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57 Cards in this Set
- Front
- Back
What is Consumption?
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Spending by households on goods and services
Exception: purchasing of housing |
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What is Investment?
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Spending on plant and equipment (machines, tools, office buildings, software)
Housing Inventory |
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What are Government Purchases?
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Spending on goods and services by local, state, and federal gov't
Excludes transfer payments (Social Security) |
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What are Net Exports?
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Exports - Imports
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What is the Aggregate Demand Curve?
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Price level for each level of Aggregate Expenditure
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Why does the Aggregate Demand Curve slope down?
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1.) Wealth Effect: (Household wealth = assets - debts) Increases in price lower purchasing power of households, decreasing consumption.
2.) Interest-Rate Effect: Higher price level increases interest rates, lowering investment and consumption. 3.) International-Trade Effect: Higher prices makes U.S. exports more expensive and foreign imports less expensive, decreasing net exports. |
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What is the formula for Real Exchange Rate?
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e = (Domestic Price * Nominal Exchange Rate) / Foreign Price
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What are the three main factors that could shift the Aggregate Demand Curve?
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Gov't Policies - Monetary which affects interest or Fiscal which affects gov't spending and tax rates
Changes in Household expectations or firms Changes in foreign variables |
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What is an Expansionary Monetary Policy?
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Actions taken by the Fed that increase the money supply (ex. buying bonds)
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What happens in the money market equilibrium if the Fed buys bonds?
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Aggregate Demand increases, money supply goes up, and interest rate goes down
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What is a Contradictory Monetary Policy?
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Actions by the Fed that decrease money supply (Fed sells bonds)
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What happens to the AD curve if the price of domestic goods increases?
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Imports increase, so net exports decrease, which shifts AD left
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What happens to the AD curve if the price of foreign goods increases?
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Exports increase, so AD shifts right
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What is the formula for Budget Balance?
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(Taxes - Transfers) - Government Spending
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What if taxes - transfers > government spending?
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Budget Surplus, opposite would be deficit
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What is the formula for Federal Deficit?
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Govt receipts - Govt. purchases - Transfer payments
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What is federal debt?
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Total amount of accumulated deficits or the total amount owed by the Federal Government
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What is the goal of a monetary policy and who runs it?
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Done only by the Fed to affect money supply and interest rate
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What is the goal of a fiscal policy and who runs it?
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Done by the Treasury Dept. at the discretion of the Legislative or Executive Branch to affect tax rate and govt spending
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What is the effect of an Expansionary Fiscal Policy on AD curve?
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G goes up, Taxes go down and/or transfer payments go up (AD curve shifts right)
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What is the formula for Marginal Propensity to Consume?
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Change in consumption / Change in disposable income
or ΔC / ΔYd |
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What is the formula for Govt. Spending Multiplier?
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1 / 1 - MPC
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What is the formula for the tax multiplier?
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-MPC / 1 - MPC
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What are Automatic Stabilizers?
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Programs which stabilize demand by expanding or shrinking the economy without any govt action.
(Welfare payments, food stamps, unemployment compensation) |
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Formula for GDP Deflator?
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Nominal / Real *100
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What is GDP?
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The market value of all final goods and services made within the borders of a country in a given year.
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What is the inflation rate?
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Percentage change in the price level from the previous period
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How to calculate the current salary based on a past CPI?
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Current salary * (Current CPI / Past CPI)
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Reasons why CPI may overstate inflation?
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1.) Substitution Bias: CPI cannot reflect consumers' ability to substitute towards goods whose relative prices have fallen
2.) Introduction of new goods makes consumers better off, and in effect, increases the real value of the dollar and does not reduce CPI 3.) Quality improvements increase the value of the dollar, but are not fully measured. |
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What is the difference between CPI and GDP Deflator?
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CPI includes only goods typically bought by consumers, while GDP includes all goods.
CPI includes imports, GDP is only domestic CPI has a fixed basket of goods, GDP has a changing basket of goods |
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What is the unemployment rate?
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Number of unemployed / Labor force * 100
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What is the Labor-force participation rate?
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Labor force / Adult population * 100
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What is the Federal Funds Interest rate?
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The interest rate banks charge each other for short term loans of reserves
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Why is the Long-Run Aggregate Supply Curve vertical?
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Price levels do not affect the number of workers, capital stock, or technology and therefore does not affect GDP
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Why is the Short-Run Aggregate Supply Curve upward sloping?
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1.) Contracts make some wages and prices "sticky"
2.) Firms are slow to adjust wages 3.) Menu costs make some prices sticky |
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What are menu costs?
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The costs to firms of changing prices
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What are some variables that shift the SRAS curve?
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1.) Increases in labor force or capital stock
2.) Technological change 3.) Expected changes in the future price level 4.) Adjustments of workers to errors in past expectations about price level 5.) Unexpected changes in the price of an important natural resource (Supply Shock - Hurricane Katrina shut down oil production in the Gulf Coast, raising prices drastically) |
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What does a monetary policy do to equilibrium in the long run?
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Only affects price level
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What is the Quantity Equation?
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Velocity = Nominal GDP / M1 Money Stock
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What is the equation for National Savings?
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National Savings = Y - C - G
(GDP - Consumption - Govt Spending) |
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What is the equation for the Real Exchange Rate and what does it indicate?
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Real Exchange Rate = Nominal Exchange Rate * (Domestic price level / Foreign price level)
The price of domestic goods in terms of foreign goods |
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What is Purchasing power parity?
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The theory that in the long run, exchange rates move to equalize the purchasing powers of different currencies
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What is the Phillips Curve?
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Relationship between unemployment and inflation rates
When unemployment is high, wages increase slowly When unemployment is low, wages increase quickly |
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What is the formula for a consol? (Bond that never matures)
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Pc = Fc / i
Price of bond = Face Value * Coupon Rate / Interest Rate |
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What is structural unemployment?
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Unemployment resulting from basic changes in the economy (Computer revolution)
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What is cyclical unemployment?
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Lack of employer demand for employees resulting from a decrease in spending and consumption in the economy
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What is frictional unemployment?
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Unemployment resulting from temporary transitions made by workers (first-time job seekers hold out because they lack the skills to find a job that suits them)
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For Purchasing Power Parity, what if e > 1?
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E is too high, or the foreign currency is undervalued relative to the domestic currency
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What is the Current Account?
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Basically Net Exports
or NX = X - IM REMEMBER: Current Account = - Financial Account |
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What is the Financial Account?
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Net Capital Inflow (NCI)
Capital coming in - Capital going out |
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What is the formula for CPI?
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(Current Year Prices / Base Year Prices) * 100
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Why does PPP not hold at all times?
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Many goods are not easily transported
and The same goods produced in different countries may be imperfect substitutes of each other |
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What is the crowding-out effect?
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An increase in interest rates because of rising borrowing by the govt in the money market
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Jeffrey Sachs Article: Institutions Matter, but Not For Everything
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1.) Struggling countries like those in Africa need more than lectures about good governance, but direct intervention to solve problems like disease or geographic isolation.
2.) Geography is the main point of the article. Countries barred off from international trade suffer from small internal markets and lack of skilled workers to promote growth. 3.) Only three solutions exist for such countries: continued impoverishment, migration to the coast, or subsidies from foreign powers. 4.) Millennium Development Goals: By 2015, goal of UN is to halve poverty and hunger rates of 1990 |
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Harford: Why Poor Countries Are Poor
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1.) In a world of diminishing returns, poorer countries gain the most from new technology, infrastructure, and education.
2.) The incentives to create wealth are turned on their heads (No point in making a business since govt will not protect against thieves, No point in paying bills since no one will take you to court, No point in getting an education because jobs are not handed out on merit) 3.) Options to fix poverty: Legal reforms to allow entrepreneurs to expand and borrow money; enlist the World economy for help |
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The Economist: Reading The Tea Leaves
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1.) India is lagging behind China in terms of GDP growth because of an overstatement of growth in services and a weak manufacturing sector.
2.) China's industrial productivity output > India's |
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The Hidden Wealth of The Poor
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1.) Massive market and regulatory failure make poor people unsuitable clients for financial services.
2.) Barriers to providing financial services include govt incompetence, inflation is high and volatile, and lack of legal framework. 3.) Microfinance has ups and downs: It fosters entrepreneurship and growth, but at the same time causes social upheaval. |