Macro Exam

2008 Financial Crisis

Global financial collapse triggered by U.S. housing market, subprime mortgages, and toxic financial products. (Ch. 24)

Subprime mortgages

High‑risk loans to weak borrowers; defaults caused collapse of MBS. (Ch. 24)

Mortgage‑backed securities (MBS)

Bundled mortgages sold as assets; became worthless when borrowers defaulted. (Ch. 24)

Moral hazard

Institutions took excessive risks expecting bailouts; worsened crisis. (Ch. 24)

Easy monetary policy

Low interest rates encouraged borrowing and inflated housing bubble. (Ch. 24)

Financial liberalization

Deregulation allowed risky financial innovation and leverage. (Ch. 24)

Corporate governance failures

Principal–agent problems led to reckless risk‑taking. (Ch. 24)

PIGS countries

Portugal, Italy, Greece, Spain — most exposed during crisis. (Ch. 24)

Euribor spike

Interbank interest rate surged, signaling distrust among banks. (Ch. 24)

Government guarantees

Restored trust by protecting deposits and preventing bank runs. (Ch. 24)

Bank recapitalization

Governments injected capital to stabilize banks. (Ch. 24)

Fiscal stimulus

Increased government spending to counter recession. (Ch. 24)

Public debt surge

EMU debt rose to ~93% of GDP after crisis measures. (Ch. 24)

COVID shock

Simultaneous supply and demand shock caused by pandemic lockdowns. (Ch. 25)

Flatten the curve

Strategy to slow virus spread to avoid overwhelming healthcare systems. (Ch. 25)

Demand shock

Fear and uncertainty reduced consumption and investment. (Ch. 25)

Supply shock

Shutdowns in transport, tourism, and production reduced output. (Ch. 25)

IS shock

“Sudden stop” of economic activity due to social distancing. (Ch. 25)

Recession vs lives dilemma

Trade‑off between strict health measures and economic damage. (Ch. 25)

Saving vs spending dilemma

Households saved more, reducing AD and deepening recession. (Ch. 25)

Market vs state dilemma

Debate over government intervention during crisis. (Ch. 25)

Nominal GDP

Value of goods/services at current prices; includes inflation. (Ch. 26)

Real GDP

Value of goods/services at constant prices; removes inflation. (Ch. 26)

GDP deflator

Price index: Nominal GDP / Real GDP. (Ch. 26)

Value added

Output minus intermediate inputs; avoids double counting. (Ch. 26)

Flow‑of‑products approach

Sums value of final goods/services produced. (Ch. 26)

Earnings approach

Sums wages, rent, interest, and profit. (Ch. 26)

Gross investment

Total investment before depreciation. (Ch. 26)

Net investment

Gross investment minus depreciation. (Ch. 26)

NDP

GDP minus depreciation. (Ch. 26)

GNP

Value produced by residents regardless of location. (Ch. 26)

Disposable income

Income after taxes: DI = C + S. (Ch. 26)

Saving–investment identity

I + X = Private Saving + Government Saving. (Ch. 26)

Gross national investment

I + (X − M); includes foreign investment flows. (Ch. 27)

National income

GDP − depreciation − indirect taxes. (Ch. 27)

Private saving

DI − C; part of income not consumed. (Ch. 27)

Government saving

Taxes − transfers − government spending. (Ch. 27)

Net foreign investment

Exports − imports; part of national saving. (Ch. 27)

Welfare state

System where government protects citizens’ economic and social well‑being. (Ch. 28)

Social contributions

Mandatory payments for social insurance (health, pensions). (Ch. 28)

VAT

Indirect tax included in prices; major revenue source. (Ch. 28)

High‑tax era

1945–1970s: strong welfare expansion, high income taxes. (Ch. 28)

Tax reduction era

1980s–1990s: supply‑side reforms, lower taxes. (Ch. 28)

Lorenz curve

Graph showing income distribution; deviation from equality line shows inequality. (Ch. 29)

Gini coefficient

Measure of inequality: G = 1 − 2 × area under Lorenz curve. (Ch. 29)

Transfer principle

Inequality measure should decrease when income is redistributed from rich to poor. (Ch. 29)

Social planner problem

Model where a planner allocates resources to maximize welfare. (Ch. 30)

MRS = MPL

Efficient labour allocation condition. (Ch. 30)

Missing markets

When insurance or risk‑sharing markets do not exist. (Ch. 30)

Market failure

When free markets do not allocate resources efficiently. (Ch. 30)

Externality

Cost or benefit imposed on others not reflected in market prices. (Ch. 31)

Negative externality

Private optimum differs from social optimum due to external damage. (Ch. 31)

Pigouvian tax

Tax equal to marginal external damage; aligns private and social optimum. (Ch. 31)

Social optimum

B′(d) = c′(d) + D′(d); includes external costs. (Ch. 31)

Monopoly

Firm with market power; sets MR = MC. (Ch. 32)

Markup

P − MC; difference between price and marginal cost. (Ch. 32)

Lerner index

(P − MC) / P = 1 / |ε|; measure of market power. (Ch. 32)

Deadweight loss

Loss of welfare because monopoly produces less than efficient output. (Ch. 32)

Growth sources

Credit constraints, human capital, political economy. (Ch. 33)

Institutions

Rules shaping economic behavior; include property rights, competition policy, regulation. (Ch. 33)

Property rights

Encourage investment and credit access. (Ch. 33)

Competition policy

Affects markups and efficiency. (Ch. 33)

Environmental regulation

Internalizes externalities; affects growth. (Ch. 33)

HDI

Index combining GDP, life expectancy, and education. (Ch. 34)

GNH

Gross National Happiness; alternative measure of well‑being. (Ch. 34)

Quality of life

Determined by income, health, education, and social factors. (Ch. 34)

Modigliani life‑cycle model

People smooth consumption over lifetime; save during working years, dissave in retirement. (Ch. 35)

Friedman permanent income hypothesis

Consumption depends on permanent income, not temporary income. (Ch. 35)

MPC

Marginal propensity to consume; fraction of extra income spent. (Ch. 35)