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BEC > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What is macroeconomics

A

The study of the economy as a whole -

Key concerns are unemployment, inflation, and long-term economic growth

subsidiary concerns - lending growth, interets rates, exchange rates, trade balance, and government budget deficits and debts

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2
Q

What is the difference between real GDP and potential GDP

A

Real GDP - this is the total dollar value of all final goods and services produced ( It is the sale of bread to customer, and not the sale of flour to the baker)

Potential GDP - This is used to see if the economy is underutilizing resources or overheating

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3
Q

What is the difference between Underutilizing resources or overheating

A

Underutilizing resources - this si when real GDP is shorter than potential GDP - the result is that unemployment rates are higher

Overheating- this is when real GDP is GREATER than potential real GDP. - the result is when unemployment rates are unsustainable low.

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4
Q

What happens when actual unemployment rates fall below NAIRU

A
  • NAIRU is the natural - non accelerated inflation rate

When the actual unemployment falls below this - then the boom conditions follow in the short term.

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5
Q

What is the difference between GDP and GNP

A

GDP - produce din the country

GNP - produced bytes residents of the country (regardless of whether they are done within or outside that countries borders

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6
Q

What is inflation

A

This is the percentage rate of increase in the price level of goods and services

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7
Q

What is hyperinflation

A

Like inflation except that the value of the currency is decreased faster and price increase much more rapidly

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8
Q

What is deflation

A

This is a general decline in the price levels or a negative inflation rate - its not just a few goods

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9
Q

What is the solution to deflation

A

an increase in money supply -

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10
Q

Three measure of price inflation
CPI
PPI
GDP inflator

A

CPI - Consumer price index - compared the price of a fixed basket of goods to an earlier period - think dollar value LIFO - retail level

PPI - Compares the price of a fixed basket of goods at a wholesaler level

GDP deflator - most comprehensive measure of price level - it includes all parties not just consumers - It is used to convert nominal GDP to real GDP

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11
Q

Aggregate Demand Curve

A

This is used to look at the overall level of prices and production of goods and services for an entire economy

  • It slopes downward

It seeks to represent the relationship between:

1) total expenditures by consumers, businesses, government and the foreign sector
2) The price level at a given point of time

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12
Q

Why does the aggregate demand curve slope down for these reasons:

Interest rate effect
wealth effect
International Purchasing power effect

A

Interest Rate Effect - higher inflation rates increase nominal interest rates. This decrease consumer borrowing. This will result in a negative shift in the demand curve

Wealth effect - higher inflation rates reduce the value of most fixed income investments ( bonds) If you have less wealth you will consume less

International Purchasing Power effect - Domestic inflation means that foreign goods are cheaper. This increase step demand for the cheaper international goods

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13
Q

Aggregate Supply Curve

A

This is used to look at the relationship between:

1) Total goods and services produced
2) The price level at given point of time

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14
Q

What happens when the demand curve “Shifts Up”

A

This is when aggregate spending increases. The demand curve moves to the right

The market equilibrium happens at a higher price point

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15
Q

What is the phillips curve

A

This is the short term tradeoff between inflation and unemployment is known as the short term phillip curve

This is when economies are not growing as fast and unemployment is higher than NAIRU

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16
Q

Cost-push inflation

A

The supply curve shift inward

This happens when the cost of inputs ( price of oil) increases. The curve is shifted to the left

Market equilibrium occurs at a higher price level and lower quantity

17
Q

What is stagflation

A

This describes periods of high inflation and high unemployment

18
Q

what is the multiplayer effect

A

This is when increases in spending by people, businesses and government cause increase in output bigger that the input ( multiple step effect)

Example: Its like saying that a change in spending of $300 by a person will raise GDP by $1,200

19
Q 
What are the elements of a business cycle:
Expansion
Recession
Depression
Recovery
A

Expansion:

  • several years of increased production
  • booming economic conditions
  • tech advances lead to positive shifts in demand curve to the right

Recession:
-2 quarters of decreased economic production or negative growth
- declines in employment
-GDP below potential
-Demand curve shifts to the left
trade wars cause a negative shift to the demand curve

Depression:

  • a recession that is long lasting
  • no formal agreement to delineate between recession and depression

Recovery:
- Early stages of expansion

20
Q

What are the indicators of economic activities:

Leading Indicators
Coincident Indicators
Lagging Indicators

A

Leading Indicators - try to predict whether the expansion or recession are likely to end in the next few months

  • Stock Market Prices
  • New orders for durable goods
  • housing starts

Coincident Indicators - these move up and down simultaneously with economic expansions and recessions

  • Industrial production
  • manufacturing and trade sales

Lagging Indicators - these only move up or down after economic conditions change

  • average prime rate for banks
  • average duration of unemployment
  • unemployment rate
21
Q

Types of unemployment:

Frictional unemployment
Structural unemployment
Cyclical unemployment
Institutional unemployment

A

Frictional - leave job voluntarily or get fired - always exists

Structural unemployment - lose your job because of change in the demand for goods and services. Require retraining. The problem is not with demand - it is the speed with which workers may be retrained

cyclical unemployment - job losses due to fluctuations in the business cycle

Institutional unemployment - this is due to government restrictions onto economy such as wage floors or restrictions on new businesses to launch

22
Q

what aerie difference between these types of rates:

Nominal interest rates
Real Interest rates
Risk-free interest rates
federal funds (discount rate)
Prime Rate
A

Nominal rate - regularly quoted by financial institutions - usually include premiums

Real Interest Rates - adjusted for inflation

Risk -Free Interest Rates - the rate you would be charged if there was no risk - US Treasury securities

Federal Funds Discount rate - commercial banks charge to each other - federal funds

Prime rate - the rate banks charge their most creditworthy business customers

23
Q

Classical Economic Theory

A

No government intervention

in the absence of government intervention (price and wage control, etc) economies would be largely self-stabilizing

24
Q

Keynesian Theory

A

Fiscal Policy - lower taxes and more government spending

Prices and wages in the economy do not adjust quick enough on their own

  • therefore the government needs to step in and use fiscal policy to manage macroeconomic conditions (Example - increase budget deficits - lower taxes air more government spending)
25
Q

Monetarist Theory

A

monetary policy - open market operations

The focus is on stable Monetary growth, not stable interest rates

  • so allow interest rates to rise and fall according to the market rather than control them
  • they recognize that prices and wages may fail to be flexible
26
Q

Supply Side Theory

A
  • Reduce taxes
  • remove impediments to economic production
  • This would shift the supply curve outward over long term

Laffer curve - if tax rates are high enough that increasing them more does not yield more revenue. Instead lowering tax rates may actually increase tax revenue

27
Q

New Keynesian theory

A

A combo of monetarist and Keynesian theory

Policy makers should use both fiscal and monetary policy to manage macroeconomic conditions loosening and tightening in responses to higher rates of unemployment

favor an active role in the government in both monetary and fiscal policy

28
Q

The Austrian theory

A

This talks about how monetary policy can lead to dislocations in the allocation of resources, lead to bubbles

For example: low interest rates can lead to companies borrowing a lot of money to create a factory that once complete may have overestimated consumer demand

29
Q

What are monetary aggregates

A

They are weak predictors of changes in output and inflation

  • this because there are on lags that are long and variable

M1 and M2 are most common

They have become harder to predict as financial market shave become more complex

BEC (30 decks)

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