Macro Intro

Question 1

Big Four of Macro

Answer 1

4 most important policy problems

1. Inflation
2. Unemployment
3. Rate of Economic Growth
4. Forecasting Movements in the Business Cycle

Question 2

Inflation

Answer 2

upward movement of prices from one year to the next; measured by percentage change in prices indices below

1. Producer Price Index
2. Consumer Price Index
3. GDP deflator

Question 3

PPI

Answer 3

based on a number of important raw materials

Question 4

The cruelest Tax

Answer 4

It eats away at our savings and paychecks; if rate of inflation exceeds growth in paycheck = decrease in purchasing power.

Question 5

The Cruelest Tax

Answer 5

It eats away at our savings and paychecks; if rate of inflation exceeds growth in paycheck = decrease in purchasing power.

Question 6

How does inflation benefit borrowers over lenders sometimes?

Answer 6

If inflation occurs, the amount borrowed may become worth half as much as it was originally.

Question 7

Unemployment

Answer 7

of unemployed persons / # of people in the labor force.

Question 8

Frictional Unemployment

Answer 8

Occurs as a natural part of the job seeking process

Question 9

Cyclical Unemployment

Answer 9

economy dips into recession

Question 10

Structural Unemployment

Answer 10

change in technology makes someone’s job obsolete

Question 11

The Rate of Economic Growth

Answer 11

Growth in the GDP: Market value of the final goods and services produced in a country in a given year

Question 12

Flow of Cost

Answer 12

All income people earn each year from producing the years output; wages (earned) + rents (earned by property owners) + interest (for lenders) + profits (for firms)

Question 13

Flow of Product aka Flow of Expenditures

Answer 13

Consumption (by household) + Investments (by business) + Net exports (Ex-Imp) + Government Purchases

Question 14

Actual v Potential Gdp

Answer 14

Actual: what we are producing
Potential: max. amount we can produce w/o causing inflation.

Question 15

Recessionary Range of the Economy

Answer 15

When actual GDP is well below the potential GDP.

Question 16

Risk of Inflation

Answer 16

Actual GDP is well above potential GDP

Question 17

GDP Gap

Answer 17

measures output the economy sacrifices because it fails to meet potential. high Unemployment occurs.

Question 18

Nominal GDP

Answer 18

Measured in market prices; rubber yardstick, stretches everyday

Question 19

Real GDP

Answer 19

nominal GDP adjusted for inflation; calculated in constant prices

Question 20

GDP Deflator

Answer 20

Nominal GDP/ Real GDP

-valuable gdp index

Question 21

Output Growth

Answer 21

careful monitored pulse of the nations economy

Question 22

Business Cycle

Answer 22

recurrent ups and downs of real gdp over several years

Question 23

Common Phases of the Business Cycle

Answer 23

Recession:
Trough: recessionary downturn in total output
Peak: business activity at its max.
Recovery: upturn economy expands to full employment

• each of the phases oscillate around a growth trend line

Question 24

Central Concern of Macroeconomist

Answer 24

is there a trend in business cycle and what are the forces behind a business cycle; what policies can control or harness business cycle

Question 25

Central concern of businesses

Answer 25

want to know whether there is a contraction or expansion

helps business plan production and marketing efforts

Question 26

Policy Tools to deal with economic problems

Answer 26

1. Fiscal Policy

2. Monetary Policy

Question 27

Fiscal Policy

Answer 27

Increased government spending
tax cuts to stimulate the economy

contracts the economy by reducing government expenditure or increasing taxes

Question 28

Monetary Policy

Answer 28

Control over money supply

Question 29

Aggregate Supply Aggregate Demand

Answer 29

AS= how much output the economy will produce at different price level
AD = what everyone in the economy would buy at different aggregate price levels; as prices fall people increase their demand.

Question 30

Macro economic equilibrium

Answer 30

combination of overall price and quantity at which neither buyers or sellers wish to change their purchases or prices.

Question 31

Keynes

Answer 31

1. Increased government expenditure
2. Tax cuts
   This will stimulate the economy.
   - FDR New Deal
   -Korean War 1950s
   - Kennedy Tax Cut 1964

Question 32

Classical Economist

Answer 32

Adam Smith, etc. Believed the economy would naturally right itself and correct for unemployment; this was main economic theory until the great depression.

Question 33

Stagflation

Answer 33

High unemployment and high inflation

ex. Johnson- Vietnam war and Great Society spending

Question 34

Demand-pull inflation

Answer 34

too much money for too few goods; prices increase

Question 35

Cost- Push Inflation

Answer 35

rapid increases in raw materials or wage increases drive up production costs; supply shocks ; eg crop failures, drought, increase in price of crude oil
- economy suffers from lower output and higher prices.

Question 36

Keynesian Dilemma

Answer 36

• Could only solve one half of the stagflation problem at a time:
  1. expansionary policy: to reduce unemployment caused increased inflation
  2. contractionary policy: reduce inflation increased unemployment

Question 37

Milton Friedman

Answer 37

Monetarist School of thought; ushered in the answer to stagflation

Question 38

Monetarist School of Thought

Answer 38

Problems result from issues with the rate of growth of the money supply; government prints too much money (inflation); recession occurs when government doesn’t print enough; Stagflation is the result of activist fiscal & monetary policy when push the economy beyond its natural rate of unemployment.

Question 39

Lowest Sustainable Unemployment Rate

Answer 39

natural rate of unemployment; lowest level of unemployment that can be attained without upward pressure on inflation; policy that tries to go reduce unemployment even further will result in short spurts of productivity while pushing up prices in wages rise and drag back to LSUR w/ higher rate of inflation.

Question 40

Monetarist Solution to Stagflation

Answer 40

Allowing the unemployment rate to rise above the LSUR, inducing a recession. caused 20% interest rates
Volker in 1979
- industries hit hardest interests sensitive : housing construction, car purchases, business investment

Question 41

Reaganomics

Answer 41

Supply-side economics; cut taxes, increase govt tax revenues, and inducing economic growth. looks similar to a tax cut (Keynesian); didn’t think tax cut would result in inflation; people would work harder and invest more if they kept more of the fruits of their labor; losses in tax revenue would be made up for in tax revenue from economic growth.. reducing budget deficit

Question 42

Result of Reagan Tax Cuts

Answer 42

Budget ballooned and deficit soared and trade deficit soared (twin deficit); onset of recession occurred under Bush

Question 43

New Classical Economist

Answer 43

Rational expectations; if you form your expectations rationally you will take into account all possible; render activist policies completely abandoned.