MacroEconomics Exam

Macroeconomics

The study of an economy as a whole

Macroeconomic modeling

Requires us to model the prices and quantities for all markets at once.

Competitive Market

A market with many buyers and sellers where competition pushes all parties toward an equilibrium state where supply equals demand.

Law of Demand

As the price of a good decreases, consumers are willing to purchase more of it.

Law of Supply

As the price of a good increases, producers are willing to sell more of it.

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a specific

Equilibrium

The point where the supply and demand curves intersect, determining the equilibrium price and quantity.

Demand Shifters

Consumer income, prices of related goods, tastes, expectations, and the number of buyers.

Supply Shifters

Input prices, technology, expectations about future prices, and the number of producers.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period.

GDP Components

GDP = C + I + G + NX (Consumption, Investment, Government Purchases, Net Exports).

Nominal GDP:

Valued at current prices and current quantities

Real GDP

Valued holding prices fixed to measure the actual quantity of goods and services produced.

Consumer Price Index (CPI):

A measure of the average price of urban consumer goods and services, used to measure the cost of living.

Inflation Rate:

The percent change in the price level from one period to the next.

Inflation Formula

(New Old) / (Old) x 100

Financial Markets:

Institutions where savers directly supply funds to borrowers, such as the bond market (debt) and stock market (equity).

Financial Intermediaries:

Institutions where savers indirectly provide funds to borrowers, such as banks and mutual funds.

National Savings (S):

The total income in the economy that remains after paying for consumption and government purchases

S = I (In equilibrium, national savings equals investment).

S = (Y - C - T) + (T - G), where (Y - C - T) is private savings and (T - G) is public savings.

Unemployment Rate Formula:

(Unemployed) / (Labor Force) x 100

Unemployment Rates Definitions:

Frictional: Short-term, caused by the job search process as workers change jobs.

Structural: Long-term, caused by market imperfections like minimum wage laws, unions, and efficiency wages.

Shoe leather Costs:

Resources wasted when inflation encourages people to reduce money holdings.

Menu Costs:

Resources wasted by the physical cost of changing prices.

Inflation-Induced Tax Distortions:

Inflation often raises the tax burden on income earned from savings because tax laws fail to account for it.

Arbitrary Redistribution of Wealth-

Inflation takes away from those who save money and gives to those who are in debt.

Real GDP vs. Nominal GDP

Nominal GDP uses current prices; Real GDP uses fixed prices to measure actual output.

The Fisher Equation

Real Interest Rate = Nominal Interest Rate - Inflation Rate.

Public Savings Formula

T - G (Taxes minus Government spending).

Budget Deficit

Occurs when government spending (G) is greater than tax revenue (T), resulting in negative public savings.

Efficiency Wages

Above-equilibrium wages paid by firms to increase worker productivity, health, or retention.

Medium of Exchange

An item (like money) that buyers give to producers when they purchase goods and services.

Liquidity

The ease with which an asset can be converted into the economy's medium of exchange.

Open-Market Operations

The Federal Reserve's primary tool for controlling the money supply by buying or selling bonds.