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macro > 15-16 > Flashcards

15-16 Flashcards

1
Q

Inflation def

A

growth in prices from one period to another

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2
Q

what is a goods basked used for?

A

to compute a consumer price index

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3
Q

inflation (formula)

A

( P(t+1) -P(t) ) / P(t)

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4
Q

Pirce index formula

A

GDP Deflator = Nominal GDP / Real GDP

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5
Q

Consumer Price Index

A
  • measure cost of living for consumers
  • based on a representative basked of commodities
  • includes goods and services bought by consumers
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6
Q

What is the most important inflation measure?

A

CPI

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7
Q

Producer Input Price Indexes

A

used to measure changes in the prices of inputs used for production

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8
Q

Producer Output Prices

A

used to measure changes in factory gate prices, excluding consumer taxes and distributors / retailers markups

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9
Q

economist’s perspective

A
  • price level is just a unit of measure
  • money is a veil - what matters is relative prices, not absolute prices
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10
Q

the real side of the economy does not…

A

change with the quantity of money or the level of prices (especially in the long run)

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11
Q

relative prices always…

A

reflect the relative value of goods

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12
Q

after some shock, prices need to …

A

adjust such that they again reflect the relative value of goods

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13
Q

When prices have time to adjust …

A

money is neutral in the long run
–> reflected by RBC model
–> not by Keynesian since prices adjust slowly

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14
Q

What is the tax system based on?

A

nominal accounts

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15
Q

What do higher wages indicate in the tax system?

A
  • higher tax brackets
  • higher taxes because of higher wages
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16
Q

inflation tax

A

if you hold cash, inflation reduces its value

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16
Q

real interest rate formula

A

r=i-pie^e

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17
Q

shoe leather costs

A

as inflation goes up
- individuals hold less cash
-they need to make more trips to the ATM
- so they spend more time when keeping cash low
=> can exceed 0.3% of GDP when inflation is 5%

18
Q

Why is changing prices costly for firms?

A

-Physical costs
- managers involved

19
Q

Is there a change if all prices increase by the same relative amount?

A

Yes
even if they increase by the same relative amount in the long run they do not change at the same time, staggered changes will induce changes in consumer demand, and others may react by changes their prices differently

20
Q

What is the effect of prices (wages) maybe reacting slower to inflation?

A

consumers are temporarily poorer (real income falls)

21
Q

if inflation is high, it is often …

A

volatile

22
Q

there is evidence that high inflation leads to …

A

lower growth

23
Q

inflation increases computational …

A

burden of individuals and makes them more likely to do mistakes (nominal illusion)

24
Q

How can mild inflation be beneficial?

A
  • reduces the real wage
  • allows firms to hire more workers
  • unemployment falls, production and economic growth increase
  • grease the wheels of economy
25
Q

What are the costs of deflation?

A
  • increases the real interest rate
  • high real interest rates incentivizes agents to save more and consume less
  • raises the real wage
26
Q

money def

A

money is an object used to make transactions, is accepted as a means of payment

27
Q

fiat money

A

money that has zero value, but it has value because government legislation says so and guarantees its value

28
Q

money increases the chances of …

A

double coincidence of wants

29
Q

money delivers big efficiency gains because

A
  • acts as a medium of exchange
  • acts as a unit of account
  • acts as a store of value
30
Q

people need more currency if

A
  • price per transaction (p) is high
  • they make many transactions –> number of transaction Y
31
Q

people want less currency if

A

the interest i is high

32
Q

Demand for money formula

A

M=PY - ai

33
Q

an increase in money supply

A

lowers the interest rate

34
Q

an increase in number of transactions

A

raises money demand and the interest rate

35
Q

bank reserves formula

A

R = ø * D = ø* (1-c) * M

36
Q

Money Multiplier formula

A

1 / (c+(1-c)*ø)

37
Q

Money multiplier is large when

A
  • households deposit a lot of money with the banks c
  • reserve requirements are low ø
38
Q

increase in c or ø

A

higher demand for currency and reserves

39
Q

money multiplier assumptions

A
  • money always stays in the country
  • loans make it back to banks as deposits
  • banks do not hold excess reserves
40
Q

seigniorage

A

profit made from printing money

41
Q

hyperinflation

A
  • over 50% per month
  • often have origins in fiscal deficits
  • government prints money since it cannot issue bonds or raise taxes
42
Q

monetarism

A

the idea that money supply growth leads to inflation

43
Q

Quantity Equation

A

MV = PY

macro (6 decks)

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