elements of mathematical models
1) One type of error term: the connection between our model and reality (distance between our models results and the data) 2) Two types of variables: the exogenous (predetermined) and the endogenous (determined). 3) Three types of equations: behavioural equations, equilibrium conditions and identities
28
Fiscal policy
Refers to the use of government spending and tax policies to influence economic conditions
29
Monetary policy
Control of the quantity of money available in the economy and the channels by which money is supplied Controlled by the Central bank NOT government Aims: Maximum employment Stable prices Moderate long-term interest rates
30
Quantitative easing
Monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money Aim is to expand economic activity
31
Problems with aggregation
Information loss | Only includes 'average' of all agents - does not take into account differences between all these agents
32
What is the purpose of the error term in an economic equation?
Exactly measures the difference between what is predicted (the fitted value) and the reality (the observed value) in a model Error term completes the model
33
Crowding out effect
Theory that rising public sector spending leads to a decrease or possible elimination of private sector spending Example: Large governments increasing borrowing is the most common form of crowding out as it leads to an increase in interest rate
34
Economic stimulus
Action by the government to encourage private sector economic activity by engaging in targeted monetary or fiscal policy Commonly employed during times of recession Tools used to implement economic stimulus: Lowering interest rate Increasing government spending Quantitative easing
35
Monetary transmission mechanism
Process by which asset prices and general economic conditions are affected as a result of monetary policy decisions
36
Closed economy
A closed economy is one that has no trading activity with outside economies Entirely self-sufficient No imports or exports
37
Open economy
An economy that interacts freely with other economies | A percentage of its goods and services are traded internationally
38
growth rate
quarterly change in GDP
39
models
Can be written in words or represented mathematically Has simplifying assumptions - e.g. number of representative agents Used to predict the reaction of the economy to shocks and policy