Macroeconomics Midterm

What is demand

The quantity of a good/service that consumers are willing and able to buy at a given price in a given time period

What is the Law of Demand

As the price of a good or service increases, the quantity demanded by consumers decreases, and vice versa

What are the Non-Price Determinants of Demand

Changes in real income

Changes in tastes/preferences

Changes in the price of related goods

Future price expectations

What is Supply

The quantity of a good/service that producers are willing and able to sell at a given price in a given time period

What is the Law of Supply

As the price of a good or service increases, the quantity supplied by suppliers increases and vice versa

What are the Non-Price Determinant of Supply

Changes to the costs of production

Changes to indirect taxes and subsidies

Changes to technology

Weather events

Future price expectations

What causes Shifts in the AD Curve

Monetary Policy (Money Supply + Interest Rates)

Fiscal Policy (Government Spending + Taxes)

What causes Shifts in the SRAS Curve

Changes in production costs

Productivity

What causes Shifts in the LRAS Curve

Changes in the Labor Force

Changes in Capital

Changes in Technology

Bonus: What can cause the shift in all the curves

Emigration & Immigration

What are Sticky Wages

The idea that wages are resistant to decreases, even in times of economic downturn.

What are the Four Theories for Sticky Wages

Implicit Contracts

Efficiency Wage Theory

Adverse Selection of Wage Cuts

Insider-Outsider Model

Four Theories for Sticky Wages

What are Implicit Contracts

An unwritten understanding between employers and employees to not cut wages during a recession.

Four Theories for Sticky Wages

What is Efficiency Wage Theory

Employers pay higher-than-market wages to increase worker productivity and morale.

Four Theories for Sticky Wages

What is Adverse Selection of Wage Cuts

If an employer cuts wages, the most productive workers may be the first to leave.

Four Theories for Sticky Wages

What is the Insider-Outsider Model

Insiders (current workers) may prevent employers from hiring new, lower-wage outsiders

What are the Components of Balance of Payments

Current Account

Financial Account

Capital Account

Balance of Payments

What is inside the Current Account

Balance of trade in goods and services (exports - imports)

Net income (interest, profits and dividends)

Current transfers

Balance of Payments

What is inside the Financial Account

Foreign Direct Investment (FDI)

Portfolio Investment

Official Borrowing

Reserve Assets

Balance of Payments

What is inside the Capital Account

Capital transfers

Transactions in non-produced, non-financial assets

Full Balance of Payments

Current Account

• Balance of trade in goods and services (exports - imports)

• Net income (interest, profits and dividends)

• Current transfers

Financial Account

• Foreign Direct Investment (FDI)

• Portfolio Investment

• Official Borrowing

• Reserve Assets

Capital Account

• Capital transfers

• Transactions in non-produced, non-financial assets

Reasons for Labor Productivity

What are the main Labor Market Policies

Government Policy

Fiscal and Monetary Policy

Labor Market Institutions

Labor Market Policies

How can Government Policy affect the Labor Market

Government can provide unemployment benefits -> discourages people to work (increases NRU)

Government can subsidize education and training-> better-skilled labor force (reduce structural unemployment)

Labor Market Policies

How can Fiscal and Monetary policy affect the Labor Market

Might stimulate aggregate demand and hence reduce cyclical unemployment rate

Labor Market Policies

How can Labor Market Institutions affect the Labor Market

Unions, minimum wage laws, and professional licensing

What Factors Increase Labor Productivity?

Improvements in a worker's skills and relevant training

Technological progress

Who Benefits during unexpected inflation

Borrowers

Who Loses during unexpected inflation

Lenders

Why are Lenders hurt during unexpected inflation

A lender who gives a fixed-rate loan will be paid back with money that has less purchasing power.

Why do Borrowers benefit during unexpected inflation

A borrower repays the loan with "cheaper" money, effectively paying back a lower real amount.

Who else is also helped by unexpected inflation

Governments with large debts

What are the different Costs of Inflation

Inflation as a "Tax"

The "Shoeleather" Costs

"Menu Costs" of Inflation

Costs of Inflation

What is Inflation as “Tax”

The government can effectively "tax" people by printing more money, which reduces the purchasing power of existing money

Costs of Inflation

What is “Shoeleather” Cost

Inflation makes holding cash less appealing, leading to a behavioral change with a real cost

Costs of Inflation

What is "Menu Costs" of Inflation

The costs to firms of changing prices, such as printing new menus, updating catalogs, or reprogramming cash registers

What is Unemployment

The unemployed consists of those of working age who are willing and able to work, actively seeking work but who do not have a job

What is the Labor Force

The total number of people who are either employed or unemployed (actively seeking work)

What are the different Types of Unemployment

Cyclical Unemployment

Structural Unemployment

Frictional Unemployment

Seasonal Unemployment

Types of Unemployment

What is Cyclical Unemployment

Demand-deficient unemployment is caused by a fall in AD in an economy

Types of Unemployment

What is Structural Unemployment

When there is a mismatch between jobs and skills in the economy

Types of Unemployment

What is Frictional Unemployment

Short-term unemployment that occurs when people are in between jobs or are searching for a new job.

Types of Unemployment

What is Seasonal Unemployment

Occurs as certain seasons come to an end and labor is not required until the next season

Who is part of the Hidden Unemployment

• Part-time or temporary job workers, looking for full time and permanent employment

• Underemployed

• Discouraged workers

What is a Trade Deficit

Exports < Imports

What is a Trade Surplus

Exports > Imports

Why is Trade Deficit Good

Greater consumption and investment → economic growth

Why is Trade Deficit Bad

Long-term buildup of foreign debt

Loss of domestic job

Why is Trade Surplus Good

High national savings

Why is Trade Surplus Bad

Lack of domestic investment opportunities

Buildup of foreign assets

What is Price Elasticity of Demand (PED)

Responsiveness to a change in quantity demanded to a change in price

What is the shorthand form for the Determinants of PED

SPLAT

What are the Determinants of PED

Substitutes

Percentage of Income

Luxury

Addictive

Time Period

Perfect Example for a Perfectly Elastic Demanded Good

Designer Clothes

Perfect Example for a Perfectly Inelastic Demanded Good

Salt

PED > 1

Demand is price elastic

PED < 1

Demand is price inelastic

PED = ∞

Demand is perfectly price elastic

PED = 0

Demand is perfectly price inelastic

PED = 1

Demand is unit price elastic

Shape of PED Curve

PED = Inelastic (PED < 1)

Steep / Vertical

Shape of PED Curve

PED = Elastic (PED > 1)

Shallow / Horizontal

What is Price Elasticity of Supply (PES)

Responsiveness of a change in quantity supplied to a change in price

What is the shorthand form of Determinants of PES

PSSST

What are the Determinants of PES

Production Log

Stocks

Spare Capacity

Substitutability of FoPs

Time

Perfect Example for a Perfectly Elastic Supplied Good

Mass Produced Clothing

Perfect Example for a Perfectly Inelastic Supplied Good

Land

PES > 1

Supply is price elastic

PES < 1

Supply is price inelastic

PES = ∞

Supply is perfectly price elastic

PES = 0

Supply is perfectly price inelastic

PES = 1

Supply is unit price elastic

Shape of PES Curve

PES = Elastic (PES > 1)

Shallow / Horizontal

Shape of PES Curve

PES = Inelastic (PES < 1)

Steep / Vertical