85 Cards in this Set
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Macroeconomics
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The branch of economics that studies the economy as a whole.
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Gross Domestic Product (GDP)
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Value of all new production in a nation (or religion) in a given period of time.
-Most common measure of production.
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Potential GDP (yF)
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Highest amount of production that an economy can achieve and sustain.
-Based on amount of available resources
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Actual GDP (y)
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Actual amount of production.
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Recession
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Actual GDP falls for two consecutive quarters or more.
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Depression
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Prolonged, deep decline in GDP (Great Depression)
-GDP is a gauge of economic well-being of a nation, but not necessarily individual well-being.
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Unemployment Rate
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Percentage of the labor force that's unemployed.
-Excluded in the unemployment rate (discouraged workers &involuntary underemployed)
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Labor Force
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All persons, 16 years or older, that are employed or actively seeking employment.
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Consequences of Higher Unemployment
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1. Wages-Stagnant
2. Crime Rates Rise
3. Health Problems Rise
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1. Frictional Unemployment
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Enough jobs, but haven't found job yet. Happens because job search takes time.
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2. Structural Unemployment
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Enough jobs, a mismatch between skills & jobs. Happens because economy grows/changes.
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3. Demand-Deficient Unemployment
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Not enough jobs, for all actively seeking employment (unhealthy economy).
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Natural Rate of Unemployment
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Sum of the frictional & structural rates.
-If economy is at full employment, the unemployment rate equals the natural rate (cannot be 0%)
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Price Level (p)
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An aggregate measure of prices in the economy.
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Inflation
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The price level rises (prices don't necessarily increase)
-Purchasing power money falls.
-Shows economy is growing/moving.
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Deflation
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The price level falls
-Purchasing power of money rises
-Shrinking/weakening economy
-You can buy more~lack of demand in economy
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Nominal Value
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A value measured in current dollars
-Doesn't account for changes overtime
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Real Value
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A value measured in constant dollars overtime
-Accounts for changes overtime.
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Consumer Price Index (CPI)
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Measures price changes of goods the typical household buys--most widely used measure of inflation.
-Govn't calculates CPI by identifying a "basket of goods" typical household buys
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Real GDP (y)
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The value of goods and services produced by the economy in a given period of time.
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Price Lever (p)
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An overall measure of prices of goods and services in the economy.
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Aggregate Demand (AD)
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Relationship between p & y demanded
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Aggregate Supply (AS)
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Relationship between price lever (p) & real GDP (y) supplied or produced in an economy
-Determines current condition in the economy-price level (p) and Real GDP (y).
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Great Depression
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1929-1939
-AD decreased
-Real GDP (y) decreased
-Unemployment increased
-Price Lever (p) decreased (deflation)
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World War II
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1941-1945
-AD increased
-Real GDP (y) increased
-Unemployment decreased
-Price Lever (p) increased (prices were kept the same, caused shortages)
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OPEC Oil Embargo
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1970s (Poil increased)
-AS decreased
-Real GDP (y) decreased
-Unemployment increased
-Price Lever (p) increased (inflation)
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Aggregate Expenditure (AE)
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Total planned spending by four sectors of economy: households, firms, government & foreign sector.
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Components of Aggregate Expenditure
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AE=C+I+G-T+X-M
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Consumption (C)
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Total expenditures by households on goods and services.
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Investment (I)
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Total expenditures by businesses on capital equipment and new inventories. Also includes household purchases of new housing (factories, computers).
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Government Spending (G)
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Total government expenditures.
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Net Government Taxation (T)
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Total tax revenue collected by government minus transfer payments.
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Exports (X)
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Total expenditures by foreign sector on domestic production.
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Imports (M)
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Total expenditures that domestic sectors spend on production of other nations.
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Net Government Budget Position
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The combined effect of G &T
-Budget deficit: G>T
-Balanced budget: G=T
-Budget surplus: G<T
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Trade Balance (X-M)
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The combined effect of X and M
-Trade deficit: X<M
-Balanced trade: G=T
-Trade surplus: X>M
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Long Run
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Micro markets in the economy have fully adjusted; the economy has reached full GDP (yF)
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Long-Run Aggregate Supply (LAS)
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Vertical line at yF
-Postion depends on economy's resource base & is independent of p.
-LAS shifts if resource base changes
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Short Run
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Markets in the economy have not fully adjusted.
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Short-Run Aggregate Supply (AS)
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Relationship between amount of the actual y supplied and p
-Shape of AS is due to the effect of production on prices in the economy.
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Long Term Financial Capital Market
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Market for borrowing funds for I
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Financial Intermediaries
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Banks and financial institutions that facilitate the exchange of financial capital.
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Interest Rate (r)
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The price of financial capital.
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Attitudes of Lenders
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Want to charge more or less r for any quantity of financial capital.
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Length of Loan
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Difference between short-term and long-term loans, waiting premium and inflationary expectation premium.
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Entry/Exit of Funds
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More/less capital at any interest rate. Sources of new funds: Domestic wealth changes.
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International Capital Flows
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Flow of funds between international capital markets.
Causes: Political/economic instability; interest rate fluctuations.
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Supply of Financial Capital Shifts
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1. Attitudes of lenders change: Changes in perception of default risk, short-term capitals, and waiting premiums.
2. Entry or Exit of Funds: Changes in domestic wealth, international capital flows.
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Business Confidence
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Expectations about future profitability
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Budget Deficit
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Occurs when government spending exceeds tax revenue.
(G-T>0)
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Budget Surplus
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Occurs when tax revenue is greater than government spending
(G-T<0)
-Smaller deficits: AD shifts left.
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Causes Nx=(X-M)
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1. World Income (GDP)-Yw
2. U.S. Income (GDP)-Yus
3. Trade Barriers (Improve net spending)
4. Currency Exchange Rates (e)
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Exchange Rate (e)
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(e) The amount of foreign currency that must be exchanged for one U.S. dollar.
-Determines the "value of the dollar"
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Conversion Ratio
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Finds the price of domestic and foreign goods in foreign country.
-$ Strengthens, € Weakens, X and U.S. NX declines as M increases
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Foreign Exchange Market
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Determines the value of a currency.
-If the exchange rate is allowed to adjust freely, exchange market will reach equilibrium.
-If $ is the commodity: S $ represents attitudes for trading $ & D $ represents attitudes for buying $
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Euro as Commodity
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Price of a euro measured in dollars (# of $ to 1 €)
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Dollar as Commodity
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Price of a dollar measured in euros. (# of € to $1)
-When exchanging € for $, S€ shifts right & D$ shifts right
-€ depreciates against the $
-$ strengthens, X & (X-M) decreases, and M increases
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Reasons for Currency Exchange
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-Travel
-Buying imports/selling exports
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Macroeconomic Shocks
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Sudden events that occur and take the economy off course.
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Demand Shift
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-Aggregate demand shocks--AD shifts (housing/Subprime Mortgage Crisis)
-AD goes down, y decreases, unemployment increases, P decreases (deflation)
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Supply Shift
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-Aggregate supply shocks--AS shifts (sudden rise in the price of oil)
-AS goes up, y decreases, unemployment increases, P increases (inflation)
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Non-interventionists
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Government policy is unnecessary, economy will self correct.
-Say "government intervention is unnecessary"
-Show Self-correcting potential of the economy when the economy is experiencing
-Believes it could distort the trade balance, lead to inflation, and crowd out investment
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Interventionists
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Government should use policy tools to speed along the recovery.
-Long run: "It takes some time for it to happen; wages, prices 'sticky"
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Macroeconomic Response on Unemployment
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-Unemp. exists when Y is less than YF
-There's an excess supply in the labor market
-Adjustments in labor market will occur and economy returns to YF
Y ↑, P ↓
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Macroeconomic Response to Inflationary Response
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-Occurs when resources are used beyond a point of sustainability
-Excess demand in the labor market
-Adjustments in labor market occur and economy achieves a stable P
y ↓, unemployment ↓, P level stable
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Macro Problems: AD Shock/AD Shifts
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1. Low inflation with high unemployment
2. Low unemployment with high inflation
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Phillips Curve
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Represents the trade-off between unemployment and inflation; implies government faces a policy trade-off
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Wage-Price Spiral
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A situation in which rising prices push workers to demand higher wages. In turn higher wages push up production costs, driving up prices, which leads back to higher wage demands, etc.
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Stagflation
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A situation in which both inflation and unemployment occur simultaneously in the economy
-Efforts to reduce inflation offset by rising oil prices & higher wages
-Efforts to reduce inflation offset by rising oil prices & higher wages
P ↑, W↑
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Monetary Policy
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Actions taken by a central bank to influence interest rates and spending in the economy
-Goals are economic growth, low unemployment, and a stable price level
-U.S. Central Bank-Federal Reserve
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Fractional Reserve System
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Banks hold fraction of deposit and lend rest
-Downside: if system is unmonitored, an incentive to hold too few reserves
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Fed Influences bank reserves through policy tools
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-Reserve Requirements
-Open Market Operations (main)
-Discount Window
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Reserve Requirements (RR)
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The minimum reserves banks must hold of a deposit (ex.10%)
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Excess Reserves
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Reserves above RR
-Changes in RR can affect excess reserves and the amount of lending by banks
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Open Market Operations
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Process of buying or selling of U.S. government securities in the open market
-Primary policy tool of the Fed
-Changes bank reserves to influence interest rates in the economy
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Fed buys bonds in the Open Market
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-Payment is made by Fed to primary dealers
-Replaces an illiquid asset (bond) with a liquid asset
-S ↓
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Federal Funds Market
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Market for overnight loans between bank.
-Banks borrow to meet reserve requirements of the Federal Reserve
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Federal Funds Rate
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-Interest rate charged for loans in Federal Funds Market
-The rate falls when Fed buys bonds
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Fed Sells Bonds in the Open Market
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-Fed sells Bonds S ↑, r ↑, I ↓, y ↓, unemployment ↑
-Payment is made by primary dealers to Fed
-Replaces a liquid asset (financial capital) with an illiquid asset (bond)
-Fewer reserves in banking system
-Bank reserves contract & Federal Funds Rate rises
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Expansionary Policy
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Fed buys bonds in Open Market Expands Bank Reserves Lowers FFR
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Contractionary Policy
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Fed sells bonds in Open Market Contracts Bank Reserves Raises FFR
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The Steps of Open Market Operations: Recession
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1. Fed buys bonds on Open Market
2. Interest Rates fall
3. Stimulates Investment Spending (I)
4. Aggregate demand shifts right-y increases & unemployment ↓
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The Steps of Open Market Operations: Inflation
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1. Fed sells bonds on Open Market
2. Interest Rates Rise
3. Investment Spending I slows
4. Aggregate demand shifts left & P decreases
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Discount Rate (DR)
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Rate on borrowing from Federal Reserve
-Changes in DR will affect bank reserves
-Used mainly in times of emergency
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Crowding-Out Effect
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A situation where interest rates rise when the government borrows funds
-Results in private-sector borrowing and investment spending fall
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ECN 203: Final Exam