macro

Question 1

Full employment

Answer 1

Full employment is when the labour market is ‘at capacity’.
This occurs when there is only frictional and structural unemployment (i.e. cyclical unemployment = 0)

Question 2

Frictional unemployment

Answer 2

arises from the job matching process.

Question 3

Structural unemployment

Answer 3

arises from changes to the underlying structure of the economy, resulting in a mismatch between the skills and capabilities demanded and supplied. This can be a result from technological advances or changing tastes. E.g. industrial revolution -> more industries opened.

Question 4

Cyclical unemployment

Answer 4

arises from business cycle fluctuations

Question 5

Speculative attack

Answer 5

A speculative attack is a massive selling of domestic currency assets.
Investors sell domestic currency assets if they expect devaluation.
Such selling required central bank to deplete international reserves.
But depleting international reserves makes it more likely central bank will have to actually devalue.

Question 6

national income accounting identity

Answer 6

Y = C + I + G

Question 7

private savings

Answer 7

disposable income - consumption

S = (Y - T) - C
S = ((C + I + G) - T) - C
= I + G - T

Question 8

public savings

Answer 8

T - G

Question 9

flow variables

Answer 9

are measures per unit of time.
e.g. your wage per fortnight, GDP, consumption investment

Question 10

stock variables

Answer 10

are measured at a point in time
e.g. your value of assets, value of your liabilities, the physical capital stock

the change over time in a stock is a flow

Question 10

current account

Answer 10

Is (i) trade balance + (ii) net foreign income balance

Question 11

capital account

Answer 11

is to do with the net change in ownership of assets and liabilities so records changes in investment.

Question 12

depreciation (delta)

Answer 12

the rate at which capital becomes obsolete.

over time capital may become less productive or there’s a new technology. e.g. iPhone; if lasts 3 years - the depreciation rate is 1/3 because a third of its value is gone after a year of use.

Question 13

marginal product (cobb-douglas)

Answer 13

the MP of an input is the amount of extra output from adding a small amount of that input holding all other inputs fixed.

assumption that its positive

Question 14

marginal product of capital

Answer 14

a(Y/K) > 0

Question 15

marginal product of labour

Answer 15

(a-1)(Y/L) > 0

Question 16

diminishing returns

Answer 16

diminishing returns to an input if someone is using more of it decreases its marginal product, again holding all other inputs fixed

First point: more of the input will always give you more output (always a positive marginal products). Second point: will still get positive amount but the amount of positive you get will be less than it was when you had much less of the input (because a flatter slope). (explaining marginal product graphically)

Question 17

constant returns to scale

Answer 17

constant returns to scale refers to scaling all inputs by the same amount.
double inputs - double outputs

Question 18

diminishing returns vs constant returns

Answer 18

Diminishing returns to each input individually (holding other inputs fixed)
Constant returns to scale (all inputs scaled together by common proportion).

Question 19

If the exchange rate is undervalued

Answer 19

excess demand for the currency (because it’s too cheap)
Central Bank sells its currency, building up its international reserves.

Question 20

if exchange rates are overvalued

Answer 20

excess supply of the currency.
CB buys back its currency, depleting its international reserves.

Question 21

International risk premia

Answer 21

Exchange rate risk (investing in assets in the foreign currency and hoping that the Australian dollar while devalue relative to the currency that is on the balance sheet, meaning the value of the asset in Australian Dollars is going to go up).

Sovereign risk (political, legal and macro settings)

Question 22

capital account + current account =

Answer 22

0

Question 23

Law of one price

Answer 23

tradable goods should sell for the same price everywhere; one prices denominated in common currency.