MACROFINAL

Fall in price level increases real GDP demanded

Why is AD curve downward sloping?

Wealth effect

Effect: Higher price level reduces real value of household wealth, which decreases consumption (C)

Interest rate effect

Effect: Higher price level raises interest rates, which decreases investment (I) and consumption (C)

International trade effect

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Effect: Higher price level makes U.S. exports relatively more **expensive** and foreign imports relatively cheaper, **decreases NX**

Movement

Occurs when price level and change in prices is **not** caused by Real GDP

Shift

Occurs when some component of real GDP changes

Employment Population Ratio

(employed/ working age population) \* 100

Labor Force Participation rate

(labor force/ working age population) \* 100

Consumer Price index

((Current year price \* Base year quantity) / (Base year price base year quantity) ) \* 100

GDP deflator

(Nomial GDP/Real GDP) \* 100

Produced domestically

GDP deflator reflects prices of final goods/services…

Sticky

Contracts, slowness to adjust wages, menu costs, make inputs…

Negative Demand Shock

Short Run: Recession, Deflation

Long Run: Potential GDP achieved, full employment, lower price level

Positive Demand Shock

Short Run: Expansion, inflation

Long Run: Potential GDP achieved, full employment, higher price level

Negative Supply Shock

Short Run: Recession, Inflation

Long Run: Original GDP and employment, original price level

Positive Supply Shock

Short Run: Expansion, deflation

Long Run: Original GDP and employment, original price level

Long Run Aggregate Supply

Aggregate curve measuring when changes in price level do not affect the level of Real GDP

Output Gap

((Actual Output - Potential Output) / (Potential Output)) x 100

Recessionary output gap

Output gap is negative

Inflationary output gap

Output gap is positive

Labor force increase, Capital Stock increase, Technological progress

3 reasons LRAS shifts right / potential GDP increases over time

Consumption increase, investment increase, government spending increase

3 reasons AD curve shifts right over time

AD curve shifts right past LRAS

When does inflation occur in AD/AS model?

Fiscal policy

Changes in federal taxes and government spending that are intended to achieve macroeconomic policy goals

Automatic stabilizers

Forms of government spending and taxes that automatically adjust along with the business cycle (eg. Unemployment insurance payments larger during recession)

Discretionary fiscal policy

Intentional actions the government takes to change spending or taxes (eg. Stimulus payments)

Taxes

Where most of revenue comes from:

Government spending

Changes in **BLANK** directly affect aggregate demand

Taxes

Changes in **BLANK** indirectly affect aggregate demand

Expansionary fiscal policy

This type of fiscal policy typically either increases government purchases, or decreases taxes

Increase real GDP and decrease unemployment

Goal of Expansionary Fiscal policy

Contractionary fiscal policy

This type of fiscal policy typically either decreases government purchases, or increases taxes

Countercyclical fiscal policy

Fiscal policy with the goal to dampen the “swings” of the business cycle

Legislative Delay, Implementation Delay

2 delays to fiscal policy:

Autonomous change

Change in G has an immediate effect on AD curve

Induced change

Change in G has a non-immediate effect on AD curve

Multiplier effect

Series of induced increases in consumption spending that result from the initial increase in autonomous spending

Government purchases multiplier

(changes in real GDP) / (change in government purchases)

Government purchases multiplier

1/(1-MPC)

Tax multiplier

(Change in real GDP) / (Change in taxes)

Tax multiplier

(-MPC) / (1-MPC)

Government Purchases Multiplier

Which is supposed to be greater: Tax Multiplier or Government Purchases Multiplier

Marginal Propensity to Consume

(Change in consumption) / (Change in income)

The Balanced budget multiplier

Any identical increase/decrease of government purchases or taxes will result in a change in real GDP of that value

Deficit

A situation in which government expenditures are greater than its tax revenue

Surplus

A situation in which government expenditures are less than its tax revenue

Debt

A stock of outstanding borrowing, how much a government owes in total

Deficit/Suplus

The amount of additional government borrowing, change in borrowing stock in a given year

Treasury securities

When a government runs a budget deficit, it finances its activities by selling:

GDP

Market value of all FINAL goods and services produced in a COUNTRY during a PERIOD of time

Short run GDP

Typically look at business cycle

Long run GDP

Typically look at economic growth

Expansion

Period of increasing GDP

Recession

Period of decreasing GDP

Intermediate goods

Goods that are used again

Final goods

Purchased by final user and not used again

Gross National Product

Identical to GDP but only counts things produced by citizens

During a period of time

Counts only new goods and services (GDP defintion)

Y \= C + I + G + NX

Equation to calculate GDP

Consumption

Spending by households on goods and services, NOT including spending on new houses

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventory AND spending by firms and households on new houses

Government purchases

Spending by federal, state, and local governments on goods/services

Net Exports

Value of exports minus value of imports

Nominal GDP

The value of final goods/services calculated at current year prices

Real GDP

The value of final goods/services calculated at base year prices (currently 2012)

Illegal production, informal economy, home production

Not captured by GDP

Working age population

16 year olds + who are not inmates or active duty military

Labor force

Sum of employed and unemployed workers in economy

Employed

Worked 1+ hours in reference week (or were temporarily away from job or on strike)

Unemployed

Someone who is not currently at work but is available for work and has actively looked for work in previous month

Discouraged workers

People who are available but believe there are no jobs for them

No

In labor force: Full time student?

No

In labor force: Homemaker?

Yes

In labor force: Laid off engineer who applied to job yesterday?

Unemployment Rate

(\# of unemployed / labor force) * 100

Labor force participation rate

(labor force/ working age population) * 100

Employment population ratio

(employed/ working age population) * 100

Up

Numerator and denominator both go up by same amount rate goes:

Down

Numerator and denominator both go down by same amount rate goes:

Frictional unemployment

Between jobs, seasonal unemployment, can increase economic efficiency

Structural unemployment

Associated with longer unemployment spells, workers may require retraining for modern jobs

Cyclical unemployment

In recoveries, this unemployment usually falls

Non-cyclical rate of unemployment

When all employment is due to frictional and structural factors, economy is at full employment

Stocks

Employed workers or unemployed workers or people who are not in the labor force

Flows

Workers who separate from a job or get hired do blank between stocks

Purchasing power

The value of money in terms of its ability to buy goods and services, or how many goods/services can be purchased with a unit of currency

Price level

Measured either through CPI, PPI, or GDP deflator

Inflation rate

Percent increase in price level from one period to next

Consumer Price Index

A measure of the prices a typical urban family of four pays for goods/services they purchase

Consumer Price Index

((Current year price * Base year quantity) / (Base year price base year quantity) ) * 100

Substitution bias

Consumers may change purchasing habits away from goods that increased in price, CPI overestimates inflation

Increase in quality bias

Difficult to separate improvement in quality from increase in price, CPI overestimates inflation

New product bias

Basket of goods used to change every 10 years, now 2 years, thus delay to including new goods, CPI overestimates inflation

Outlet bias

CPI used to survey prices at traditional retail stores, not internet, CPI overestimates inflation

Producer price index

An average of the prices received by producers of goods/services at all stages of production

GDP deflator

A measure of the price level of all final goods/services that are produced in the U.S. during the current year

GDP deflator

(Nomial GDP/Real GDP) * 100

Produced domestically

GDP deflator reflects prices of final goods/services…

Purchased by typical consumer

CPI reflects prices of all goods/services…

Nomial Variables

Calculated using current year prices