Macro part 2

notes for sem. p 2 page 20

GDP

total market value of new final goods and services produced by a country

the GDP expenditure approach

C + I + G + Nx

what does C stand for

consumers (households)

What does I stand for

Investments

What does G stand for

Government spending

What does Nx Stand for

Net exports

What is Consumption spending

all household consumption on durable and non-durable goods

What is Investment spending

purchasing:

\-capital goods

\-services

\-firms buying anything for the company

\-real estate

What is government spending

\-federal gov spending

\-all defense spending

\-infrastructure

\-healthcare

\-school

\-justice system

\-NASA

\-etc.

Are transfer programs part of government spending

NOPE

What do transfer programs include

\-medicare

\-medicaide

\-social security

\-housing assistance

\-transfers from the state

What is the Net Export formula

Exports - imports

inventory

goods that firms produce now but intend to sell later

What does GDP NOT measure

\-crime levels

\-work hours

\-non official markets like babysitting and the drug markets

\-distribution

growth rate formula

( ( y2 - y1 ) / Y1 ) x 100

what is nominal GDP

\-current dollars

\-measures value of a variety of “market” goods at the dollar price they are sold as

Real GDP

\-accounts for inflation when we measure our time

\-attempts to capture the change in amount

Real GDP formula

Nominal GDP / GDP deflator

How many quarters of negative GDP growth are required to have a recession

2

What does CPI stand for

Consumer Price Index

What is the CPI

\-a static basket of goods measured over many years

What are some issues with using the CPI to measure inflation

\-tends to be more volatile

\-not reflective of population

\-measures data from only urban consumers

What percent of consumers does CPI measure

93%

What are the negative effects of inflation

\-less access to necessary goods

\-impact on lower middle class/ lower class

\-negative impacts on lower class

real interest rate formula

nominal interest rate + inflation rate

Who is in the laborforce

\-people 16 and older

\-had employment during the reference week

labor force participation rate

(Labor Force ÷ Civilian Noninstitutional Population) x 100

Cyclical unemployment

\-the people who are laid off due to a recession

Frictional unemployment

stuck between old job and new job

Structural Unemployment

Tech change and the job becomes unnecessary

What is underemployed

want full time work but you can only find part time

do underemployed count as employed

YEP

Discouraged workers

people who are not looking for a job

Are discouraged workers people counted towards unemployment or employment

employment

What is the order of the Macro Cycle

Production → Income → Spending →

Aggregate expenditure approach

C + I + G

What is a simple model

Prices are stable and there is a closed economy

Y =

GDP

Y is

national income/ aggregate output

AE

aggregate expenditures

C formula

A+ B\*Y

A in C formula stands for

autonomous consumption

B in C formula stands for

MPC

MPC

ΔC/ΔY

MPS formula

1-MPC

What is the MPC for people with high income

low MPC

If you want to generate local income should you give stimulus to people with ______ income

low

Change in GDP formula (multiplier effect)

ΔAE \* (1 / MPS )

The higher the MPC the ________ the multiplier effect

higher

fiscal policy

taxes/government spending

Multiplier formula

1/MPS

total taxes formula

taxes - transfer payments

What kind of budget do you have if G = T

balanced budget

\
\
What kind of budget do you have if G > T

budget deficit

\
\
What kind of budget do you have if G < T

budget surplus

Yd stands for

disposable income

Yd formula

y-t

ΔY formula for taxes

\-ΔT \* (MPC/MPS)

ΔY for gov. spending

ΔG \* 1/MPS

Expansions are caused by

\-decrease in Gov/ transfer payments

\-increase in tax rev

\-trends towards budget surplus

Downturns are caused by

\-gov./ transfer payments increase

\-tax revenue decreases

\-trends toward budget deficit

What is money

socially acceptable form of payment for goods, services, or paying off a debt

wealth formula

total assets - debts

what is income

flow of resources coming over time

fiat money

money that represents worth

a dollar bill is (fiat/commodity)

fiat

What is commodity money

something that has worth that is traded

cigarette are (fiat/commodity)

commodity

What is liquidity

the relative ease and speed with which an asset can be used for real transactions

the federal reserve

the central bank of the US

central bank

controls the money supply

M1

\-currency

\-demand deposits

\-travelers checks

What are demand deposits

checking accounts

M2

\-currency

\-demand deposits

\-travelers checks

\-money market mutual fund

\-savings accounts

\-small denomination time deposits

M3

\-currency

\-demand deposits

\-travelers checks

\-money market mutual fund

\-savings accounts

\-small denomination time deposits

\-large time deposits

\-institutional money market funds

\-short term repurchase agreements

\-larger liquid funds

Which type of money is more liquid

M1

Money demand

demand for liquidity

DD stands for

demand deposits

RR stands for

Required reserves

What are required reserves

amount of deposits banks must keep

ER

Effective interest rates

What is ER

amount of deposits the banks can lend out or use to buy bonds

TR stands for

total reserves

What is R

fraction of deposit banks are required to hold on to

Money multiplier

1/r

Federal funds rate

the interest rates that banks charge other institutions to loan on an overnight basis

what will the federal reserve do to increase the FFR

sell securities

FFR is also equal to

the policy rate

what is the bank prime rate

what banks actually charge

What components of GDP are effected by Interest rates

C and I

Why might the fed increase interest rates

reduce inflation

What causes inflation

raise in price levels for goods

demand pull inflation

increase in demand raises prices

cost push inflation

increase in cost for an important good with no replacement

soft landing

reduce demand → raise unemployment → lower wage growth → firms start to lower prices

profit push

firms use the idea of inflation to give a reason for raising prices