Macro Midterm Flashcards
Aggregate Output:
everything that is produced within a country
Potential Output
Y* amount of goods/services an economy could produce (assumes everyone who wants to work is working 40 hour weeks and full use of capital)
Y*
potential output
Y
actual output
recessionary gap
Y* > Y
Inflationary gap
Y > Y*
employement
anyone over the age of 15 who has a job
Cyclical unemployment:
caused by recession/business cycle
Frictional unemployment
moving between jobs
Structural unemployment
mismatch of skills
labor force
number of people employed + unemployed
Unemployed people
Does not include: discouraged (given up) workers, students, retired people
Employment rate
people employed / labor force * 100
Labour participation rate
labour force / adult population
Calculating GDP
value added (avoids double counting), expenditure (formula) income approach
Income approach
wages + profits + interest payments + indirect taxes - subsidies + depreciation
CPI negatives
OVERSTATES inflation
Does not measure quality change, introduction of new goods, or substitution effect
Formula for percentage change
new - old / old * 100
CPI Steps
Calculate consumption in each year (using base year quantities)
Calculate CPI in each year = total cost (year) / total cost (base year) * 100
Inflation = CPI (year 2) - CPI (year 1) / CPI (year 1) * 100
GDP approach inflation
- Calculate nominal GDP in each year (price * quantity) and add
- Calculate real GDP for each year (keep price constant and change quantity)
- GDP deflator for each year = nominal GDP / real GDP * 100
Inflation = new deflator - old deflator / old deflator * 100
C formula
C = a + bYd
MPS
Z - slope of AE function
AE = A + zY
A is autonomous expenditure, Z is MPS or induced expenditure
Nx
X0 - mY
Simple multiplier
1 / 1-Z (steepter = bigger Z = bigger multiplier)
How to calc changes?
△ Y = △ in A * simple multiplier (1 / 1-Z)
Fisher effect
i = r + pie^e
Shifts in AE
change in a, I, G, X
Change in AE Slope
change in MPC, tax, MPI
Change in Price level
shifts AE up (if decrease in PL), move along AD
Large Z
Steep AE = flat AD curve, large shifts (unstable)
Small Z
Flat AE = steep AD, small shifts (stable)
Multiplier
distance between new and old equalibrium (= A * mult (change in Y / change A)
Simple mult
distance between AD curves after shift (constant PL) = change A/1-z
Automatic Stablizers
increase tax, decrease MPC, increase MPI (they make Z smaller)
Supply Shocks
NEG = left, pos = right - tech, factors of production
Negative Demand Shocks
left shift - downward pressure on wages (slow due to sticky wages)
Demand shock causes
change in I (interest rates), G or tax (fiscal policy) or exports
Positive demand shock
right - upward pressure on wages, they rise until equalbrium
Automatic (economy on its own)
AS shifts wages until equalibrium
Policy changes
Shift AD curve to equalbirum - not exact or long tern
National savings
Y - C - G
Private savings
Y - T - C
Public Savings
T - G
Neoclassical Growth theory
diminishing marginal returns (keep 1 constant), constant returns to scale (change both, output should change the same amount)
If population increases
GDP increases, living standards decrease
Constant returns mean
no change in living standards, increase in GDP
