Ch 1. Concepts of closed macro

Question 1

Concepts:
Microeconomics and macroeconomics

Explain two key ideas of macroeconomics

Answer 1

• Microeconomics = The study of individual decision-making units, such as firms and households.
• Macroeconomics = The study of economy-wide aggregates, such as inflation, unemployment, economic growth, and international trade.
• Macroeconomics: two key ideas:
  
  • Decisions and variables of the aggregate economy: the whole economy, not only one market or one firm.
  • To simplify reality to allow for analysis and knowledge of how the economic activity works and policies to implement.

Question 2

3 main variables in macroeconomy

Answer 2

1. Production (GDP)
2. Unemployment rate
3. Inflation

Question 3

What are economic models

Answer 3

Economic models will allow us to analyze the interrelationships between macroeconomic variables. They are generally based on hypotheses and assumptions that are important to consider.

Question 4

What are the main objectives of the macroeconomy

Answer 4

• GDP grwoth: LEading to economic growth in the long term.
• High employment (low employment rate)
• Stability in prices (inflation)
• Others: stability in exchange rates, public finances, external accounts.

Question 5

Macroeconomic policies (Tools)

Answer 5

• Monetary policy: ruled by central Central Bank (interest rates, credit conditions…)
• Fiscal Policy: decisions of the goverment regardin public finances (transfers, public expenditure, taxes)
• Other policies: innovation, bureacracy, trade policy, product market, institutions (courts), barriers to trade, financial regulation, labour market institutions

Question 6

Circular flow of income

Answer 6

1. Households:
   * Buy and consume. Own and give production factors
2. Production factors Market:
   * Households sell, companies buy
3. Companies:
   * Produce and sell. Hire and use production factors
4. Goods and services market:
   * Companies sell, households buy

Question 7

Explain the main groups of macroeconomic variables

Answer 7

• Stock variable: variable that measures “something” at a specific moment in time. This implies that this measurement includes the “accumulated valie” of what we are measuring up to the precise moment atwhich we measure it. (i.e. wealth, employment)
• Flow variable: is a variable that measures “something” per unit of time. In reality, a flow variable is the change in a stock variable over a period of time. (i.e. salary (monthly), income (monthly)).

Question 8

Is economic growth a smooth process?

2 Periods

Answer 8

• Business cycle: Alternating periods of positive and negative growth rates. It affects labour market outcomes.
• Recession: Period when output is declining or below its potential level.

Question 9

State Okun’s Law

Also clarify coefficient if needed

Answer 9

Okun’s law: A strong relation between GDP growth and unemployment rate.
Changes in the rate of GDP growth are negatively correlated with the unemployment rate.
Output falls → Unemployment rises → Well-being falls
Okun’s Coefficient: Degree of correlation.

Question 10

Equivalent ways to measure GDP?

Answer 10

1. Total spending on domestic products
2. Total domestic production (measured as value added)
3. Total domestic income

National accounts are the systems used to measure overall output and expenditure in a country.
* Circular flow model shows this equivalence: Houselholds → Expenditure → Firms →Value added ($) = Income ($) → Households

Question 11

What are economic shocks?

Types?

Answer 11

Shocks are an unexpected event (such as extreme weather) wich causes GDP to fluctuate.
Two types:
1. Good or bad fortune strikes the household
2. Good or bas fortune strikes the entire economy