Macroeconomics

Final Exam Prep.

What are macroeconomical frameworks?

indicators that are used by economists to determine changes.

e.g.

• inflation

• recession

What are Policy tools?

tols used by the federal government to influence macro economy

e.g.

• new laws

• permits or licenses

• taxes

What is the Gross domestic product (GDP)?

value of the output of all final goods and services produced within one year in one region/country

measurement for overall economy purchases by consumers or produces

In which parts can the GDP be seperated?

• consumer spendings (consumption)

• business spending (investment)

• govenment spending on goods and services

• spending on net exports

What is the trade balance?

TB= Exports - Imports

TB>0 Trade Surplus

TB<0 Trade deficit

What can the GDP be measured as?

GDP= C+I+G+(X-M)

What is the Gross National Product (GNP) ?

Sum of production that can take place domestically or international

e.g. VW producing in China

What is the Net National Product?

GNP - Depreciation

used to determine how high the GNP is after deducting the costs that occur to maintain the output

Difference between Nominal Value and Real Value

Nominal Value: What is written on the price tag or paycheck

Real value: adjusted for inflation

What is a recession?

a significant decline in national output/ GDP

What is a Depression?

an especially lengthy and deep decline in output

the economic damage is significant larger than in a recession

What is a Trough?

The lowest point of output in a recession before recovery begins

recession lasts from peak to trough

upswing lasts from trough to peak

What is referred to as Business cycle?

economys relatively short-term movement in and out of recession

Why is the GDP not appropriate to describe the standard of living of people?

As GDP does not include:

• leisure time

• level of enviromental cleanliness, healt and education

• inequality and security

• available technology

Who does the the number of unemployed include?

People that are out of work and actively looking for a job

What is reffered to as “Out of the labor force”

People that are unemployed and not willing or able to find a job

What is reffered to as “Labor Force” ?

People that are employed and the unemployed (the ones looking for a job)

How to calculate the labor force?

Employed + unemployed

Thus, everyone that is working or wants to work

What is the base for the unemployement rate?

Total labor force

What is reffered to as “Hidden unemployment”?

• people that have a job that underestimates their skills and abilities

• discouraged workers that stopped looking for a job out of frustration

What is the problem with sticky wages? (wages that stay at a certain level and are not decreasing)

In a Recession the supply that would pay those wages drops and the shortage intensifies

Why are wages sticky?

• Implicit contract that wages are not moving down

• Efficiency wage theory - efficiency is related to pay

• Adverse selection of wage - if employer cuts wages the best employees will seek work elsewhere

What is the natural rate of unemployement?

rate of unemployement that occurs eventhough the economy ist healthy

can be caused by:

• frictional unemployment - unemployment that occurs as workers move between jobs

• structural unemployment - as individuals lack skills valued by employers

What is Inflation

general ongoing rise in the level of prices in an entire economy

pressure for prices in most countries

What is the Substitution Bias used for?

It considers the ability of consumers to subsitute goods

What is an Indexation

Adaption to Inflation

Can be linked to mortages, prices, interests or rent

Trade balance

Gap between a region / nations exports - imports

Exports - Imports

What does Merchandise trade balance refer to?

balance of trade only looking at goods

What is the Current acoount balance

trade balance under influence of international flows of income and foreign aid

What is uniliteral transfers?

payments from governments, charities of individuals who don’t receive any exchange

What is referred to as Financial capital?

international flow of money that faciliates trade and investment

How can a government surpus or deficit be calculated?

Supply of financial capital - Demand for financial capital

Savings + (Imports - Exports) = private Investments + (Government Spending - Taxes)

If G<T than the government is a money supplier

If G>T than the the government is a money demander

How can the trade deficit be determined other than Imports-Exports

Domestic Investment -(Private domestic saving + (Taxes - Government spending)

Thus, all the investment made - all the savings results in the “leftover” investment that must be payed for abroad

How can the trade surplus be determined other than Exports - Imports

private domestic saving + (Taxes - Government spending) - total investment

Thus, all the leftover capital that is not getting domestically investment gets invested abroad

What usually happens to the trade deficit during a recession?

It gets lower

Less investments means that the savings are closer to being sufficient and that lowers the imports

What is the level of trade?

Percentage to which a country exports in relative to the GDP

How can trade deficit / surplus be used do evaluate a countrys economy?

Not at all.

Neither surplus nor deficit are an explicit good or bad sign.

It all is up to that the borrowing / lending makes overall sense in the economic conditions that the country is facing.

For what time frame is Say’s law: Supply creates its own demand a good approximation?

long run

As the cycle components recession and depressions are therefore leveled out

When is Keynes’law: Demand creates its own supply applicable?

short run

e.g. during recessions buyers are deciding how the companies are producing

What is the total aggregate supply (AS) ?

total quantity of output that firms produce and sell

What is reffered to as Potential or Full-employment GDP?

the maximum quantity an economy could reach under ideal conditions

Thus, full employment, availability of technology and sufficient capital

How can the Aggregate Supply Curve cross the Potential GDP?

potential GDP refers to the natural unemployment rate and the sustainable level of work.

If people work overhours, maintenance of machines is left out to keep them running the potential GDP can be exceeded to reach a higher maximum GDP

What is the Aggregated Demand (AD) ?

total amount of spending on domestic goods and services

It includes:

• consumption

• investment

• government spending

• net exports

What does the equilibrium of AD and AS show?

the real GDP

how many units are produced at which price

What is the short-run aggregate supply (SRAS) ?

It looks at the economical behaviors while contracts and wages are fixed

So saying how does the supply differs with change in price when the costs don’t change.

e.g. a coffee shop is able to sell coffee for 4$ instead of 3$ but wages increase only once a year and are therefore fixed for a period of time

Evaluate where the economy stands

• not at maximum capacity as AS is not vertical

• operating at a medium price range not in a deep depression

• economy is more facing unemployment than inflationary risks

Why are the LRAS curves vertical?

In the long-run price and costs level out so firms produce at their ideal capacity, no matter of price.

What shifts the SRAS curve to the right?

Increase in productivity or reduced costs

What shifts the SRAS to the left?

Higher prices for key input variables (e.g. labor)

What happens usually if companys loose trust in the market?

AD perspective

they tend to invest less which lowers the AD and shifts the curve left

How are LRAS and potential GDP related to eachother

they indicate the same

What happens when AD shifts left?

Equilibrium will have a lower output and lower price

Farther below potential GDP

What happens when AD shifts right?

New Equilibrium has a higher quantity and price

Closer to potential GDP

How can you tell whether an economy is in a recession from looking at the AD, SRAS and LRAS graphs?

How close the Equilibrium of AD and SRAS is to the LRAS

If Equilibrium is close to LRAS the economy is near full employment

How can you identify growth in the AD/AS diagram?

shift of AS to the right

shift of LRAS (potential GDP) to the right

How can you identify recessions in the AD/AS diagram?

If Equilibrium is substantially below potential GDP

Name the two ways of how inflationary pressure arises

1. AD continues to shift to the right finding the equilibrium on the steeper part of the AS curve

2. rise in input that shifts AS to the left and therefore equilibrium up

How is the Keynesian Zone in the AD AS diagram described?

• high unemployment

• low risk for inflationary prices

• low cost increase if demand cuve shifts right

How is the Neoclassical Zone (Say’s Law) in AD-AS diagram described?

• curve is vertical so no increase of real GDP possible

• unemployment is low (just natural unemployment left)

• only a shift of AS to the right can increase the quantity and the real GDP

• shift to the right in AD causes higher prices and inflation

How is the indermediate zone in AD-AS diagram described?

• economy gets closer to potential GDP

• prices rise more quickly as first constraints are being encountered (shortage of workers or materials)

• unemployment lowers

What does the Keynesian perspective focus on?

That firms only produce if they expect to sell it

What is a recessionary gap?

equilibrium below potential GDP

What is an inflationary gap?

equilibrium above potential GDP

What happens to the price when demand decreases (AD shifts left) to the price according to the Keynesian model?

the price is constant and the AD only afffects output, just price

What institution can move AD during a deep recession?

Government by increasing spending

What are menu costs and why do they slow down perfect price adjustments as in economical theory?

costs the firm faces when changing prices

holds the firm from lowering or increasing prices

Thus, eventhough AD fluctuates, prices don’t change accordingly

What results from sticky wages and prices?

Unemployment and recession (excess supply)

What is referred to as Expenditure mutliplier?

As ones spending becomes anothers income who than can spend again, the inital investment has a much larger impact on the GDP

What does the Phillips Curve represent?

the trade-off between unemployment and inflation

If the unemployment is low, inflation will be high and versa vice

What is reffered to as Expansionary fiscal policy?

tax cuts or increases in government spendings to stimulate aggregate demand and move out of recession

What is referred to as Contracionary fiscal policy?

tax increases or cuts in government spending to shift demand curve to the left to reduce inflationary pressure.

continue chapter 26