Macro Intro Flashcards
Big Four of Macro
4 most important policy problems
- Inflation
- Unemployment
- Rate of Economic Growth
- Forecasting Movements in the Business Cycle
Inflation
upward movement of prices from one year to the next; measured by percentage change in prices indices below
- Producer Price Index
- Consumer Price Index
- GDP deflator
PPI
based on a number of important raw materials
The cruelest Tax
It eats away at our savings and paychecks; if rate of inflation exceeds growth in paycheck = decrease in purchasing power.
The Cruelest Tax
It eats away at our savings and paychecks; if rate of inflation exceeds growth in paycheck = decrease in purchasing power.
How does inflation benefit borrowers over lenders sometimes?
If inflation occurs, the amount borrowed may become worth half as much as it was originally.
Unemployment
of unemployed persons / # of people in the labor force.
Frictional Unemployment
Occurs as a natural part of the job seeking process
Cyclical Unemployment
economy dips into recession
Structural Unemployment
change in technology makes someone’s job obsolete
The Rate of Economic Growth
Growth in the GDP: Market value of the final goods and services produced in a country in a given year
Flow of Cost
All income people earn each year from producing the years output; wages (earned) + rents (earned by property owners) + interest (for lenders) + profits (for firms)
Flow of Product aka Flow of Expenditures
Consumption (by household) + Investments (by business) + Net exports (Ex-Imp) + Government Purchases
Actual v Potential Gdp
Actual: what we are producing
Potential: max. amount we can produce w/o causing inflation.
Recessionary Range of the Economy
When actual GDP is well below the potential GDP.
Risk of Inflation
Actual GDP is well above potential GDP
GDP Gap
measures output the economy sacrifices because it fails to meet potential. high Unemployment occurs.
Nominal GDP
Measured in market prices; rubber yardstick, stretches everyday
Real GDP
nominal GDP adjusted for inflation; calculated in constant prices
GDP Deflator
Nominal GDP/ Real GDP
-valuable gdp index
Output Growth
careful monitored pulse of the nations economy
Business Cycle
recurrent ups and downs of real gdp over several years
Common Phases of the Business Cycle
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
Central Concern of Macroeconomist
is there a trend in business cycle and what are the forces behind a business cycle; what policies can control or harness business cycle
Central concern of businesses
want to know whether there is a contraction or expansion
helps business plan production and marketing efforts
Policy Tools to deal with economic problems
- Fiscal Policy
2. Monetary Policy
Fiscal Policy
Increased government spending
tax cuts to stimulate the economy
contracts the economy by reducing government expenditure or increasing taxes
Monetary Policy
Control over money supply
Aggregate Supply Aggregate Demand
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.
Macro economic equilibrium
combination of overall price and quantity at which neither buyers or sellers wish to change their purchases or prices.
Keynes
- Increased government expenditure
- Tax cuts
This will stimulate the economy.
- FDR New Deal
-Korean War 1950s
- Kennedy Tax Cut 1964
Classical Economist
Adam Smith, etc. Believed the economy would naturally right itself and correct for unemployment; this was main economic theory until the great depression.
Stagflation
High unemployment and high inflation
ex. Johnson- Vietnam war and Great Society spending
Demand-pull inflation
too much money for too few goods; prices increase
Cost- Push Inflation
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.
Keynesian Dilemma
- 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
Milton Friedman
Monetarist School of thought; ushered in the answer to stagflation
Monetarist School of Thought
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.
Lowest Sustainable Unemployment Rate
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.
Monetarist Solution to Stagflation
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
Reaganomics
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
Result of Reagan Tax Cuts
Budget ballooned and deficit soared and trade deficit soared (twin deficit); onset of recession occurred under Bush
New Classical Economist
Rational expectations; if you form your expectations rationally you will take into account all possible; render activist policies completely abandoned.
