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Science of Psych > MACRO Midterm #1 > Flashcards

MACRO Midterm #1 Flashcards

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1
Q

What is the production function and how does it relate to GDP?

A

It describes its ability to turn inputs into outputs: GDP=Y=F(K,L)

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2
Q

Production Function Constant Returns to Scale

A

F(K,L)=Y

If we multiply K and L by some number, Y gets multiplied by the same number.

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3
Q

Output price=
Labor Price=
Capital Price=

A

P
W
R “Rental rate”

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4
Q

Real wage=

A

Wage/Price

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5
Q

What determines the equilibrium factor price?

A

The intersection between supply and demand of factor demand ( Labor or Capital) and factor supply.

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6
Q

Profit=?

A

Profit = Revenues- Labor costs- Capital Costs

PF(K,L)- WL- RK

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6
Q

MPL=? at firm maximization…

A

Wage over Price… (Real wage)

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7
Q

What is the profit maximization of L* level?

A

Where the Production function is equal to the W/L slope.

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8
Q

Until what point will the firm hire labor?

A

Until marginal product of labor = real wage..

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9
Q

Until what point will a firm rent capital

A

Until Marginal Product of Capital is = Rental Price of Capital/ Price

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10
Q

Real rental Price of capital=

A

R/P

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11
Q

Total real wages paid to labor=

A

Wage/Price x Labor or MPL x L

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12
Q

Euler’s theorem

A

F(K,L) = MPL x Labor + MPK x K

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13
Q

Why do we use log of wages to determine income distribution?

A

If all wages double then the variance goes up but the variance in logs does not change.

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14
Q

Closed Economy equation=?

A

Y=C+I+G

Output= Consumption + Investment+ Government Spending

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15
Q

Disposable Income

A

= Y- T

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16
Q

Equation for households (disposable income and consumption/saving)

A

Y-T (Disposable Income) = Consumption + Savings

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17
Q

Marginal Propensity to Consume=?

A

Change in consumption when disposable income increases by one dollar.

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18
Q

What is the slope of the consumption function?

A

MPC

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19
Q

Why does the Investment Function slope downward?

A

Because as r rises, the quantity of investment demand falls.

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20
Q

Demand for goods and services equations:

A

Y^d= C + I + G
C= C(Y-T)
I=I(r)

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21
Q

Supply and Demand for Loanable funds

A

Y= C + G + I
Y-C-G= I

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22
Q

Savings =?

A

Investment

S=(Y-T-C) + (T-G) = I

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23
Q

Private savings=
Public savings=

A

Disposable income (Y-T) - Consumption (C)
Government Revenue (Taxes) - Government Spending

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24
Q

Decrease in taxes…. private savings

A

Increases private savings

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25
Q

Decrease in taxes…. public savings

A

Decreases public savings.

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26
Q

At equilibrium interest rate what has to equal what?

A

Savings has to equal investment

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27
Q

What is the supply of lovable funds?

A

Savings ( S= Y-T- C)

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28
Q

What is the demand for loanable funds?

A

Investments

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29
Q

Savings equation?

A

S=Y-C(Y-T)-G

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30
Q

Change of Savings Equations

A

= Change of Government Spending

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31
Q

Change of Savings=

A

MPC x Change in Tax

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32
Q

Change of savings=

A

(1-MPC) x Change in income

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33
Q

Money Supply Equation?

A

Money Supply= Money multiplier x Monetary Base
M=m*b

34
Q

Three uses for money?

A

Store of Value
Medium of exchange
Unit of account

35
Q

Commodity vs Fiat money

A

Commodity money has intrinsic value (gold)

Fiat money has no intrinsic value (dollar bills)

36
Q

Forms of money

A

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.

37
Q

What is the money supply?

A

It is the amount of money available in the economy.

38
Q

M( Money Supply)=?

A

= Currency + Demand deposits

C is cash created by the fed and D deposits at private banks.

39
Q

What is a liability and asset?

A

Liabilities= what the bank owes (source of funds)
Assets= What the bank owns (use of funds)

40
Q

What are deposits that bank have received bu have not lent out yet called?

A

reserves

41
Q

Fractional reserve banking

A

The fraction of total deposits that a bank holds as reserves is called the reserve-deposit ratio

42
Q

equation for rr (reserve-deposit ratio)

A

rr= Reserves/ Deposits

43
Q

Equation for money supply

A

Money Supply = Currency +Demand Deposits

M=C+D

44
Q

What is the equation for Total Money Supply in fractional reserve banking?

A

1
— x original deposit
rr

45
Q

leverage ratio equation?

A

bank capital

46
Q

Monetary base equations

A

Base= C + R

Base= Public currency and reserves R

47
Q

Money Supply Equation= ?

A

Money Supply= Currency + Deposits

Money Supply also equals = cr * D (equals Currency) + rr * D (equals demand deposits)

48
Q

Monetary Base equation?

A

Base = Currency + Reserves

49
Q

Money supply Equation=?

A

M. = cr+1/ cr+rr *Base

50
Q

Another Money Supply Equation=? (Demand and cr)

A

M= (cr + 1)*D

51
Q

A decrease in the reserve-deposit ratio, rr, does what to money multiplier and money supply?

A

increases both

52
Q

A decrease in the currency-deposit ratio, cr, does what to money multiplier and money supply?

A

Increases both

53
Q

Reserves equation (balance sheet)

A

Reserves= deposits- loans

54
Q

Money multiplier equation=

A

m = cr + 1/ cr+ rr

55
Q

If monetary base (Base= Currency + Reserves ) decreases what happens to money supply ( money multiplier * base)?

A

money supply decreases by the same amount

56
Q

QTM

A

Quantity theory of money, leading explanation of how money affects prices in the long run.

57
Q

Baumol-Tobin: “going to the bank once/month”

A
58
Q

Total cost of bank withdrawal equation:

A

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.

59
Q

Equation for Money Demand

A

M^d= PY/2n

60
Q

Fisher equation:

A

i=r + pi

nominal Interest rate= real interest rate + inflation

61
Q

Seignorage

A

The revenue from printing money

62
Q

Printing money to raise revenue is like imposing an inflation tax.

A
63
Q

What is considered hyperinflation?

A

When annual inflation exceeds 50%

64
Q

Quality theory if money

A

MV=PY

M= money supply
V= Velocity of money
P= Price level
Y= Real output (real GDP)

65
Q

Shoe-leather cost?

A

inconvenience of reducing money holdings because walking to the bank more ofter causes one’s shoes to wear out more quickly.

66
Q

Equation for Velocity of money?

A

V= P*Y/ M

67
Q

GDP

A

Gross domestic product

Market value of all final goods and services produced within a country in a given period of ti,e.

68
Q

Equation for Geometric Growth rate?

A

Xn/X1 ^ 1/n-1

69
Q

Equation for GDP?

A

Y=C + I + G + X - M

Y= output (GDP)

C= Consumption
I= Investment
G= Government Spending
X= Exports
M= Imports

70
Q

When a foreign citizen works in the U.S, his production is part of US. GDP

A
71
Q

Gross National Product

A

GNP= Our residents income

72
Q

Nominal GDP

A

goods and services valued at current prices

73
Q

Real GDP

A

goods and services valued at constant (base) prices.

74
Q
A
75
Q

Equation for GDP deflator

A

P=

Real GDP

76
Q

Equation for CPI

A

CPI=

Price in year b * Q in year b

77
Q

Nominal GDP equation:

A

Real GDP x GDP Deflator= Nominal GDP

78
Q

Weaknesses of CPI as measure of inflation:

A

Consumers substitute towards good that become cheaper, so impact on the cost of living is smaller than the CPI says.

Quality adjustment:

79
Q

Equation for GDP deflator

A

Nominal GDP
——————– x 100
Real GDP

80
Q

Equation for Capital

A

Capital = Assets - liabilities

81
Q

Leverage ratio equation

A

Leverage ratio= Assets/Capital

82
Q

Baumon- Tobin Model for Optimal bank trips

A

Total Cost= n * fee for withdrawal + Money you start with/ 2n

Money Demand= money you start with/ 2n

83
Q
A

Science of Psych (6 decks)

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