Macroeconomics Flashcards
What is macroeconomics
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
What is the difference between real GDP and potential GDP
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
What is the difference between Underutilizing resources or overheating
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.
What happens when actual unemployment rates fall below NAIRU
- NAIRU is the natural - non accelerated inflation rate
When the actual unemployment falls below this - then the boom conditions follow in the short term.
What is the difference between GDP and GNP
GDP - produce din the country
GNP - produced bytes residents of the country (regardless of whether they are done within or outside that countries borders
What is inflation
This is the percentage rate of increase in the price level of goods and services
What is hyperinflation
Like inflation except that the value of the currency is decreased faster and price increase much more rapidly
What is deflation
This is a general decline in the price levels or a negative inflation rate - its not just a few goods
What is the solution to deflation
an increase in money supply -
Three measure of price inflation
CPI
PPI
GDP inflator
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
Aggregate Demand Curve
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
Why does the aggregate demand curve slope down for these reasons:
Interest rate effect
wealth effect
International Purchasing power effect
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
Aggregate Supply Curve
This is used to look at the relationship between:
1) Total goods and services produced
2) The price level at given point of time
What happens when the demand curve “Shifts Up”
This is when aggregate spending increases. The demand curve moves to the right
The market equilibrium happens at a higher price point
What is the phillips curve
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
Cost-push inflation
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
What is stagflation
This describes periods of high inflation and high unemployment
what is the multiplayer effect
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
What are the elements of a business cycle: Expansion Recession Depression Recovery
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
What are the indicators of economic activities:
Leading Indicators
Coincident Indicators
Lagging Indicators
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
Types of unemployment:
Frictional unemployment
Structural unemployment
Cyclical unemployment
Institutional unemployment
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
what aerie difference between these types of rates:
Nominal interest rates Real Interest rates Risk-free interest rates federal funds (discount rate) Prime Rate
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
Classical Economic Theory
No government intervention
in the absence of government intervention (price and wage control, etc) economies would be largely self-stabilizing
Keynesian Theory
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)
Monetarist Theory
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
Supply Side Theory
- 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
New Keynesian theory
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
The Austrian theory
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
What are monetary aggregates
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
