Midterm 1

Front 1

market clearing model (3)

Back 1

1. market is in equilibrium
2. supply and demand curves intersect
3. price of good or services moves quicky to bring Qs and Qd into balance

Front 2

sticky prices

Back 2

sticky- do not immediately change to changes in S and D. Prices stay the same for long periods of time.

prices stickiness is a better assumption when describing SR behavior

Front 3

stock

Back 3

quantity measure at a given point in time

Front 4

flow

Back 4

quantity measure per unit of time

Front 5

% change in nominal GDP=

Back 5

%change real GDP + % change GDP deflator

Front 6

investment

Back 6

goods purchased by individuals and firms to add to their stock of capital

Front 7

capital

Back 7

stock of equipment and structures used in production

funds to finance the accumulation of equipment and structures.

Front 8

nominal GDP

Back 8

based on a current years prices. (not inflation adjusted)

Front 9

real GDP

Back 9

inflation adjusted GDP: uses x year as a base year.

Front 10

GDP deflator (aka implicit price deflator for GDP)

Back 10

(nonimal/real) * 100

Front 11

CPI

Back 11

fixed basket of goods

use same quantity of goods in both years, use nominal prices

multiply by 100

Front 12

laspeyres index

Back 12

fixed basket of goods

Front 13

paasche index

Back 13

changing basket of goods

Front 14

CPI vs GDP deflator

Back 14

CPI has substitution bias

CPI does not reflect introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights

Unmeasured changes in quality: Quality improvements increase the value of the dollar, but are often not fully measured.

GDP deflator measures the priees of all goods in an economy. CPI only measures prices of consumer goods.

GDP deflator does not reflect reduction in consumers welfare that may result from substitutions

Front 15

how to calculate inflation

Back 15

use CPI values

Front 16

labor force

Back 16

number of employed + number of unemployed

Front 17

unemployment rate

Back 17

unemployed/ labor force x 100

Front 18

labor force participation rate

Back 18

labor force/ adult population x 100

Front 19

4 functions of money

Back 19

unit of account- applies a common value to all goods and services

store of value- provides the ability to smooth out consumption

conversion of assets: liquidity function

medium of exchange: readily allows for exchange of goods and services. avoids double coincidence of wants.

Front 20

reserve requirements

Back 20

regulations imposed on banks by the fed the central bank that specify a minimum reserve-deposit ratio

Front 21

how to calculate final amount of money in economy given reserve ratio

Back 21

original deposit * 1/RR

Front 22

fisher equation

Back 22

i=r+pi

nominal interest rate equals real interest rate plus inflation

Front 23

quantity theory of money, quantity equation

Back 23

MV=PY, V is fixed (data) Y is fixed (fixed factors of production)

a change in the money supply can only be met with a change in nominal GDP

Front 24

why do governments print money

Back 24

it is the third way to pay for stuff

1. taxes
2. issue bonds
3. print money to pay for things

Front 25

quantity theory of money and quantity equation

Back 25

a 1% increase in the money supply results in a 1% increase in P due to percent change form of quantity equation. a 1 percent increase in pi (inflation) causes a 1 percent increase in the nominal inflation rate

Front 26

assumption of a small open economy

Back 26

world interest rate is what dominates a country interest rate

Front 27

characteristics of perfect competition

Back 27

perfect knowledge
no one firm, ind. can influence price
no externalities
free entry, exit
non public good

Front 28

how to calculate how much money ends up in an economy

Back 28

initial deposit *1/RR

Front 29

costs, benefits of deflation

Back 29

bad for debtors, people with no disposable income who borrow.

increased purchasing power

bankruptcy costs

Front 30

costs, benefits of inflation

Back 30

loss in purchasing power

capital gains may be wiped out (earnings on stocks)

increased opportunity cost of holding money

results in increased search costs

shoeleather costs

menu costs

tax laws (capital gains)

nominal wages of workers

Front 31

okuns law

Back 31

1:2 ratio of fall in GDP to rise in unemployment

Front 32

unemployment due to structural changes

Back 32

resutls from changes in technological progress and preferences (agriculture to industry)

Front 33

frictional unemployment

Back 33

it takes time to find a job and test to see if you like it/are fit for the job

Front 34

f, s

Back 34

f= job finding rate
s= job separation rate

Front 35

U/L equation

Back 35

S/(S+F)

Front 36

demand for money and interests rate

Back 36

inverse relationship between demand for money and nominal interest rate

positive relationship between demand for money and real interest rate

Front 37

why do governments print money

Back 37

a way to fund purchases

seignorage

control inflation rate/money supply

Front 38

what changes in money supply effects

Back 38

only changes in nominal variables (wages, prices)

not real variables (real GDP, consumption)

Front 39

nominal interest rate

real interest rate

Back 39

price of money that banks pay

increase in purchasing power

Front 40

supply of savings and exchange rate

Back 40

a decrease in supply of dollars to be exchanged to foreign currency, raising the equilibrium interest rate

Front 41

change of prices and real exchange rate

Back 41

changes in prices are nominal effects, not real effects