Macro Exam 2

Front 1

K

Back 1

Capital

Front 2

L

Back 2

Labor

Front 3

Y

Back 3

Income

Front 4

Per Worker Production Function

Back 4

the relationship between Real GDP per hour worked and capital per hour worked,

holding the level of technology constant

Front 5

What causes a movement along the Per Worker Production Function?

Back 5

An increase in the capital per hour worked is a movement along theper-worker production function

Front 6

What causes a shift in the Per Worker Production Function?

Back 6

Technological change, an investment in R&D, and education cause a shift in the per-worker production function

Front 7

Economic Growth Model

Back 7

a model that explains growth rates in real GDPper capita over time

Front 8

The Great Moderation (1945 – 2007)

Back 8

absence of severe recessions in the US during this time period

Front 9

What caused The Great Moderation?

Back 9

1. Services were greater than goods

2. Establishment of unemployment insurance

3. Active gov't policies stabilized the economy

4. Stability of the financial system

Front 10

Durable goods

Back 10

Goods that last longer than 3 years

Ex. consumer- fridges, cars

Ex. producer – machinery

Front 11

Non-durable goods

Back 11

Food

Front 12

During a recession what happens to durable goods?

Back 12

Will decrease

Front 13

During a recession what happens to non-durable goods?

Back 13

Will have no impact

Front 14

What will happen to inflation during a recession?

Back 14

will decrease in a recession. It is much harder to raise prices during a recession

Front 15

What will happen to unemployment during a recession?

Back 15

will increase in a recession. Sometimes unemployment will remain high even after a recession has ended

Front 16

Why will unemployment remain high after a recession has ended?

Back 16

1. Growth rate of capital is greater than the growth of employment

2. Firms my hold onto productivity gains

3. Firms choose to continue to operate below capacity

Front 17

Savings of Households

Back 17

the interest = the level of savings

Front 18

TR

Back 18

Transfer Payments

Front 19

C

Back 19

Consume

Front 20

T

Back 20

Taxes

Front 21

G

Back 21

Government expenditures and purchases

Front 22

Formula: Sprivate

Back 22

= Y + TR - C - T

= income + transfer payments - consume - taxes

Front 23

Formula: Spublic

Back 23

= T - G - TR

= taxes - government - transfer payments

Front 24

Formula: Total Savings

Back 24

= Sprivate + Spublic

or

= Y - C - G

Front 25

Balance Budget

Back 25

Tax = G + TR

Front 26

Budget Deficit

Back 26

Tax < G + TR

Front 27

Budget Surplus

Back 27

Tax > G + TR

Front 28

During a budget deficit what happens to Spublic and savings?

Back 28

Spublic is (-) and Savings goes Down

Front 29

During a budget surplus what happens to Spublic and savings

Back 29

Spublic is (+) and Savings goes UP

Front 30

Financial intermediaries

Back 30

firms such as banks, mutual funds, pension fund, and insurance companies that borrow funds from savers and lend them to borrowers

Front 31

What are the four roles of Financial intermediaries?

Back 31

1. Match borrowers with lenders

2. Risk Sharing

3. Liquidity

4. Information

Front 32

Risk sharing

Back 32

the chance the value of a financial security will change relative to what you expect.

Front 33

Liquidity

Back 33

ease of which financial security can be turned into cash

Front 34

Information

Back 34

facts about borrowers and expectations about returns on financial securities.

Ex. Stock price

Front 35

Labor Productivity

Back 35

the quantity of goods and services that can produced by one worker or by one hour of work

Front 36

What causes labor productivity to increase?

Back 36

1. Increase in capital per hour worked

2. Technological change

Front 37

Capital

Back 37

manufactured goods that used to produce other goods and services

Front 38

Capital Stock

Back 38

the total amount of physical capital available in a country

Front 39

Human Capital

Back 39

accumulated knowledge and skills workers acquire from education and training from their life experiences

Front 40

Technology

Back 40

processes a firm uses to turn inputs into outputs of goods and services Can Be processes, but typically machinery, equipment, or software

Front 41

Which is better in the long-run? Technological change or increase in capital?

Back 41

Technological is better in the longrun, able to produce more with less capital

Front 42

What increase Real GDP per capita?

Back 42

Increases in Labor Productivity

Front 43

6 Economic Functions of the Government

Back 43

1. ensure all resources are employed

2. stabilize economy

3. prevent unemployment

4. stabilize business cycle

5. prevent inflation

6. promote economic growth

Front 44

What does the process of economic growth depended on?

Back 44

the ability of firms to expand their operations, buy additional equipment, train workers, and adopt new technologies

Front 45

Retained Earning

Back 45

profits that are reinvested in the firm rather than paid to the firm’s owners

Front 46

Funds from households: Directly

Back 46

Stocks - financial securities thatrepresent ownership of a firm

Bonds – financial securities thatrepresent a promise to repay a fixed amount of funds

Front 47

Funds from households: indirectly

Back 47

Bank loans

Front 48

ProducerPrice Index (PPI)

Back 48

an average of prices received by producers of goods andservices at all stages of production

Front 49

What is included in the PPI?

Back 49

intermediate goods (goods used to create something else) and raw goods

Front 50

Relationship between PPI and CPI

Back 50

if price increases on PPI, then price increases CPI

you see movements in the PPI before you see them in the CPI

Front 51

Nominal Variables

Back 51

economic variables calculated in current year prices

Front 52

Real Variables

Back 52

are measured in dollars of the base year of the price index

Front 53

Nominal Interest Rate

Back 53

the stated interest on a loan

Front 54

Real Interest Rate

Back 54

nominal interest rate minus the inflation rate

Front 55

Interest

Back 55

cost of barrowing funds expressed as a percentage of the amount borrowed

Front 56

For the economy as a whole do we measure nominal interest rate or real interest rate?

Back 56

Nominal Interest Rate

Front 57

Treasure Bills

Back 57

Short-term loans made to the government

Front 58

Can the nominal interest rate be less than realinterest rate?

Back 58

Yes when inflation > nominal interestrate

Front 59

Deflation

Back 59

a decline in the price level (negative inflation rate)

Front 60

Formula: Growth rate

Back 60

= (Real GDPyear2 - Real GDPyear1) / Real GDPyear1

Front 61

Rule of 70

Back 61

take an annual growth rate and put 70 over it and that will tell you how long it will take to double.

Ex. 70/3 = 23 years 70/10 = 7 years

Front 62

Long Run economic growth

Back 62

process by which rising productivity increases the standard of living

1. Best measured standard of living is Real GDP

2. Real GDP per capita

3. fluctuates due to business cycle

Front 63

Price Level

Back 63

measure of the average prices of goods and services in the economy

Front 64

Formula: GDP Deflator

Back 64

= (Nominal GDP / Real GDP) * 100

Front 65

GrossNational Product (GNP)

Back 65

the value of final goods and services produced by residents of the US even if production takes place over seas (outside of US)

Front 66

National Income

Back 66

= GDP - Depreciation

Front 67

Formula: Disposable Personal Income

Back 67

= Personal Income - Tax Payments

Front 68

Formula: Personal Income

Back 68

= GDP - RE + TR +I

Front 69

RE

Back 69

Retained Earnings

Front 70

Income

Back 70

1. wages

2. interest

3. rent

4. profit corporations

5. profit sole-properoritship

Front 71

Wages

Back 71

Wages + fringe benefits (health care)

Front 72

Interest or Net interest

Back 72

difference between interest and savings and debt

Front 73

Rent

Back 73

rent received by households

Front 74

profit corporations

Back 74

larger businesses

Front 75

profit sole proprietorship

Back 75

usually smaller businesses

Front 76

Labor Force

Back 76

is the sum of employed and unemployed workers in the economy

Front 77

Who is not included in the Labor force?

Back 77

retirees, active military, prisoners, mental patients, those who looked for work in the past 12 months but not past 4 weeks

Front 78

Discourages workers

Back 78

are people who havenot looked for a job in the previous 4 weeks because they believe none are available to them

Front 79

How is unemployment rate measured?

Back 79

The US Census Bureau conducts HouseHold Surveys. They interviews 60k households about employment (includes anyone 16+)

Front 80

Formula: Employment Rate

Back 80

= (# of unemployed / Labor Force) * 100

Front 81

Formula: Labor Force Participation Rate

Back 81

= (Labor Force / Working Age Population) * 100

Front 82

Formula: Working Age Population

Back 82

= Labor Force + Not included Labor Force

Front 83

Underemployed

Back 83

people, who are “over” qualified for their position, Part-time but want a full-time job, understates the degree ofjoblessness

Front 84

Problems with measuring the Unemployment Rate

Back 84

Not taken into account:

1. discouraged workers

2. understating / overstating unemployment

3. underemployed workers

Front 85

Labor Force Participation Rate

Back 85

which measures the share of Americans at least 16 years old who are either employed or actively looking for work

Front 86

The EstablishmentSurvey (Payroll Survey)

Back 86

-Samples 30,000business

-measures totalnumber of persons employed and on a company payroll

-doesn’t includeself-employed people

- doesn’t includenew firms

-doesn’t provideinformation on unemployment

Front 87

Vibrant Economy

Back 87

firms are constantly created and destroyed

Front 88

Creative Destruction

Back 88

1. Changes in consumer preferences

2. Technological Change

3. Entrepreneurs Respond to the changes

Front 89

Frictional Unemployment

Back 89

short-term unemployment that arises from the process of matching workers with jobs

Front 90

Seasonal Unemployment

Back 90

unemployment due to factors such as weather,variations in tourism, and other calendar events

Front 91

Structural Unemployment

Back 91

unemployment arising from a persistent mismatch between the skills and attributes of workers and their requirements of jobs

Front 92

Cyclical Unemployment

Back 92

unemployment caused by a businesscycle recession

Recessionoccurs, company lay off workers

Eventually will have an Expansion – hire people back

Front 93

Full Employment

Back 93

when the only remaining unemployment is structural andfrictional

Front 94

Formula: Natural Rate of Unemployment

Back 94

= Frictional Unemployment + Structural Unemployment

Front 95

Explaining unemployment: Government Policies

Back 95

Can reduce the level of frictional and structural unemployment:

Frictional - speed up matchmaking process

Structural - Trade Adjustment Assistant Program

Can add to Frictional and Structural unemployment:

increase time devoted to searching for jobs

keeping wages above market level

provide incentives for firms to hire workers

Front 96

Unemployment Insurance

Back 96

1. The US and most otherindustrialized economies

2. Usually equal to ½the average wage

3. Opportunity Costto job search

4. Recessions worse without it

Front 97

Unemployment: International Comparison

Back 97

Other countries will have higher unemployment rates

Front 98

Minimum Wage Laws (price floor)

Back 98

- State and Local gov't can set Minimum Wage

- Est. in 1938 was $0.25/hour

- Qs > Qd = Surplus

- increase the the unemployment rate

- teenager affected the most (least skilled)

Front 99

Labor Unions

Back 99

Organization of workers that bargainfor higher wages and better working conditions for their members

Front 100

Efficiency Wages

Back 100

Are higher than market wages that a firm pays to increase worker productivity

Front 101

Inflation

Back 101

the percentage increase in the average price level form one year to the next

Front 102

How to measure Price Level?

Back 102

1. GDP Inflator

2. Consumer Price Index (CPI)

Front 103

Consumer Price Index (CPI)

Back 103

an average of the prices of goods and servicespurchased by the typical urban family of four

it is sometimes referred to as a cost-of-living index

Front 104

Formula: Consumer Price Index (CPI)

Back 104

1. Total the yearly cost of the basket

2. CPI = (current year basket / base year basket) * 100

3. Percent change: (CPIyear2-CPIyear1)/CPIyear1

Front 105

Who calculates CPI?

Back 105

The Bureau of Labor Statistics (BLS)

-Surveys 30,000 HH on their spending habitso

-Constructs a market basket of goods andservices purchased by the typical urban family of 4

-Eight broad categories along with their share ofthe basket

Front 106

What are the categories of the basket?

Back 106

1. Housing

2. Food and Beverage

3. Transportation

4. Medical

5. Education

6. Recreation

7. Apparel

8. Other g/s

Front 107

What is best used to measure Price Levels? GDP Inflator or CPI?

Back 107

CPI is best used. GDP Inflator is broad, measures the price level of all final goods and services and doesn't measure the change in price level.

Front 108

Sub Bias

Back 108

BLS assumes that each month consumers purchasethe same amount of each product in the market basket

Note: you wouldpurchase less of a product that went up in price and more of one that went downin price.

Front 109

Increase in Quality Bias

Back 109

Increase in the price of a productis due to:

1. Pureinflation

2. Improvedquality

Note: It hard to tell which onecaused the change in price. Use statistical methods to determine.

Front 110

New Product Bias

Back 110

if the market basket is not updated frequently,the price decreases of new products are not included CPI

Front 111

Outlet Bias

Back 111

- consumersbegan to increase their purchases from discount stores

- BLS didn't account for this, continued to collect data from traditional full-price retail stores

- To deal with this, Point of Purchase Survey

Front 112

MACRO

Back 112

the study of the economy as a whole

allows individuals, firms, and the government to understand current economic conditions and help predict future conditions. This enables them to make better choices.

Measure Total Production and Total Income

Front 113

Business Cycle

Back 113

alternating period of economic growth and economy recession

Graph will have peaks and troughs – trending upward

Ideal: we want the graph to tend upwards and be smooth

Government to help keep the business cycle “smoother”

Front 114

Two Stages of the Business Cycle

Back 114

Expansion

Recession

Front 115

Expansion

Back 115

Increase in Total production

Increase in Total employment

Front 116

Recession

Back 116

Decrease in Total production

Decrease in Total employment

Front 117

Economic Growth

Back 117

the ability of an economy to produce increasing quantities of good and services

Front 118

Rate of growth

Back 118

how fast it grows

Lower growth rates lead to lower standard of living

Higher growth rate leave to higher standards of living

Front 119

Why do growth rates differ across countries?

Back 119

high levels of employment

There is a relationship between unemployment and the business cycle in the short run but not in the long run

Front 120

Growth rate in the short run?

Back 120

would increase during recession and decrease in an expansion

Front 121

Growth rate in the long run?

Back 121

Will revert to the average

Front 122

Inflation Rate

Back 122

percent increase in the price level from one year to the next

Front 123

Gross Domestic Product (GDP)

Back 123

the market value of all final goods and services produced in a country during a period of time (usually a year)

Front 124

Who measures GDP?

Back 124

Measured by Bureau of Economic Analysis (BEA)

Compiles the data necessary to calculate GDP.

Done every 3 months

Front 125

How is GDP measured?

Back 125

measured in market values NOT quantities

Front 126

What is included in GDP?

Back 126

market value of final goods and services

Intermediate goods

Only current production goods ("used" not counted)

Front 127

Final goods/services

Back 127

goods/services purchased by its final user and not used in the production of any other good or service

Front 128

Intermediate good

Back 128

good or service that is input into another good or service

Front 129

Formula: Government Purchases

Back 129

= Y - C - I

Front 130

Formula: Investment spending

Back 130

= C - Y - G

Front 131

Formula: Transfer Payments

Back 131

= T - G - Spublic

Front 132

Formula: GDP

Back 132

Y = C + I + G + NX

Front 133

Net Exports (NX)

Back 133

= Exports - Imports

Front 134

Consumption

Back 134

spending by HH on goods and services

Doesn't include spending on new houses

Front 135

Investment

Back 135

spending by firms on new factories, office buildings, machinery, inventory

Includes spending by HH + firms on new houses

Front 136

Gross Private Domestic Investment

Back 136

1. business fixed investment

2. residential investment

3. changes in business investment

Front 137

Business Fixed Investment

Back 137

new factories, etc..

largest component of investment because it can fluctuate

Front 138

Residential Investment

Back 138

new single and multi-family homes

Front 139

Changes in Business Inventories

Back 139

changes in business inventories

Front 140

Government Purchases

Back 140

spending by federal, state, and local governments

doesn't include transfer payments

Front 141

Why are imports not included in Net Exports

Back 141

Exports are what are produced in the US

Front 142

Purchases by State and Local Gov't > Federal

Back 142

Most government activities are provided at a state and local level

Front 143

Imports > Exports

Back 143

Negative Net Export

Front 144

Spending on Services > Spending on goods

Back 144

Long term tend in high income countries

Shift away from goods and more toward services

Due to wealthier and older populations

Front 145

Saving rate

Back 145

percent of income saved

Front 146

Long run consequence of the increase in the saving rate?

Back 146

increase in saving

increase funds convertible for investment

Front 147

Short run consequence of the increase in the saving rate?

Back 147

hard for sales of durable goods.

decrease in consumption

Front 148

Value Added

Back 148

The market value a firm adds to a product

Final Price = Total Value Added

Front 149

GDP fails to include two types of production?

Back 149

Household production

Underground Economy

Front 150

Household production

Back 150

good and service people produce for themselves

Front 151

Underground Economy

Back 151

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations (illegal)

Front 152

Is it a big deal that GDP excludes household productions and underground economy?

Back 152

Short run - no

Long run - yes

Front 153

Nominal GDP

Back 153

the value of final goods and services evaluated at current year prices

Front 154

Real GDP

Back 154

the value of final goods and services evaluated at base year prices

when using Real GDP we are keeping the purchasing power of the dollar constant

Front 155

Price Index

Back 155

Measures prices in 1 year relative to price in the base year

Front 156

Transfer payments

Back 156

payments by government to individuals for which the government does not receive a new good or service in return

(ex. SS or Income Tax returns)