final macro exam

scarcity

we must make decisions on what to produce, how to produce, and for whom to produce.

headline inflation

the total increase in the price of goods and services in an economy over time including everything- food, energy, housing, and transportation.

core inflation

measure that excludes food and energy because these items tend to fluctuate with temporary factors like weather or oil supply.

consumers

decide what ought to be produced because they have the money to buy.

producers

decide how to make products because they want it to be attractive to customers.

tradeoffs

this or that, some combination of both, but not everything mentality.

PPF

set of all the combinations of the two goods that the economy could produce, if all available resources were used and combined in the most efficient way possible.

point above PPF

unattainable because the resources aren’t available.

points inside PPF

suggest that the resources are being underutilized or used inefficiently. These points indicate that the economy is not operating at its full potential.

opportunity cost

because resources are limited, choosing to produce more of one good means giving up some of another good. can’t have all pancakes.

shifts in PPF

• more or better resources (like new tech) would shift PPF to right

• fewer or lower quality resources would shift PPF to left

point directly on PPF

combination of goods and services is being produced without any waste. (undesirable because we run into risk of competition for resources or inflationary pressures.)

business investment

businesses acquire equipment and new technology to increase their productive capacity and improve efficiency.

how do businesses finance their investments?

they borrow in financial markets and use loans to acquire additional productive capacity.

who puts money into financial markets?

savers are putting money into financial markets. (people from the US or other countries that make their savings available so that Americans companies can borrow to expand.)

crowding out

gov spends a lot of money, making it tougher for businesses to invest and expand because not enough money to lend out (from gov).

demand

list of combinations of price and quantity of a specific good that consumers are willing and able to buy. (list made by financial situations and preferences, as prices go up for a good, the demand for that good goes down, vice versa)

demand shifters:

prices rising (decrease demand), consumer income rises (increase demand), consumer preferences change like oranges are good for health (increase demand), change in number of consumers

supply

list of combinations of price and quantity that producers are willing and able to bring to the market. (producers make decisions about what to bring to market based on if the goods will sell)

supply shifters:

• increase in cost of production: if facing higher costs for production (maybe due to increase in labor costs), they find it less profitable than before, willing to bring fewer to market

• decrease in cost of production: cost less to produce products, resulting in higher profit potential and motivates producers to bring more to market

market equilibrium

consumers are able to buy and producers are able to sell exactly the amount they had planned to buy and sell.

lonable funds

the market where loans are bought and sold (owners and lenders instead of buyers and sellers)

demand for loanable funds

businesses look to borrow to buy equipment and expand their capacity, regular people look to borrow to get help if their income is not sufficient

budget deficit

happens when gov spends more money than it collects from taxes and revenues.

supply for loanable funds

US households might spend less than what they could have spent given their income, foreigners also save.

what happens if the government runs a large budget deficit?

government has to borrow in the loanable funds market in order to finance the budget deficit.

demand-pull inflation

inflation caused by too much demand pulling too few goods because strong demand pulls prices up. (new video game, everyone wants it, it sells out because not enough made, people are willing to pay more to get it.)

cost-push inflation

high production costs push prices up, even though demand is not increasing. (a bakery makes bread, all the sudden flour becomes more expensive, more expensive to make bread so its sold at a higher price.)

labor market

where labor services are bought and sold

flexible labor market

equilibrium always changing, can be hired or fired on the spot, wages always changing

“voluntarily unemployed”

refers to people who chose not to work, even though jobs are available. WAG

rigid labor market

results in disequilibrium that stays for a lengthy period of time, wages stay unchanged

“involuntarily unemployed”

workers that are unemployed not by choice (connects to rigid market)

circular flow of income

concept that helps us understand how income and economic activity are created (road map)

households

include everyone who participates in the economy: producers, employers, employees, retirees, shareholders (households provide labor, work for firms)

firms

legal and economic agents that exist to produce and sell goods and services (firms produce)

how do households and firms work?

households provide labor and work for the firms, firms produce the goods and services, then they pay the households in wages, households then buy things which becomes revenue for firms.

how do households use their income?

they pay taxes to government, buy goods and services, they save and invest in the financial market, and they purchase foreign made goods

net taxes

the net amount of all the taxes paid by all households collectively to the gov

consumption expenditures

households use part of their disposable income to purchase goods and services produced by firms

short-run

spending promotes growth and production

long-run

future growth, saving expands economy’s productive capacity

budget surplus

if tax revenue is more than government spending (1 million in taxes but only spending 800,000)

structural deficit

the part of the deficit that exists even when the government is doing fine

government debt

determined by adding together all annual deficits and surpluses overtime

business investment

occurs when a company buys equipment, new technology or anything else that might allow it to expand its productive capacity (investing in durable goods)

issuing bonds

a bond is issued by a borrower and is a promise to pay back the lender a certain amount of money in the future

foreign markets

revenue source for firms, the firms export goods and services to consumers in other countries and collect revenue in return

trade account surplus

if the value of the goods we export exceeds the value of the goods we import

trade account deficit

if we spend more on foreign made goods than the value of the goods we export

circular flow of income equation

I = S + (T-G) + (M-X)

• c= consumption

• t= taxes

• s= savings

• m= imports

• g= gov spending

• i= business investment

• x= exports

unemployment rate

the ratio of the number of people unemployed to the number of people who are members of the labor force. (to be a member you must either have a job or be unemployed but actively seeking unemployment)

unemployment rate equation

number of people unemployed / number of people in the labor market

structural unemployment

has to do with jobs that were lost and unlikely to come back even when the economy improves (because of changes in consumer demand and new technology)

cyclical unemployment

has to do with the booms and is the type if unemployment that is caused by a decline in total spending.

frictional unemployment

unemployed workers who are “between jobs” and is considered part of the normal course of the labor market.

seasonal unemployment

individuals who have jobs which are seasonal in nature such as jobs in agricultural industry, resorts or construction workers in cold climates.

Of the 4 categories, what is the most difficult to come back from?

Structural unemployment is the most difficult to combat.

employment rate

percentage of individuals between the ages of 16 and 64 who are actually employed

factors to shift labor market demand

the willingness of employers to hire would tend to rise when the possibility of more profit is there and would fall when engaging in production.

supply shifters in labor market

a change in the willingness or ability of workers to work, as well as the number of available workers

• increase in number or willingness would shift supply to right

• decrease in number or willingness would shift supply to left

marginal product of labor

increase in what firms produce from hiring a worker

3 determinants of productivity

education, technology, and infastructure

gross domestic product

the total value of all the final goods and services produced in the economy during a time period, usually a year

income approach

by summing up all the incomes that were derived from producing the economy’s outputs of goods and services (adding up incomes)

expenditures approah

by summing up all the spending that took place in the economy in order to buy all the goods and services produced (add up money spent in economy)

GDP equation

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

consumption spending

money that households spend on goods and services

government spending

money that gov spends on goods, services, and public programs to run the country and support the economy

investment spending

money spent on goods and services that will be used to produce more in the future (tech)

net exports

rising exports provide jobs for Americans and add to economic activity

nominal GDP

the total value of all goods and services produced in a country within a specific time period (usually a year) measuring using current price levels

real GDP

nominal GDP adjusted for changes in price levels

per-capita GDP

allows us to make claims about a country being rich or poor

Gross National Product GNP

the total value of all goods and services produced by a country’s residents in a given time period (no matter where its produced)

GDP vs GNP

• GDP measures all production within a country’s boarders, regardless of who owns it

• GNP measures production based on who owns it, regardless of where it happens

disposable income

the portion of income left after households have paid taxes to the government. you make 3000, you pay 500 in taxes, your disposable income is 2500.

What is the consumption spending equation?

C = a + b (1-t) Y

In the consumption spending equation, what does a mean?

Means autonomous consumption, which is part of the consumer spending that does not depend on income. Its the basic, must-have spending that happens no matter what.

In the consumption spending equation, what does b mean?

Means marginal propensity to consume, which is the percent of each additional dollar of disposable income that households devote to consumption spending. Its how much more you spend when you get more money. (you get extra 100, you spend 80 and save 20, MPC = 80%)

what is investment spending?

It is how much businesses plan to spend on things in the future. It is decided by confidence, costs, future expectations… not just how much money the economy has right now.

What three factors does business investment depend on?

• Interest rates: if its cheap to borrow (at low rates, businesses will invest)

• economic outlook: if businesses think he economy will grow

• The regulatory environment within which businesses operate: if laws and rules make it easy and profitable to do business (low taxes and few restrictions)

unplanned investment

when businesses produce more than what they end up selling, wasted resources. (like we made too much on lulu)

what are determinants on how much we sell to other countries?

• the value of our currency compared to foreign currencies

• how well the foreign economies are doing

• if other countries think our goods are high quality

what is the imports spending equation?

M = m (1-t) Y

In the imports spending equation, what does m represent.

It means marginal propensity to import, which is the percent out of each additional dollar in disposable income that households chose to devote to purchasing foreign made goods.

Out of MPC and MPI, what is higher?

MPC is always higher than MPI because not all additional spending foes to imports- some is used to buy domestically made goods.

• a higher MPI would weaken the domestic economy because more money is leaving the country instead of supporting local businesses

what are exogenous factors?

they are factors that are not affected by todays state of the economy. (a + G^0 + I^0 + X^0)

what is the final large equation in the goods market?

Y = [1/1-(b-m)(1-t)][a + G^0 + I^0 + X^0]

what is the multiplier?

represented in the equation by [1/1-(b-m)(1-t)] or k, it shows that when someone spends money (like the gov spending more), it doesn’t just stop there… that money gets spent again and again by others, making the economy grow by more than the initial amount spent.

what are the variables of the multiplier?

• the MPC: as the MPC rises (or people spend more extra money), the multiplier gets bigger. shows that households are confident or are spending on essentials.

• the MPI: the MPI would be a leakage in the multiplier because money is going out of the country instead of supporting local businesses, creating a smaller ripple.

• taxes: taxes are another leakage because after taxes go to the government, people have less extra money to spend, creating a smaller ripple.

implicit multiplier

actual multiplier after accounting for crowding out

fiscal policies

have to do with actions by the government that involve changes in government spending or taxes. (actions by the gov)

what are expansionary policies?

designed to make the economy grow faster in times of sluggish performance. (increase gov spending, cut taxes)

what are contractionary policies?

they are designed to slow down the economy. (decrease gov spending, raise taxes)

what are aggregate expenditure?

the total spending in the economy (consumption, gov, business investment, exports, imports)

what can shift the AE line?

every time one of the factors that affect the intercept changes, we have a shift. for example, an increase in G, I, or X would move the intercept up on the total expenditure axis. (increase=more sending at every level, decrease=less spending at every level)

what would rotate the AE line?

every time there is a change in b, m, or t, we will have a change in the slope. when b rises or m/t decline, the AE will get steeper. when b decline or m/t increase, the AE line gets flatter.

to find the point of equilibrium in the goods market, what must we use on the graph?

the 45 degree line, it is guaranteed to be equal distance between the two axis’s.

what does the equilibrium tell us about full employment on the goods market graph?

• if Y is below Y^F (where F means full employment), the economy would be experiencing a contractionary gap which means not enough production, leading to unemployment.

• if Y is above Y^F, the economy would be experiencing an expansionary gap which means too much production, leading to inflation. (consider contractionary policy)