Macro Study Sheet

absolute advantage

producing the most of a good

comparative advantage

producing a good at the lowest opportunity cost

can a country have absolute advantage in both goods or comparative advantage in both

a country can only have absolute advantage in both

how do you determine who produces which good?

the country with the lowest opportunity cost

output is the default, how do we do it?

output opposite over (OOO)

why is something an input

land, labor, capital are mentioned

how do you remember inputs

input opposite under (IOU)

what do households provide to the factor market?

land, labor, capital and entrepreneurial activity

what do households want from markets?

goods and services in return for cash

what do firms want from the market

LLCE in return for costs

what do firms provide for the markets

G & S in return for revenue

what does government take from firms and households

taxes

what does government provide for firms and households

goods and services

demand determinants

expectations, number of buyers, taste, income, related goods

supply determinants

resource price, other goods, technology, taxes/subsides, expectations, number of sellers

are 2nd hand goods included in RGDP

no, counted the first time

are intermediate goods included in RGDP

no, only final goods are counted

are final goods included in RGDP

yes

are transfer payments included in RGDP

no, there was no good or service produced

are financial transactions included in RGDP

no, commissions count bur nor transactions

are military services included in RGDP

yes, payment for service

what is the most interest rate sensitive part of GDP

investments bc investments require borrowing funds

how do net exports change based upon dollar value

strong dollar = less exports

weak dollar = more exports

if CIGSNX increased or decreased, does AD change or does AS change?

AD changes

what does an increase in government spending to do real IR

real IR increases with due to deficit spending

what is the crowding out effect

Crowding out effect occurs when government spending increases, causing a decrease in private investments

what changes in CPI and what remains constant

price changes while quantity stays constant

how often is the basket of goods updated

every 10 years

what are some drawbacks for CPI

does not account for improvements in goods or government spending

what is the CPI base year

CPI is always 100 in base year

what is the equation for CPI

(current year/ base year) \* 100

what is the equation for inflation

((current year- last year) / last year)\*100

what is deflation

decrease in price level

what is subtracted from RGDP to get NGDP

depreciation

how do you get disposable income

personal income - taxes = disposable income

what are the 2 parts of disposable income

consumption and savings

what is the government spending multiplier

1/MPS

what is the tax multiplier

MPC/MPS

how can you find GS multiplier with TX multiplier

TX multiplier + 1 = +/- GS multiplier

does RGDP have inflation

no, RGDP does not include inflation

how do you convert NGDP to RDGP

• NGDP/GDP deflator

• NGDP/CPI = RGDP

what equation would you use if RGDP increased by 8 and RGDP increased by 2?

NGDP = inflation + RGDP or 8 = inflation + 2

do economist prefer NGDP or RGDP and why?

RGDP bc inflation has been eliminated

does RGDP or NGDP per capita give us a better indication of the well being of an individual

RGDP per capita because it looks at numbers per person

who is helped by unanticipated inflation?

borrowers

who is hurt by unanticipated inflation

Savers and lenders

who is helped by lower than anticipated inflaction

savers and lenders

who is hurt by lower than anticipated inflection

borrowers

what is demand pull inflation and what causes it

AD moves right, too much money

what is cost push inflation and what causes it

AS moves left, neg supply shock or rise in costs of inputs

what are the four types of unemployment

structural, cyclical, frictional, seasonal

structural unemployment

skills dont match what’s needed

cyclical unemployment

out of work due to recession

frictional unemployment

just finished school or quit a job

seasonal unemployment

Hasselhoff in the winter

what is a discouraged worker

someone who has given up looking for work

is the unemployment rate under or over stated

understated due to discouraged workers and part time employees

which type of unemployment can become zero

cyclical

what is the difference between MCP and APC

MPC concerns additional income, APC fixed point

what is the difference between MPS and APS

MPS concerns additional income, APS fixed point

what is the equation for MPC and MPS

MPC + MPS = 1

MPC = change in consumption / change in income

MPS = change in savings / change in income

what is the equation for APC and APS

APC + APS = 1

APC = consumption / income

APS = savings / income

what are non income determinants of saving

wealth, expectations, taxation, HH debt

if GS increases by 100, TX increases by 100 what happens to RGDP?

RGDP increases by RGDP

is GS stronger or TX stronger

GS is a stronger multiplier than TX

what are the equations for closing a recessionary gap with the GS/TX multiplier

balanced budget multiplier

change in initial spending \* TX multiplier = change in RGDP

change in taxation \* TX multiplier = change in RGDP

determinants of AD

consumption, investments, government spending, net exports

determinants of AS

land, labor, capital, entrepreneurism, taxes and subsidies

who runs fiscal policy

congress and the president

what are the two options for fiscal policy

government spending and taxation

expansionary fiscal policy

recession- increase government spending and decrease taxes

what happens when government spends more than it receives in taxes

runs on a deficit

what does a deficit do to interest rates

deficit raises interest rates, surplus decreases interest rates

contractionary fiscal policy

inflation- decrease government spending and raise taxes

what are built in stabilizers

things built into the economy to slow the fall in a recession and rise when times are good

what stabilizers are used during a recession

unemployment and welfare

does unemployment and welfare create a surplus or deficit

deficit because we spend more when tax rev is low

what stabilizers are used during an inflationary gap

progressive tax system

does the progressive tax system cause a surplus or deficit

surplus when everyone is working, tax rev is high

what are advantages of stabilizers over legislation from congress

stabilizers go into effect immediately

what do surpluses and deficits do to real IR

real IR dec with surplus

real IR inc with deficit

what is crowing out

the economy is in a recession, inc in GS or dec in TX, AD moves right. Demand for LF inc causing real IR to inc. Investments dec bc higher borrowing, AD dec and PL and RDGP dec

what is the net export effect with fiscal policy

the economy is in a recession FED buys bonds to dec IR, dollar depreciates due to the lower IR, net exports inc, imports are relatively expensive. exports become relatively cheap for foreign consumers and NX = exports - imports

what is the difference between a deficit and the national debt

deficit is one year, national debt is cumulative

what does surplus do to the national debt

surpluses pay down the national debt

what is the value of money

the value of money is what it can purchase

what is the equation for the value of money

dollar = 100/price level, more inflation less value

what could the FED do to offset rise in NIR

buy bonds to increase MS and decrease NIR

M1 currency

currency, coins, and checkable deposits

larget part of M1

what’s included in M2

M1 + saving accounts, money markets and CDs

whats included in M3

M2+ jumbo CDs

reserve requirement

amount banks are required to keep in the vault

what creates money

loans create money

what destroys money

paying off loans

what happens when FED is involved in recessionary gap (dec discount rate)

buy bonds chain rule: MS inc, IR dec, INV inc, AD inc, PL inc, RGDP inc, UN dec

what happens when FED is involved in an inflationary gap (inc discount rate)

sell bonds chain rule: MS dec, IR inc, INV dec, AD dec, PL dec, RGDP dec, UN inc

federal funds rate

rate that banks lend to each other

discount rate

rate banks pay to borrow from FED

prime rate

what banks charge their best customers