Macroeconomics

final exam

unemployment rate equation

unemployment / labor force

active labor market

many separation and hires; meaning workers entering and exiting unemployment

sclerotic market

few separations and hires, meaning a stagnant unemployment pool

sepration in the labor market

include quits and layoff

CPS - current population survey

shows the us average monthly flow of workers in and out of employment, providing key labor market statistics.

average duration of unemployment

lenght if time people spend unemployed - 2 months-

discouraged workers

'“out of the labor force” and not actively looking for a job but will take one if they find one

employment rate equation

employment / population

when unemployment is higher

employed workers face a higher chance to loose their jobs, unemployed worker face a lower probability of finding a job or they can expect t remain unemployed longer

labor force

unemployed + employed

participation rate eqaution

labor force / whole population (non institutional pop)

collective bargaining

negotiation between unions and firms

reservation wage

the wage that could make worker indifferent between working or being unemployed.

worker’s bargaining power depends on

how costly for the firm to find other worker and how hard for workers to ind another job if they were to leave the job

efficiency wage theories

link the productivity of the efficiency of workers to the wage they are paid

firms want to pay above the reservation wage to

decrease worker’s turnover and increase productiity

The aggregated nominal wage W ( wage setting) equation is

P^eF(u,z)

P^e

expected price level

u

unemployment

z

all the factors that affect wages given the expected price level and the unemployment rate

an increase un the unemployement rate

decreases wages

unemployment insurance (part of z)

the payment of unemployment benefits to workers who lose their jobs

employment protection (part of z)

makes it more expensive for firms to lay off workers

production function

relation between the inputs used in production and the quantity of output produced, and on the price of these inputs

the function F(u,z)

represents the relationship between wages, the unemployment rate (u), and other institutional or economic factors (z).

price setting equation (P)

(1+m)W

in the price setting equation what is m

the markup

in the price setting equation what is w

the nominal wage

in the price setting equation what is P

price level

simple production function for the economy

Y = A*N

in Y = A*N what is A ( A is always equal to 1 and constant)

labour productivity

in Y = A*N what is N

number of workers

markup (m)

the percentage that firms add to their production costs (primarily wages) to determine the selling price of their goods or services.

F(u,z) =

w / p

the higher the unemployment rate …

the lower the real wage chosen by wage setters

wage-setting relation

relation between the real wage and the rate of unemployment

price setting relation

w/p or 1/1+m

price setting decisions

determines the real wage paid by firms

F(Un,z)

1/1+m

In F(Un,z) what’s Un

the natural rate of unemployment

Assuming P=P^e in the short run

P may be different from what is expected whn nominal wages are set

Assuming P=P^e in the medium run

output tends to return to its natural level

AS-AD model

combination of the aggregate supply relation and the aggregate demand relation

aggregate supply relation

captures the implications of equilibrium in the labor market

aggregate demand relation

captures the implications of equilibrium in both the goods and financial market

AS relation

P = P^e(1+m) F(1-Y/L , z)

Consumption function when depending on the real wealth

C = C(Y-T , We/p)

in C = C(Y-T , We/p), what is We

it’s the nominal wealth

the equilibrium condition in the goods market is

Y = C(Y-T , We/P) + I(Y,i) + G

AD relation

Y = Y(We/p , i ,G , T)

In Y = Y(We/p , i ,G , T) what is i, G, T

the monetary and fiscal policy variables

How curved is hte aggregated demand curve

downward sloping

What shifts the IS or LM curve

change in monetary or fiscal policies - or more generally any variable other than the price level

monetary expansion

Monetary expansion is a central bank policy aimed at increasing the money supply to stimulate economic activity by lowering interest rates and encouraging spending and investment.

what is the short term consequence of monetary expansion

increase in P and increase in output

What happens to the Aggregate Demand (AD) and Aggregate Supply (AS) curves after a monetary expansion in the short and medium term? in the short term

The AD curve shifts rightward due to lower interest rates, leading to increased investment and output. Both the price level (P) and output (Y) rise.

What happens to the Aggregate Demand (AD) and Aggregate Supply (AS) curves after a monetary expansion in the short and medium term? in the medium term

As output exceeds the natural level (Yn), price expectations adjust upward, causing the AS curve to shift upward. Output returns to Yn, and the price level (P) increases further.

What are the medium-term effects of a monetary expansion on the components of demand?

Consumption (C) decreases, investment (I) increases, and government spending (G) remains unchanged.

How does a decrease in the budget deficit affect the AD-AS model in the short and medium term? in the short term

The AD curve shifts leftward due to reduced government spending (G) or increased taxes (T), lowering output (Y) and the price level (P).

How does a decrease in the budget deficit affect the AD-AS model in the short and medium term? in the mediun term

The AS curve shifts downward as wage setters lower their expectations. Output returns to Yn, and the price level decreases further.

If fiscal consolidation is achieved by reducing government spending, how does it affect the composition of demand in the medium term?

Consumption (C) increases, investment (I) remains unchanged, government spending (G) decreases, and net exports (NX) increase due to lower price levels.

What are the short-term and medium-term effects of an increase in oil prices? in the short term

The price level (P) increases, and output (Y) decreases.

What are the short-term and medium-term effects of an increase in oil prices? In the medium term

The price level increases further, and output decreases below the natural level due to higher costs and reduced demand.

How does an increase in oil prices affect the natural rate of unemployment?

An increase in oil prices raises production costs, increasing the markup (m), which in turn increases the natural rate of unemployment.

What is GNP - gross national product

Measures the value added by a country's factors of production, including net income from abroad.

what is GDP - gross domestic product

Measures the value of goods and services produced within a country.

What factors contribute to long-run growth in GDP per capita?

Long-run growth is driven by capital accumulation (higher saving rates) and technological progress (improvements in productivity).

Why do poorer countries often grow faster than richer ones?

Poorer countries can grow faster due to the "catch-up effect," where they adopt existing technologies and benefit from higher returns to capital, leading to convergence with richer countries.

How do openness in goods and financial markets affect the AD-AS model?

• Openness flattens the AD curve, making changes in price levels more impactful.

• An increase in domestic demand raises output but reduces net exports (NX).

• An increase in foreign demand raises output and NX, with a greater effect due to price changes in foreign markets.

What is the real exchange rate

the price of domestic goods relative to foreign goods

real exchange rate ε =

P∗E⋅P

In ε=P∗E⋅P, what is P

the domestic price level

In ε=P∗E⋅P, what is E

nominal exchange rate

In ε=P∗E⋅P, what is P*

foreign price level

What happens when a country's currency depreciates by 10% but its CPI increases relative to another country's CPI?

The real exchange rate might remain constant or even appreciate, depending on the relative inflation rates. If domestic inflation exceeds the nominal depreciation, the real exchange rate appreciates.

What is a current account

Records payments for exports, imports, net income, and net transfers. In other words, it the transaction above the line to record payment to and from the rest of the world.

What is a Financial account

Records changes in ownership of international assets, such as foreign investments and loans. In other words, it the transaction below the line to record net foreign holding of domestic assets

If a country has a current account deficit, what does it imply about its financial account?

A current account deficit is typically offset by a financial account surplus, indicating that the country is borrowing from or receiving investments from abroad.

A country's currency depreciates by 10% against another currency, and its CPI increases by 10% while the foreign CPI remains constant. What happens to the real exchange rate?

The real exchange rate remains unchanged because the 10% depreciation offsets the 10% increase in domestic prices.

Suppose Country X's savings are less than its investment. What does this indicate about its financial accounts?

There is a surplus, as the country relies on foreign investments or loans to finance its deficit.

Suppose Country X's savings are less than its investment. What does this indicate about its current

There is a deficit, as the country is importing more goods/services than it exports.

growth

steady increase in aggregate output over time

productivity

increase in annual growth

we care about growth because we care about

the standard of livinf

Purchasing power parity (PPP) is used to

compare the stadard of living accross countries

Easterlin paradox

once our basic needs are satisifed, higher income per person does not increase hapiness, and the level of income relative to others, rather than the absolute level of income

openness in goods market

ability of consumer and firms to choose between domestic goods and foreign goods. (even countries most comited to free trade have tarifs and quotas)

tariff

taxes on imported goods

quotas

restriction on quantities

openness in financial markets

ability of financial investors to choose between domestic assets and foreign assets

capital control (which was until recently is even rich countries)

restriction on the foreign assets their domestic residents could hold and the domestic assets foreign could hold

openess in factors markets

the ability if firms to choose where to locate production, and worker to choose where to work

tradable goods

goods that compete with foreign goods in either domestic markets or foreign markets.

real exchange rate

price of domestic goods relative to foreign goods

nominal exchange rate

the price of the domestic currency in terms of foreign currency

(nominal) appreciation

increase in price of domestic currency in terms of foreign currency

nominal depreciation

decrease in price of domestic currency in terms of foreign currency

fixed exchange rate

system in which two or more countries maintain a constant exchanger rate between their currencies

in exchange rate, revaluations are

increase in the exchange rate