3203 Unit 1 Study guide Flashcards
Describe endogeneous vs. exogeneous variables.
Endogeneous: a variable that’s explained by the relationships within the model
Ex: equilibrium price of supply and demand model bc producer in response to consumer demand
Exogeneous: outside variables used to explain the endogenous variable and whose value is independent/not affected by other parts of the model.
Describe stocks vs. flows
Stock: variable measured at one specific time and represents a quantity existing at that point in time
Flow: variable measured over an interval of time measured per unit of time (ex: a year)
-Bath tub analogy: stock is the water sitting in the tub, flow is the water coming out of the faucet and down the drain
How do you mathematically convert stocks to flows?
If Z = XY (levels of stocks)
%∆Z = %∆X + %∆Y
If Z = X/Y
%∆Z = %∆X - %∆Y
Define GDP
Represent’s monetary value of all goods and services produced within a nation’s borders over a period of time
Define unemployment rate
% of the total labor force that is unemployed but actively seeking employment and willing to work
What is labor force?
Number of Employed + Number of Unemployed
Define labor force participation rate
the percentage of the adult civilian population in the labor force.
Formula: LBPR=Labor Force/Adult Population
-Does not include discouraged workers
Define inflation
tells us how rapidly the overall level of
prices is rising compared to previous years.
What is the fundamental identity of national income accounting?
Total Production = Total Expenditure = Total Income
What are the 3 approaches of National Income accounting?
- The production approach
- The expenditure approach
- The income approach
What is the production approach?
add up the current market value of all final
goods and services newly produced in the economy
- (price of apples * quantity of apples) + (price of oranges * quantity of oranges) + etc.
What is the expenditure approach?
the total spending on currently produced final goods and services in the economy.
GDP=C + I + G + NX
-C is largest is US. transfer payments don’t count
What is the income approach?
- employee income
2.+ Self-employed income - +corporate profits
(=National income) - +depreciation
(=Gross National Product) - income income paid to Americans by foreigners
- Income to foreigners from Americans
(Total=Gross Domestic Product)
- Income to foreigners from Americans
What are the 5 major issues with gdp?
- Black and grey markets
- Nonmarket production: stuff we do on our own instead of buying it makes gdp look lower
- Tech improvements: underestimated by GDP
- Economic bads: stuffs you pay to avoid (ex: vaccines to avoid the flu)
- also if hurricane destroys house GDP goes up because people have to buy a new one - Leisure and quality of work
What is the equation for the GDP deflator? What does it do?
(Nominal GDP/Real GDP)*100
- Index that measures price level (see handout)
- Today we use chain-weighting to calculate real GDP
What is CPI(Consumer Price Index)?
A measure of price level that uses a typical bundle of household goods with quantities from the past.
-The problem is that in the real world the bundle can change over time with different preferences
What’s the difference between CPI and GDP deflator?
Deflator compares base year Price with different quantities
-includes all final goods
CPI holds Q fixed
-only includes a bundle of consumer
How do you calculate CPI?
CPI Numerator/CPI Denomiator x 100
*see CPI handout on how to get numerator and denominator.
How do you correct a price for inflation using CPI or GDP deflator?
Price X (base year deflator / comparing year deflator)
How do you calculate the inflation rate with each of these tools?
(New-old/old) x 100
Describe the Venn diagram of the population and labor force.
US Population
Adult Non-institutionalized
Civilian Labor Force
Employed + Unemployed
What are the 2 issues with the unemployment rate?
- Discouraged workers: they’ve quit looking for a job actively, but they would take a job
- Underemployed workers
What are the 4 types of unemployment?
- Frictional: search unemployed, takes time to find a job (regular unemployment)
- Seasonal: not much to be fixed because it’s inevitable, ex: lifeguard
- Structural: caused by wage rigidity or unusual market structure (ex: minimum wage)
- Cyclical: workers losing their jobs due to business cycle fluctuations (booms and recessions)
How do you calculate real interest rate?
if Fisher equation: i= r + ii^e
*Therefore: r= i - ii^e
[i= interest rate r=real interest rate ii^e=expected inflation rate]
-This shows that the interest rate is partly for profit but also to protect lender against inflation
what does profit maximization imply?
MPK = R/P = rc firms will want an amount of capital that will make the marginal product of capital equal to the real rental price of capital
MPL = W/P = w firms will hire an amount of labor that will make the marginal product of labor equal to the real wage rate
How is national income divided?
Divided among capital and labor according to alpha.
What are the 3 characteristics of money?
- Medium of exchange: more efficient than bartering
- Unit of account: allows bus/gov/ppl to account for funds
- Store of value: keeps stable value (consistent over time)
Define seigniorage
Process where the gov collects revenue by printing money
-Aka inflation tax
Define the following types of money:
C, M1, M2
C = currency (most liquid)
M1: c + traveler’s checks + demand deposits + other checkable deposits
M2: m1 + small time deposits + savings accounts and money market deposits + mutual funds
What is the equation of exchange in stocks and in flows?
MV=PY
%ΔM+%ΔV=%ΔP+%ΔY
M=Money Supply V=Velocity P= Price Level Y=Price Level
What are the issues with expected inflation?
- Menu costs: cost of updating price lists/menus
- Shoeleather costs: cost of having to rush when you take your money out to pay because it’s losing value( i =r + ii)
- U.S Capital gains taxes are not indexed to inflation
- Greater variability in relative prices due to less frequent price changes, misallocating resources distorts production
What are the issues with unexpected inflation?
- Redistributes income (this is only bad if it affects future decisions)
- It makes people nervous about taking risks → less investment
- People try to protect themselves against the unexpected inflation uses real resources and is wasteful
- If some prices are sticky causes changes in relative prices
- But if inflation is expected it’s easier to overcome sticky prices with time
- Problems are worse with higher inflation because higher inflation is usually more variable
How do banks create money with fractional reserve banking?
- Banks get money from the fed
2. They keep the reserve requirement in the bank and loan out the rest
Define required reserve ratio
- Also known as reserve requirement
- Fraction of deposits that regulators require bank to hold in reserves and not loan out
Define money multiplier
- Also known as potential deposit expansion multiplier
- Measures the maximum amount of money that a commerical bank can create by given central bank
How do to use money multiplier?
MM=1/rr then MM x deposit
-example MM=1/.1=10 10x$100=$1000
