MACRO Midterm #1 Flashcards
What is the production function and how does it relate to GDP?
It describes its ability to turn inputs into outputs: GDP=Y=F(K,L)
Production Function Constant Returns to Scale
F(K,L)=Y
If we multiply K and L by some number, Y gets multiplied by the same number.
Output price=
Labor Price=
Capital Price=
P
W
R “Rental rate”
Real wage=
Wage/Price
What determines the equilibrium factor price?
The intersection between supply and demand of factor demand ( Labor or Capital) and factor supply.
Profit=?
Profit = Revenues- Labor costs- Capital Costs
PF(K,L)- WL- RK
MPL=? at firm maximization…
Wage over Price… (Real wage)
What is the profit maximization of L* level?
Where the Production function is equal to the W/L slope.
Until what point will the firm hire labor?
Until marginal product of labor = real wage..
Until what point will a firm rent capital
Until Marginal Product of Capital is = Rental Price of Capital/ Price
Real rental Price of capital=
R/P
Total real wages paid to labor=
Wage/Price x Labor or MPL x L
Euler’s theorem
F(K,L) = MPL x Labor + MPK x K
Why do we use log of wages to determine income distribution?
If all wages double then the variance goes up but the variance in logs does not change.
Closed Economy equation=?
Y=C+I+G
Output= Consumption + Investment+ Government Spending
Disposable Income
= Y- T
Equation for households (disposable income and consumption/saving)
Y-T (Disposable Income) = Consumption + Savings
Marginal Propensity to Consume=?
Change in consumption when disposable income increases by one dollar.
What is the slope of the consumption function?
MPC
Why does the Investment Function slope downward?
Because as r rises, the quantity of investment demand falls.
Demand for goods and services equations:
Y^d= C + I + G
C= C(Y-T)
I=I(r)
Supply and Demand for Loanable funds
Y= C + G + I
Y-C-G= I
Savings =?
Investment
S=(Y-T-C) + (T-G) = I
Private savings=
Public savings=
Disposable income (Y-T) - Consumption (C)
Government Revenue (Taxes) - Government Spending
Decrease in taxes…. private savings
Increases private savings
Decrease in taxes…. public savings
Decreases public savings.
At equilibrium interest rate what has to equal what?
Savings has to equal investment
What is the supply of lovable funds?
Savings ( S= Y-T- C)
What is the demand for loanable funds?
Investments
Savings equation?
S=Y-C(Y-T)-G
Change of Savings Equations
= Change of Government Spending
Change of Savings=
MPC x Change in Tax
Change of savings=
(1-MPC) x Change in income
Money Supply Equation?
Money Supply= Money multiplier x Monetary Base
M=m*b
Three uses for money?
Store of Value
Medium of exchange
Unit of account
Commodity vs Fiat money
Commodity money has intrinsic value (gold)
Fiat money has no intrinsic value (dollar bills)
Forms of money
C: Currency (cash)- paper bills and coins in the hands of the public.
M1: C+ Demand deposits- balances in bank checking accounts that depositors can access on demand by writing a check or paying online
M2: M1+ funds in other forms of bank accounts.
What is the money supply?
It is the amount of money available in the economy.
M( Money Supply)=?
= Currency + Demand deposits
C is cash created by the fed and D deposits at private banks.
What is a liability and asset?
Liabilities= what the bank owes (source of funds)
Assets= What the bank owns (use of funds)
What are deposits that bank have received bu have not lent out yet called?
reserves
Fractional reserve banking
The fraction of total deposits that a bank holds as reserves is called the reserve-deposit ratio
equation for rr (reserve-deposit ratio)
rr= Reserves/ Deposits
Equation for money supply
Money Supply = Currency +Demand Deposits
M=C+D
What is the equation for Total Money Supply in fractional reserve banking?
1
— x original deposit
rr
leverage ratio equation?
bank capital
Monetary base equations
Base= C + R
Base= Public currency and reserves R
Money Supply Equation= ?
Money Supply= Currency + Deposits
Money Supply also equals = cr * D (equals Currency) + rr * D (equals demand deposits)
Monetary Base equation?
Base = Currency + Reserves
Money supply Equation=?
M. = cr+1/ cr+rr *Base
Another Money Supply Equation=? (Demand and cr)
M= (cr + 1)*D
A decrease in the reserve-deposit ratio, rr, does what to money multiplier and money supply?
increases both
A decrease in the currency-deposit ratio, cr, does what to money multiplier and money supply?
Increases both
Reserves equation (balance sheet)
Reserves= deposits- loans
Money multiplier equation=
m = cr + 1/ cr+ rr
If monetary base (Base= Currency + Reserves ) decreases what happens to money supply ( money multiplier * base)?
money supply decreases by the same amount
QTM
Quantity theory of money, leading explanation of how money affects prices in the long run.
Baumol-Tobin: “going to the bank once/month”
Total cost of bank withdrawal equation:
Total cost= i x PY/2n + nPC
First term reflects the average interest earning income forgone for holding money instead of keeping it in the interest account
Second term is the cost of withdrawal.
Equation for Money Demand
M^d= PY/2n
Fisher equation:
i=r + pi
nominal Interest rate= real interest rate + inflation
Seignorage
The revenue from printing money
Printing money to raise revenue is like imposing an inflation tax.
What is considered hyperinflation?
When annual inflation exceeds 50%
Quality theory if money
MV=PY
M= money supply
V= Velocity of money
P= Price level
Y= Real output (real GDP)
Shoe-leather cost?
inconvenience of reducing money holdings because walking to the bank more ofter causes one’s shoes to wear out more quickly.
Equation for Velocity of money?
V= P*Y/ M
GDP
Gross domestic product
Market value of all final goods and services produced within a country in a given period of ti,e.
Equation for Geometric Growth rate?
Xn/X1 ^ 1/n-1
Equation for GDP?
Y=C + I + G + X - M
Y= output (GDP)
C= Consumption
I= Investment
G= Government Spending
X= Exports
M= Imports
When a foreign citizen works in the U.S, his production is part of US. GDP
Gross National Product
GNP= Our residents income
Nominal GDP
goods and services valued at current prices
Real GDP
goods and services valued at constant (base) prices.
Equation for GDP deflator
P=
Real GDP
Equation for CPI
CPI=
Price in year b * Q in year b
Nominal GDP equation:
Real GDP x GDP Deflator= Nominal GDP
Weaknesses of CPI as measure of inflation:
Consumers substitute towards good that become cheaper, so impact on the cost of living is smaller than the CPI says.
Quality adjustment:
Equation for GDP deflator
Nominal GDP
——————– x 100
Real GDP
Equation for Capital
Capital = Assets - liabilities
Leverage ratio equation
Leverage ratio= Assets/Capital
Baumon- Tobin Model for Optimal bank trips
Total Cost= n * fee for withdrawal + Money you start with/ 2n
Money Demand= money you start with/ 2n
