Midterm #2 Flashcards
Section
Details
Unit II: Income Inequality
Macroeconomics Comprehensive Study Guide
Lorenz Curves
Lorenz Curve: A graphical representation of income inequality. Gini Coefficient: A measure of inequality (0 = perfect equality, 1 = perfect inequality). Quintiles divide the population into five equal groups by income.
Empirical Evidence: Income Inequality
Gini Coefficients (OECD countries, mid-2000s): U.S. Gini coefficient rose from 0.338 (1980s) to 0.381 (2000s). Income gap has widened between quintiles in recent decades.
Economic Explanations for Income Inequality
Globalization and Skill-Biased Technological Change favor high-skill workers. The ‘superstar effect,’ immigration, and weaker unions also contribute.
Policy Implications
Solutions: Early childhood education, improved high school quality, and financial aid for higher education.
Unit VI: U.S. Tax System
Overview of Federal and State Revenue Sources
Financial Overview of U.S. Government
Federal Revenue (2018): Income taxes - $1,684B (51%), Payroll - $1,171B (35%), Corporate - $205B (6%). State/Local (2016): Sales - $550B (35%), Property - $466B (30%).
Tax Rates
Average Tax Rate (ATR) = T/I. Marginal Tax Rate (MTR) = ΔT/ΔI. For salary $50K, ATR = 13.2%, MTR = 22%.
Taxes and Equity
Benefits Principle: Pay taxes based on benefits received (e.g., gas tax). Ability-to-Pay Principle: Higher earners pay more.
Types of Tax Systems
Progressive: Higher income pays more % of income. Regressive: Lower income pays more %.
U.S. Debt Ceiling
Debt ceiling limits how much the U.S. can borrow. When reached, payments may be prioritized or borrowing halted.
Unit III: Monetary System
Overview of the U.S. Monetary System
Functions of Money
Money as Medium of Exchange, Unit of Account, Store of Value. Fiat (USD) vs. Commodity Money (e.g., gold).
Money Supply (M0, M1, M2)
M1: Currency + demand deposits. M2: M1 + savings deposits.
Money Multiplier
Money Multiplier (MM) = 1/R. Example: If R = 10%, MM = 10. ΔTot Dep = Original Deposit × MM.
Federal Reserve System
Main tools: Open Market Operations, Discount Rate, Reserve Requirements, Quantitative Easing (QE).
Unit III: Money Growth and Inflation
Overview of Money Growth and Inflation
Classical Theory of Inflation
Inflation (π) = % ΔP. Quantity Theory: M × V = P × Y. Inflation results from increased money supply.
Fisher Effect
Fisher Equation: i = r + π. Where i = nominal, r = real, π = inflation rate.
Costs of Inflation
Inflation Tax reduces purchasing power. Shoeleather, Menu Costs, Relative Price Variability, and Tax Distortions from inflation.
Unit IV: Open Economy
Open Economy Basics
Exchange Rates
Nominal Rate (e): Currency exchange rate. Real Rate (E): Goods/services exchange rate. E = (e × P_domestic) / P_foreign.
Net Exports (NX) and Net Capital Outflow (NCO)
NX = NCO: Trade balance connects with capital flow. U.S. residents buying German bonds increases NCO.
Savings (S), Investment (I), and NCO
National Income Accounting: S = I + NCO. Savings used for domestic investment or foreign assets.
Market for Loanable Funds (LF)
Loanable Funds Market Supply: Savings. Demand: Investment and NCO. Equilibrium real interest rate (r) balances them.
Unit IV: Open Economy – Foreign Exchange and Capital Flow
FX and Capital Flow in Open Economy
Foreign-Currency Exchange Market (FX)
If a U.S. resident buys German bonds, they supply USD in FX market. High E = expensive U.S. goods, reducing exports (X).
Government Budget Deficits and Capital Flight
Deficits increase r, reduce private I, and appreciate USD, decreasing NX. Capital flight increases NCO, depreciates E, increases NX.
Three-Panel Diagram for Macroeconomics: Open Economy
Three-panel Diagram: Loanable Funds (LF), Net Capital Outflow (NCO), and Foreign Exchange (FX) markets.
Loanable Funds (LF) Market
Axes: Real Interest Rate (r) and Quantity of Loanable Funds (Q_LF). Budget deficits decrease savings, raise r, reduce Q_LF.
Net Capital Outflow (NCO) Market
Axes: Real Interest Rate (r) and Net Capital Outflow (NCO). High r attracts foreign capital, reducing NCO.
Foreign Exchange (FX) Market
Axes: Exchange Rate (E) and Quantity of Dollars (Q_USD). Low NCO decreases USD in FX, raises E, reduces exports.
