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Micro and Macro > Macro Final > Flashcards

Macro Final Flashcards

1
Q

What is aggregate demand?

A

Aggregate demand is summation of all spending in the economy - in a circular economy

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2
Q

What is aggregate expenditure?

A
  • Planned expenditure by business and households
  • The aggregate expenditure function (AE) is the sum of planned induced expenditure and planned autonomous expenditure.
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3
Q

How is aggregate expenditure different from GDP?

A

GDP(Y) is the national accounts measure of the sum of actual expenditure in the economy, not planned expenditure

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4
Q

Why are exports autonomous and not imports?

A
  • Exports are exogenous for us, endogenous for other countries
  • Imports are endogenous
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5
Q

What parts of GDP are exogenous and endogenous?

A

Exports: exogenous
Imports: endogenous
Investment: exogenous
Consumption: endogenous

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6
Q

What are the two types of aggregate expenditure?

A

Induced and Autonomous

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7
Q

What is induced aggregate expenditure?

A

Expenditures that vary with real GDP are called induced aggregate expenditures. Consumption spending that rises with real GDP is an example of an induced aggregate expenditure.

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8
Q

What is autonomous aggregate expenditure?

A

The planned expenditure that is not determined by current income.
* investment (I) and exports (X) are the major autonomous expenditures, can be volatile

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9
Q

What is Marginal Propensity to Consume (MPC)?

A

Defines this link between changes in income and the changes in consumption they induce
* ΔC/ΔY
* How much of the GDP increase in our economy gets spent

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10
Q

What is the Marginal Propensity to Import?

A

Defines this link between changes in income and the changes in imports.
* ΔM/ΔY

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11
Q

What are the major forces that effect exports?

A
  • economic conditions in other countries,
  • changes in tastes and preferences across countries,
  • changes in trade policies, and
  • the emergence of new national competitors in world markets
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12
Q

Where is short-run equilibrium output?

A

Where aggregate expenditure and current output are equal (Y=AE)

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13
Q

What is the multiplier effect?

A
  • The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital.
  • The amount of the marginal propensity to consume, therefore, contributes to the multiplier effect because extra income leads to extra demands and/or spending and creates more income.
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14
Q

What are the two components of a government budget?

A
  • A plan forgovernment expenditureson goods and services,G.
  • Anet tax rate on income,t, set to generate revenue to finance expenditure.
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15
Q

How is a government expenditure curve characterised?

A

A horizontal line, any change in government expenditure would shift this line up or down in a parallel way.

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16
Q

What is net taxes?

A

The difference between taxes collected and transfers paid, the revenue collected by the government from housheolds

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17
Q

What is disposable income?

A

National income minus net taxes. Y-NT

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18
Q

What is the consumption function?

A

Consumption = autonomous consumption + induced consumption based on disposable income. Ex. C= 20 + 0.8YD

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19
Q

What is the slope of AE?

A

marginal propensity to consume disposable income − marginal propensity to import. Ex. ΔAE / ΔY = c (1−t) − m

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20
Q

What is the multiplier equation?

A

1/1-AE

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21
Q

Why does a government budget differ from a household budget?

A

Because a household can improve its budget balance by cutting its expenditure without affecting its income. A government cannot. Why?
* A cut in government expenditure reduces national income and tax revenue.

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22
Q

What is the equation for government budget balancing?

A

Net tax revenue(tY)−government expenditure(G)
BB=tY-G

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23
Q

What is fiscal policy?

A

The government’s use of its taxing and spending powers to affect aggregate expenditure and equilibrium real GDP.

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24
Q

What is an automatic stabilizer?

A

Automatic stabilizers are mechanisms built into government budgets, without any vote from legislators, that increase spending or decrease taxes when the economy slows.

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25
Q

What is discretionary fiscal policy?

A

Changes in net tax rates and government expenditure intended to offset persistent autonomous expenditure shocks and stabilize aggregate expenditure and output.

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26
Q

What is public debt?

A

The outstanding stock of government bonds issued to finance government budget deficits. ΔPD= −BB

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27
Q

What is the public debt ratio?

A

(PD/Y): the ratio of outstanding government debt to GDP
* the appropriate measure of the debt situation

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28
Q

What is the induced expenditure equation? (with no government)

A

(c-m)Y

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29
Q

What is the symbol for autonomous expenditure? (with no government)

A

Ao

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30
Q

What is the aggregate expenditure equation? (with no government)

A

Ao + (c-m)Y

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31
Q

What is the equilibrium equation? (without government)

A

Y=Ao + (c-m)Y

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32
Q

What is the equation for autonomous expenditure? (with government)

A

Ao + Go

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33
Q

What is the equation for induced expenditure? (with government)

A

(c(1-t) - m)Y

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34
Q

What is the equation for aggregate expenditure? (with government)

A

Ao + Go + [c(1-t) - m]Y

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35
Q

What is the equilibrium equation? (with government)

A

Y = Ao + Go + [c(1-t) - m]Y

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36
Q

What qualifies something as money?

A

A means of payment as a medium of exchange
A unit of account
A store of value
A standard of deferred payments

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37
Q

What is a medium of exchange?

A

A commodity, token, financial asset, or transferable electronic asset such as a bank deposit, generally accepted in payment for goods and services or the repayment of debt.

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38
Q

What is unit of account?

A

The standard in which prices are quoted and accounts are kept. A unit of account is something that can be used to value goods and services, record debts, and make calculations

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39
Q

What is store of value?

A

An asset that carries purchasing power forward in time for future purchases.

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40
Q

What are bank reserves?

A

Cash (legal tender) held by banks to meet possible withdrawals by depositors.

41
Q

What is fiat money?

A

Money that the government has declared to be legal tender.

42
Q

What is credit money?

A

Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts. These claims or debts can be transferred to other parties in exchange for the value embodied in these claims.

43
Q

What makes up the money supply?

A

The sum of bank deposits and fiat money in circulation outside the banks at any time is the stock of medium of exchange and the economy’smoney supply (M1/M2)
* cash in circulation + bank deposits

44
Q

What’s included in M1?

A

M1 includes currency and money in checking accounts (demand deposits). Account checks are also a component of M1, but are declining in use.

45
Q

What’s included in M2?

A

M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds. These are considered “easy to access” and therefore “near money”.

46
Q

What is the monetary base?

A

Legal tender comprising notes and coins in circulation plus the cash held by the banks.
* Over time the Monetary Base < Money Supply
* Monetary base = reserve ratio × deposits

47
Q

What’s included in M2+?

A

M2 + deposits at other financial institutions

48
Q

What is liquidity?

A

The cost, speed, and certainty with which asset values can be converted into cash.

49
Q

What is net income interest?

A

Net interest income (NII) is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors.

50
Q

What is reserve ratio?

A

the ratio of cash reserves to deposit liabilities held by banks. (reserve ratio/deposit liability= rr)

51
Q

What is the deposit multiplier?

A

The deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves. The deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned.(1/rr)

52
Q

Demand for money comes in three parts, what are they?

A

The transactions demand;
The precautionary demand; and
The speculative demand.

53
Q

What is transaction demand?

A

The transactions demand for money is based on money being the means of payment. People and businesses hold some money to pay for their purchases of goods, services and assets.

Most important, fiat money.

54
Q

What is precautionary demand?

A

The precautionary demand for money is the act of holding real balances of money for use in a contingency. As receipts and payments cannot be perfectly foreseen, people hold precautionary balances to minimize the potential loss arising from a contingency.

Examples of saving for precautionary motive include saving to face health risk, business risk, unavoidable expenditures and risk of income fluctuation, saving as a contingency fund for retirement, etc.

55
Q

What is speculative demand?

A

Keynes referred to the speculative demand for money as the money held in response to concern that bond prices and the prices of other financial assets might change.

56
Q

What is the demand for money balances?

A

The amount of money balances that everyone in the economy
wishes to hold is called the demand for money.
The opportunity cost of holding any money balance is the
interest that could have been earned if the money had been
used instead to purchase bonds.

57
Q

What is the link between demand for money balances and real GDP?

A

Lt =kY

58
Q

How to measure the change in money balances in response to a change in interest rates?

A

ΔL/Δi

59
Q

What is the demand for money function?

A

L = kY−hi
=transactions and precautionary balance based on income(kY) + the asset demand based on interest rates(−hi)

60
Q

What is the real money supply?

A

The nominal money supplyMdivided by the price levelP,(M/P), which measures its purchasing power in terms of goods and services.

61
Q

What happens to real income when the quantity of real money demanded rises?

A

Real income rises

62
Q

What happens to the equilibrium interest rates if the money supply lowers?

A

Equilibrium interest rates will rise

63
Q

What is the LM curve?

A

Liquitidy money curve

The LM curve shows all combinations of interest rates and income levels at which the money market clears.

Equilibrium is where Demand for money = Supply of money

64
Q

What is the difference between the deposit multiplier and the money multiplier?

A

The deposit multiplier represents the **maximum amount **of money a country could potentially create through bank lending. Think of it as a best-case scenario. The money multiplier, on the other hand, represents the actual change to the money supply created through lending.

65
Q

How to calculate the maximum increase in the money supply?

A

1/rr x increase in monetary base

66
Q

What is the central bank?

A

A central bank is an institution that conducts monetary
policy using its control of the monetary base and interest rates

67
Q

What are monetary policies?

A

Monetary policies are actions on the part of the central
bank used to control inflation and support economic growth through the control of interest
rates, money supply and exchange rates in order to change aggregate demand and economic
performance

68
Q

What is the bank rate?

A

The bank rate is the interest rate that the central bank
charges commercial banks on its loans.

69
Q

What are the three techniques central banks use to control monetary base and money supply?

A

Reserve requirements, open market techniques, bank rates.

70
Q

What is the overnight rate?

A

This is the key instrument used for monetary policy and is the interest rate large financial institutions receive or pay on loans from one day until the next. The bank rate is the upper end of this overnight rate.

71
Q

What is neutral interest rate?

A

The interest rate that, in the view of the central bank, is consistent with actual real GDP equals potential real GDP and inflation at target.

72
Q

What are the four rules of monetary policy?

A

Effective moral bound, moral suasion, quantitative easing, forward guidance

73
Q

What is effective moral bound?

A

A bank’s policy interest rate cannot be set below a small positive number. This helps alleviate uncertainty surrounding liquidity risk in the financial markets (so that a 2008 credit crunch wouldn’t be as devastating.)

74
Q

What is moral suasion?

A

A central bank persuades and encourages private/commercial
banks to follow its policy initiatives and guidance - this is essentially an increase in communications with financial market participants to emphasize the central bank’s longer-term support for markets and its actions to promote stability.

75
Q

What is quantitative easing?

A

Quantitative easing, usually in the form of credit easing, is the management of the central banks assets designed to support lending in specific financial markets - cash is supplied to specific markets, rather than the entire system.

76
Q

What is forward guidance?

A

Forward guidance is information on the timing of future changes in the central banks’ interest rate setting, and is intended to help firms and
households make expenditure decisions that require debt financing.

77
Q

How to calculate net tax rate?

A

The net tax rate is the slope of the net tax function. NTR = ∆NT/∆Y − t

78
Q

What are the conditions that allow banks to create money?

A
  1. the public has confidence in banks and is willing to hold and use bank
    deposits as money
  2. the public is willing to borrow from the banks to finance expenditures or
    asset purchases
  3. the banks are willing to operate with reserves assets, cash for net cheque clearings and
    withdrawals, equal to some small fraction of their deposit liabilities
  4. the banks are willing to accept the risks involved in lending to the public
79
Q

What is the equation for money supply?

A

M = 1/rr x MB

80
Q

What are bonds?

A

All of the assets that earn interest, have money prices that change corresponding to changes in market interest rates, and are not means of payment (i.e. stocks,
bonds, money-market instruments etc.)

81
Q

Describe changes in the money supply

A

A lower money supply raises equilibrium interest rates,
while a rise in the money supply lowers the equilibrium interest rate

82
Q

What is an exchange rate?

A

An exchange rate is the domestic currency price of a
unit of foreign currency.

83
Q

What causes the appreciation and depreciation of a currency?

A

An increase in domestic money supply causes a depreciation of the
domestic currency, and an appreciation of the foreign currency. Rises in domestic interest
rates cause an appreciation of the domestic currency.

84
Q

What is a transmission mechanism?

A

A transmission mechanism links money, interest rates and exchange rates through financial markets to output, employment and prices.

85
Q

How does the wealth effect affect interest rates and consumption?

A

Wealth Effect: ↑ Interest Rates = ↓ autonomous consumption.

86
Q

How does the cost of credit affect interest rates and consumption?

A

↓ interest rates = ↓ cost of credit = ↑ consumption

87
Q

How do interest rates affect investment?

A

Changes in interest rates also cause changes in investment expenditure, because they change the price and availability of credit for financing (inverse relationship).

88
Q

How do interest rates affect the exchange rates?

A

A rise in interest rates leads to an appreciation of the domestic currency. Import prices fall relative to prices of domestic goods
and services.

89
Q

How many graphs will be on the test on what do they measure?

A
  1. the money market, the relationship between interest rates (y) and quantity of money (x) (the demand of money curve)
  2. interest rates (y) and expenditure (x)
  3. aggregate expenditure (x) and output (y)
  4. aggregate demand and supply (price is y, output/potential GDP is x)
90
Q

What is the difference between the bank rate and the overnight rate?

A

While the bank rate refers to the rate the central bank charges banks to borrow funds, the overnight rate—also referred to as the federal funds rate—refers to the rate banks charge each other when they borrow funds among themselves.

91
Q

What is potential output?

A

the output the economy can produce on an ongoing basis with given labour, capital, and technology without putting
persistent upward pressure on prices or inflation rates

92
Q

What is the natural unemployment rate?

A

The ‘full employment’ unemployment rate observed when the economy is in equilibrium at potential
output.

93
Q

What contributes to growth in potential output?

A

Growth in the labour force and growth in labour productivity coming from improvements in technology as a result of investment in fixed and human capital.

94
Q

What is the business cycle?

A

The short-run fluctuations in real GDP and employment relative to Potential Output (GDP) and full employment
caused by short-run changes in aggregate demand and supply

95
Q

What are output gaps?

A

The differences between actual real GDP and potential GDP that occur during business cycles.

96
Q

What are inflationary gaps and recessionary gaps?

A

The terms used to describe positive and negative output gaps based on the effects the gaps have on factor prices.

97
Q

When does actual output adjust to potential output?

A

Actual output adjusts to potential output over time if factor input and final output prices are flexible and changes in prices shift the aggregate supply curve to equilibrium with aggregate demand at YP.

98
Q

How are short-run equilibrium real GDP and price determined?

A

By short-run aggregate demand and aggregate supply, illustrated by the
intersection of the AD and AS curves.

99
Q

What is the structural budget balance (SBB) ?

A

The structural budget balance (SBB) is an estimate of **what the budget balance would be if the economy were operating at potential output. **Changes in the structural budget balance are indicators of changes in fiscal policy because they measure changes in expenditure and tax programs at a standardized income level

Micro and Macro (4 decks)

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