BEC Macroeconomics Flashcards
Economic activity of an entire economy (nation or region).
Macroeconomics
Free-flow model in macroeconomics considers:
Individuals Businesses Government Financial sector Foreign section (imports/exports)
Amount of individual income that are not spent on domestic consumption.
Leakages (taxes, savings, imports)
Amounts of expenditures not for domestic consumption added to the domestic production.
Injections (gov spending/subsidies, investment expenses, exports)
Aggregate spending/demand curve (AD)
Demand measures the total consumer spending, business investments, gov entities, and net foreign spending on exports. Negatively sloped curve.
Consumer (consumption) spending (CS)
70% of total aggregate demand, personal income and income taxes are most important determinants
Consumption function (CF)
Relationship between consumption spending and disposable income (DI)
When CF=CS=DI, then
Consumers are spending all of their DI, when consumers are not spending all their income, DI over CS is consumer savings.
Average propensity to consume (APC)
% of disposable income spend on consumption goods (CS/DI)
Average propensity to save (APS)
% of disposable income saved (S/DI)
Marginal propensity to consume (MPC)
Change in consumption as a % of change in disposable income (change in CS/change in DI)
Marginal propensity to save (MPS)
Change in savings as a % of change in disposable income (change in S/change in DI)
Investment spending most dependent on:
Interest rate, higher interest rates associated with lower levels of spending, considered most volatile component of aggregate spending
Intentional changes by gov in tax receipts or spending, which are implemented in order to increase or decrease aggregate demand.
Discretionary fiscal policy
To increase aggregate demand:
- Increase government spending
- Decrease taxes
- Increase transfer payments (ex. SS, unemployment)
When net exports are positive (exports greater than imports)
Aggregate demand is increased, for past 20 years, US has been net IMPORT country (aggregate demand is decreased)
Factors that determine country’s level of imports/exports:
- Relative level of income/wealth= more imports
- Relative value of currency- weaker currency stimulates exports
- Relative price levels
- Restrictions and tariffs
- Relative inflationary rates- higher=higher cost of input=less exports because they cost more
Aggregate demand can shift due to the following (curve shifts, so all are factors other than price):
- Personal taxes
- Consumer confidence
- Technological advances
- Corporate taxes
- Interest rates
- Government spending
- Exchange rates/net exports
- Wealth changes
Multiplier effect
Cascading effect on demand where a single factor that causes change in aggregate demand will have multiplied affect on aggregate demand.
Initial change in spending x (1/(1-MPC))
If the conventional supply curve shifts left, there will be less supply and the price will…
Increase
Three types of supply curves:
- Classical (vertical)
- Keynesian (kink where full employment occurs)
- Conventional (upward slope where full employment occurs)
Factors that change position of supply curve:
- Resource availability- increase in economic resources= curve shifts right (more output @ same or less cost)
- Resource cost- decrease in cost, moves curve to the R
- Technological advances- increased efficiency shifts the curve to the R
An increase in the value of Chinese currency relative to US dollar would most likely cause:
Increased aggregate demand in US (fewer goods bought from China, more goods bought in US, US goods would be less expensive in China)
Aggregate demand and supply curves intersect at price and quantity that are:
Either at, above or below potential GDP (potential GDP is max amt of goods/services economy can produce), the curves intersect at actual output of economy, which can vary from potential GDP
Equilibrium real output
Point at which aggregate supply and demand curves intersect
Increased aggregate demand with classical supply curve=
Increased aggregate supply=
Higher price levels
Higher output, lower price
Increased demand with conventional supply curve=
Increased supply alone=
Increased output and price level
Increase output, reduce price
Nominal Gross Domestic Product (Nominal GDP)
Total output of final goods and services produced for exchange in the domestic market during a period. Only includes goods produced, not sold, domestically during that period.
Two approaches to calculating GDP:
- Expenditures approach (expenditures of consumer, business, gov and foreign buyers)
- Income approach- gross domestic income
Real Gross Domestic Product (Real GDP)
Total output of final goods and services produced for exchange in domestic market during a period at CONSTANT prices. Used GDP deflator as price index.
GDP deflator
Comprehensive measure of price leveled used to derive real GDP. Prices compared to base period to determine value. =(Nominal GDP/Real GDP) x 100
Potential Gross Domestic Product (Potential GDP)
Max final output that can occur in domestic economy at a point in time without creating upward pressure on the general level of prices in the economy.
Represented by production-possibility frontier where economy fully utilizing resources (being efficient)
Net Domestic Product (NDP)
GDP less deduction for depreciation (capital consumption)
Gross National Product (GNP)
Total output of all goods/services produced worldwide using US entity economic resources. Replaced by GDP in 1992.
Personal income and personal disposable income
Amount of national income before taxes, after taxes, received by an individual.
Rate of unemployment caused by changes in the composition of employment opportunities over time.
Structural unemployment
Official measure of full employment
Cyclical unemployment, full employment is when there is no cyclical unemployment
Natural rate of unemployment
% of labor force not employed as a result of frictional, structural or seasonal unemployment (less than total unemployment, since total includes cyclical)
Two surveys by Bureau of Labor Statistics (BLS):
- Current Employment Survey (CES)- monthly sample of businesses and gov entitites
- Current Population Survey (CPS)- monthly sample survey of households
Not in labor force:
- Less than 16
- Retired
- Not seeking work
- Institutionalized
- Active military
Frictional unemployment
Not employed because they are in transition or have imperfect information. Ex. those who are moving or searching for work that fits their talents
Structural unemployment
Not employed because their prior types of jobs have been greatly reduced or eliminated or because they lack the skills needed for available jobs. Ex. could happen because of technological innovation
Seasonal unemployment
Not employed because their work opportunity regularly and predictably varies by the season.
Cyclical unemployment
Not employed because a downturn (contraction) in the business cycle.
Unemployment rate=
Unemployed/Size of labor force
Variations between business cycles are most likely attributable to:
Duration and intensity
A trough in the business is characterized by:
Unused productive capacity and an unwillingness to risk new capital investments (lowest level of business activity and greatest underutilized capacity)
Business cycles
Cumulative fluctuations (up and down) in aggregate real GDP, which generally lasts two or more years through no consistent pattern of length or intensity.
Peak
Point in economic cycle that marks end of rising aggregate output (expansion) and beginning of decline.
Trough
Point in economic cycle that marks end of decline (recession) in aggregate output and beginning of increase.
Economic expansion
Normally longer than recessionary periods, period in which aggregate output is increasing.
Early expansion- high income elasticity sectors do well (cyclicals and energy) as people are starting to spend more on apparel, retail and autos.
Basic materials and technology do well as expansion continues.
Late expansion and boom stage- capital goods, financial firms and transportation do well due to high income elasticity (airlines, trucking, RR)
Economic contraction (recession)
Aggregate output is decreasing, normally of shorter duration than expansionary periods. Consumer staples and utilities continue to perform well during this time because they have very low income elasticity (income changes to not influence demand)
Recession defined
Period of 2+ consecutives quarters in which there is a decline in Real GDP, economic downtown in which real GDP declines by 10% or less
Depression defined
Decline in real GDP of more than 10%, decline in real GDP lasting more than 2 years.
Primary cause of business cycles
- Changes in business investment spending
- Changes in consumer spending on durable goods (appliances, autos)
Demand declines=output declines=unemployment and underutilization of resources
Causes of decline in business and consumer spending:
- Tax increases
- Declining confidence
- Rising interest rates
Leading economic indicators (indicate change in business cycle)
- Consumer expectations
- Initial unemployment claims
- Weekly manufacturing hours
- Stock prices
- Building permits
- New orders for consumer goods and capital goods
- Real money supply
Lagging indicators (occur after changes to confirm elements of business cycle)
- Changes in labor cost per unit of output
- Ratio of inventories to sales
- Duration of unemployment
- Commercial loans outstanding
- Ratio of consumer installment credit to personal income
Considering a 2% rate of inflation, what would the value of a $1,030 loan with interest be?
$1,030/1.02=$1009,80
(Nominal GDP/Real GDP) x 100=
GDP deflator
What indicator does federal gov use to measure inflation primarily?
Consumer Price Index
How does inflation distort reported income?
Depreciation is NOT reflective of current fixed-asset replacement costs.
Consumer price index (CPI-U)
Relates prices paid by all urban consumed for a fixed basket of goods and services during a period to price of basket in prior reference period. Includes households only. Ex. 233 CPI indicates prices were 133% higher in that period than in base period.
Personal Consumption Expenditure Price Index (PECPI)
Chained index compares one quarter’s prices to previous quarter. Includes households and nonprofit institutions, considers changes in buying patterns, not based on fixed basket of goods.
Purchase price index (PPI)
Average change over time in the selling pries received by domestic producers. Measures revenue vs. expenditures (CPI). Primarily used to deflate revenue streams.
Inflation
Annual increase in price level.
2 fundamental causes of inflation
- Demand-induced (demand-pull)- level of aggregate spending exceeds productive capacity, prices rise
- Supply-induced (supply-push)- increasing cost of inputs passed on to buyer in form of higher prices, generally output also decreases causing unemployment
Consequences of inflation
- Lower current wealth and lower future real income- consumers on fixed incomes will reduce consumption
- Higher interest rates- Offset declines in purchasing power financers derive from loans=less borrowing
- Uncertainty of economic measures- reduces current demand and postpones investments
Deflation vs.
Disinflation
Annual rate of decrease of price level vs. decline in the rate of inflation
Causes of deflation
- Significant decrease in demand, results in widespread reduction in prices by sellers in an attempt to stimulate sales.
- Increase in aggregate supply that significantly exceeds an increase in aggregate demand, sellers reduce prices to move product.
Deflationary spiral
When prices are falling, consumer have an incentive to delay purchases and businesses have an incentive to delay investments in anticipation of lower prices in the future.
What federal reserve strategy would increase the money supply?
- Decrease the reserve requirement
- Purchase US Treasury bond from banks
- Reduce the discount rate
- Increase money supply, lowers ST interest rates
Functions of money in the economy:
- Medium of exchange
- Measure of value
- Store of value
M1
US paper currency and coin and check-writing deposits.
M2
M1 plus savings deposits, MM deposit accounts, CDs under 100,000, individual money-market mutual funds. Primary focus of fed’s action to influence economy.
Monetary policy
Concerned with managing money supply to achieve national economic objectives. Federal Reserve System can regulate at national level only.
Velocity of money (VM)
Measure of rate at which money in circulation is used for purchasing new, domestically produced goods and services. VM=GDP/MS (ex. every dollar in money supply was used 1.43x in Q4). No clear relationship between VM and inflation.
Fiscal policy
Use of gov taxation, spending and transfer payments to achieve economic objectives. Implemented by legislative action. Can be implemented at national, state and local levels.
3 types of fiscal policy actions
- Expansionary
- Neutral
- Contractionary
Primary approach to achieving economic objectives?
Monetary policy because it can be approved more quickly and fewer artificial influences (fiscal policy causes redistribution of income and output)
Prime interest rate
Rate banks charge most credit-worthy customers.
In macroeconomics, would investing in common stock be considered investment spending?
No, this is considered saving, home construction, business investments would be considered investing
Gross domestic product gap
Comparing real GDP to potential GDP, if real GDP exceeds potential GDP, there is a positive gap
Business cycle in the US is measured in terms of changes in:
Real GDP
Which of the following are least likely to be relevevant to the study of macroecon?
Elasticity of demand because concerned with individual good/service
Marginal units/worker=
Units produced/#of workers
Real GDP per capita
Real GDP/population, common measure of the standard of living in the country
