Macroeconomics Ec 101 Final Review

Front 1

What is Consumption?

Back 1

Spending by households on goods and services
Exception: purchasing of housing

Front 2

What is Investment?

Back 2

Spending on plant and equipment (machines, tools, office buildings, software)
Housing
Inventory

Front 3

What are Government Purchases?

Back 3

Spending on goods and services by local, state, and federal gov't
Excludes transfer payments (Social Security)

Front 4

What are Net Exports?

Back 4

Exports - Imports

Front 5

What is the Aggregate Demand Curve?

Back 5

Price level for each level of Aggregate Expenditure

Front 6

Why does the Aggregate Demand Curve slope down?

Back 6

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.

Front 7

What is the formula for Real Exchange Rate?

Back 7

e = (Domestic Price * Nominal Exchange Rate) / Foreign Price

Front 8

What are the three main factors that could shift the Aggregate Demand Curve?

Back 8

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

Front 9

What is an Expansionary Monetary Policy?

Back 9

Actions taken by the Fed that increase the money supply (ex. buying bonds)

Front 10

What happens in the money market equilibrium if the Fed buys bonds?

Back 10

Aggregate Demand increases, money supply goes up, and interest rate goes down

Front 11

What is a Contradictory Monetary Policy?

Back 11

Actions by the Fed that decrease money supply (Fed sells bonds)

Front 12

What happens to the AD curve if the price of domestic goods increases?

Back 12

Imports increase, so net exports decrease, which shifts AD left

Front 13

What happens to the AD curve if the price of foreign goods increases?

Back 13

Exports increase, so AD shifts right

Front 14

What is the formula for Budget Balance?

Back 14

(Taxes - Transfers) - Government Spending

Front 15

What if taxes - transfers > government spending?

Back 15

Budget Surplus, opposite would be deficit

Front 16

What is the formula for Federal Deficit?

Back 16

Govt receipts - Govt. purchases - Transfer payments

Front 17

What is federal debt?

Back 17

Total amount of accumulated deficits or the total amount owed by the Federal Government

Front 18

What is the goal of a monetary policy and who runs it?

Back 18

Done only by the Fed to affect money supply and interest rate

Front 19

What is the goal of a fiscal policy and who runs it?

Back 19

Done by the Treasury Dept. at the discretion of the Legislative or Executive Branch to affect tax rate and govt spending

Front 20

What is the effect of an Expansionary Fiscal Policy on AD curve?

Back 20

G goes up, Taxes go down and/or transfer payments go up (AD curve shifts right)

Front 21

What is the formula for Marginal Propensity to Consume?

Back 21

Change in consumption / Change in disposable income

or

ΔC / ΔYd

Front 22

What is the formula for Govt. Spending Multiplier?

Back 22

1 / 1 - MPC

Front 23

What is the formula for the tax multiplier?

Back 23

-MPC / 1 - MPC

Front 24

What are Automatic Stabilizers?

Back 24

Programs which stabilize demand by expanding or shrinking the economy without any govt action.

(Welfare payments, food stamps, unemployment compensation)

Front 25

Formula for GDP Deflator?

Back 25

Nominal / Real *100

Front 26

What is GDP?

Back 26

The market value of all final goods and services made within the borders of a country in a given year.

Front 27

What is the inflation rate?

Back 27

Percentage change in the price level from the previous period

Front 28

How to calculate the current salary based on a past CPI?

Back 28

Current salary * (Current CPI / Past CPI)

Front 29

Reasons why CPI may overstate inflation?

Back 29

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.

Front 30

What is the difference between CPI and GDP Deflator?

Back 30

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

Front 31

What is the unemployment rate?

Back 31

Number of unemployed / Labor force * 100

Front 32

What is the Labor-force participation rate?

Back 32

Labor force / Adult population * 100

Front 33

What is the Federal Funds Interest rate?

Back 33

The interest rate banks charge each other for short term loans of reserves

Front 34

Why is the Long-Run Aggregate Supply Curve vertical?

Back 34

Price levels do not affect the number of workers, capital stock, or technology and therefore does not affect GDP

Front 35

Why is the Short-Run Aggregate Supply Curve upward sloping?

Back 35

1.) Contracts make some wages and prices "sticky"

2.) Firms are slow to adjust wages

3.) Menu costs make some prices sticky

Front 36

What are menu costs?

Back 36

The costs to firms of changing prices

Front 37

What are some variables that shift the SRAS curve?

Back 37

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)

Front 38

What does a monetary policy do to equilibrium in the long run?

Back 38

Only affects price level

Front 39

What is the Quantity Equation?

Back 39

Velocity = Nominal GDP / M1 Money Stock

Front 40

What is the equation for National Savings?

Back 40

National Savings = Y - C - G

(GDP - Consumption - Govt Spending)

Front 41

What is the equation for the Real Exchange Rate and what does it indicate?

Back 41

Real Exchange Rate = Nominal Exchange Rate * (Domestic price level / Foreign price level)

The price of domestic goods in terms of foreign goods

Front 42

What is Purchasing power parity?

Back 42

The theory that in the long run, exchange rates move to equalize the purchasing powers of different currencies

Front 43

What is the Phillips Curve?

Back 43

Relationship between unemployment and inflation rates

When unemployment is high, wages increase slowly

When unemployment is low, wages increase quickly

Front 44

What is the formula for a consol? (Bond that never matures)

Back 44

Pc = Fc / i

Price of bond = Face Value * Coupon Rate / Interest Rate

Front 45

What is structural unemployment?

Back 45

Unemployment resulting from basic changes in the economy (Computer revolution)

Front 46

What is cyclical unemployment?

Back 46

Lack of employer demand for employees resulting from a decrease in spending and consumption in the economy

Front 47

What is frictional unemployment?

Back 47

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)

Front 48

For Purchasing Power Parity, what if e > 1?

Back 48

E is too high, or the foreign currency is undervalued relative to the domestic currency

Front 49

What is the Current Account?

Back 49

Basically Net Exports

or

NX = X - IM

REMEMBER:
Current Account = - Financial Account

Front 50

What is the Financial Account?

Back 50

Net Capital Inflow (NCI)

Capital coming in - Capital going out

Front 51

What is the formula for CPI?

Back 51

(Current Year Prices / Base Year Prices) * 100

Front 52

Why does PPP not hold at all times?

Back 52

Many goods are not easily transported

and

The same goods produced in different countries may be imperfect substitutes of each other

Front 53

What is the crowding-out effect?

Back 53

An increase in interest rates because of rising borrowing by the govt in the money market

Front 54

Jeffrey Sachs Article: Institutions Matter, but Not For Everything

Back 54

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

Front 55

Harford: Why Poor Countries Are Poor

Back 55

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

Front 56

The Economist: Reading The Tea Leaves

Back 56

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

Front 57

The Hidden Wealth of The Poor

Back 57

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.