Macroeconomía Flashcards
1
Q
What are the three aspects which macroeconomics studies?
A
- Output
- Unemployment rate
- Inflation rate
2
Q
Which pros/cons have the euro zone?
A
- Represents a major economic force and cohetion. Strengthening of the common market.
- Concs:
Am unitary policy can’t be entirely efficient to the entire number of countries.
3
Q
What are the implications of an always increasing economy?
A
It implies all the system all around the economy will focus just in get higher numbers.
4
Q
What were the objectives of the course?
A
Understand the economy in two ways: Short-term and medium-term is these aspects:
1. Unemployment, Output, Inflation rate
2. Fiscal and monetary policy
Long-therm output growth
5
Q
What’s a easy way to describe GDP?
A
GDP: Production and Income
6
Q
Three ways of define GDP:
A
- The sum of the value of each final product.
- The sum of the final products of every firm less the intermediate products.
- GDP: Sum of incomes in the economy during a given period. (These refers to wages and profits.
7
Q
What’s nominal GDP:
A
Is the sum of prices and the quantity of final goods.
Nominal GDP increases for three reasons:
Prices increases over time
Quantity increases over time
Prices can relatively change
8
Q
What’s real GDP?
A
The quantity of goods multiplied by a constant (This constant is referred as an fix price)
9
Q
Describe the GDP growth as a formula:
A
[Y(t) - Y(t-1)]/ Y(t-1)
Positive GDP growth are expansions.
Negative GDP growth are recessions.
10
Q
Problems measuring GDP:
A
- The quality of the products just varies all over the time.
- Calculate the value generated by online services is extremely difficult. They’re free.
- Measuring illegal products.
- It’s difficult to define where’s the value on the financial market.
- Home production is excluded. Per example, mom’s pie
11
Q
What’s the solution related to the quality of products?
A
It’s assigned a concept: Hedonic price. Which refers to describe it following their characteristics.
12
Q
Who banks solve the problem to calculate the aggregate output they have?
A
They use the spread between the free-risk interest and the lending rate multiplied by the number of loans. This action is problematic because the free-risk interest can vary with the time.
13
Q
What’s the labor force?
A
Unemployment + Employment = Labor Force
14
Q
Describe the formula of unemployment rate?
A
Unemployment/Labor Force = Unemployment (u)
15
Q
Describe the partipation rate formula
A
Labor force/People of working age
16
Q
Why is economy interested in unemployment?
A
- Because is a way to know how is the welfare of the unemployment.
- It’s a way to know how the economy is going.
17
Q
What is inflation and deflation?
A
- The increase of price level.
- Deflation is the decline in the price level.
18
Q
What’s the GDP deflator?
A
Nominal GDP/ Real GDP = Y/Y$
19
Q
How we measure the inflation?
A
- GDP deflator
- Consumer price index
20
Q
Describe CPI:
A
The CPI is related to goods and services, which represents the consumption basket.
The set of goods produced in the economy is not the same as the set of goods purchased by consumers.
21
Q
Why do we care about inflation?
A
- When prices and wages are not the same.
- Inflation leads to other distortions.
22
Q
Composition of GDP:
A
- Consumption.
- Government spending. (It does not include government transfer, nor interest payment on the government debt)
- Investment
- IM The purchases of foreign goods and services.
- Exports
23
Q
What are the things that are not considered in GDP? (Exogen)
A
- IM
- Exports
24
Q
What are the assumptions?
A
- Prices are fixed.- The firms are willing to supply any amount of good at a given price.
- The economy is closed.- The rest of the world does not exist.
In conclusion:
Z = C + I + G.
25
What's the consumption function?
C(Yd)
C = c(0) + c(1)*Yd
Where:
c(0) - The intercept of the consumption function.
c(1) - The consumption propensity.
26
Formula of disposable income:
Yd = Y - T
27
What's the combination of the consumption function and disposable income?
C = c(0) + c(1)*(Y - T)
28
What's the formula of savings (S)?
S = Yd - C
S = Y - T - C
29
What's the relation between Taxes and Government spending?
T < G -> Deficit
T > G -> Surplus
30
Derivate the investment function related to savings.
Y = C + I + G
Y - T = C + I + G - T
Y -T - C = I + G - T
S = I + G - T
I = G - T - S
I = T + S - G
31
What's the equilibrium in the financial market?
Money demand = Money supply
32
Give the 3 concept of money?
1. Is a medium of exchange.
2. It's the unit of account which prices and incomes are quoted.
3. Store of value from the present to the future.
33
The role of central bank?
- Make decisions about money supply and interest rate.
- Key role of payments.
- Regulate financial institutions.
- Give stability to the economy
34
What's a bond?
A promise by the government to pay a certain amount in the future,
35
What are the assets?
It's what the bank relies on when they lend money.
36
What are the liabilities?
What the bank have the responsability to pay.
37
Which way exist to store financial wealth?
1. Coins and bills (physical currency) and checkable deposits (checks). Can be used in transactions.
2. Bonds.- Not usable in transactions.
38
What are the two constants that lead the hold of money?
1. Your level of transactions.
2. The interest rate.
39
Define income, savings, financial wealth and investment?
Income.- It's what a person receive from working and dividends obtained by interest.
Savings.- After tax.
Financial wealth.- Assets - liabilities.
Investment.- New capital goods.
40
Give the Demand for money model:
Md = $Y * L(i)
41
What are the open market operations?
- To increase the supply of money, the bank buys bonds.
- To decrease the supply of money, the central bank sells bonds.
42
How the open market operations affect the IS model?
Buying bonds: This means that Md (Money demand) increase, for instance there are many bonds so the interest rate decreases.
Sell bonds. The money demand decreases, so the interest rate increases.
43
Central banks decide to modify the quantity of money or the interest rate?
The money supply. They fix a interest rate and work around them.
44
Describe the 3 ECB keys of interest rates:
1. Refinancing rate: This allow banks to get money when they're short of funds.
2. Deposit facility rate: The interest rate that institutions receive overnight.
3. Marginal lending facility rate: Rate credit bank can obtain about overnight credit.
45
What happens when interest rate goes to 0?
People hold more money, for instance. When it reaches 0, people don't care about hold money or using it on bonds. As they see that the situation just get worse, they dont want to spend money nor use it in bonds.
46
What's the dynamic of intermediary banks?
They receive deposits.
They use it later to:
- Loans/Bonds/Stocks
- Reserves
47
What are the three reasons why banks hold money?
1. People wants their deposits back.
2. To respond to checks.
3. The reserve bank demands a 1% of ratio
48
Describe the supply = demand of money, considering the currency propensity and theta:
(c + 0(c-1)*Yd L(i) = H
49
What's the money multiplier?
1/(c + 0(c-1)
50
What's the highpowered money?
The overall supply of money depends on the central bank.
1. Currency
2. Reserves
51
Describe the formula based on the composition of the Central bank and the money supply:
Central bank money (Highpowered money): Currency + Reserves
Money Supply: Currency + Deposits
52
What's the assumption we made to stablish a connection between LM and IS curve?
M = Y$ * L(i)
This means the money supply is equal to the nominal output per the interest rate.
So, nominal output is: Y$ = Y * P
For instance:
M/P = Y * L(i)
53
Graphic the LM curve taking in account the money supply and the output:
Graphic it :p
54
What's the difference between fiscal and monetary policies?
Fiscal refers to deficit and surplus government spending.
Monetary policies of central bank does (Monetary supply and interest rate)
55
How deficit reductions works in a economy?
We have to consider the next:
I = S
I = Y + T - G
When taxes decrease, at a first moment we can think that the deficit increases. However, firms can have more flexibility so they can generate more benefits.
56
Say the difference between nominal and real interest rate?
Nominal interest rate is connected to the national currency.
Real interest rate is stablished in terms of basket of goods.
57
Define real interest taking in account: nominal interest rate, inflation, expected prices and the pass of years:
Real interest rate after 1 year: (1 + r)
Nominal interest rate after 1 year:
[(1 + i) Pt] /P(e)t+1
- [(1 + i) Pt]/ P(e)t+1 = 1 + r
We define expected inflation in the next way:
[P(e)t+1 - Pt]/Pt
So, we derivate it to obtain inflation:
1 + pi = 1 + [P(e)t+1 - Pt]/Pt
1 + pi = P(e)t+1/(Pt)
1/1 + pi = Pt/ P(e)t+1
For instance:
- (1 + i) / 1 + pi = 1 + r
- 1 + i = 1 + pi * r + pi + r
- r = i - pi
58
What's the risk premium and mention the aspects it depends on:
It's the quantity of money a borrower receive for buying a risky bond instead of a secure one. It's determine by the next:
- Probability of default
- Aversion to risk
It's denoted in the next way:
r + x
59
Mention leverage and capital ratio:
Leverage ratio: Assets/Capital
How many assets have 1 dollar of investment.
Capital ratio: Capital/Assets
60
What provides the federal reserve of the US to avoid bankrupts?
They give an insurance when there exist the rumour a bank cant pay their lends
61
What's a unconventional monetary policy?
Long-term bonds.- They give security to firms just to invest and generate money.
62
Extend the IS-LM model:
Y = C(Y,T) + I(Y, i - pi + x) + G
But, assuming central bank can control the real interest:
Y = C(Y, T) + I(Y, r + x) + G.
I = I stable
63
What implies the application of IS - LM model into a medium term model?
High investment -> High production
High production -> High employment
High employment -> Low Unemployment
Low unemployment -> High wages
Higher production costs -> Higher prices
Higher wages- -> Further increase in prices
64
What are the two realities of unemployment?
- Active: A market with many hires and separations.
- Sclerotic: A market with few hires, no separations and a great pool of unemployment.
65
What are the two kinds of separations can exist in a market?
1: Change the actual job for a better one. (quit)
2: Loose the job. Can pass two things. (layoff).
66
In what consist the theory of wage determination determined by firms and employers:
A. Bargaining power of firms and workers.
B. The efficiency of workers
67
In what the theory of wages rely on to determine the wages:
1. The reservation wage
2. Labor market conditions.
68
What is it contemplated in the bargaining power of the employees?
1. How costly it would be to replace him.
2. How hard it could be to find another job
69
What are the efficiency wages?
The implication that a worker who is motivated and have more connections with the job they do, would be more productive than the ones with a routinary job. These refers to the commitment a employee can have with their job.
70
What's the model we create considering all of those factors?
W = P(e) * F(u,z)
Where:
P(e) are the expected level of prices.
F(u,z) is the function related to unemployment and "z" that is the variable part which is stablished by the bargaining power of the employee.
71
Why expected price?
Employees don't care about the quantity of money they get. It's more important to know, how many things you can get with that money. That's why we use (W/P)
72
What's the "z" variable?
- Unemployment insurance.
- Employee protections.
- Minimum wage.
73
What's the concept of output we use in this model of labor market?
Y = A*N
A: Productivity
N: Employment
We assume that every worker have a productivity of 1.
74
How firms set their price?
P = (1+u)* W
u: The markup.- The benefit the firm wants .
In a competitive market: u=0.
75
To stablish a balance between the wage-setting and the price-setting, what we have to assume?
We have two models:
W/P(e) = F(u,z)
W/P = 1/(1+u*)
-> We have to stablish that the expected prices would we the same prices. But in exchange, it's necessary to stablish a natural rate of unemployment to maintain the consistency between this two models. P(e) = P
Natural not only describes a pass of time but also depends on the markup and other external conditions.
76
Draw the Price setting and Wage setting model:
Draw :P
77
What's the natural level of employment?
u = U/L
u = (L - N)/L
We can assume a natural level of employment:
Nn = L*(u - 1)
78
With a natural level of employment, what we can stablish?
The natural level of output
Yn = A * Nn
Natural level of output
A.- Productivity
Nn .- Natural level of employment.
-> We use it to replace.
Yn = A * L(u - 1)
1 + Yn/A * L = u
79
With the last asumption, what can we say about the price-setting model?
We have:
F[1+Yn/(A*L)] = A/(1+u*)
80
What's the conclusion of the model of natural output and unemployment?
The real unemployment and output tends to their natural part in medium term.
81
What are the assumptions we made for phillips curve?
We remember:
W = P(e)*F(u,z)
P = W * (1 + u*)
P = P(e) * F(u,z) * (1 + u*)
We stablish a relation between the unemployment and the prices.
82
What's the new formula for the unemployment function?
F(u,z) = e^-[(a*u)+z]
83
Stablish the Philips curve with the new formula:
After logaritmes and shit:
pi = Expected pi + (u* + z) - a * u
84
How the Philips curve works?
When there is more unemployment, it means a higher salary, so higher prices and finally inflation
85
What can we imply of expected inflation?
Expected inflation can be the result of a modification of inflation, for instance:
A multiplier * Inflation of last year.
The new formula is:
pi = o*expected pi + (u* + z) - a*u
86
What implications can have this?
If expected = 0
We have the original Philips curve:
pi = (u* + z) - a*u
it it's 1
pi - expected pi = (u* + z) - a*u
87
What's the meaning of the natural unemployment in Philips curve?
When inflation is the same compared to the one year before:
un = (u* + z)/a
With this implication we can deduce the next:
Pi = Expected pi + a(u* + z)/a - a*u
pi - expected pi = a(un) - a*u
pi - expected pi = -a (u - un)
the natural rate of unemployment is the limit where it cannot be sustained anymore.
88
Build the Philips curve around the natural output (potential output):
Before we established:
u = U/L -> u = 1 - N/L
So:
Y = N
Y = L(1-u)
The same with Un
Y(n) = L(1 -U(n))
Y - Y(n) = L - L*u -L + L*u(n)
Y - Y(n) = -L(u - u(n))
Conclusion:
pi - expected pi = (a/L)(u - u(n))
89
Draw de new model:
Draw :p
90
What happen when expectations are unanchored?
The inflation is not anymore a expectations and it just relates with the last year inflation. In long term, this means the last year is the new inflation so becomes difficult to stabilize it.
91
What happens when the economy is on a big depression?
This means the LM curve can't be lowered because it reaches a point of a negative interest rate. Because of that, it reflexes an impossibility to reach the 0 of inflation. (Deflation trap)
92
What is low output with high inflation?
Stagflation
93
How we measure standard living?
1. Welfare refers to the consumption.
2. The differences in productivity.
3. Standards living can be related to happiness.
94
What's the aggregate output proposed by Solow?
F(K,N) = Y
Where:
K is the capital (technology, plants, building)
N labor - number of people working
95
What are the returns for scale and how we stablish it?
It occurs when:
F(2k,2n) = 2Y
It means, when we duplicate the capital and labor, we are supposed to get the double of output
96
What are the decreasing returns in terms of capital and labor?
In terms of capital, when we start to increase it. But the results generate a smaller increase in output.
The same happens with labor.
97
What's the output per worker?
F(k/N,1) = Y/N
98
Draw the Solow model and it changes when the technology represent improvements:
Draw :P
99
What conclusions we can get from the Solow model?
Accumulation of capital doesn't mean growth. It's necessary advances in technology to get a better margin of progress. In this case, this affect the function itself.
100
What are the three assumptions we give to understand the growth model?
1. The economy is closed:
I - S + (T - G) = 0
2. Public savings equals 0 = (T - g)
I = S
3. The investment is proportional to the output:
S = k * Y
We get:
I(t) = k * Y(t)
101
How investment works in the growth model?
K(t+1) = K(t) * (1 - J) + I(t)
J represents the depreciation of the capital when years passes.
102
If we want to express the Solow model based on the marginal work of every employee in a economy, what we have to do and what implies?
Multiply everything by 1/N
It means the next:
K(t+1)/N = K(t) * (1 - J) * 1/N + I
-> This means:
K(t+1)/N - K(t)/N = s*Y(t)/N - J*K(t)/N
The change of the capital in one year equals to the proportion of the output less the depreciation.
103
Draw the Solow model taking in account de depreciation and the saving proportion:
Draw :P
104
Construct the consumption per worker, based on the Sollow model:
Y/N = f(K/N,1)
-> f(K/N) = square root [K(t)/N]
Into the sollow model:
K(t + 1)/N - K(t)/N = s* square root (K(t)/N) - J*K(t)/N
We assume a steady point where the capital of the next year, doesn't change at all compare to the past year:
s*square rook (K(t)/N) = J* K(t)/N
s^2 * (K(t)/N) = J^2 * [K(t)/N]^2
Conclusion:
[s/J]^2 = K(t)/N
Y/N = F(k(t)/N) = square root * K(t)/N = s/j
In general consumption is:
C/N = Y(t)/N - J*K(t)/N
C/N = S/J - J*[S/J]^2
C/N = s(1 - s)/J
105
The two ways social security works?
Fully funded system: This system works in the way the taxes give the import and the state invest it.
pay-as-you-go: Taxes redistribute to the contributors.
106
We consider two things in the Sollow model, capital and number of workers. What else can we include?
We can include the human capital (quality of the human skills). This means H. The new function have this form:
Y/N = F(K/N, H/N)
107
Define financial wealth and demand for money:
Financial wealth: Value of all the financial assets, liquidity, bonds, deposits and other investments.
Money demand: Only liquidity.
