Macro Review Flashcards
Natural rate of unemployment and full employment rate
Same rate, includes no cyclical unemployment only frictional and structural
Economic Growth determinants
Quantity and quality of resources
Technology/productivity
Capital stock
Economic growth shown graphically
Outward shift in the PPC or rightward shift of LRAS
Economic growth path
Change in interest rate-change in investment spending, change in capital stock, change in economic growth
What happens with a change of taxes?
Affects consumption and therefore shifts AD
What happens with a change in business taxes?
Affects firm costs and therefore AS but also affects investment and therefore AD
Types of unemployment
Frictional (in between jobs)
Structural (insufficient skills for job)
Cyclical (unemployment due to lack of demand)
Determinants of Aggregate Demand
Consumption, Investment, Government spending, net exports
GDP equation
GDP=C+I+G+(X-M)
Determinants of Aggregate Supply
Input costs, technology, legal-institutional environment
National income
Real GDP/output
Real GDP
gross domestic product adjusted for inflation
Nominal GDP
Gross domestic product not adjusted for inflation
Determinants of the PPC
Change in technology
Change in quantity or quality of resources
Specialization and trade
CPI equation
(Price of the current market basket/value of the market basket in the base year)*100
Quantity theory of money
Identity (equation) that shows how an increase in the money supply will result in a proportional increase in prices
MV=PQ(p*q=nominalGDP)
GDP deflator
Index number that shows how prices have changed for all goods and services
(Nominal GDP/real GDP)*100
Does real GDP account for changes in price and is it adjusted for inflation?
Yes
Mixed economy
Mixture of different economies
Aims to have private property, pricing and individual self interest
Government deficit spending
**
Supply Shock
Sudden unexpected change in aggregate supply
Classical view
Aggregate supply is vertical and government does not need to get involved because wages and prices are flexible upward and downward
*Full employment level of real GDP stays the same regardless of price level
Stagflation
Simultaneous increases in the inflation rate and unemployment rate
Federal Funds Rate
The rate that banks charge one another on overnight loans from their excess reserves
Scarcity
Unlimited wants and limited resources
Circular Flow-Product market
Businesses sell goods and services in the product market which individuals buy. In return, individuals give money to businesses in the product market which is the business’ revenue.
Circular flow-resource market
Individuals give land labor capital (resources) to businesses. In return businesses pay individuals which turns to individual’s income
Free market
businesses, government and consumers
GDP definition
dollar value of all final goods and services produced in a country’s borders in a given year
What is not included in GDP?
Intermediate goods
non production transactions
non market activities
Nominal vs real GDP
Nominal is NOT adjusted for inflation real is adjusted
GDP deflator
(Nominal GDP/Real GDP)*100
CPI
Measure of inflation
(market basket of current year/market basket in base year)*100
Frictional unemployment
Unemployed because you are in between jobs
Structural unemployment
Unemployed because of skills
Cyclical unemployment
Happens because of recession
In the short run, how are the wages, resource prices and price level affected?
Wages and resource prices do not change at the same pace as price level
In the long run, how do wages resource prices and price level change?
They all change at the same pace which makes the LRAS vertical
Fiscal Policy
Changes in government spending or taxation to influence the economy (affects C and G)
Inflationary gap: decrease government spending or increase taxes
Recessionary gap: increase in government spending or decrease taxes
Monetary Policy
Changes in the money supply to influence the economy (affects I)
Inflationary gap: decrease money supply
Recessionary gap: increase money supply
Keynesian View
Aggregate supply is horizontal
Prices and wages are sticky downward
Need government interference
What are the two reasons that people demand money?
Transaction demand- households and businesses need money for daily transactions
Asset demand- people may prefer holding money rather than other assets (bonds, stocks, real estate)
Money market graph
Interest rate and quantity of money
Demand is downsloping- higher interest rate=less money
The fed supplies the money-perfectly vertical and inelastic supply
Affect on interest rate when the fed changes the supply of money
If the fed increases the supply of money then the interest rate goes down and if the fed decreases the supply of money then the interest rate goes up
3 Fed Tools (monetary policy)
1) reserve requirement (how much the bank has to hold in its reserves)
2) discount rate (interest rate that the fed charges banks to borrow money)
3) open market operations (buying and selling of government bonds-buy bonds to increase money supply and sell bonds to decrease money supply)
The higher the interest rate the_____ investment
less
Real interest rate=
nominal interest rate-expected inflation
Lump sum taxes
The tax revenue of the government is the same at all GDP levels
Demand pull inflation
Excess of total spending over the countries ability to produce—overissuance of money by the central bank
Too much spending chasing too few goods
Cost-push inflation
Output and employment decline while price level rises
Cost-push inflation is the result of supply shocks
Functions of money
Medium of exchange, store of value, unit of account
Money multiplier
1/reserve ratio
