Macroeconomics Flashcards
What 2 things does the GDP measure?
- Total Income
2. Total expenditure on outputs/inputs
What is the difference between GDP and GNP?
Gross National Product (GNP) is the total income earned by a nation’s permanent residents (called nationals).
Foreign Portfolio Investment
Investment that is financed with foreign money
but operated by domestic residents e.g. stocks and bonds.
Define Brain Drain
Emigration of the most skilled workers.
What does the Lorenz curve show?
a graph on which the cumulative percentage of total national income (or some other variable) is plotted against the cumulative percentage of the corresponding population (ranked in increasing size of share). The extent to which the curve sags below a straight diagonal line indicates the degree of inequality of distribution.
Gini coefficient of 0 means?
That income equality is perfect - there is no space between the income line and the Lorenz curve.
Define Persistent Poverty.
Being in poverty in the current year and 2/3 preceding years.
Explain Utilitarianism
- Based on utility
- An extra $1 of income brings more utility to the poor than to the rich
- Therefore wealth should be redistributed until incomes are equal
Explain Liberalism
- Based on the ‘before you knew if you’ll be rich or poor’ idea
- Should maximise the worst-off person in the society
- Not full equalisation because of the incentive effect
Explain Libertarianism
- Government should punish crime, but should not redistribute income
- Equal oppurtunity is more important than equal income
Poverty trap
a situation in which an increase in someone’s income is offset by a consequent loss of state benefits, leaving them no better off.
What is the unemployment rate equation?
(Number of unemployed/labour force) x 100
Cyclical Unemployment
Cyclical unemployment is a factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise.
Define Hysteresis
The lagging effects of past economic effects on future ones.
Structural Unemployment
Structural unemployment is a longer-lasting form of unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors such as technology, competition and government policy. Reasons why structural unemployment occurs include workers’ lack of requisite job skills or that workers live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what companies need and what workers can offer.
Frictional Unemployment
the unemployment which exists in any economy due to people being in the process of moving from one job to another.
Efficiency Wages
Firms pay their employees more than average in order to raise their productivity but can lead to unemployment because that is less money to spend on hiring more poeple.
What is the difference between financial markets and financial intermediaries?
Financial markets = Savers directly provide funds to borrowers e.g. Bond/Stock Market
Financial Intermediaries = Savers indirectly provide funds to borrowers e.g. Banks, Investment funds.
National Saving is equal to?
Investment
Private Saving
Y - T - C
Public Saving
T - G
What adjusts the Supply and Demand for Loanable Funds?
The Interest Rate
A decrease in tax on interest income will…?
Shift the Supply of Loanable Funds outwards and therefore reduce the interest rate and increase investment.
An investment tax credit will…?
Shift the demand for Loanable Funds outwards and therefore increase the interest rate and increase saving.
What effect does the budget deficit have on the market for loanable funds?
A budget deficit decreases the supply of loanable funds - the supply shifts to the left.
What do we mean by ‘crowding out’?
The fall in investment as a result of government budget deficit.
What is the formula for the present value of money?
X/(1 + r)n(power)
X = FV r = Interest rate e.g. 5% = 0.05 n = number of years e.g. two years - squared.
Define adverse selection
That a high risk person is more likely to apply for insurance
Define moral hazard
That people tend to be more reckless when they know they have insurance
What is the difference between an idiosyncratic risk and aggregate risk?
Idiosyncratic = only affects a single entity
Aggregate risk = affects all economic agents
Define Fundamental analysis
The study of a company’s accounting statements and future prospects to determine its value i.e. whether its overvalued, fairly valued or undervalued.
What does the efficient market hypothesis (EMH) state?
That stock prices only change with new information and therefore you could just buy any stocks because they fairly reflect the value at that particular time.
Explain Keynes’s Beauty Contest
That people pick the stocks that they think other people find desirable.
What are the three functions of money?
- Medium of exchange
- Unit of account
- Store of value
What is the difference between commodity money and fiat money?
Commodity money has intrinsic value e.g. gold, Fiat money is valuable because the government decrees that it is - it’s all about trust.
Define Money stock.
The quantity of money circulating in the economy.
What does M1 measure?
Currency in circulation + overnight deposits.
What does M2 measure?
M1 + deposits with maturity
What does M3 measure?
M2 + repurchase agreements, money market funds shares etc.
A reserve ratio of 1 means?
That banks have to keep 100% of the deposits.
How do you calculate the money multiplier?
1/reserve ratio
What are open market operations
Buying/Selling government bonds to influence the money supply.
Explain the refinancing rate/repo rate.
It is the interest rate the Central Bank charges the banks in a short-term. Increase = decreased money supply.
Decreasing the repo rate will ______ money supply.
Increase.
What does the quantity theory of money suggest?
That as the government increases the amount of money in circulation this leads to inflation as we buy more but how productive we are doesn’t change.
The money supply curve is…?
Vertical because the money supply doesn’t change depending on the value or price etc. it only changes when the government wants it to.
According to classical dichotomy, changes in the money supply affect _____ variables but not _____ variables
Nominal, Real.
Define monetary neutrality.
The irrelevance of monetary changes for real variables.
What does the velocity of money refer to?
The speed at which the money changes hands.
What is the Velocity quantity equation?
V = (P x Y)/M or M x V = P x Y - P = Price level - Y = Goods and Services produced in a year - (P x Y) = Nominal GDP of the economy - M = money supply
Define Inflation Tax
When a government raises revenue by printing money
Define hyperinflation
Inflation that exceeds 50% a month
Real interest rate is equal to?
Nominal interest rate - Inflation rate
And therefore:
Nominal = Real + Inflation
Explain the fisher effect
Because Nominal interest rate = Real + Inflation, as CB increases money growth this results in inflation and therefore increase in nominal interest rate/fall in real interest rate
What are shoe-leather costs?
Shoe leather cost refers to the cost of time and effort (more specifically the opportunity cost of time and energy) that people spend trying to counter-act the effects of inflation, such as holding less cash and having to make additional trips to the bank.
What does Net capital outflow refer to?
The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.
NCO = ?
NX
S = ?
I + NCO
Real exchange rate compares the prices of domestic goods and foreign goods in the domestic economy. What is the equation?
(Nominal Exchange Rate x Domestic currency)/Foreign price
What is the law of one price?
That a good must sell for the same price in all locations otherwise we’d experience arbitrage. It is linked to PPP.
The supply of loanable funds comes from?
National Saving
The demand for loanable funds comes from?
Investment and Net capital outflow
In an open economy, government budget dificits: _____ the supply of loanable funds, ______ the interest rate, _________ domestic investments, Cause net foreign investment to ______?
Reduce, Increase, Crowd out, Fall
Trade policies do not…?
Affect the trade balance?
What would be the effect of an import Quota?
Appreciation of the real exchange rate - which offsets the initial increase in net exports which demonstrates that trade policy does not effect trade balance.
Define Capital Flight
Capital flight, in economics, occurs when assets or money rapidly flow out of a country, due to an event of economic consequence. Such events could be an increase in taxes on capital or capital holders or the government of the country defaulting on its debt that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength.
What impact does capital flight have on the macroeconomy?
Interest rates increase and domestic currency depreciates.
