Chapters 1-5 Flashcards
Output
the level of production of the economy as a whole - and its rate of growth
Unemployment rate
the proportion of workers who are not employed and who are looking for a job
Inflation rate
the rate at which the average price of the goods in the economy is increasing over time
measure of aggregate output
GDP
What is GDP?
- The value of final goods and services produced in an economy during a given period.
- The sum of value added in the economy ( value of production minus value of intermediate good used in production)
- The sum of incomes in the economy during a give period
Nominal GDP
Quantities of finals goods multiplied by their current prices. As prices and quantities pro
Real GDP
Sum of the production of goods multiplied by a constant (i.e. price of goods for a base year). Weighted average of the output of all final goods
Labour force is…
the sum of employment and unemployment
The unemployment rate is….
ratio of number of people who are unemployed to the number of people in the labour force
What is the participation rate defined as?
ratio of the labour force to the total population of working age
The employment rate can be an indicator of what?
How efficiently the economy is utilising its resources
Inflation is…
the sustained rise in the general level of prices
Deflation is…
the sustained decline in the price level
GDP deflator
ratio of nominal GDP to Real GDP. It gives the rate at which the general level of prices changes over time
Consumer Price Index (CPI)
Considered the average price of consumption (as GDP assimilates some goods not sold to consumers but firms and also some goods are imported). Can be considered the cost of living.
Why do economists care about inflation?
There is no such thing as pure inflation and so prices and wages do not rise proportionately. Inflation can lead to distortions. Leads to changes in income distribution.
Is deflation good if inflation is considered bad?
No. Can create many of the same problems as inflation (distortion). Can also affect the ability of monetary policy to affect output.
Short run
a few years. Year to year movements on output driven by movements in demand
Medium run
Approx a decade. Economy tends to return to a level of output determined by supply factors such as capital stock, level of technology and size of labour force
Long Run
a few decades or more. Looks at things such as the education system, the savings rate, and the role of the government.
Composition of GDP
Consumption, investment, Gov spending, Net exports
Consumption
Goods and services purchased by consumers
Investment
Sum of non-residential investment and residential investment (new capital goods - NOT shares or gold)
Government Spending
The purchases by the national, regional and local governments. (does not include government transfers i.e. benefits and pensions)
Net Exports
Also known as the trade balance. Is the difference between the number of exports and the number of imports (X-IM). If imports is greater than exports it is a trade deficit. If the other way round it is a trade surplus.
Inventory investment
Difference between goods produced and goods sold each year.
In a closed Economy what is the total demand for goods (Z)? And what are the assumptions?
Z=C+I+G
All firms produce the same good which can then be used by consumers for consumption, by firms for investment or the government.
Firms are willing to supply any amount of the good at price P
Assume economy is closed
What is consumption primarily dependent on?
The disposable income of the consumer. The is the income after having made transfers to the government and paid taxes. This is a positive relationship. As disposable income goes up so does the amount which is consumed.
What is the equation for Consumptions with relation to disposable income?
C = c0 +c1(Yd)
What is c1?
The marginal propensity to consume. So for every £ increase in income the consumer will only consume a fraction of that increase and save the rest.
What is c0?
It gives the fact that despite income potentially being equal to zero people will still have to eat.
Disposable income
Income minus Taxes - Y-T
Investment
Considered exogenous variable. In the model is taken as a given so does not respond to changes in production.
Stipulation for equilibrium in the goods market?
the production equals the demand for goods. Y=Z
What is autonomous spending?
The of the demand for goods which does not depend on output. (c0 + I + G - c1T)
What is 1/(1-c1)?
The multiplier. It will tell you how much output increases when c0 increases.
components of the 45 degree graph
The market equilibrium is when the demand line intersects the 45 line. An increase in autonomous spending shifts the demand line upwards.
What affects the size of the multiplier?
The marginal propensity to consume
What is Saving?
The sum of private saving and public saving
How is private saving defined?
the saving by consumers and is their disposable income minus their consumption.
Public saving is defined as?
Taxes minus government spending. If taxes exceed gov spending then the gov is running a budget surplus
Another way of considering equilibrium in the goods market
Investment is equal to savings
What does (1-c1) represent
The marginal propensity to save
Money
Is what you can use for transactions and pays no interest
Bonds
pays a positive interest rate, i, but cannot be used for transactions.
Demand for money
the sum of all the individual demands for money by the people in the economy. Depends on the level of transactions and interest rate.
What effect does interest rate have on the demand for money?
Has a negative effect. The higher the interest rate the more likely people are going to save it and put their money in bonds.
What causes a shift in the money demand curve?
A change in the nominal income. If there is an increase then there is a shift to the right and vice versa
What is the stipulation for equilibrium in the money market?
Money supply = money demand
What is the effect of an increase in the nominal income on the interest rate?
It leads to an increase in the interest rate as the money demand curve shifts now intersecting the money supply curve at a new point.
What is the effect of an increase in the money supply?
An increase in the money supply causes the interest rate to decrease.
How do central banks control the money supply?
Buying and selling bonds
How will they increase the amount of money in the economy?
By buying bonds and pays for them by creating money
How does the central bank decrease the money supply?
By selling bonds and removing the money from circulation
What is it referred to when the central bank buys and sells bonds to affect the money supply?
Open Market operations
What is meant by the bond markets went up today?
The price of bonds has risen and thus interest rates have decreased.
What happens when the central bank buys bonds?
The demand for bonds rises, increasing their prices and thus the interest rate goes down
What happens when the interest rate gets nearer to zero?
People become indifferent between holding bonds and holding cash. It becomes likely the economy will slip into a liquidity trap
Liquidity trap
When the demand for money becomes horizontal. Any increase in the money supply will have no effect on the interest rate. People are willing to hold more money at the same interest rate.
Financial intermediaries
Institutions that receive funds from people and firms and use those funds to buy financial assets or to make loans to other people and firms
What is the demand for central bank money?
the demand for money by people plus the demand for reserves by banks
What is the demand for currency equal to?
CU=cMd
What is the demand for deposit accounts equal to?
D=(1-c)Md
What does the letter θ represent in the relation between Reserves and deposits?
The reserve ratio. The the more deposits made the greater the amount of reserves required.
Considering the demand for deposits, what is the demand for bank reserves?
R=θ(1-c)Md
What is the equation for the demand for central bank money?
Hd=CUd+Rd
which as we know from previously stating the other equations can be written as:
Hd=[c+θ(1-c)]Md
or
Hd=[c+θ(1-c)]€YL(i)
What is the money multiplier?
Is derived from looking at the demand for money from a different aspect. Considered what the demand is in relation to how much money is supplied and is found by using a constant term 1/[c+θ(1-c)]
How is the IS curve derived?
Through the varying intersections of the demand curve with the 45 degree line and thus the equilibrium output changing.
Changes in what factors will shift the IS curve?
Taxes and Government spending
What is the effect of an increase in taxes?
First off the increase in taxes causes a decrease in disposable income. This leads to a decrease in consumption and a decrease in the demand for goods. This decreases the equilibrium output will shift the IS curve. For a given interest rate the output is lower than previous
What is the LM relation?
Is the line depicting where the money demand curve intersects the money supply curve at varying interest rates.
What causes a shift in the LM curve?
Changes in the money supply. This means there is a new equilibrium in the financial market. An increase in the money supply would shift the LM curve down.
What does fiscal policy affect?
The amount of government spending and/or the amount of taxes paid.
What is the effect of an increase in taxes?
IS Curve: Shift left
LM Curve: No shift
Movement of output: Down
Movement of interest rate: Down
What is the effect of a decrease in taxes?
IS Curve: Shift right
LM Curve: No shift
Movement of output: Up
Movement of interest rate: Up
What is the effect of an increase in spending?
IS Curve: Right
LM Curve: No shift
Movement of output: Up
Movement of interest rate: Up
What is the effect of a decrease in spending?
IS Curve: Shift left
LM Curve: No shift
Movement of output: Down
Movement of interest rate: Down
What is the effect of an increase in money?
IS Curve: No shift
LM Curve: Down
Movement of output: Up
Movement of interest rate: Down
What is the effect of a decrease in money?
IS Curve: No shift
LM Curve: Up
Movement of output: Down
Movement of interest rate: Up
What is a policy mix?
Combination of fiscal and monetary policy.
What is the fiscal policy multiplier?
The term which measures the effect a change in autonomous spending has on the equilibrium level of output.
1/(1-c1-d1)+d2*f1/f2
What is the monetary policy multiplier?
Measures the response of production to a change in the money supply
