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26 Cards in this Set
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Define Macroeconomics |
Macro 2 Lecture notes #1 Macroeconomics definition – Macroeconomics is concerned with the behaviour of the economy as a whole, booms and recessions, the economy’s total output of goods and services, the growth of output, the rates of inflation and unemployment, the balance of payments and exchange rates. Macroeconomics deals with both long run economic growth and short run fluctuations which constitute the business cycle. |
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What are the three main models in Macro? |
- Short run- Medium run- Long Run |
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What are the main assumptions in the long run? |
Potential output is expected to grow short run fluctuations are ignored. Determined solely by supply side considerations Output is determined by the productive capacity of the economy All factors of production, land labour capital and technology are assumed to be fully employed. This is a state of “Potential Output” Assumes contracts will have expired |
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Main causes of economic growth in the long run |
Technology Physical and human capital accumulation Infrastructure Higher rates of domestic saving. |
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In the long run, the AS line is assumed to be? |
Productive capacity is fixed, therefore vertical AS Curve |
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AD AS curve explains short to medium run determination of? |
inflation and real output. |
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What are the assumptions for the AD AS model in the short run? |
- Too short for markets to clear - Actual output can deviate from potential output. - Short run fluctuations in real output are important. - AD is major determinant of fluctuations - In short run, prices are assumed to be constant, Therefore horizontal AS Curve |
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What are the major reasons for a diagonal as curve in the medium run? |
Misconception therory - People believe they are making more money so they produce more. Sticky wages, costs and prices. Menu Costs |
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What is the Phillips curve? |
Medium run trade-off between inflation and unemployment |
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What is the business Cycle? |
Describes the variation in economic activity around the path of growth. - Measures the difference between potential and actual growth |
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What is the formula for the output gap? |
Actual output – Potential output |
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In a recession the output gap will be? |
Negative |
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In a boom the output gap will be? |
Positive |
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The cost when an economy is growing above trend is _______, the cost when an economy is growing below inflation is _________________. |
Inflation, Unemployment |
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Costs of unemployment in a recession is caused by? |
associated with loss in potential output |
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Costs of inflation in a boom is caused by? |
upsets price relationships and reduces the efficiency of the price system. |
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What are the main pro cyclical Variables? |
- Output- Employment- Interest rates- Money Supply |
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What are the main counter cyclical Variables? |
- Inventories- Unemployment rate- Amount of bankruptcies. |
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What are some key leading indicators? |
- Profitability- Building approvals- Weekly hours worked- Yield curve on bonds. – When short term interest rates have a higher yield than long term interest rates on the same quality of bond. This is caused by higher demand for short term credit. |
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Key lagging indicators? |
Key lagging indicators- Wages, unemployment |
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Define "Recession" |
2 consecutive quarters of negative growth. |
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When was the new classical school theory developed? |
1970’s |
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When was the new keynsian school theory developed? |
1980’s, 1990’s |
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What are the assumptions of the new classical school? |
- Economic agents optimise- Rational decision making (Of available information)- Markets are assumed to clear This then assumes that:- No voluntary unemployment- Markets are continually in equilibrium |
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What are the assumptions of the new New Keynesian School? |
- Markets will not always clear- This is due to:- Incomplete information - Institutions affecting markets- Costs of changing wages leading to price rigidities |
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GDP Deflator |
= Nominal GDP / Real GDP * 100 |
