MACRO FINAL EXAM 203 Flashcards


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1

Macroeconomics

study of behavior including unemployment, Inflation, recession, and other economy wide phenomenons

2

Microeconomics

The study of individual decision making by firms and individuals

3

3 Main concerns of macro

Inflation

Unemployment

Output Growth

4

Recession

decline in economic activities

(2 Quarters of negative growth real GDP falls)

5

Booms

Increase or improvement in the inflation adjusted market value of goods and services produced by an economy over time (Fast Growth)

6

Aggregate Output

Total level of new production of goods and services from an economy

7

Output growth

Refers to an increase in aggregate output from the previous period

8

GDP

US the total value of all new goods and services produced within a country's borders in a given period

9

Who measures GDP

The Bureau of economic analysis

10

What does GDP not include

NOT: crime, pollution, income distribution, income from citizens living abroad

used goods stocks and bonds

11

What does GDP Include

total consumption of spending, businesses investments, government spending, net exports

12

What is double counting GDP and how is it prevented

To avoid double counting only include the value of final goods

(No intermediate goods)

13

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)

14

Structural unemployment

caused by sectoral shifts, or changes in the structure of the economy

15

Frictional unemployment

Caused by day to day workings of labor market

16

cyclical unemployment

changes in unemployment caused by short-run variations in the economy, (such as economic booms or recessions)

17

What makes the natural rate of unemployment

Structural and frictional unemployment

18

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

19

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

20

CPI

consumer price index

Measure of overall costs of goods and services bought by a typical consumer

21

How is CPI calculated

Bureau of labor statistics

Cost of market basket in given year/cost of market basket in base year X100

22

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.

23

What are the characteristics of a consumption function

relationship between disposable income and consumer spending

24

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

25

The marginal propensity to consume

change in consumption for ever $1 increase in aggregate income (Y)

Change in C/Change in Y

26

If aggregate output/income increased by 100, how does consumption increase

MPC .9, income went up by 100, 50 spent, 10 saved

27

What is the total income Equation

y = C + S + T

28

How do you find household savings

S = Y - C equals planned investment at the equilibrium in the macro goods and services market

29

What is the marginal Propensity to save and how do you find it

MPS = 1 - mpc

30

what is planned investment

amount of investment firms plan to undertake during a year

31

Why is it called planned

because it does not include unplanned inventory changes

32

What is planned aggregate expenditure

AE = C + I + G

33

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

34

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

35

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

36

What is the equilibrium level of output

AE = Y

37

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

38

At the equilibrium level of output what is true about leakages and injections

S + T = I + G

39

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

40

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

41

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

42

What is disposable income

YD= Y - T

43

What is the intercept of planned aggregate expenditure? what is the slope?

Intercept = a -bt+ I + G

Slope = BY

44

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

45

What is government debt?

Total accumulated debt owed by the government

46

What is the difference

government debt is the total accumulation of deficit and surplus

47

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

48

What is the tax multiplier

The factor that a change in tax will make a change in GDP

49

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

50

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

51

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

52

What is the "full-employment" level of output

Output of the natural rate of unemployment

53

What role does the federal reserve serve

Regulate and monitor the private banking system

Manage money

54

What is the FOMC

Federal Open Market Committee

55

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

56

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

57

How does this purchase or sell affect the private banking system?

Decreases/Increases their reserves

58

How does expansion monetary policy increase output?

by increasing the money supply

59

How does contractionary monetary policy decrease output?

By decreasing the money Supply

60

How does expansionary Fiscal policy increase output?

Increasing the government spending or decrease in taxes

61

What is crowding out

Increased government spending leads to borrowing more which makes a decrease planned

62

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

63

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

64

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

65

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

66

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

67

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

68

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

69

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

70

On the AD/AS graph, what does the P represent on the vertical axis?

P represents the price level,

71

What does Y represent on the horizontal Axis

for the AD/as graph

y = output

72

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

73

What is Potential GDP

refers to highest level of gross domestic product that can be sustained long term

74

What is the natural rate of unemployment

4.8%

75

What are the two components of the natural rate of unemployment

frictional and structural

76

How does monetary policy affect the AD/AS Graph

Monetary policy increases aggregate demand through expansionary tools

77

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

78

How does the Keynesian model adjust to the long run?

focusing on short run adjustments risk overlooking long term causes of economic growth

79

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

80

What does the Short-Run Phillips Curve show?

shows relationship between inflation and unemployment

81

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

82

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

83

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

84

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

85

Nominal GDP

P Current X q Current

86

Real GDP

P Base X Q Current

87

Real GDP growth rate

End - beginning/Beginning X 100

88

Deflator

Nominal/Real X 100 pts.

89

Inflation

end - beginning/beginning X. 100%

90

Find Y, YD, C, S

AE= C + I + G

Yd = Y - T

S = Y - t - c

S + T = G + I

91

C
I
T
G
S
Y

YD or Y - T

Consumption

planned investment

taxes

gov purchases

savings

real output/income

disposable income