Macroeconomics Flashcards
What is the inflation rate?
A device that measures how fast prices are rising
What are endogenous variables?
Variables that a model tries to explain
What is the market clearing condition?
Quantity supplied = Quantity demanded
What is the difference between the long run and the short run?
In the long run, prices are flexible. In the short run, they’re sticky
What is GDP
Gross Domestic Product is the market value of all final goods and services produced within an economy in a given period of time
Whats Nominal GDP
The value of goods and services measured at current prices
Whats Real GDP
GDP measured at fixed prices
Whats Gross National Product
The total income earned by nationals, including those living abroad
What is the Marginal Product of Labour
The extra output produced by a unit increase in Labour
When should a firm keep employing labour?
Until MPL = w/p
w = wage, p = price
w/p is the real wage
When should a firm keep renting capital
Until MPK = r/p, the real price of rent
What is the general form of a Cobb-Douglas Production function?
Y(K,L) = AK^(a)L^(1-a)
Show the Marginal Propensity to consume on a graph
MPC is the increase in consumption when disposable income increases by 1
What is the national saving?
Y - C - G
What is private saving?
Y - T - C
What is public saving?
T - G
What is saving equal to?
Investment
Plot Saving against Investment
Show the impact of an increase in government purchases on saving and investment. Explain crowding out
Increase in government purchases causes interest rate to rise and investment to fall. Called crowding out investment
What is fiscal policy?
Changes to spending and taxation, usually by elected representatives
What is monetary policy
Changes to interest rates and banking, made by central banks
What are the three properties of money?
i) store of value
ii) unit of account
iii) medium of exchange
What is the Quantity Theory of Money?
Money Supply x Velocity = Prices x Output
Explain why changes in the money supply has ultimate control over inflation
What is seigniorage?
The revenue raised by printing money
What is the fisher equation?
r = i - pi
r = real interest rate
i = nominal interest rate
pi = inflation
What is the effect on the nominal interest rate by a 1% increase in inflation
a 1% increase
What is the ex-ante real interest rate?
The expected real interest rate
What are the costs of expected inflation? [2]
Shoe-Leather costs - constantly walking to the bank
Menu costs - constant price changes
What is the impact of unexpected inflation
If the real interest rate is less than expected interest rate, then the creditor gains as the money being paid back is worth more than anticipated
If the interest rate is more than expected, the debtor gains as the debtor repays the loan with less valuable currency.
What is classical dichotomy?
The theoretical separation of nominal and real variables
What is Saving minus Investment
Net Exports
When does a country have a trade surplus?
When net exports are greater than zero
In an small open economy, what is assumed about the real interest rate
Always equal to world interest rate, r*
Show the impact of expansionary fiscal policy in a small open economy
Show the impact in a small open economy of an increase in investment
What is the nominal exchange rate
The relationship between the relative price of the currency of two countries
What is the equation for the real exchange rate?
(Nominal exchange rate)(Price of domestic good) / (Price of foreign good)
What is the relative price of domestic goods if the real exchange rate is high?
Domestic goods are fairly expensive
Show the impact on net exports and the real exchange rate with expansionary fiscal policy
What is the equilibrium unemployment rate
sE=fU
What is frictional unemployment?
the time it takes workers to search for a job
What are sectoral shifts?
Changes in demand for certain skills in industries
What is wage rigidity?
When wages fail to adjust to the level where labour supply equals labour demand
Show the effect of wage rigidity on unemployment
What is the Solow Growth model designed to show?
How growth in the capital stock, in the labour force and advances in technology, interact in an economy
Draw the basic solow model
When is the capital stock in a steady state
when sf(k) = delta(k)
Show how an increase in saving affects the capital stock
When is the golden rule steady state achieved?
When consumption is maximised, ie when MPK = delta
Show the golden rule steady state on a graph
Show the transitional effect on output, consumption and investment to the golden rule steady state from starting with too much capital
Increase saving rate
Output increases
Consumption increases
Investment decreases
What is denoted by n in the solow growth model?
The increase in population
What is the steady state condition in the Solow model with population growth?
MPK = (delta + n)k
What is denoted by g in the Solow growth model?
Labout-augmenting technological progress
Give 3 leading economic indicators
New orders for consumer goods
Average work week
Index of stock prices
What is aggregate demand?
The quantity of goods and services people want to buy at any given price levels
What is aggregate supply?
The relationship between the quantity of goods and services supplied and the price level
Show long term and short term aggregate supply lines on a graph
Show the effect on prices and output of a decrease in the money supply both in the long run and the short run
What does IS and LM stand for?
IS - investment, saving
LM - liquidity, money
Draw the keynesian cross
What is the government purchases multiplier?
A 1 unit increase in government purchases increase output by 1/1-MPC, where MPC is the gradient of planned expenditure
Draw the IS-LM model
What is the effect of increase in government spending on the IS curve
Shifts to the right
What is the effect on an increase in the money supply on the LM curve?
Shifts to the right
Show the impact of an increase in government purchases on the IS-LM model
Show the impact of an increase in the money supply on the IS-LM model
What are the three central bank reactions to an increase in government purchases?
Hold output constant
Hold interest constant
Hold money supply constant
What is the pigou effect?
As prices fall and real money balances rise, consumers should real wealthier and spend more
What is the debt-deflation theory?
A fall in price levels raise the amount of real debt, so unexpected inflation enriches creditors and impoverishes debtors
Draw the mundell fleming model
Show the effect of an increase in government spending with a floating exchange rate?
Show the effect of an increase in the money supply with a floating exchange rate
What is the impact of an increase in net exports in a floating exchange rate?
IS curve shifts right, exchange rate rises, output remains constant
Show the effect of an increase in government spending in a fixed exchange rate system
