Midterm 2 Flashcards
Labor force size =
number employed + number unemployed only
unemployment
Number unemployed / Labor force * 100
labor force participation
labor force / adult population * 100
difference between frictional and structural unemployment
frictional occurs because you’re actively looking or swapping jobs structural occurs because of the absence of demand of a certain type of worker from outsourcing or tech
natural unemployment =
frictional + structural unemployment
how do you calculate gdp deflator
gdp deflator = nominal gdp / real gdp * 100
CPI =
price this year / price base year
how to calculate inflation from previous year
cost year - cost prev / cost prev * 100
What’s the rule of 70
takes 70/growth rate years to double RGDP
change in GDP
= Technology + 1/3 delta K / k (qty capital) + 2/3 delta L / L (labor)
What is most important to growth
institutions, then technology once established
AE =
C + I + G + X - IM where I is planned investment
Planned investment =
actual change in investment - unplanned change
When change in AE < GDP
inventories rise and employment falls
When change in AE > GDP
Inventories fall and employment rises
Consumption =
a + MPC (Y-T)
MPC =
change in consumption /change in income
What’s on the AE model
national income on x axis, AE on y axis keynsian cross for 1:1 Y = AE
Unplanned investment =
Y (AS) - AE
Fiscal policy uses
G, T
delta AE = 1/1-MPC * delta G
delta AE = -MPC/1-MPC * delta T
Monetary policy uses
monetary supply
delta AE = 1/1-MPC * delta I
What’s the weath effect
consumption increases lower prices, nominal assets have more purchasing power
Interest rate effect
lower prices, less money to buy stuff -> more money in bank so more loanable funds and more investment demand
When is SRAS shifted
shifts with costs of production, right if wages fall or productivity rises or commodities fall
Stagflation occurs when … a recession occurs when…
AS shifts left, AD shifts left
Discretionary fiscal policy
deliberate changes in G T or Tr
Automatic stabilizers
Government spending and taxes that auto increase and decrease with a business cycle
Okun’s law
1% rise in unemployment for each 2% fall in GDP
US govt borrows by
selling bonds
Fischer equation
contracted nominal interest rate ≈ real interest rate + expected inflation rate.
M1 =
currency in cirulation + checking accounts
M2 =
M1 + time deposits (interest saving accounts)
delta money supply =
1/rr * delta money bonds
Two problems of monetary system
Liquidity problems -> not enough cash to meet withdrawals, FDIC insured, solvency (net worth < 0)
Federal reserve toosl
Increase money supply by buying bonds
Decrease by selling bonds
Reserver ratio
Discount Rate
In the long run, on the money chart,
MD eventually shifts to the new interest rate if MS move, changes in MS affect price level but not real GDP or real interest rate
Expansionary monetary policy
has the money supply increased, interest rate decreased, consumption increased, and with it AD
Contractionary monetary policy has the
AD decreased since interest rate is increased after the money supply is decreased
Contractionary monetary policy has the
AD decreased since interest rate is increased after the money supply is decreased
when velocity is constant
money growth = real gdp growth + inflation
Velocity equation
MV = PY where M = M1, P = price level, Y = real GDP
