MACRO FINAL EXAM STUDY GUIDE NEED TO KNOW FORMULAS Consumption function formula o C a bY where b mpc slope of function change in consumption change in output where a part of consumption that doesn t matter about income What does mps stand for and what is the formula o mps 1 mpc where mpc slope o marginal propensity to save how much out of each extra dollar you will save Income equation o Y 1 b a I G NX What does mpc stand for and how do you find it o Marginal propensity to consume how much out of each extra dollar you spend o b slope of consumption function Government expenditure multiplier o Y G 1 1 mpc Compound growth formulas where PV n and FV equals o PV FV 1 i n o FV PV 1 i n o PV how much you put in today o n number of years o FV future value Nominal interest rate o i nom i real expected inflation o i nom I risk free risk premium Money supply formula o Ms 1 required reserve ratio Real GDP formula o real GDP nom GDP P 100 Unemployment rate formula o UR U LF where U of unemployed and LF labor force where U unemployed and E employed Labor force formula o LF U E XY o X Y What impact does an increase in Ms have in the SR o lowers i incr I agg D Y P What impact does an increase in Ms have in the LR o Increases price only MACRO FINAL EXAM STUDY GUIDE Components of aggregate demand o D C G I X M What is the wealth effect o W C D Y P Long run Phillips curve shows relationship between and and has a slope o Unemployment inflation negative What happens to demand when government implements budget cuts o D and Y P bc G Difference between gross and net investment Find real GDP when price deflator 200 and nominal GDP 2000 o Depreciation o Real GDP 1000 o Output Increasing real GDP means an increase in Increasing nominal GDP means increasing o Price or output or both If demand production o People have to sell from inventories so output and inventories If demand production o Need to cut back on production so output and inventories Only money can be universally accepted as o a medium of exchange When Fed buys existing bonds o Ms Shorting stocks means o You gain when stocks fall Monetary policy increases so o Ms i I D Y P Possible reasons to buy stock o Dividends o Capital gains o Voting rights o High return o High risk o NONE G D Y P Fiscal policy is so when G o Government spending o G D Y P Increasing savings in the SR would o D Y Increasing government expenditures must increase taxes money supply interest rates inflation none When there is a decrease in the number of workers productivity must increase decrease MACRO FINAL EXAM STUDY GUIDE When consumption falls what happens to output and prices o Y P US Growth rates real GDP per year real GDP per capita o GDP per year 3 o GDP per capita 2 how well the economy is really doing Productivity is o Output per worker Output increases if and increase o Productivity and labor by more o Increase Economic growth means o Producing more resources supplies for everyone o Determines how well you will live Downsides to economic growth o Forgone consumption shifted to investment o Income inequality rich get richer poor stay the same o Uses up natural resources possible resource depletion o Possible loss in quality of life What is compound growth o Growth on growth What is compound interest o Interest on interest In the LR the supply curve shifts right over time due to an increase in o Increases in labor capital technology etc Benefits of economic growth o Increases output income wealth o Improves quality of life o Basis to solving environmental problems income inequality poverty In SR consumption so I and in the LR we can o I o We can consume more and the economy will grow When vertical scales are logarithmic slopes o Growth rates Asian Tiger countries were able to o Grow their economies rapidly to catch up to the US Increasing productivity in the LR growth per capita GDP o Increases growth per capita GDP Increasing growth in real GDP per capita productivity o Increases MACRO FINAL EXAM STUDY GUIDE Consequences of inflation o Distortion of the signaling function of relative prices unanticipated Reduces the value of money Increases uncertainty about the future Lenders lose money to borrowers redistribution of income wealth from L to B o Inefficient money holding shoe leather costs anticipated o Harms those on a fixed income o Need to frequently re price menu costs anticipated o Tax distortion taxed on nominal income When inventories are down that is good or bad o Good because it indicates sales and that means demand Correlation between movements in stock and the overall market conditions are called o Beta measure of market risk Human capital is o Stock of skills Three things that increase productivity o Human capital better technology more education What is NOT the best way for American workers to compete with lower wage workers abroad o Cutting wages Luddites are Real wages depend on o Productivity o People who fear technology because they think it will hurt their jobs they think machines will take away their jobs put them out of work Why do we discount present value to find future value o Because of interest NOT inflation What is the classical growth theory o The economy rends to full employment so leave it alone Why should we short sell What is the process of short selling o Because you gain if the stock price falls Borrow shares from broker and buy back at a cheaper price What is buying stock on margin What are investment banks o Leverage using borrowed money to magnify returns increase percent returns o Financial entity involved in issuance of new securities primary markets and financial consulting for mergers acquisitions etc What are venture capitalists o Partnership that provides capital and advice to new firms in return for stock ownership they profit if and when the company goes public What is FINRA o Regulates NY Stock Exchange type of self regulatory organization MACRO FINAL EXAM STUDY GUIDE Why is diversification good o By putting funds in a number of different investments you can continue to average a high yield while reducing the risk o Reduces individual risk but there is still systematic risk What does it mean to be unemployed o No job currently but you re available to work and actively seeking In the consumption function what happens to income when consumption o Income What is a mutual fund o An investment company that pools together money and buys financial assets What policy ies should be used when there is cyclical unemployment o Use