Macro Final

GDP

Gross Domestic Product
The Market value of all final goods and services produced within a country in a given time period.

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

Y/GDP/Income/Expenditure/Production/Output
C/Personal Consumption
I/Gross private domestic investment
G/Government spending
X/Exports
M/Imports
(X-M)/Net exports

To find real gdp

multiply price in base year * quantity in current year

Economic growth

It is a sustained/long term increase in Real GDP Per Capita overtime
An increase is due to an increase in labor hours or labor productions such as, education, technology, capital (factories, machines, etc), Economies of scale
True measure of how rich a country is

Leader vs Follower

A leader country makes or finds something new; the follower country uses what they have found to also grow

Convergence

poorer countries will grow at faster rates than richer countries because the rich countries already have everything and will grow at a slower rate, while poor countries are playing the catch up effect and will grow faster.

Supply Curve

up/left for decrease, down/right for a increase. Supply is workers

Demand Curve

up/right increase, down/left for decrease. Demand is firms

unemployment rate

# of unemployed people/ # of people in Labor Force * 100

cyclical unemployment

unemployment caused by a business cycle.

business cycle

Alternating periods of economic expansion and economic recession
in an expansion, cyclical is lower than normal rate and gpd is above potential
in a recession, output is less than 0, then opposite of above,

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

labor rate

labor cost per hour= (gross pay + all annual costs) / actual worked hours per year

M1

currency and checking accounts

M2

savings accounts, time deposits, money markets, and all of M1

Bonds, stocks, and credit cards don't coun

fiscal policy

It is when the government either increases or decreases spending OR they increase or decrease Tax Rates in order to turn a cyclical into a less bumpy road, trying to make it constant.

fiscal surplus

exists where government tax revenues exceed its expenditure

Discretionary Fiscal Policy

During a recession Fiscal deficit increases because spending must be increased leading to even less tax revenue
Vis Versa

Problems with Fiscal Policy

-Lags (Recognition, Administrative, Implementation)
-Expected future policy reversals
-Crowding out effect
-Government is less efficient than firms
-Distortionary Effects

Crowding out effect

Recession: Gov spending increases so GDP increases 🙂
Problem: Gov borrowing from banks increases, it is going to make it harder now for businesses/firms to borrow and take loans, decreases GDP 🙁

Laffer Curve

A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.

First Welfare Theorem

under perfect competition, markets achieve pareto efficiency

First Welfare Theorem requirements

No externalities
Perfect information (no one firm knows more than another)
Firms and Consumers take prices as given

Fed tools

-Open Market Operations
-Change required reserve ratio
-Lender of last resort rate (Discount Rate) or change interest rates on reserves

Currency Union

an agreement between a group of countries to share a common currency, and usually to have a single monetary and foreign exchange rate policy

Reserves

deposits that banks have received but have not loaned out

Liquidity Trap

adverse economic situation that can occur when consumers and investors hoard cash rather than spend or invest it even when interest rates are low, stymying efforts by policymakers to stimulate economic growth.

pegged exchange rate

Value of the currency is fixed relative to a reference currency, such as the US dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Dollarized System

Country who doesn't have its own form of currency and uses it from another place. Along with the same interest and exchange rates. Stable rates.

Gold Standard

a monetary standard under which the basic unit of currency is defined by a stated quantity of gold

Changing the discount/interest rates

If rate increases Banks become less willing to lend to public
If rate decreases Banks become more willing to lend to public

Problems with GDP

Inflation to fix it us Real GDP
More people and to fix it GDP/Population=GDP per capita
Inequality
Leisure
Money does not = happiness, different amounts of money make different people happy
Underground illegal activity
Household Pollution

Real GDP growth rate formula

Value later year - value earlier year
—--------------------------------------------------- x 100
Earlier year

to find nominal GDP

Quantity(year1) * Price(year1)

Real GDP per capita

real GDP/population

Creative Destruction

Process by which new production units replace outdated ones
You have to take a short run loss for a long run gain

structural unemployment

unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

Inflation

Decrease in the value of money
Increase in "Price Level" (average price of everything)

who is affected by inflation

Hurts savers and helps borrowers
Hurts: savers, fixed income
Helps: borrowers
Indifferent: flexible income

Why we use money

- Unit of account (simplifies relative price)
- Medium of exchange
- Store of value
- Standard or deferred payment
-Bartering is inefficient

Why we use US dollars

legal tender

Fiscal Deficit

When government spending is > tax revenue

During an expansion,

inflation increases

Government solution: Contractionary Fiscal Policy (Gov spending decreases or tax rates increase)
Leads to short term recession

During an expansion,

GDP decreases

Solution: Expansionary Fiscal Policy (Gov spending increases or Tax rate decreases)
Leads to long term inflation increase

Pro free market

Expansion: Government spending decreases
Recession: Tax rates decrease

Pro big government

Expansion: Tax rates increase
Recession: Government spending increases

Expected future policy reversals

Recession: Gov spending increases so GDP increases 🙂
Problem: Means that tax rates will increase in the future :(

Government is less efficient than firms

Governments respond to votes and words but firms respond to supply and demand
Government does use their own money like firms, they use our tax money

Distortionary effects

Gov unemployment benefits increase so people won't try as hard
Laffer Curve

pareto efficiency

A condition in which no change is possible that will make some members of society better off without making some other members of society worse off.

Open Market Operations

the purchase and sale of U.S. government bonds by the Fed from regular banks

Required Reserve Ratio

the fraction of deposits that banks are required to keep in reserve

Fed Funds Rate

interest rate charged on bank-to-bank loans. Subject to daily fluctuations

Problems with monetary Policy

-Less effective if expected
-Lags, 3-6 to process
-Inefficient if people don't believe in central bank independence
-Liquidity Trap

Quantitative Easing

Purchase securities to reduce interest rates and increase the money supply.
Spur economic activity by buying longer-term government bonds and other assets.
Inject cash into the economy, encouraging banks to lend and borrowers to borrow.

Fiat Currency

Legal tender, especially paper currency, authorized by a government but not based on a gold standard or silver standard

Money Multiplier

the amount of money the banking system generates with each dollar of reserves