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zMacroeconomics > Notes 2 > Flashcards

Notes 2 Flashcards

1
Q

Unit labor cost

A

w x l

Y

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2
Q

Compensation =

A

labor cost per output + output per hour

3.7 = 1.5% + 2.2%

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3
Q

Productivity in Quarter 2

A

Productivity rose 2.2%

as output growth - 2.4%

exceeded hours worked growth - 0.2%

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4
Q

It is becoming __________ to get additional output from current workers

A

more difficult

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5
Q

With aggregate demand still rising, firms will have to ___________ hiring in 2012

A

increase

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6
Q

Hourly compensation

Real Hourly compensation

A

Hourly compensation - rose 3.7%

real hourly compensation - rose 1.7%

*inflation 2.0%

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7
Q

Growth in ______________ remain weak, giving firms incentive to hire

A

unit labor costs

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8
Q

Labor?

A

Labor is relatively inexpensive, leading to higher profits

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9
Q

Since labor is relatively inexpensive

A

Allows for additional capital for expansion plans to offset tighter credit conditions

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10
Q

wages =

A

wages = Lcost/unit + output per hour

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11
Q

2nd quarter 2012 wages

A

2.17% = 0.93% + 1.24%

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12
Q

Increase productivity —–>

A

increase profits

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13
Q

Price rising ——–> increase profits

A
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14
Q

Single family housing starts =

A

535,000

5.5% m/m

29% y/y

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15
Q

Single family permits =

A

512,000

0.2% m/m

25% y/y

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16
Q

Upward momentum is building for ______________

A

residential construction

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17
Q

Residential construction should add _______________

A

0.33% to 2012 GDP growth

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18
Q

Residential Construction Factors:

A

Large inventory of foreclosed homes

homebuilders are more confident home sales on an upward trajectory

low level “dearth”, new home inventory

rising jobs, income, and confidence

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19
Q

Proxy for new housing demand

“measure”

A

Growth in construction < Growth in households

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20
Q

S (savings) =

A

= Sprivate + Spublic

= Y (output) - C (consumers) - G (government)

= Investment

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21
Q

Value of total savings must equal ___________________

A

value of total investment

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22
Q

In U.S., we have an extremely ______ savings rate

A

low

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23
Q

Slonable funds

A

Households willingness to save

Government surplus

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24
Q

Dlonable funds

A

Profitable investment opportunities

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25
Q

∆technology => increase profitability => increase demand for lonable funds => increase LF exchanged and rate=> increase capital stock

A
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26
Q

Where does purchasing managers index want to be?

A

over 50

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27
Q

Purchasing Managers Index

A

Measures nationwide goods producing business activity

Survey of Business Activity asks:

  1. increase
  2. decrease
  3. or no change in inventories
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28
Q

Diffusion Index

A

% reporting increasing + 1/2% reporting no change

> 50 expansion

< 50 contraction

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29
Q

Current PMI (purchasing managers index)

A

51.5

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30
Q

What is the current PMI signaling?

A

Manufacturing is weak but seems to be stabilizing

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31
Q

Manufacturing is weak but stabilizing:

A

uncertain fiscal policy and global economic growth will weigh on manufacturers

weak foreign demand

New orders are expanding (52.3) => leading indicator

Inventories are rising slightly (50.5)

Production was slightly contracting (49.5)

employment was up (54.7)

prices paid were up (58.0)

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32
Q

New orders are expanding

A

52.3 - leading indicator

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33
Q

Inventories are rising slightly

A

50.5

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34
Q

Production was slightly contracting

A

49.5

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35
Q

Employment was up

A

54.7

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36
Q

Prices paid were up

A

58.0

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37
Q

Leading indicators: Two “gaps” are proxies of future production

A
  1. New orders - Inventories = 1.8 (good omen for future production)
  2. Production - New Orders = -2.8 (foreshadows stronger output)
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38
Q

Business have strongly balance sheets and high profits

A

Record high “quick ratio” = liquid assets (mostly cash) relative to short term liabilities

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39
Q

Say’s law:

A

supply creates its own demand

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40
Q

Keynes on why GDP fluctuate in short run

A

aggregate expenditures (demand) determine supply

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41
Q

Budget constraint: Income + ∆debt =

A

taxes + interest debt + consumption + savings

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42
Q

future income =

A

∆debt

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43
Q

20 year average monthly change =

in credit

A

$6.7 billion

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44
Q

August monthly change =

in credit

A

$18 billion

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45
Q

20 year average Y-O-Y growth rate =

in credit

A

7.7%

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46
Q

August Y-O-Y growth rate =

in credit

A

5.5%

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47
Q

Surging credit due to:

A

rising non-revolving credit (financing for big ticket items)

rising auto loan and government backed student loans

increase debt => increase spending => ∆Y/Y

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48
Q

Supply side of credit

A

better access to credit to release pent-up demand

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49
Q

Demand side of credit

A

better labor market => improving financial positions (ability) => rising consumer confidence (willingness) => credit financed consumption

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50
Q

Full capacity utilization =

A

82-84%

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51
Q

at Y potential

A

Unemployment rate = 5%

Capacity utilization = 82-84%

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52
Q

U.R > U.R natural =>

A

Y < Ypotential

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53
Q

In long run, Ypotential =

A

f( # workers

K stock

technology

*not Price Level

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54
Q

Ypot =

A

f( - normal production capacity - full employment)

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55
Q

2 simplifying assumptions of static model

A

no inflation

no change in long-run aggregate supply

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56
Q

Gross debt 2012 =

A

$16 trillion

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57
Q

Nominal GDP 2012 =

A

$16 trillion

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58
Q

Debt-to-GDP 2012 =

A

103%

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59
Q

More important about debt?

A

debt relative to economy

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60
Q

Fed. Reserve holds

A

$1.9 trillion

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61
Q

SS trust bonds / treasury bill =>

A

$2.9 trillion

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62
Q

Public debt 2012 =

A

$11.2 trillion

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63
Q

Public debt to GDP 2012:

A

72.5%

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64
Q

Rogoff/Reinhart public debt to GDP limit

A

90% limit for public debt to GDP

  • would slow GDP growth by 1%

from 3% to 2%

65
Q

Is our D/Y a problem?

A

default risk => no

purpose of debt: consumption or investment

Large iD (int. x Debt) => increase Taxes or decrease Government spending

High D/Y => increase int. rates => decrease inventory => decrease Y/L =>decrease ∆Y/Y

66
Q

Analogy Test:

A

essential similarities > essential differences

67
Q

2009 things

A

decrease in optimism

decrease in wealth

increase in exchange rate

decrease Yrow

68
Q

Housing Demand drops

A

decrease Investment residential

shift left AD

69
Q

Price homes fall, price stocks flat

A

Wealth decreases

shift AD left

70
Q

Price of oil increases =. input price increases

A

shift AS to left

shift AD to left

71
Q

Decrease Consumer/business confidence

A

decrease Consumption and investment

shift AD left

72
Q

Dollar falls =>

A

increase exports, decrease M

shift AD right

73
Q

Foreign economies grow 5%

A

increase exports

shift AD right

74
Q

Discretionary macro policy response to 2007

A

Fed Reserve decrease interest rates to move AD right

doesnt work - prices rise

people dont spend because busy deleveraging

75
Q

Automatic Mechansim

A

fix itself in time - milton friedman

“long run it will work itself out”

76
Q

Discretionary Policy

A

Johy Maynard Keynes

long run we are all dead

77
Q

Self-adjusting model:

A

When S curve shifts to the left: wages are falling

  • drops morale and worker productivity

in theory:

  1. workers will accept lower wages
  2. lenders accept lower interest rates
  3. producers accept lower price of inputs
78
Q

Recession:

A

AD to the left; AS to the left

or

Y potential decreases

Price is low relative to production costs

79
Q

Expansion:

A

AD to the right; AS to the right

Price is high relative to production costs

80
Q

Labor Costs are _____ of total

A

70%

81
Q

Unit labor cost ——->

A

measure of inflation (roughly)

82
Q

Equilibrium condition of new orders

A

new orders = shipments

83
Q

shipments/sales =

A

Production - ∆inventory

84
Q

During Recession:

A

New and Factory Orders plummeted and companies like Chyrsler and GM had to be bailed out of bankruptcy

85
Q

shipments =

A

coincident economic indicator——good measurement of how the current economy is doing

86
Q

New orders =

A

Leading indicator of future

87
Q

Unfilled orders =

A

leading indicator of future production

88
Q

Factory orders fell _____ in August

A

-5.2%

89
Q

Nondurable good orders rose _______

A

2.2% (not good indicator)

90
Q

Durable goods orders fell _______

A

-13.2%

91
Q

Core capital goods new orders

A

rose 1.1%

92
Q

business investment:

A

non defense capital goods, excluding aircraft

93
Q

Leading indicator of future hiring

A

Core capital goods

94
Q

Business investment spending

A

slowed preupitously in the 3rd quarter

95
Q

Above 50 Business Baromete Index

A

expansion

96
Q

Below 50 Business Barometer Index

A

contraction

97
Q

Business Barometer Index: survey of business activity asks

A

Increasing

Decreasing

or No change

98
Q

Business Barometer Index: assyne

A

increasing = 44.7%

No change = 10%

Decreasing + 45.3%

Index = 44.7 + 5 = 49.7

99
Q

Business Barometer Index in September

A

49.7 (contraction territory)

100
Q

Manufacturing in Midwest is _________________

A

contracting for the first time in 3 years

101
Q

Vehicle production is _______________

A

moderating - still growing but slowing down

102
Q

Rising uncertainty over (bbi):

A

Global Economy

Fiscal Cliff

103
Q

Slumping foreign demand for (bbi):

A

industrial equipment

104
Q

New orders (bbi):

A

47.4

leading indicator says a turnaround is not imminent, new orders falling

105
Q

Production (bbi) =

A

55.4

firms are keeping production in line with new orders

106
Q

Order backlog (bbi) =

A

41.6

signals weak production levels in future

107
Q

Employment (bbi) =

A

52.0

firms are hiring to ramp up production to meet demand

108
Q

Inventories (bbi) =

A

51.1

inventories are still rising

109
Q

Prices paid (bbi) =

A

63.2

building input price pressures with little “pricing power” - falling profits

110
Q

Pricing power

A

If you have this you can raise the price without losing business

111
Q

New orders - inventories (bbi)

A

-3.7

Negative gap is omen for weaker production

112
Q

New orders - Production (bbi)

A

-8

negative gap foreshadows weaker production

113
Q

Shipments

A

Production - change in inventories

114
Q

Production =

A

F(employment)

115
Q

Increase in expected future price level would _____________

A

shift supply curve to the left

116
Q

Closed Economy investment

A

Y - C - G

117
Q

A manufactuerer’s unfilled orders will be unchanged if during the month

A

New Orders = Shipments

118
Q

Investment in Closed Economy

A

Y - C - G

119
Q

What increases the equilibrium interest rate?

A

Increase in the budget deficit

120
Q

The demand for durable goods

A

declines by a greater percentage than does GDP during a recession

121
Q

The response of investment spending to an increase in the government budget deficit is called __________

A

crowding out

122
Q

What happens to unemployment as an economy begins to emerge from a recessionary phase of the business cycle

A

unemployment continues to rise

123
Q

What will raise consumer expenditures?

A

An increase in expected future income

124
Q

A decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would ________

A

shift demand curve out

125
Q

When a government runds a budget deficit, we expect ________________

A

investment will fall

126
Q

Financial intermediary’s main function:

A

match households with excess funds to firms who want to borrow funds

127
Q

An increase in the price level will

A

Move the economy up along a stationary short run aggregate supply curve

128
Q

The international trade effect states that:

A

An increase in the price level will lower net exports

129
Q

When price level in US rises to the price level of other countries

A

Imports will rise

exports will fall

net exports will fall

130
Q

National income =

A

Consumption + Savings + Taxes

131
Q

Labor Productivity

A

The quantity of output produced in one hour by one worker

132
Q

The 45-degree line shows points such that

A

Real aggregate expenditure equals real GDP

133
Q

Increase expectation in inflation results in:

A

shift the short run aggregate supply curve to the left

134
Q

Private savings

A

Y + Tr - C - T

135
Q

Countries with a strong rule of law:

A

have a faster economic growth

136
Q

Increase in aggregate demand causes:

A

Increase in real GDP in short run

Increase in price level in short run and long run

137
Q

Best Measure of the standard of living

A

real GDP per capita

138
Q

Potential GDP

A

The level of GDP attained when all firms are producing at capacity

139
Q

wL =

A

70% of total costs

140
Q

wage/salary costs (70%)

A

rose 1.7% y-o-y

141
Q

Benefit costs (30%)

A

rose 2.1% y-o-y

142
Q

Total Compensation rose

A

1.8%

.7 x 1.7% + .3 x 2.1%

143
Q

Employment Cost Index:

This will:

A
  1. Contain broader inflationary pressure
  2. Allow FED to maintain low interest rate policy
144
Q

Rising __________________

A

retirement and health benefits

145
Q

Firms are focusing on ___________________________

A

containing wage growth in an attempt to save costs and remain profitable

146
Q

Firms health insurance costs are ______________

A

slowing as they pass along benefit costs to employees

147
Q

_____________ will keep consumers’ spending under pressure

A

slow wage expansion

148
Q

_________________________ will limit wage gains going forward

A

Labor market slack and extended periods of weak job growth

149
Q

________________ will push wages and salries lower and slow benefit growth

A
150
Q

Deficit 2009 =

A

$1.4 trillion

151
Q

1993 Deficit reduction act

A

Increase Taxes

Cap growth of government spending

152
Q

Debt

A

sum of all deficits

153
Q

Deficit

A

G - T in given period

154
Q

If deficit to GDP = 3%

A

Debt

GDP

is constant

155
Q

If deficit to GDP < 3%

A

Debt

GDP

is falling

156
Q

When unemployment reaches _________, deficit to GDP rises above 3%, increasing Debt/GDP to 90%

A

6%

157
Q

AFDC example of

A

transfer payments

158
Q

___________ helps the US economy to be self correcting

A

The Federal Budget

zMacroeconomics (26 decks)

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