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78 Cards in this Set
- Front
- Back
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What is the Business Cycle?
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Short run contractions and expansions in economic activity.
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What does Monetary policy cover?
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The Growth and management of the money supply.
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What seperates Macroeconomics from Microeconomics?
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Aggregation
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What is an endogenous variable?
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One that is determined by the model. The purpose of models is to explain the endogenous variables behavior.
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What is an exogenous variable?
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A variable that is determined outside the model (price of steel income)
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What are the 3 components of a model?
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Variables,
Assumptions, Purpose |
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WHat is the only different assumption that divides long run and short run models?
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The speed at which an economy adjusts prices and wages.
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What are the 3 approaches to national income accounting?
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Product Approach
Income Approach Expenditure Approach |
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Why is P.I.E. equivelant?
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Due to circular flow.
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Under the circular flow model, what should Output equal?
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Output = Expenditure
Expenditure = Agregate Demand Output = Aggregate Supply |
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According to the product approach, how is GDP defined?
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The Market value of
Final Goods and Services Newly Produced Within a nation |
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Which national income accounting approach is value added?
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Product Approach
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What is the value added approach?
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Followed by the Product model, it is the output of a producer minus the value of inputs.
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What are assets used for?
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Assets are used to sore values.
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Can you consue assets?
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You cannot consume assets?
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Are assets included in GDP calculations?
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No. A fall in the Dow Jones will not directly lower GDP.
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What is GNP?
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Gross National Product is anything produced by US citizens. IE a us factory in china is included in US GNP.
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How is GNP calculated?
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GDP = GNP - Net Factor Payments
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What is the Expenditure Approach?
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Looks at C+I+G+NX
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What % of GDP is consumption?
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70%
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In the consumption spending component of GDP, spending by who/what is measured?
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Spending by households
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What % of GDP is investment?
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15%
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In the expenditure approach, what is Investment?
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Spending for new capital goods, residential fixed investment, and inventory investment.
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What do firms spend their money on in the Investment component of the Expenditure Approach?
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Mostly capital goods
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In the expenditure approach to government, how are transfers and interest payments counted?
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They are not counted
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What % of GDP is Government spending according to the expenditure approach?
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20%
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What causes recessions?
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Lack of investment.
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How does the Income Approach Measure GDP?
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As the sum of Private and government sectors income.
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What are flow variables?
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Measured per unit of time. GDP, income, savings, investment, Defecit.
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What are stock variables?
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Measured at a point in time. Quantity of money, value of houses, capital stock, wealth.
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What do changes in real variables reflect?
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Changes in real variables reflect only quanitty changes.
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What do changes in nominal values reflect?
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Changes in prices and changes in quantity.
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If todays CPI is 232, how much have prices increased since the base year?
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132%
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What base ear do we use today?
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2005-06, or 1982
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What are some problems with CPI?
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It doesnt reflect substitution
It doesnt reflect chanes in quality biased 1 or 2 points per year |
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What is an interest rate?
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a rate of return promised by a borrower to a lender
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What are the 4 factors of production?
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Capital
Labor Others Productivity of Factors |
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With regards to labor supply, which effect do we assume dominates?
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We assume that the substitution effects dominate.
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What is the Labor Supply curve determined by?
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Individuals decisions.
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What is the Labor Demand curve determined by?
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It is derived from the Marginal Product of Labor
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According to the classical model, what is output determined by?
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Only Capital and Labor
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Who calculates the unemployment rate?
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BLS
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Workers that have stopped looking for work are known as what?
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discouraged workers
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What is the natural rate of unemployment?
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Estimated at 5%
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What causes natural unemployment?
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Structural Unemployment
Frictional Unemployment |
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What is the difference between structural unemployment and frictional unemployment?
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Frictional unemployment is short-lived
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What is cyclical unemployment?
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Cyclical = Actual - Natural
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What assumption does full output have regarding employment?
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There is no cycliucal unemployment.
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What does Okuns Law state?
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A 1% increase in unemployment leads to a 2% decrease in output.
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What is the primary decision variable in Private Savings calculus?
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Consumption
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What is consumption smoothing?
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People like to keep consumption constant. Dont bllow all of their money at one time.
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What factors change consumption behavior?
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Changes in current income
Changes in expected income Changes in wealth Changes in the real interest rate |
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With regards to changes in the real interest rate, which effect do we assume dominates?
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We assume that the substitution effect dominates, leading individuals to save more when interest rates rise.
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Which variables does Fiscal Poliy affect?
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G and T
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Investment is what kind of concept/variable?
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It is a flow concept
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Capital is what kind of concept/variable?
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It is a stock concept.
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How does a firm find its equilibrium capital?
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At the point where User Cost = MPK
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To keep capital stock constant, what has to happen year to year?
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Investment = depreciation
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As the interest rate increases, what happens to savings and investment?
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Savings increases,
Investment Decreases |
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What 2 things can chift the labor supply curve?
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Population
Labor Force Partificpation |
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What things can shfit the labor demand curve?
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Productivity (determined by MPC)
Capital Stock (K) |
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What 6 things can shift the Savings curve?
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Income
Real Interest Rate Government Spending Taxes Wealth Expected Future Income |
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What 2 things can shift the investment curve
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Real interest rate
Marginal Product of Capital |
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A mom makes 40k a year. She spends 16k of that on daycare. What is her contribution to GDP in the Expenditure Approach?
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16k increase in concumption, 24k spread out in other categories.
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A mom makes 40k a year. She spends 16k of that on daycare. What is her contribution to GDP in the Income Approach?
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56k to homemaker and factors of prodcution
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A mom makes 40k a year. She spends 16k of that on daycare. What is her contribution to GDP in the Product Approach?
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56k domestic value added
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What is desired capital stock?
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The amount of capital that allows a firm to earn the largest expected profit.
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When does a firm have anequilibrium amount of capital?
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When UC = MPK
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Why does desired investment fall as the real interest rate rises?
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The user cost of capital increases, resulting in a smaller capital stock,
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An increase in output does what to the price level?
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It causes the price level to decrease.
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An increase in the real interest rate does what do the price level?
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It causes the price level to rise
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What roles does money play?
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Store of Value
Medium of Exchange Unit of Account |
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Is money an asset?
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Yes, it holds wealth
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What is the most liquid asset?
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Money
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What components make up M1?
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Currency
Travelers Checkcks Checkable Deposits Demand Deposits |
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What are all M1 components used for?
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Used to make payments
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What are the M2 components?
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M1
Savings Small Time Deposits Money Market Mutual Funds |
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What is the relationship between maturity, risk and liquidity.
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higher maturity = higher risk = lower liquidity
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