Intermediate Macroeconomics Midterm

Exogenous Variables

variables determined outside of the model, the model takes their values as given

Endogenous Variables

Variables determined within the model by other variables called determinants

Long-Run

Factor supplies are fixed
Fixed labor
Fixed Capital

Short-Run

Sticky prices

GDP

Total market value of all final goods and services produced by the factors of production within a country over a period of time

Components of Expenditure

C+U+G+Xn

Consumption Spending

Value of all goods bought by households

Investment Spending

total spending on new capital by firms

Government Spending

Spending at all levels of government in the production of public services, excluding transfer payments

Net Exports

Everything shipped outside the nation minus everything imported

NGP

GDP + Net Factor Icome

NNP

GNP - depreciation

Consumer Price Index (CPI)

CPI = (The cost of goods and services bought by a typical urban household in yr t / The cost of goods and services bought by a typical urban household in base year)100

GDP Deflator

(Nom GDP / Real GDP)100

PCE Deflator

(Nominal consumption spending / Real Consumption Spending)100

Employed (E)

Working for pay for one hour or more per week or 15+ hours unpaid

Unemployed (U)

Not employed, seeking work

Not in Labor Force (N)

Not employed and not looking for work, civillian, 16+, non-institutional age

unemployment rate

share of labor force that are employed
U/(U+E)

Participation Rate

Share of indiviudals in total population participating in labor market
(U+E)/(U+E+N)

Increasing Returns to Scale

F(zK, zL) is greater than z(F(K,L))

Decreasing Returns to scale

F(zK, zL) is lesser than z(F(K,L))

Constant Returns to Scale

F(zK, zL) is equal to z(F(K,L))

Price of Output

P

Nominal Wage

W

Rental Rate of Capital

R

Real Wage

W/P

Real Rental Rate of Capital

R/P

Wages Paid to Labor

(W/P)L

Investment and Rents

(R/P)K

Profits paid to owners of firms

Y - (WL/P) - (RK/P)

Marginal Production of Labor, MPL

The marginal output that can be produced by adding one more unit of labor

Marginal Production of Capital, MPK

The marginal output that can be produced by adding one more unit of labor

Firm Hiring

W/P = MPL

Firm Investment

K/P = MPK

Cobb Production Function

F(K, L) = AK^aL^a-1

Capital Share

a

Labor Share

a-1

Value of a

0 < a < 1

Gini Coefficient

Scale of income inequality from 0 to 1. 0 is no inequality, 1 is maximum inequality

Loanable Funds Market Equillibrium

S = I(r)

Money

Stock of assets that can be readily used to make transactions

Functions of Money

1. Medium of Exchange

2. Store of Value

3. Unit of Account

Fiat Money

Money with no intrinsic value

Commodity money

money with intrinsic value

Currency

Cash/coins held by public

Demand Deposits

funds held in checking accounts

Mo Money Supply

Monetary Base (Currency + Demand)

M1 Money Supply

Currency plus demand deposits and other liquid deposits, including saving deposits and accounts at credit unions

M2 Money Supply

M1 plus small-denomination time deposists, balances in retail money market funds

Dual Mandate of the Fed

Keep prices stable and promote maximum sustainable employment

Lender of Last Resort

The Fed lends money to banks who can’t borrow from anyone else

Monetary Policy

Control over the money supply

Monetary policy that increases money supply

buy bonds in open market operations or increase lending to banks

Monetary policy that decreases money supply

ell bonds in open market operations or reduce lending to banks

Velocity of Money

The rate at which money circulates

Quantity Identity (variables)

V = (PY)/M

Quantity Identity

Velocity = Nominal GDP/Money Supply

Real Money Balances

Purchase power of the money supply

Supply of Real Money Balances

M/P

Demand for Real Money Balances

(M/P)^d=kY

Quantity Theory of Velocity

money supply grows at the same rate as GDP

Inflation Rate

%P = %M-%Y

Money Market Equillibrium

1/K = V

Ex-ante Interest Rate

Interest rate people expect
nom interest rate - expected inflation

Ex-post Interest Rate

Interest Rate that happens in reality
Nom interest rate - real inflation

seigniorage

revenue that the government makes by printing money

Shoe Leather Costs

Cost of reducing money holding

Menu Costs

Cost of changing prices

Relative price distortion

Different firms change price at different times, creating microeconomic inefficiencies

Tax Adjustment

Some taxes aren’t adjusted for inflation

General Inconvience

Inflation makes it difficult to compare nominal prices across time, complicating fincancial planning

Included/Excluded from GDP

1. Used goods, underground economy not included
2. Unsold goods are included
3. Imputated value of owner occupied housing and public goods and services are included

GDP Production Approach

All added value produced by firms

GDP Expenditure Approach

Y = C + I + G + Xn

Components of Consumption Spending

1. Durables

2. Non Durables

3. Services

Components of Investment Spending

1. Non-residental capital

2. Residential capital

3. Changes in Business Inventory

General Function Notation

Y= G(D1, D2)

GDP Income Approach

Adding up all incomes in the economy

Price Index General Form

Price Index = (cost of market basket in yr t / cost of same market basket in base year)100

Symbol for Inflation

pi

Fed’s Preferred Measure of Inflation

PCE Deflator

Understates Inflation

GDP Deflator, it uses a changing market basket

Overstates Inflation

CPI, uses fixed market basket

PCE Deflator Market Basket

All consumption spending

CPI Market Basket

A bundle of goods and services bought by the typical urban consumer

GDP Deflator Market Basket

All production within the economy

Private Saving

Income minus taxes and consumption

Public Saving

Taxes minus government spending

National Savings

National income minus Consumption and Government spending

Demand for Goods and Services (C)

C= Co + C1(Y-T)

List of Endogenous Variables

Y = (K, L)

C= Co + C1(Y-T)
I = o - dr
r : S=I(r)

List of Exogenous Variables

G bar
T bar
K bar
L bar
Co
o