Macroeconomics: Ball Mankiw

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total income of everyone in the economy adjusted for level of prices

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real gdp

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no long-term trend -- varies substantially from year to year

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unemployment

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variables that a model tries to explain

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endogenous variables

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variables that a model takes as given-- the model's input

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exogenous variables

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supply function Qs= ______

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s(price of good, price of input goods)

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Qd = _______

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D(price of good, Y or aggregate income)

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price of pizza and quantity of pizza exchanged (variable type?)

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endogenous variables

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aggregate income and the price of materials (variable type?)

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exogenous variables

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assumption that price of a good is found where supply and demand curves intersect

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market clearing

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study of how households and firms make decisions and how these decisionmakers interact in the marketplace

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microeconomics

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the plural of anecdote

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data

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administrative data on tax collection, education programs, defense and regulation; surveys of retail establishments, manufacturing firms, and farm activity

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sources of GDP data

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total expenditure on the economy's output of goods and services

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GDP

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firms give goods to and income to households

households buy goods and thus give expenditure

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circular flow

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sum of wages and profit OR total expenditure

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GDP

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market value of all final goods and services produced within an economy in a given period of time

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GDP

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firm hires people to produce bread but doesn't sell the bread. What happens to GDP?

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nothing -- expenditure and income has zero net change

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firm sells goods from inventory. What happens to gdp?

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nothing

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firm puts bread into inventory. What happens to GDP?

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rises -- expenditure on bread plus labor

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rancher sells McDonalds some meat for .50 that is then sold for 1.50. Change in GDP?

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1.50 -- intermediate goods don't count

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estimate of the value of goods and services not sold in the marketplace (eg housing, wages of public servants)

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imputed value

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nominal gdp / real GDP = ______

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GDP deflator or implicit price deflator

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real gdp X GDP deflator = _______

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nominal GDP

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Nominal GDP / GDP deflator = _______

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Real GDP

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average prices between two years as the "base year" to compute price changes

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chain-weighted

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List components of expenditure

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consumption investment government purchases net exports

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c+I+G+NX = Y

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national income accounts identity

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nondurgable goods, durable goods, services

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consumption

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business fixed, residential fixed, inventory -- creates new capital

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types of investment

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GDP + factor payments from abroad - factor payments to abroad

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gross national product

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GNP - Depreciation = _________

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net national product (NNP)

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the consumption of fixed capital (about 10% of GNP)

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depreciation

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national income - indirect business taxes - corporate profits - social insurance contributions - net interest + dividends + government transfers + personal interest income

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personal income

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personal income - personal tax and nontax payments

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disposable personal income

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eliminate the portion of fluctuations due to predictable
seasonal changes

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seasonal adjustment

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quantity consumed X current price of apples + weighted cost of all other current goods / quantity consumed times older cost of goods

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CPI change

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CPI and GDP deflator are different for three reasons _______

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CPI measures only goods bought by consumers not all goods, GDP only includes domestic goods, CPI applies fixed weights to the prices of different goods while GDP deflator assigns changing weights

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a price index with a fixed basket of goods (ie CPI)

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Laspeyres index)

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a price index with a changing basket of goods (ie gdp deflator) -- understates the

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paasche index

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tends to overstate the increase in the cost of living because doesnt account for substitution effect

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laspeyres index (cpi)

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tends to underestimate the increase in the price of living because it doesnt account for changes in consumer welfare from substituting cheaper goods

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paasche index / gdp deflator

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adjust benefits in laws and contracts to current prices

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cost of living allowances

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sum of employed and unemployed

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labor force

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labor force /adult participation X 100 -- generally about 64.6%

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labor force participation

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sources for employment statistics at the bureau of labor statistics

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population survey and survey of 160,000 business establishments

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an increase in an equal percentage in all factors of production causes an increase in output of the same percentage --- ie, zY = F(zK, zL)

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constant returns to scale

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amounts paid to each factor of production

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factor prices

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vertical line reflecting fixed amount of capital and labor in production

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factor supply

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PF(K,L) -WL -RK = ______

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profit function (wages times labor and kaptial time R factor price)

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F(K, L+1) - F(K,L) extra amount of output from extra unit labor

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marginal product of labor

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how much labor does firm hire?

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Wages = price X marginal product of labor

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MPL = _____ /________ "real wage" measured in output rather than dollars

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W / price

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F(K+1, L) - F(K,L)

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marginal product of capital

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MLK = real rental price of capital = ______ / ______

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Rent / Price

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where do firms choose labor and capital levels

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where factors' marginal product falls to equal its real factor price

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Y - (MPLXL) - MPKXK

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economic profit

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value that remains after firms have paid the factors of production

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economic profit

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MPLXL +MPKXK + Economic Profit =__________

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national income (Y)

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with constant returns to scale Euler's theorem states F(K,L) = _________

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MPKXK + MPL XL

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Accounting profit = __________

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Economic Profit + (MPK X K)

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economic profit plus MPK times K = _____________

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accounting profit

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economic profit and return to capital (which are lumped together because firm owners and capital owners are the same)

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accounting profit

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the marginal product of labor after the black plague had _________ while real rents for landowners ________

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increased, fell

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alpha times Y = MPK X K

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capital income or MPL x K

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(1- alpha) Y = labor income =

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labor income or MPL x L

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capital's share of income (as a constant between zero and one)

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alpha

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F(K,L) = _________

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AK(to the alpha)L(to the one minus alpha)

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how did black death affect Marginal product of labor

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increased it along the labor curve thus increasing real wages

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(1 - a) AK(^a)L(-a) = __________

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MPL

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aAK(^a-1)L(a-1) = ______

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MPL

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(1-a) Y/ L

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MPL

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a ( Y/K )

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MPK

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Y/L = __________

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average labor productivity

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Y/K= _______________

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average capital productivity

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constant representing the ratio of labor income to capital income

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(1-a) / a

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(1-a) / a

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constant representing the ratio of labor income to capital income

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Income - taxes (Y - T)

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disposable income

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C= ___________ "consumption function"

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C(Y - T )

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slope of the consumption function, amount by which consumption increases for unit increases in (y-t) disposable income

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marginal propensity to consume

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averages about 15 % of US gdp

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investment

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cost of funds used to finance investment

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interest rate

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nominal interest rate is 8 percent and inflation is 3 percent. What is real interest rate?

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5%

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real interest rate is 4% and inflation is 3%. What is nominal interest rate?

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7%

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slope of the I = I(r) function is?

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negative because as interest rate rises the quantity of investment demanded will fall

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welfare payments for the poor and social security payments are/are not included in variable G

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are not -- transfer payments duh

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equation stating that supply of output equals its demand , such that only interest rate is not fixed or can adjust to ensure demand for goods equals supply (output)

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Y = C(Y - T) + I(r) + G. bold means bar over the letter

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National Saving (S) or I = __________

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Y - C - G

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Y - C - G

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national saving

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(Y - T - C) + (T - G)

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private saving plus public saving, or national saving

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Y - C(Y - T ) - G = S = _____________

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I(r) left hand side of equation is fixed

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the I(r) curve slopes ________- because as interest rate decreases, more investment projects ________---

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downward become profitable

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ingreasing G causes interest rates to ______- and investment to ____________-

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increase, decrease "crowd out" effect

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a reduction in taxes will ________ investment and ___-_-- the interest rate

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decrease and increase (because a corresponding increase in consumption must be met by a decrease in investment overall)

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causes of investment demand to change

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technological change, government encouragement or discouragement of investment through tax laws

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an increase in investment demand (shift of I curve to the right) will _______ equilibrium saving and ________ equilibrium interest rate (in case of vertical saving schedule where consumption is independent of interest rate)

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unchange, increase

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stock of assets that can be readily used to make transactions

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money

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way to transfer purchasing power from the
present to the future

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store of value

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the terms in which prices are quoted
and debts are recorded

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unit of account

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the unlikely happenstance of two people each having a good that theother wants at the right time and place to make an exchange

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double coincidence of wants

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the purchase and sale of government bonds

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open market operations

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buying government bonds from the public will _____

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increase the money supply

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selling government bonds from the fed's portfolio

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decrease the money supply

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sum of outstanding paper money and coins

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currency

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people hold in their checking accounts

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demand deposits

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Money x Velocity =

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Price x Transactions

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measures the rate at which money circulates in the economy

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transactions velocity of money

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costs of inflation

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shoeleather costs, menu costs, the

cost of relative price variability, tax distortions, and the inconvenience

of making inflation corrections

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opportunity cost of holding money

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nominal interest rate

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theoretical separation of real and nominal variables

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classical dichotomy

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advantage of inflation

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makes labor market work better