What qualifies as the "short-medium term" in macroeconomics?
One financial quarter to 3 years.
What qualifies as the "Long Term" in macroeconomics?
>3 years, i.e. Decades, Centuries.
What does the Business Cycle Dating Committee do?
The Business Cycle Dating Committee dates recessions (trough) & recoveries (peak).
What does NBER stand for?
National Bureau of Economic Research.
True or False:
Business cycles are recurrent and predictable.
FALSE. Business cycles are NOT predictable.
What are the exogenous variables in the basic macro model?
Exports
Government
Imports
Investment
What is a leading indicator?
One that may be predictive of a recession or an expansion.
What is a lagging indicator?
a measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend.
What is "market clearing assumption?
Presumes that the price of a good or service moves quickly to bring Qs=Qd
What are "sticky" prices and wages?
Describe the slow rate at which some prices and wages adjust to supply and demand.
What are Endogenous Variables?
Variables that a model tries to explain.
What are Exogenous Variables?
Variables that a model takes as given.
What is an economic aggregate?
Summarization of data across different markets for goods, services, workers and assets
What is national income accounting?
Accounting system used to measure GPD and many related statistics.
What are the two ways of computing GDP in the Circular Flow model?
1. Total income from production of goods and services.
2. Total expenditures on purchases of bread.
In macroeconomic terms, what is a "stock"?
A quantity measured at a given point in time, e.g., the amount of water in a bathtub.
In macroeconomic terms, what is a "flow"?
A quantity measured per unit of time, e.g., the amount of water coming out of a faucet.
Is a person's wealth a stock or a flow?
A stock.
Is a person's income and expenditure a stock or a flow?
Flows.
What is Nominal GDP?
The value of goods and services measured at current prices.
What is Real GDP (RGDP)?
The value of all goods and services measured using a constant set of prices.
How is RGDP computed?
Real GDP=(Base year prices x Current year quantities)
What is the GDP Deflator?
The ratio of nominal GDP to real GDP.
What does the GDP Deflator show?
What's happening to the overall level of prices in the economy.
What is a quick way to calculate the GDP deflator?
Nominal GDP = Real GDP x GDP Deflator.
What is the national income accounts identity?
Y = C + I + G + NX.
What does Consumption consist of in the NIA identity?
The goods and services bought by households.
What does Investment consist of in the NIA identity?
Goods bought for future use.
What are the three subcategories of consumption?
1. Nondurable goods
2. Durable goods
3. Services
What are the three subcategories of investment?
1. Business fixed investment
2. Residential fixed investment
3. Inventory investment
What does Government consist of in the NIA identity?
Goods and services bought by federal, state, and local governments.
What transfer payments are included in Government, as represented in the NIA identity?
None.
Why are transfer payments not included in Government purchases in the NIA identity?
They reallocate existing income without adding to production.
How is GNP calculated?
GNP = GDP + Factor Pmts. FROM Abroad - Factor Pmts. TO Abroad.
What does NFI stand for?
Net Farm Income
What does National Income (NI) measure?
How much everyone in the economy has EARNED.
What are the six categories of National Income (NI)?
1. Compensation of Employees
2. Proprietor's Income
3. Rental Income
4. Corporate Profites
5. Net Interest Earned
6. Indirect Business Taxes
How do we compute the CPI?
CPI = (Q x Current Price) / (Q x Base Year Price)
Is the CPI a good measure of the overall prices of goods and services in the economy?
NO. The CPI only measures the prices of goods and services bought by consumers.
Why is the GDP deflator a good measure of how the prices of imported goods are changing?
IT ISN'T!! The GDP deflator only includes DOMESTICALLY PRODUCED goods.
True or False:
the CPI assigns changing weights to the prices of different goods.
FALSE. The CPI assigns FIXED weights to the prices of goods.
What is the definition of the labor force?
The sum of the employed and unemployed.
What is the unemployment rate?
The percentage of the labor force that is unemployed.
What are the three categories in the Current Population Survey?
1. Employed
2. Unemployed
3. Not in the Labor Force
How do we calculate the unemployment rate?
U = (Number of Unemployed) / (Labor Force) x 100
What is the Labor-force participation rate?
The percentage of adult population that is in the labor force.
How do we calculate the Labor-force participation rate?
Labor-Force Participation Rate =
(Labor Force) / (Adult Population) x 100
What are the factors of production?
The inputs used to produce goods and services.
What is public saving?
(T - G)
Any excess of tax revenue over government spending, which can be positive (budget surplus) or negative (budget deficit).
How do we write the production function?
Y = F(K,L).
What does the production state?
Output is a function of the amount of capital and the amount of labor.
What are constant returns to scale?
Mathematically, zY = F(zK, zL) for any positive number z.
What are factor prices?
The amount paid to the factors of production.
What is the Marginal Product of Labor (MPL)?
The extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed.
How would you express the concept of Marginal Product of Labor (MPL) in a production function?
MPL = F(K, L+1) - F(K,L).
How do we calculate the competitive firm's demand for for labor?
W = P x MPL
or
MPL = W / P
What does the term "real wage" mean in macroeconomics?
The payment to labor measured in units of output, rather than in dollars.
What is the Marginal Product of Capital (MPK) ?
The amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant.
How would you express the concept of Marginal Product of Capital (MPK) in a production function?
MPL = F(K+1, L) - F(K,L).
Why does the MPL curve slope downwards?
Because the MPL declines as L increases.
What is disposable income?
Income after the payment of all taxes (Y-T).
How do households divide their disposable income?
Disposable income is divided between consumption and saving.
How would we mathematically express the assumption that the level of consumption depends on directly on the level of disposable income?
C = C(Y-T)
What is the marginal propensity to consume (MPC) ?
The amount consumption changes when disposable income increases by one dollar.
What does the interest rate do?
It measures the cost of the funds used to finance investment.
If the interest rate rises, _____ investment projects are profitable, and the quantity of investment goods demanded _____.
fewer, falls
What is the nominal interest rate?
The rate interest rate investors pay to borrow money.
What is the real interest rate?
The nominal intrest rate corrected for inflation.
What is the investment function?
I = I(r)
What is the mathematical term for National saving (S) ?
S = (Y - T - C) + (T - G) = I
What is private saving?
Disposable income minus consumption, (Y - T - C)
What is "crowding out" ?
Government purchases (G) increase, causing the interest rate to increase, which causes investment to decrease.
How is National Income distributed to the factors of production?
Total output is divided between the payments to K and the payments to L, depending on their marginal productivities.
What is the Cobb-Douglas production function?
F(K,L) = A K^a*L^(1-a)
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of capital?
An increase in K raises the MPL and reduces the MPK.
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of labor?
An increase in L raises the MPK and reduces the MPL.
What are the three purposes of money?
1. A store of value
2. A unit of account
3. A medium of exchange
What is fiat money?
No intrinsic value; established as money by government decree.
What is commodity money?
Has intrinsic value, e.g., gold.
What are the components of M1?
Currency + DD + Traveler's checks + Other Checkable Deposits.
What are the components of M2?
M1 + Retail Money Market Mutual Fund Balances + Savings Deposits + Small Time Deposits.
How is the quantity equation expressed?
(Money x Velocity) = (Price x RGDP)
M x V = P x Y
What is the income velocity of money?
The number of times a dollar bill enters someone's income in a given period of time.
How can we compute the velocity of money?
V = (Price x Real GDP)/Money
What are real money balances?
A measure of the purchasing power of the stock of money.
How do we calculate real money balances?
M / P
What is an example of a simple money demand function?
(M/P)^d = k*Y
When people want to hold a lot of money for each dollar of income, money changes hands _____.
Infrequently.
When people only want to hold a little money for each dollar of income, money changes hands _____.
Frequently.
According to the Quantity Theory of Money, what determines the level of output (Y) in an economy?
The factors of production and the production function.
According to the Quantity Theory of Money, what determines the nominal value of output (P*Y) in an economy?
The money supply (M).
According to the Quantity Theory of Money, what determines the level of prices (P) in an economy?
The ratio of the nominal vale of output (P*Y) to the level of output (Y).
According to the Quantity Theory of Money, what has ultimate control over the rate of inflation?
The Central Bank.
What is seigniorage?
The revenue raised by printing money.
How do we calculate the real interest rate (r)?
r = i - ?
(?=rate of inflation)
What does the Fisher equation show?
That the nominal interest rate can change for two reasons:
1. r changes.
2. ? changes.
The quantity theory of money shows that rate of _____ determines the rate of _____.
money growth, inflation.
The real interest rate adjusts to equilibrate _____ and _____.
savings, investment
The Fisher equation tells us to add the _____ and the _____ to determine the _____.
r, ?, i
What do the Quantity Theory and the Fisher equation together tell us?
How money growth affects i.
According to the Quantity Theory, an increase in the rate of money growth of __ percent causes a __ percent increate in the rate of inflation.
1, 1
According to the Fisher equation, a __ percent increase in the rate of inflation causes a __ percent increase in the nominal interest rate.
1, 1
What is the Fisher Effect?
The 1:1 relationship between ? and i.
What does E? represent?
The expectation of future inflation, where ? denotes actual future inflation.
What is the Ex-Ante real interest rate?
i - E?.
What is the Ex-Post real interest rate?
i - ?.
How can we more precisely write the Fisher Effect?
i = r + E?.
Why does the nominal interest rate affect money demand?
Because it's the cost of holding money.
How can we use the Fisher equation to write the nominal interest rate as the sum of the real interest rate and expected inflation?
M/P = L(r + E?, Y).
What does the equation M/P= L(r+E?, Y)
state?
That the level of real money balances depends on the expected rate of inflation.
What is shoeleather cost?
The inconvenience of reducing money holding, caused by a higher i, which is caused by a higher (expected) ?.
What are menu costs?
The costs of firms having to change posted prices more frequently as a result of a higher (expected) ?.
What happens when expected inflation induces variability in relative prices?
It leads to microeconomic inefficiencies in the allocation of resources.
How does expected inflation affect changes in tax liability?
The tax code measures income as the nominal, rather than real, capital gain, distorting how taxes are levied.
How does expected inflation affect the dollar's usefulness as a measure of value?
Becomes less useful because the $'s value must constantly be corrected for ?.
What are five costs of expected inflation?
1. Shoeleather costs
2. Menu costs
3. Relative price variability
4. Changes in tax liability
5. Dollar less useful as a measure of value
What are two costs of unexpected inflation?
1. Redistribution costs
2. High inflation variability
Who is hurt/helped by redistribution costs of unexpected inflation?
Lenders are hurt - value of their loan decreases.
Borrowers are helped - amount they owe, in real terms, decreases.
How is high inflation variability costly?
It makes it difficult to plan for the future, affecting both lenders and workers (with pensions).
What is a benefit of inflation?
It can grease labor markets by allowing inflation to cut real wages, bypassing nominal wage cuts.
What causes hyperinflation?
Governments print money to finance large budget deficits.
What is the classical dichotomy?
The theoretical separation of real and nominal variables.
Why is the classical dichotomy an important insight?
It allows us to examine real variables while ignoring nominal variables.
What is monetary neutrality?
The irrelevance of money for real variables.
What are "real variables"?
All variables measured in physical units, such as quantities and relative prices.
What are "nominal variables"?
Variables expressed in terms of money.
What is the nominal interest rate, in terms of opportunity cost?
The opportunity cost of holding money.
The nominal interest rate is the sum of the _____ and the _____.
r, ?.
The quantity theory of money assumes that the velocity of money is _____.
stable
Why does the quantity theory of money imply that the price level is proportional to the quantity of money?
Because the factors of production and the production function determine RGDP.
What does it mean if the demand for money depends on the nominal interest rate?
The price level depends on both the current quantity of money and the expected future quantities of money.
What qualifies as the "short-medium term" in macroeconomics?
One financial quarter to 3 years.
What qualifies as the "Long Term" in macroeconomics?
>3 years, i.e. Decades, Centuries.
What does the Business Cycle Dating Committee do?
The Business Cycle Dating Committee dates recessions (trough) & recoveries (peak).
What does NBER stand for?
National Bureau of Economic Research.
True or False:
Business cycles are recurrent and predictable.
FALSE. Business cycles are NOT predictable.
What are the exogenous variables in the basic macro model?
Exports
Government
Imports
Investment
What is a leading indicator?
One that may be predictive of a recession or an expansion.
What is a lagging indicator?
a measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend.
What is "market clearing assumption?
Presumes that the price of a good or service moves quickly to bring Qs=Qd
What are "sticky" prices and wages?
Describe the slow rate at which some prices and wages adjust to supply and demand.
What are Endogenous Variables?
Variables that a model tries to explain.
What are Exogenous Variables?
Variables that a model takes as given.
What is an economic aggregate?
Summarization of data across different markets for goods, services, workers and assets
What is national income accounting?
Accounting system used to measure GPD and many related statistics.
What are the two ways of computing GDP in the Circular Flow model?
1. Total income from production of goods and services.
2. Total expenditures on purchases of bread.
In macroeconomic terms, what is a "stock"?
A quantity measured at a given point in time, e.g., the amount of water in a bathtub.
In macroeconomic terms, what is a "flow"?
A quantity measured per unit of time, e.g., the amount of water coming out of a faucet.
Is a person's wealth a stock or a flow?
A stock.
Is a person's income and expenditure a stock or a flow?
Flows.
What is Nominal GDP?
The value of goods and services measured at current prices.
What is Real GDP (RGDP)?
The value of all goods and services measured using a constant set of prices.
How is RGDP computed?
Real GDP=(Base year prices x Current year quantities)
What is the GDP Deflator?
The ratio of nominal GDP to real GDP.
What does the GDP Deflator show?
What's happening to the overall level of prices in the economy.
What is a quick way to calculate the GDP deflator?
Nominal GDP = Real GDP x GDP Deflator.
What is the national income accounts identity?
Y = C + I + G + NX.
What does Consumption consist of in the NIA identity?
The goods and services bought by households.
What does Investment consist of in the NIA identity?
Goods bought for future use.
What are the three subcategories of consumption?
1. Nondurable goods
2. Durable goods
3. Services
What are the three subcategories of investment?
1. Business fixed investment
2. Residential fixed investment
3. Inventory investment
What does Government consist of in the NIA identity?
Goods and services bought by federal, state, and local governments.
What transfer payments are included in Government, as represented in the NIA identity?
None.
Why are transfer payments not included in Government purchases in the NIA identity?
They reallocate existing income without adding to production.
How is GNP calculated?
GNP = GDP + Factor Pmts. FROM Abroad - Factor Pmts. TO Abroad.
What does NFI stand for?
Net Farm Income
What does National Income (NI) measure?
How much everyone in the economy has EARNED.
What are the six categories of National Income (NI)?
1. Compensation of Employees
2. Proprietor's Income
3. Rental Income
4. Corporate Profites
5. Net Interest Earned
6. Indirect Business Taxes
How do we compute the CPI?
CPI = (Q x Current Price) / (Q x Base Year Price)
Is the CPI a good measure of the overall prices of goods and services in the economy?
NO. The CPI only measures the prices of goods and services bought by consumers.
Why is the GDP deflator a good measure of how the prices of imported goods are changing?
IT ISN'T!! The GDP deflator only includes DOMESTICALLY PRODUCED goods.
True or False:
the CPI assigns changing weights to the prices of different goods.
FALSE. The CPI assigns FIXED weights to the prices of goods.
What is the definition of the labor force?
The sum of the employed and unemployed.
What is the unemployment rate?
The percentage of the labor force that is unemployed.
What are the three categories in the Current Population Survey?
1. Employed
2. Unemployed
3. Not in the Labor Force
How do we calculate the unemployment rate?
U = (Number of Unemployed) / (Labor Force) x 100
What is the Labor-force participation rate?
The percentage of adult population that is in the labor force.
How do we calculate the Labor-force participation rate?
Labor-Force Participation Rate =
(Labor Force) / (Adult Population) x 100
What are the factors of production?
The inputs used to produce goods and services.
What is public saving?
(T - G)
Any excess of tax revenue over government spending, which can be positive (budget surplus) or negative (budget deficit).
How do we write the production function?
Y = F(K,L).
What does the production state?
Output is a function of the amount of capital and the amount of labor.
What are constant returns to scale?
Mathematically, zY = F(zK, zL) for any positive number z.
What are factor prices?
The amount paid to the factors of production.
What is the Marginal Product of Labor (MPL)?
The extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed.
How would you express the concept of Marginal Product of Labor (MPL) in a production function?
MPL = F(K, L+1) - F(K,L).
How do we calculate the competitive firm's demand for for labor?
W = P x MPL
or
MPL = W / P
What does the term "real wage" mean in macroeconomics?
The payment to labor measured in units of output, rather than in dollars.
What is the Marginal Product of Capital (MPK) ?
The amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant.
How would you express the concept of Marginal Product of Capital (MPK) in a production function?
MPL = F(K+1, L) - F(K,L).
Why does the MPL curve slope downwards?
Because the MPL declines as L increases.
What is disposable income?
Income after the payment of all taxes (Y-T).
How do households divide their disposable income?
Disposable income is divided between consumption and saving.
How would we mathematically express the assumption that the level of consumption depends on directly on the level of disposable income?
C = C(Y-T)
What is the marginal propensity to consume (MPC) ?
The amount consumption changes when disposable income increases by one dollar.
What does the interest rate do?
It measures the cost of the funds used to finance investment.
If the interest rate rises, _____ investment projects are profitable, and the quantity of investment goods demanded _____.
fewer, falls
What is the nominal interest rate?
The rate interest rate investors pay to borrow money.
What is the real interest rate?
The nominal intrest rate corrected for inflation.
What is the investment function?
I = I(r)
What is the mathematical term for National saving (S) ?
S = (Y - T - C) + (T - G) = I
What is private saving?
Disposable income minus consumption, (Y - T - C)
What is "crowding out" ?
Government purchases (G) increase, causing the interest rate to increase, which causes investment to decrease.
How is National Income distributed to the factors of production?
Total output is divided between the payments to K and the payments to L, depending on their marginal productivities.
What is the Cobb-Douglas production function?
F(K,L) = A K^a*L^(1-a)
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of capital?
An increase in K raises the MPL and reduces the MPK.
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of labor?
An increase in L raises the MPK and reduces the MPL.
What are the three purposes of money?
1. A store of value
2. A unit of account
3. A medium of exchange
What is fiat money?
No intrinsic value; established as money by government decree.
What is commodity money?
Has intrinsic value, e.g., gold.
What are the components of M1?
Currency + DD + Traveler's checks + Other Checkable Deposits.
What are the components of M2?
M1 + Retail Money Market Mutual Fund Balances + Savings Deposits + Small Time Deposits.
How is the quantity equation expressed?
(Money x Velocity) = (Price x RGDP)
M x V = P x Y
What is the income velocity of money?
The number of times a dollar bill enters someone's income in a given period of time.
How can we compute the velocity of money?
V = (Price x Real GDP)/Money
What are real money balances?
A measure of the purchasing power of the stock of money.
How do we calculate real money balances?
M / P
What is an example of a simple money demand function?
(M/P)^d = k*Y
When people want to hold a lot of money for each dollar of income, money changes hands _____.
Infrequently.
When people only want to hold a little money for each dollar of income, money changes hands _____.
Frequently.
According to the Quantity Theory of Money, what determines the level of output (Y) in an economy?
The factors of production and the production function.
According to the Quantity Theory of Money, what determines the nominal value of output (P*Y) in an economy?
The money supply (M).
According to the Quantity Theory of Money, what determines the level of prices (P) in an economy?
The ratio of the nominal vale of output (P*Y) to the level of output (Y).
According to the Quantity Theory of Money, what has ultimate control over the rate of inflation?
The Central Bank.
What is seigniorage?
The revenue raised by printing money.
How do we calculate the real interest rate (r)?
r = i - ?
(?=rate of inflation)
What does the Fisher equation show?
That the nominal interest rate can change for two reasons:
1. r changes.
2. ? changes.
The quantity theory of money shows that rate of _____ determines the rate of _____.
money growth, inflation.
The real interest rate adjusts to equilibrate _____ and _____.
savings, investment
The Fisher equation tells us to add the _____ and the _____ to determine the _____.
r, ?, i
What do the Quantity Theory and the Fisher equation together tell us?
How money growth affects i.
According to the Quantity Theory, an increase in the rate of money growth of __ percent causes a __ percent increate in the rate of inflation.
1, 1
According to the Fisher equation, a __ percent increase in the rate of inflation causes a __ percent increase in the nominal interest rate.
1, 1
What is the Fisher Effect?
The 1:1 relationship between ? and i.
What does E? represent?
The expectation of future inflation, where ? denotes actual future inflation.
What is the Ex-Ante real interest rate?
i - E?.
What is the Ex-Post real interest rate?
i - ?.
How can we more precisely write the Fisher Effect?
i = r + E?.
Why does the nominal interest rate affect money demand?
Because it's the cost of holding money.
How can we use the Fisher equation to write the nominal interest rate as the sum of the real interest rate and expected inflation?
M/P = L(r + E?, Y).
What does the equation M/P= L(r+E?, Y)
state?
That the level of real money balances depends on the expected rate of inflation.
What is shoeleather cost?
The inconvenience of reducing money holding, caused by a higher i, which is caused by a higher (expected) ?.
What are menu costs?
The costs of firms having to change posted prices more frequently as a result of a higher (expected) ?.
What happens when expected inflation induces variability in relative prices?
It leads to microeconomic inefficiencies in the allocation of resources.
How does expected inflation affect changes in tax liability?
The tax code measures income as the nominal, rather than real, capital gain, distorting how taxes are levied.
How does expected inflation affect the dollar's usefulness as a measure of value?
Becomes less useful because the $'s value must constantly be corrected for ?.
What are five costs of expected inflation?
1. Shoeleather costs
2. Menu costs
3. Relative price variability
4. Changes in tax liability
5. Dollar less useful as a measure of value
What are two costs of unexpected inflation?
1. Redistribution costs
2. High inflation variability
Who is hurt/helped by redistribution costs of unexpected inflation?
Lenders are hurt - value of their loan decreases.
Borrowers are helped - amount they owe, in real terms, decreases.
How is high inflation variability costly?
It makes it difficult to plan for the future, affecting both lenders and workers (with pensions).
What is a benefit of inflation?
It can grease labor markets by allowing inflation to cut real wages, bypassing nominal wage cuts.
What causes hyperinflation?
Governments print money to finance large budget deficits.
What is the classical dichotomy?
The theoretical separation of real and nominal variables.
Why is the classical dichotomy an important insight?
It allows us to examine real variables while ignoring nominal variables.
What is monetary neutrality?
The irrelevance of money for real variables.
What are "real variables"?
All variables measured in physical units, such as quantities and relative prices.
What are "nominal variables"?
Variables expressed in terms of money.
What is the nominal interest rate, in terms of opportunity cost?
The opportunity cost of holding money.
The nominal interest rate is the sum of the _____ and the _____.
r, ?.
The quantity theory of money assumes that the velocity of money is _____.
stable
Why does the quantity theory of money imply that the price level is proportional to the quantity of money?
Because the factors of production and the production function determine RGDP.
What does it mean if the demand for money depends on the nominal interest rate?
The price level depends on both the current quantity of money and the expected future quantities of money.