202 final Flashcards
GDP
total money value of newly produced final g/s produce in a domestic economy in the course of a yr transaction through organized market
inflation equation
(CPI later - CPI earlier) / CPI earlier
adjusting wage equation
amount adjusting x (CPI of adjusting to / CPI adjusting from)
inflation
sustained increase in PL
- normal + common
deflation
sustained decrease in PL
- rare + dangerous
disinflation
slow down inflation rate
- rare + normal
ex:
1%
2
3
1
2
hyperinflation
excessively high rate
- never
stagflation
stag eco + inflation
- rare + normal)
ex: increase inflation + UE but stagnant or declining GDP
nominal statistic
unadjusted
- can change due to △ in output, price, or both
↑ NGDP
- ↑ out ←→ price
- ←→ out ↑ price
- ↑ out ↑ price
- outputs little ↓ x prices big ↑
- outputs big ↑ x prices little ↓
- no deflation + recession = ↑
- if RGDP ↑ , it’s not certain NGDP ↑
real statistic
adjusted for inflation
- ONLY △ due to △ in output
↑ RGDP
if NGDP ↑ , it’s not certain RGDP ↑
interest rate effect
influence on flations
1. inflation = ↓ IR
2. deflation = ↑ IR
3. disinflation = ←→ moderate change
4. stag = ↑ IR in stag eco
- negative connection between PL and IR
- positive connection between IR and risks
movement along vs shifts AD
- movement along = change in PL lead to change in demand
- shift = change in Q that change PL
1st reason why AD curve down
wealth effect/real balance effect
- as PL ↓, purchasing power ↑ and so demand quantities ↑
2nd reason why AD curve down
interest rate effect
- as PL ↓, purchasing power of any given amount of money ↑ , purchased quantities ↑ and some ppl save more
- if interest rate ↓, ppl would buy more
3rd reason why AD curve down
Change in relative PL
if PL in US ↓, this cause ↑ spending on US G/S by foreign entities
Why AS curve up 1
employer misperception
- as PL ↑ some employers OVERESTIMATE their gains & they offer ↑ amount for sale
Why AS curve up 2
employees misperception
- as PL ↑ eventually wages are adjusted upward, some employee overestimate their gain & cause them to work harder.. allowing firm to ↑ amount for sales
Why AS curve up 3
sticky prices
“sticky” does not change
- as PL ↑, some firms are reluctant to increase their prices to menu costs
- when firm doesn’t ↑ price, ↑ in incurred sold quantity
Why AS curve up 4
Sticky Wage
- PL ↑ , wages are slow to adjust
- during this time, wage are not adjusted to real wage
- employer have lower real cost lead to higher real profits –> cause firm to offer ↑Q for sale
influences on C
- change in wealth
wealth = accumulating of asset of value NOT INCOME
↑ wealth - changes in tax rates
↓ tax rate - change in interest rates
↓ interest rate - changes in expected PL
household EXPECTS higher PL - change in expected national income
household EXPECT ↑ national income - changes in population (longterm)
↑ population
influence on I
- change in interest rate
↓ interest rate - changes in tax rates
↓ tax rate - changes in expectations of firms about future business conditions
firm EXPECT IMPROVE business conditions( ↑ current) - technological innovations (new product/improvement to existing product)
↑ techno innovation
influence on G
- changes in political agendas of congress & president
if congress & president want to SPEND MORE - status of the economy
if eco needs a stimulus - War vs peace
transition from peace to war
1st influence on (x-m)
- change of status of the economy a trading partner
if trading partner enjoys high rate of eco growth, (x ↑ - m ↓ ) - trade policy - deliberate action that is taken by a gov. to influence trade flows
a) tariff: tax imposed on imported goods
Impose tariff = x (net export) ↑ m ↓ AD→
b) quota: restrictions on import units allowed into a country impose on the gov of importing country
c) exports subsidy: gov prodivdes financial assistance to firm or industries to encourage export
x ↑ = AD → - changes in RELATIVE PL
↓ in relative PL of US, x ↑ m ↓ (ppl buy more from US, US also buys more from US) - changes in exchange rate
if US dollar ↓, ( x ↑ m↓)
- cuz dollar is weaker
What happen to net export when USD appreciate
Import = increase
(buying foreign goods)
export = decrease
(foreign buy less from us)
net export = decrease
What happen to net export when currency depreciation
Import = decrease
(buying foreign goods)
export = increase
(foreign buy more from us)
net export = increase
given exchange rate, app or dep
depre: initial rate < new rate
app: initial rate > new rate
LRAS
- where potential GDP lies
- verticle cuz no stick wage/price or misperception
1st type of UE
frictional
short term UE occurs when ppl r transitioning between jobs
- most common + normal
- signal well functioning eco
2nd type of UE
structural
skills demanded by employers are different from the skills you have
- require re-training
- last longest-time (longterm)
- most serious
3rd type of UE
cyclical
occurs during downturns (recession) in the economy
What questions are in BLS survey
- r u currently employed?
yes = in LB + employed
no = move to 2nd questions - are you expecting to return to work in the next month
yes = LB + unemployed
no = move to 3rd questions - have u looked for work in the last 4 weeks
yes = LB + unemployed
no = NOT in LB |NOT unemployed | is a discourage worker
UE rate conceptual
of unemployed / # of ppl in labor force
labor force participation equation
LFPR = # of ppl in LB / # working age population
high LFPR = lots of ppl trying to find job n are in LB
low LFPR = ppl giving up
influences on interest rates
FP influences on AD →
expansionary:
↑ gov spending
↓ tax rate
↑ transfer
MP influences on AD
↓ RRR/DR/IR
buy security
auto (self) correction
eco can eliminate recessionary and inflationary gap automatically
- moves AS curves
3 FED structures
- board of governor (BOG)
- Federal Open Market Committee (FOMC)
- 12 regional banks
BOG
- looks at the big picture decision of MP
- consist of 7 ppl
- appointed by the president w advice n consent of the senate
- term: 14 yr 2 yr rotation
BOG terms
normal term - 14 yrs 2yrs rotation
voluntary separation - leave voluntarily
death
mental incapacity - person adjudicated by 3 panel position claiming you arent fit for the job
fraud
who is the most important person of BOG
there’s 1 person who acts as “the chair”
- makes decision + break ties
- 4 yrs term n can be renominated
FOMC
details of MP
- 12 ppl
(7 BOG + NYC FED president + 4 other regional bank presidents)
2 themes regarding the fed
- dispersion of power
- FED acts slowly and in small steps
6 functions of the FED
- conduct MP
- FED serves as bank for US gov
- regulates bank industry
- responsible for clearing checks
- serves as an agent of US treasury
- lender of last resorts
monetary policy
set of tools used to influence the economy
1st FED functions
conduct MP (adjust the supply of money)
- use 4 tools
1st tool
change in required reserve ratio (RRR)
- if FED wants expansionary MP, ↓ RRR
↓ RRR means bank has more to loan, which grows the eco
Required reserve ratio
% of deposit that bank must keep in cash or on file w the fed
- if % is not met, bank shut down
2nd tools
change in discount rate
- if FED want expansionary MP = ↓ discount rate
(this will let bank have more money to loan out, growing eco
discount rate
interest rate charged by the fed on loans it makes to the bank
- THE ONLY INTEREST RATE THAT THE FED CAN SET
federal fund rate
interest rate that is charged by banks on loans they lend to other banks
- ↑ ↓ rate depends on supply n demand
prime rate
Interest rate bank charge their best customers
3rd tool
change in interest paid to banks on their excess reserve deposited w the fed
- if fed want expansion MP = ↓ interest paid to bank on excess reserve
4th tools
open market operations
- if fed want expansion, fed BUYS US gov security
(when fed buys, the security goes to the fed but the bank will gain money
↑ monay = ↑ loan and ↓ interest rate
- MOST USED
open market operations
fed buy/sell US gov security
- all banks own security bc
1. make them trustworthy (safe financial institute)
2. pay good interest
3. highly liquidity
2nd FED functions
fed serves as the bank for the US gov
3rd FED functions
FED regulates the bank industry
3 list of regulations that no longer exit
1. min contact hrs: fed tell banks to be open for a certain amount of time
2. hold time on deposit: money can’t be automatically spent
3. vault checks: ensure RRR is met
4th FED functions
fed is responsible for clearing check
6th FED functions
Fed is the lender of last resorts
- the idea that bank go to the FED last if they need a loan
- why?
1. other banks would have lower IR than the fed
2. reluctant for scrutiny from FED (bank borrowing money from FED kinds of set off a suspicious alarm)
5th FED functions
FED serves as an agent of the US treasury
- controls the circulation of money (when to release printed bills into eco)
Is national debt a problem? Yes
argues that when debt is repaid, this will bankrupt future generation as debt repayment is basically transfer of wealth outside the US eco
Is national debt a problem? No
argues that to the extent the debt is owe to ppl in US, repayment will be a transfer of wealth from 1 segment of society to another
- gov can pay debt at any time
FED + Target
- must choose either target money or interest rates
- forfeit one when choosing the other
When does FED target interest rates
- when it’s concerned with unemployment or RGDP
- change federal fund rates
if interest rate is not at target, FED either contract or expand market
- move AD for expand
- move AS for contract
When does FED target money
- target money if concerned w inflation
- change M1/M2
M1
liquid money that is easily spent / converted
SIZE - 19 trillion
- more liquidity than M@
what does M1 consist of
cash/coin from:
1. outside of banks
2. amount in bank’s checking account
3. amount in non-bank checking account
- statefarm
4. amount in travelers check
M2
broader measure of money that consist of M1 + some less liquid asset
21 trillion
what does M2 consist of
- all of M1
- amount in saving account
- amounts in money market mutual funds (MMMP)
- amounts in money market deposit accounts (MMDA)
- amount in certificates of deposit (CDS)
deposit creation multiplier
total deposit = initial deposit x (1/RRR)
- RRR in decimals
deposit creation multiplier
how bank create money
problem with deposit creation multiplier
- assumes bank hold only RRR, and all excess reserves are loaned out, and any loaned amount is subsequently redeposited into the banking system
- problem cuz actual multiplier is smaller than indicated
progressive income tax
(tax system)
tax rate ↑ as income ↑
regressive income tax
(tax system)
Income ↓ tax ↑
- no country currently has regressive income tax
flat income tax (proportional)
(tax system)
tax rate is constant at all income level
- some country has it
AS/AD + Phillips
AS = left + right
AD = up + down
if AS move left or right, Phillip’s point will move the opposite
- left = right
if AD move up or down, Phillip’s will move the same direction
monetizing
central bank buys debt of its own government
problem w monetizing
- cause central bank to respond bc they have target on IR w excessive borrowing
- cause separation between FP and MP to disappear
- since FP+MP are expansionary, this add inflationary pressure
- gov adding to debt by ↑ borrowing
Conservative vs liberal
conservative want smaller role for gov
- rec gap = ↓ tax rate
- in gap = ↓ gov spending
liberal want bigger role for gov
- rec gap = ↑ gov spending
- in gap = ↑ tax
indexing
method to cope w inflation
- periodic adjustment to wages/benefits base on measuring change in PL
1st problems with indexing
lag between occurrence of inflations + when wages/benefits are adjusted
- indexing happen once per yr
- ex: inflation in 2022 but benefits comes after
2nd problems with indexing
inflation may not be measured accurately
- BLS can make mistakes
3rd problems with indexing
may reduce incentives to control inflations
- since you’re getting “benefits” they might not want to resolve it
4th problems with indexing
disruptive to international trades
quantity theory of money
works w equation of exchange and develop assumption:
if v is constant then ↑ M can ↑ py (nominal GDP)
- its actually P that ↑ not py
- change in m will change p
v = velocity
m = money
p = price
y = real gdp
influence on velocity of money
-affect by
1. how frequently ppl are paid
- more payment = ↑ V
2. efficiency of banking system
- more efficient = ↑ V
3. change in interest rate
- ↑ interest = ↑ V
4. change in PL
- ↑ (or positive) change = ↑ V
adaptive expectation
ppl form their expectation based SOLEY on past info
- ex:
inflation goes from
1
2
4
what would be the next rate?
if you say 8 by following the pattern then that’s adaptive
calculate using rule of 72
growth rate x time = 72
2 times that = 72
influences on eco growth
productivity (biggest factor)
what ↑ productivity?
1. physical capital per worker
- ex: machines, building, equip
2. natural resources per worker
- ex: land, oil, fossils
3. human capital per worker
- ex: skills, education, health
4. technical knowledge
- awareness of best way to do things
