Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
116 Cards in this Set
- Front
- Back
|
GDP
|
market value of all final goods and services produced within a country in a year
|
|
|
Fundamental Macro Equation
|
Y = C + I + G + NX
|
|
|
Consumption
|
spending on household products from all over the world
|
|
|
Investment
|
plant equipment
housing inventory accumulation |
|
|
Government Spending
|
government consumption expenditure
|
|
|
Net Exports
|
Exports - Imports
|
|
|
Public Saving
|
T - G
|
|
|
Private Saving
|
Y- T - C
or S |
|
|
supply in loanable funds market
|
public and private saving
|
|
|
NCO
|
Capital Out - Capital In
-Net Capital Inflow -(Capital In - Capital Out) |
|
|
Current account
|
trade in goods and services
X - IM |
|
|
Capital account
|
trade in assets
Capital In - Capital Out |
|
|
Loanable Funds Market
|
(Y- T - C) - (T - G) = I + NX
T= amount gov't collects from households in taxes minus amount pays back to households via transfer payments |
|
|
Why CPI might overstate inflation
|
substitution bias
introduction of new goods unmeasured changes in quantity |
|
|
Frictional unemployment
|
mismatch between workers and jobs
|
|
|
Structural unemployment
|
quantity of labor supplied > quantity of labor demanded
|
|
|
Cyclical unemployment
|
people have skills, but can't find jobs due to downturn in available jobs
|
|
|
Natural Rate of enemployment
|
frictional + structural
|
|
|
Min. wage laws
|
lead to structural unemployment
|
|
|
Efficiency Wages
|
above eq. wages to increase worker productivity
-worker health, turnover, quality, effort |
|
|
PDV
|
$F/ (1 + i) ^N
|
|
|
F
|
$PDV (1 + i)^N
|
|
|
Risks related to bonds
|
credit risk
interest rate risk |
|
|
Law of One Price
|
same good/asset should sell for same price regardless of market if easily traded
|
|
|
Arbitrage
|
market forces make prices in different markets same
|
|
|
Efficient Market Hypothesis
|
market incorporate all available information immediately into security's price
|
|
|
3 forms of EMH
|
1) weak: past prices can't help predict
2) semi-strong: publicly available info can't help you predict 3) strong: public or private can't help you predict |
|
|
Functions of Money
|
medium of exchange
unit of account stored value ultimate liquid asset |
|
|
Net Worth
|
A-L
|
|
|
Reserves
|
money bank has on hand
vault cash or deposits with Fed |
|
|
Federal reserve bank functions
|
establish "discount rate" at which member banks may borrow from Fed
determine which banks receive loans establish reserve requirement conduct open market operations |
|
|
expansionary money policy to decrease discount rate
|
buying bonds
inject reserves |
|
|
contractionary money policy
|
sell bonds to increase discount rate
|
|
|
tools of the Fed
|
open market operations
changing reserve requirement discount rate |
|
|
Fed funds rate
|
interest rate banks charge each other for loans
|
|
|
discount rate
|
interest rate on loans Fed makes to banks
|
|
|
money demand
|
how much wealth people want to hold in liquid form
depends on price level |
|
|
Inflation Tax
|
when tax revenue inadequate and ability to borrow limited, gov't may print money to pay for its spending
|
|
|
Fischer Effect
|
Normal interest rate = Inflation rate + Real interest rate
nominal interest rate adjusts one-for-one with changes in inflation rate |
|
|
Cost of inflation
|
shoeleather costs
menu costs misallocation of resources from relative-price variability confusion and inconvenience tax distortions |
|
|
shoeleather costs
|
resources wasted when inflation encourages people to reduce money holdings
|
|
|
menu costs
|
cost of changing prices
|
|
|
misallocation of resources from relative-price variability
|
firms don't all raise prices at same time so relative prices may vary, distorting allocation of resources
|
|
|
closed economy
|
doesn't interact w/ other economies in world
|
|
|
open economy
|
interacts freely w/ other economies in world
|
|
|
trade deficit
|
imports > exports
NX>0 |
|
|
trade surplus
|
imports< exports
NX<0 |
|
|
balanced trade
|
exports = imports
NX = 0 |
|
|
variables that influence net exports
|
consumer's preference for foreign and domestic goods
prices of goods at home and abroad incomes of consumers at home and abroad exchange rates at which foreign currency trades for domestic currency transportation costs government policies |
|
|
effects of money expansion
|
fed buys bonds
money supply increased so value of money falls, price levels increased, devaluing money (inflationary) |
|
|
effects of money contraction
|
fed sells bonds
money supply decreased so value of money increased, price levels decrease, value of money increase |
|
|
nominal variables
|
measured in monetary units
|
|
|
real variables
|
measured in physical units
|
|
|
relative price
|
price of a good relative to another
|
|
|
classical dichotomy
|
separation of nominal and real variables
|
|
|
neutrality of money
|
changes in money supply do not affect real variables in long run
|
|
|
velocity of money
|
rate at which money changes hands
|
|
|
hyperinflation
|
inflation exceeding 50%
|
|
|
Special cost of unexpected inflation
|
arbitrary redistributions of wealth
higher than expected inflation so debtors get purchasing power (pay less) lower than expected inflation so credits get purchasing power |
|
|
net capital outflow
|
domestic residents' purchase of foreign assets - foreigner's purchase of domestic assets
basically NX |
|
|
foreign direct investment
|
domestic residents actively manage foreign investment
|
|
|
foreign portfolio investment
|
domestic residents purchase foreign stocks or bonds supplying "loanable" funds to foreign firm
|
|
|
NCO > 0
|
capital outflow
|
|
|
NCO < 0
|
capital inflow
|
|
|
NCO influenced by
|
real interest rates paid on foreign assets
real interest rates paid on domestic assets perceived risks of holding foreign assets government policy affecting forein ownership of domestic assets |
|
|
S > 1
|
excess loanable funds flow abroad in form of positive net capital
|
|
|
S < 1
|
foreigners financing some of country's investment
NCO > 0 |
|
|
Nominal exchange rate
|
price of one currency in terms of another currency
|
|
|
Real exchange rate
|
price of goods in one country in terms of price of goods in some other country
|
|
|
Law of One Price
|
good should sell for same price in all markets
|
|
|
Purchasing-Power Parity (PPP)
|
any unit of currency should be able to buy same quantity of goods in all countries
|
|
|
Implications of PPP
|
nominal exchange rate between two countries should equal ratio of price levels
if two countries have different inflation rates, then e should change over time greater country's inflation rate, faster its currency should depreciate relative to low-inflation country |
|
|
Limitations of PPP
|
exchange rates don't always adjust to equalize prices across countries
many goods can't be traded foreign, domestic goods not perfect substitutes |
|
|
recession
|
periods of falling real income and rising unemployment
|
|
|
depressions
|
severe recessions
|
|
|
economic fluctuations are
|
irregular, unpredictable
most macroeconomic quantities fluctuate together as output falls, unemployment rises |
|
|
Function of AD and AS model
|
determine eq. price level and eq. output (real GDP)
|
|
|
AD curve
|
shows amount of g&s demanded in economy at a given price level
AD curve slopes downward |
|
|
Why AD slopes downward
|
Wealth Effect (increase P, decrease C)
Interest-Rate Effect (increase P, more sold to keep up with P level so i increase) Exchange-Rate Effect (increase P, increase i, so NX<0) |
|
|
AS curve
|
shows total quantity of goods and services firms produce/sell at any gien price level
AS curve slopes upward |
|
|
Long Run Aggregate Supply Curve
|
vertical
|
|
|
3 Theories of Short-Run Aggregate Supply
|
Sticky-wage theory
Sticky-price theory Misperceptions theory |
|
|
Misperceptions theory
|
firms confuse change in P with change in relative price of products sell
|
|
|
Expansionary Monetary Policy effect on AD
|
increase MS
decrease i AD increase so AD shift right Y and P increase in short-run P increase in long-run, Y go back to normal |
|
|
Contractionary Policy effect on AD
|
decrease MS
increase i AD decrease so AD shift left P and Y decrease in short run P increased, Y return to normal |
|
|
Expansionary Fiscal Policy
|
increase government spending
decrease taxes |
|
|
Contractionary Fiscal Policy
|
decrease government spending
increase taxes |
|
|
Budget Surplus
|
T > G
|
|
|
Budget Deficit
|
T<G
|
|
|
Marginal Propensity to Consume
|
change in consumption/change in disposable income
|
|
|
Automatic stabilizers
|
programs that stabilize demand by expanding/shrinking with economy w/o any additional legislative action
|
|
|
Phillips Curve
|
negative association between inflation rate and unemployment rate
|
|
|
Vertical Long-Run Phillips Curve
|
vertical
|
|
|
natural-rate hypothesis
|
unemployment eventually return to normal/"natural" rate, regardless of inflation rate
|
|
|
expected inflation
|
how much people expect price level to change
|
|
|
Long Run and Short Run Phillips Equation
|
in short run, Fed can decrease u-rate below natural u-rate by making inflation greater than expected
in long run, expectations catch up to reality, and u-rate goes back to natural rate |
|
|
supply shock
|
event that directly alters firms' costs and prices, shifting AS and Phillip's Curve
|
|
|
Cost of reducing inflation
|
Fed must slow down rate of money growth, reducing AD
SR: decreased output, increased u-rate LR: output, u-rate return to normal |
|
|
sacrifice ratio
|
% pts of annual output lost/ 1% point reduction in inflation
|
|
|
Rational Expectations
|
people optimally use all information they have when forecasting future
|
|
|
Productivity
|
Y/L
average quantity of g&s produced/unit labor |
|
|
Physical Capital/Worker
|
K/L
stock of equipment and structures used to produce goods and services |
|
|
Human Capital/Worker
|
H/L
knowledge and skills workers aquire through education, training, experience |
|
|
Natural Resources/Worker
|
N/L
inputs into production nature provides |
|
|
Technological Knowledge
|
society's understanding of best ways to produce goods and services
|
|
|
productivity depend on
|
level of technology
physical capital/worker human capital/worker natural resources/worker |
|
|
effect on savings and investment on productivity
|
can boost productivity by increase physical capital per worker
|
|
|
Diminishing Returns and Catch-Up Effect
|
government can implement polices that temporarily increase saving and investment so physical capital increase, increasing productivity and living
as physical capital increase, extra output from additional physical capital falls |
|
|
Rich vs. Poor countries
|
Giving workers in rich countries more physical capital will increase their productivity very little
Giving workers in poor countries more physical capital will increase their productivity a lot |
|
|
Effect on Investment from Abroad on Productivity
|
investment from abroad
|
|
|
Convergence
|
poor countries grow faster than rich countries and eventually catch up in terms of GDP/capita
|
|
|
Why does convergence occur?
|
technology transfer
poor countries attract more capital |
|
|
3 Modern Approaches to Development
|
Environmental Approach
International Trade Approach Institutional Approach |
|
|
Environmental Approach
|
poor development of country depend on
geography climate endemic disease inaccessibility to trade routes lack of natural resources |
|
|
International Trade Approach
|
countries need to integrate themselves into the world economy via:
trade in goods and services capital inflows |
|
|
institutional approach
|
legal/political system
monetary stability corruption |
