Macroeconomics
study of behavior including unemployment, Inflation, recession, and other economy wide phenomenons
Microeconomics
The study of individual decision making by firms and individuals
3 Main concerns of macro
Inflation
Unemployment
Output Growth
Recession
decline in economic activities
(2 Quarters of negative growth real GDP falls)
Booms
Increase or improvement in the inflation adjusted market value of goods and services produced by an economy over time (Fast Growth)
Aggregate Output
Total level of new production of goods and services from an economy
Output growth
Refers to an increase in aggregate output from the previous period
GDP
US the total value of all new goods and services produced within a country's borders in a given period
Who measures GDP
The Bureau of economic analysis
What does GDP not include
NOT: crime, pollution, income distribution, income from citizens living abroad
used goods stocks and bonds
What does GDP Include
total consumption of spending, businesses investments, government spending, net exports
What is double counting GDP and how is it prevented
To avoid double counting only include the value of final goods
(No intermediate goods)
What is the difference between nominal GDP and Real GDP
Real GDP Tracks the total value of goods and services calculating the quantity but using constant prices that are adjusted for inflation.
Nominal GDP does not account for inflation
(Real gdp: Constant, Nominal: Current)
Structural unemployment
caused by sectoral shifts, or changes in the structure of the economy
Frictional unemployment
Caused by day to day workings of labor market
cyclical unemployment
changes in unemployment caused by short-run variations in the economy, (such as economic booms or recessions)
What makes the natural rate of unemployment
Structural and frictional unemployment
How does high inflation hurt the economy
Shoe lether/Menu cost
Shoe- costs households incur to minimize cash holding during high inflation
Menu- costs that businesses face when trying to change prices
If inflation is higher/lower than expected then who benefits and who loses
If inflation is higher than Borrower Benefits
If it is lower than lender Benefits
CPI
consumer price index
Measure of overall costs of goods and services bought by a typical consumer
How is CPI calculated
Bureau of labor statistics
Cost of market basket in given year/cost of market basket in base year X100
What is the focus of supply side policies
Supply-side policies focus on improving the production capacity and efficiency of an economy. These policies are aimed at increasing the supply of goods and services by improving factors such as labor productivity, technology, infrastructure, and access to capital.
What are the characteristics of a consumption function
relationship between disposable income and consumer spending
What is the autonomous level of spending
C = A + b * Y
spending that does not depend on level of income
EX. food water shelter rent clothing
The marginal propensity to consume
change in consumption for ever $1 increase in aggregate income (Y)
Change in C/Change in Y
If aggregate output/income increased by 100, how does consumption increase
MPC .9, income went up by 100, 50 spent, 10 saved
What is the total income Equation
y = C + S + T
How do you find household savings
S = Y - C equals planned investment at the equilibrium in the macro goods and services market
What is the marginal Propensity to save and how do you find it
MPS = 1 - mpc
what is planned investment
amount of investment firms plan to undertake during a year
Why is it called planned
because it does not include unplanned inventory changes
What is planned aggregate expenditure
AE = C + I + G
When graphed with a total output on the horizontal axis what is the significance of a 45 degree line
Shows all points where aggregate expenditure and output are equal
If AE > Y, what is the unplanned change in inventories? How do firms respond?
Total spending is more than production, unplanned decrease in inventories, firms will increase production
If AE < Y, what is the unplanned change in inventories? How do firms respond?
total spending is less than production, unplanned increase in inventory, firms will decrease production
What is the equilibrium level of output
AE = Y
What is a leakage and an injection to spending stream?
Leakage = Household income not spent S + T
Injections= spending from anyone but households I + G
At the equilibrium level of output what is true about leakages and injections
S + T = I + G
When either the autonomous level of spending or planned investment changes, what is the change in the equilibrium output?
Change in Y=Change in ( A, I, G) * 1/1-mpc
what is the spending multiplier smaller in the real world vs our model
Fiscal Drag= when output increases, income increases, and households move up income brackets and the marginal tax increases maxing the size of the multiplier decrease
What is Fiscal policy and who sets it at the federal level
Budget policies that affect government spending and tax revenues. House of representatives, senate, and president set it at the fed level
What is disposable income
YD= Y - T
What is the intercept of planned aggregate expenditure? what is the slope?
Intercept = a -bt+ I + G
Slope = BY
what is a budget deficit or surplus
The federal deficit or surplus is either excess spending that must be borrowed or excess tax revenues for a fiscal year T-G
What is government debt?
Total accumulated debt owed by the government
What is the difference
government debt is the total accumulation of deficit and surplus
if the federal government is running a deficit/surplus, what happens to the federal debt?
If G>T the government is spending less than tax receipts and there is a surplus of T-G>0
What is the tax multiplier
The factor that a change in tax will make a change in GDP
Why is it smaller than the spending multipler
This is because the entire government spending goes towards increasing aggregate demand but only small portion of the increased disposable income is consumed
What are automatic stabilizer
Taxes and spending that are counter-cyclical to change in output
Cause deficits to increase during recessions and decrease during expansion
What are a cyclical deficit and a structural deficit
cyclical- the portion of the budget balance attribute to short run changes in economic conditions
Structural- A government budget that persists even when the economy is at full employment
What is the "full-employment" level of output
Output of the natural rate of unemployment
What role does the federal reserve serve
Regulate and monitor the private banking system
Manage money
What is the FOMC
Federal Open Market Committee
Who makes up the FOMC
12 members
7 Members of the board of governors of the federal reserve system - president of the federal reserve bank
What happens when the federal reserve purchase t-bills or sells t-bills
becomes open market operations creates money when buying T-bills, decreases money supply when selling T Bills
How does this purchase or sell affect the private banking system?
Decreases/Increases their reserves
How does expansion monetary policy increase output?
by increasing the money supply
How does contractionary monetary policy decrease output?
By decreasing the money Supply
How does expansionary Fiscal policy increase output?
Increasing the government spending or decrease in taxes
What is crowding out
Increased government spending leads to borrowing more which makes a decrease planned
What does aggregate demand show? why is AD downward sloping?
The relationship between output and price
An increase in the interest rates causes a decrease in planned investment
Explain Interest Rate Effect on Planned Investment, the Consumption Link to interest rates, and the Real Wealth Effect.
An increase in interest rate causes a decrease in planned investment and consumption, saving increases, and consumption rises when real wealth rises
what causes AD to shift and in which direction
aggregate demand shifts to the right as consumption, investment, government spending, and spending on exports
Shifts to the right
How does Monetary Policy and/or Fiscal Policy shift the AD curve?
an increase in money supply shifts the money supply to the right
An increase in government purchases or a cut in taxes shifts the curve to the right
why does the short run aggregate supply curve slope upwards
that means a decrease in the overall price level results in a lower quality of goods and services supplied and vice versa
if output prices rise and wages remain unchanged, what happens to firms profit maximizing out and vice versa?
SRAS slopes upward because of sticky wages
why is the SRAS curve flat on the left side and steep on the right side?
The SRAS curve slopes because sticky input prices and sticky output prices
what factors shift the SRAS curve? what factors shift the LRAS curve?
the cost of labor or wages and the cost of imported goods that we use as inputs for other products
LRAS when economy experiences an increase in growth and investments the long run aggregate supply curve also shifts to the right and vise versa
On the AD/AS graph, what does the P represent on the vertical axis?
P represents the price level,
What does Y represent on the horizontal Axis
for the AD/as graph
y = output
why is long run aggregate supply curve vertical
because in the long run an output that an economy can produce is not related to the price level
What is Potential GDP
refers to highest level of gross domestic product that can be sustained long term
What is the natural rate of unemployment
4.8%
What are the two components of the natural rate of unemployment
frictional and structural
How does monetary policy affect the AD/AS Graph
Monetary policy increases aggregate demand through expansionary tools
how does fiscal policy affect the AD/AS graph
an increase in government purchases or a cut in taxes shifts the aggregate demand curve to the right
How does the Keynesian model adjust to the long run?
focusing on short run adjustments risk overlooking long term causes of economic growth
Why are wages sticky
Slow response to change in: long term contracts imperfect information to firms, minimum wage, the social contracts that employers will not lower your wage
What does the Short-Run Phillips Curve show?
shows relationship between inflation and unemployment
What is represented on the vertical axis and horizontal axis of a Phillips Curve graph?How does the economy move from one point on the Phillips Curve to another?
Y - inflation
X- unemployment
Economy moves as inflation increases and unemployment decreases
What causes the Phillips curve to shift? Review the causes and results of shifts in the Short-Run Phillips curve. For instance, how does Demand Pull Inflation shift the Short-Run Phillips Curve?
Cost-Push Inflation?
Supply shock and inflation cause the PC to shift.
Demand pull increase in AD upward movement along PX
Unemployment rate decreases as inflation rises
Cost-push expected rate of inflation. will cause SRPC to decrease
Hows does the fed flight inflation? If the fed successfully lowers expected inflation how does the short run Phillips curve respond
Fed fight inflation by influencing interest rates, This will cause srpc to shift
what does LRPC show? why does it have a different that the short run phillips curve and what is the implication of that
RPC shows that there is no trade off between inflation and unemployment in the long run
employment and inflation can change
Nominal GDP
P Current X q Current
Real GDP
P Base X Q Current
Real GDP growth rate
End - beginning/Beginning X 100
Deflator
Nominal/Real X 100 pts.
Inflation
end - beginning/beginning X. 100%
Find Y, YD, C, S
AE= C + I + G
Yd = Y - T
S = Y - t - c
S + T = G + I
C
I
T
G
S
Y
YD or Y - T
Consumption
planned investment
taxes
gov purchases
savings
real output/income
disposable income