Topics in Macro applied to AM (1)

Question 1

What defines a recession?

Answer 1

• Two consecutive negative quarters of GDP growth
• US: negative growth in employment

Question 2

How do you calculate GDP? And why are imports subrtacted?

Answer 2

Formula: GDP = C + I + G + (X - M)

C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports

Imports are subtracted because we want to measure goods domestically produced.

Question 3

What are the leading sectors of GDP?

Answer 3

Construction, manufacturing (durable good ), services (lagged contribution ex hairdresser)

Question 4

What are durable and non-durable goods?

Answer 4

Durable = duration of usage more than a year

Question 5

What is a business cycle leading indicator?

Answer 5

It’s a measurable economic factor that changes before the economy starts to follow a particular pattern or trend.

Question 6

How is GDP potential growth estimated?

Answer 6

It’s estimated using models that account for labor, productivity, and capital inputs in the economy.

Question 7

What does an output gap indicate?

Answer 7

An output gap measures the difference between the actual economic output and the potential output at full capacity.

Question 8

Why is understanding the residential and equipment investment cycles important?

Answer 8

These cycles can indicate the future state of the economy, with residential investment often leading GDP growth and equipment investment lagging.

Question 9

How can inflation leading indicators be used?

Answer 9

They can be used to anticipate inflation trends and make informed decisions about monetary policy and investment.

Question 10

What is the significance of the inflation mechanism in macroeconomics?

Answer 10

It explains how inflation is transmitted throughout the economy, affecting prices, wages, and purchasing power.

Question 11

What factors are considered in long-term GDP growth modeling?

Answer 11

Factors such as demographic trends, technological advancements, and capital accumulation are considered.

Question 12

What is PMI?

Answer 12

Purchasing Managing Index = Monthly survey among managers of companies who buy different inputs to asses if an industry will grow/decline

Question 13

How can you intepret numbers of leading GDP growth indicators?

Answer 13

Look at total number to see if it is an increase or decrease, then you can see in the breakdown what drove that increase /decrease ( no real number to say indication you look at history and how the data changes)

Question 14

What does it mean it the leading indicators for GDP are negative?

Answer 14

Declining over months could mean that we have slowing or deterriorating momentum and further evidence for recession.

Question 15

Why is demand driven inflatoin easier to tackle for central banks than supply driven?

Answer 15

Demand driven inflation stems from employment growth, wages increasing which means that the economy is running hot. This can be managed by the central banks applying fiscal and monitary policies that cool down the economy

Question 16

Why is it difficult to manage driven inflation with monetary policies?

Answer 16

Supply driven inflation is the result of a cost-push shock which can be conatined by making big moves in the interest rates for a long period of time. This results in recession so the central banks have to make a trade-off between recession and having a high inflation for a longer period of time.

Question 17

What is a cost-push shock to inflation?

Answer 17

It is an increase in inflation driven by and increase in production costs.

Question 18

What is neutrality of money and how is it defined?

Answer 18

MV = PY

M = Money supply
V = Money velocity (rate of exchange)
P = Price level of goods and services
Y = Real output (real gdp)

Growth rate of money = growth rate of price level

In long run, changes in money supply only affect prices and have no real impact on the quantity of goods and services produced (Y)

Question 19

Who are the agents controlling fiscal and monetary policy?

Answer 19

Fiscal policy is controlled by government and monetary policy by the central bank

Question 20

What type of indicators do you need for inflation to have a complete picture?

Answer 20

Demand, Supply (Labour and International factors)