Macro

Question 1

GDP: Components of Aggregate Demand

Answer 1

• consumption of consumer goods and services
• investment in capital goods and real estate
• government purchases of goods and services
• net exports (net demand of domestic goods by foreigners)

Question 2

Labor Market: Unemployment, types

Answer 2

Jobless but looking for a job

• Frictional: result of free labor market and allocation of labor to jobs (“matching”) –> healthy
• Structural: result of a mismatch of skills in an economy (e.g. shift from manufacturing to service economy)
• Cyclical: loss of jobs in recession when firms cannot afford to hire enough employees

Question 3

Labor Market: unemployment rate

Answer 3

# unemployed

Labor Force

Question 4

Labor Market: Labor Force

Answer 4

Employed + # Unemployed

Question 5

Labor Market: Participation Rate

Answer 5

Measure of the active portion of an economy’s labor force:

_ Labor Force _

Total Population over 16yTrend

Trend 1970 - 2010

• men: 80% –> 70% (result of aging population)
• women: 40% –> 60% –> 55% (recession)

Question 6

Labor Market: Categories

Answer 6

• employed
• unemployed
• retired
• full-time student
• disabled
• other (detached from labor force)

Question 7

Macro Data: GDP (Y) Definition

Answer 7

GDP is a measure of output, i.e. market production

• market value
• of all final goods and services newly produced
• on domestic soil
• during a period of time

Question 8

Labor Market: Problems of Unemployment

Answer 8

1) Depreciation of human capital (lose skills)
2) Productive externalities: waste resources
3) Social externalities: increase in crime, divorce, etc.
4) Individual self-worth: lower marginal utility of leisure

Question 9

GDP: Measuring GDP in Practice

Answer 9

1) P_roduction method_ (supply): sample firms and gather “value added” (sales - cost of raw material)
2) Expenditure method (demand): Y = C + I + G + NX
3) Income method: Labor income + capital income

Question 10

GDP: Expenditure components

Answer 10

1) Consumption (C): sum of durables, non-durables and services purchased domestically by individual consumers (excluding new housing)
2) Investments (I): sum of durables, non-durables and services purchased domestically by businesses

Does NOT include real estate / stock transactions –> not produced!

Question 11

GDP: Government spending

Answer 11

Spending on goods and services

(Does not include wealth transfers (welfare spending)

Question 12

GDP: Supply Side components

Answer 12

Production = f(A, N, K, other inputs)

A: technology

N: labor input - demand/supply

K: capital input - past investments

Question 13

Prices: Types of prices

Answer 13

P = price of output (cf. CPI)

W = realwage, price of labor

r = real interest rate, price of money

$, e = price of foreign currency, FX market

Question 14

Markets that determine the level of GDP (Y) and all aspects of the macroeconomy

Answer 14

1) Labor market: demand / supply
2) IS-LM market: loan demand / supply
3) Aggregate Demand vs. Aggregate Supply
4) FX market

Question 15

Markets: Labor Market (1/4)

Answer 15

Labor market:

• determined by demand / supply
• determines N, W
• determines production/supply side

Question 16

Markets: IS-LM market (2/4)

Answer 16

IS-LM market:

• determined by loan demand / supply
• determines r, I
• key to central bank policy

Question 17

Markets: Aggregate Demand vs Aggregate Supply(3/4)

Answer 17

Aggregate Demand vs. Aggregate Supply

• determines P, Y
• key to understand inflation

Question 18

Markets: FX market (4/4)

Answer 18

FX market

• determines $, e (value of currency)
• key to linking international markets

Question 19

GDP: Savings - Personal Savings Rate

Answer 19

Savings Rate =

^{<em>S(hh) </em>}* / *_{<em>Y(d) </em>}

• Household Savings S(hh) = Y - T + Tr - C
• Disposable Income Y(d) = Y - T + Tr

(T: Taxes, Tr: Welfare Transfers)

Trend: 1970 - 2010: 15% –> 2.5%

Question 20

Savings: Government (Public) Savings, Deficit

Answer 20

S_govt = T - (G + Tr)

Negative S_govt = deficit

Question 21

Savings: Total Savings

Answer 21

Total Savings in the Economy

S = S_govt + S_HH

S = Y - C - G

S = I + NX

Question 22

Price and Inflation: Importance to measure prices

Answer 22

• price is a key metric to measure production (Y)
• Changes in price (inflation, deflation) are important to track real growth rates

Question 23

Price and Inflation: Price Index, Technological Bias of CPI

Answer 23

Consumer Price Index

• representative basket of goods –> measure inflation
• technological bias: quality improvements, new product inventions distort the CPI –> 1% of inflation

Question 24

Price and Inflation: Real and Nominal Values given CPI

Answer 24

Real Value of 1995 GDP in 1982 $

= Nominal 95$ * CPI (^82$/_95$)

Question 25

Price and Inflation: Real Growth GDP I

Answer 25

1) Determine Real Y(t+1) and Real Y(t) in same year$ 2) Calculate Growth Rate = _Real Y (t+1) - Real Y (t)_ Real Y (t)

Question 26

Price and Inflation: Real Growth GDP II

Question 27

Price: Yield Curve definition and insights

Answer 27

1. Definition: relationship between interest rates (yields) on securities of differing maturities 2. Insights: infer the market’s expectation of future economic conditions * flat curve: low aggregate demand, recession * upward sloping: boom, growth, high aggregate demand (accelerating π or r)

Question 28

Nominal Yield / Interest Rate

Answer 28

i = r + π^e + p * i = nominal interest rate * r = real interest rate on security * πe = expected inflation * p = risk premium (in macro = 0)

Question 29

Yield Curve: causes for shift

Answer 29

Change (increase, decrease) in * current _and_ future r * current _and_ future π^e

Question 30

Yield Curve: what causes the yield curve to slope upwards or downwards?

Answer 30

Change in * future (not current) r --\> expected future recession * future (not current ) π^e --\> expected acceleration or falling inflation rates

Question 31

Inflation Why do we care about inflation?

Answer 31

Costs of Inflation * Variability: * higher inflation correlates with higher variability *for both borrower and lender* * both require risk premium * no contract possible, ineffective economy * Indexing Costs: * contracts are indexed * cash flows less stable! * Menu Costs: * costs of re-pricing goods * price loses signaling function * Shoe-Leather Costs: * unattractive to hold cash * increased transaction costs of borrowing