Updated 2006-10-28 00:38


Terms, definitions, and concepts related to Macroeconomics.

Section I

MacroeconomicsThe attempt to explain how and why the total exchanges between firms and households (the economy) grow (long-term) and fluctuate (short-term) overtime.
Real GDP: SimpleAll New Production in the economy during a quarter/year
Real GDP: FullThe monetary value, not including the increase in prices, of all spending on (household consumption, firm investment, government purchases, and purchases by foreigners - exports) or all income earned from (household wages and firm profits) the value added to production (intermediate goods or services) by people within a country (and not counting value added by foreign goods or services - imports) during only the past (backward looking) year/quarter.
Unemployment: Simple definitionAnyone who wants a job, but doesn't have a job
Unemployment: Payroll survey definitionAny person released from the payroll of approximately 160,000 companies or government agencies surveyed each month.
InflationChange in the Average Level of Prices, not one price. It causes the purchasing power of money to decline.
Inflation MeasuresBasket Indexes measure it, including: - Consumer Price Index - Producer Price Index - Personal Consumption Expenditure Index (Used by Fed)
"Forward Looking" Indicators- Manufacturer's New Orders: Durable Goods - Initial Weekly Jobless Claims - Retail Sales and Food Services Excluding Motor Vehicles and Parts Dealers - Bond Spreads to gauge inflation - Capacity Utilization

Section II

Question Answer
Hyperinflationprice increases over 1000 percent a year
Business CycleThe fluctuation in the economy, commonly observed through changes in real GDP and Unemployment
RecessionReal GDP decreases, while U increases
ExpansionReal GDP increases, while U decreases
Business Cycle TheoriesSeek to explain Production fluctuations: - Supply and output - Demand and output - Supply and Demand - Employment fluctuations - Flexibility or non-flexibility of the real wage (W/P)). Theories include - Classical - Keynesian - Monetarism - New Classical - New Keynesian
Goal of Classical EconomicsShow that exchanges between households and firms are self adjusting and self equalizing ("invisible hand")
Attributes of Classical Economics- Supply creates its own demand (Say's Law) - Wages and prices are flexible, so economy adjusts very quickly - Excess supply leads to fall in price - Real Wage rises, causing unemployment - Firms lower nominal wage so as to reduce unemployment and return market instantly to equilibrium - No good explanation for Business Cycle (except to say that equilibrium must return).

Section III

Unemployment Rate# Unemployed/ (# Employed + # Unemployed)
Classical EconomicsY = f(L, K)(K - Capital
L - Labor
Keynesian EconomicsY = C + I + G + (X-M)(C - Consumption
I - Investment
G - Government Spending
(X - M) - Net Exports
Monatarists%ΔM * %ΔV = %ΔP * %ΔY(Where V is constant, P is fixed in short-run, and %ΔY is fixed in the long-run (around 3%))
New Classical EconomicsY = A * Kα * L(1-α)(Where A is "total factor productivity": growth in production not accounted for by changes in K or L. In short, technological change.)
New Keynesian EconomicsP = f(w, μ, MPL)(MPL - marginal product of labor in the aggregate, derived from an aggregate production function)
Real Interest Rateireal = inominal - E(rinflation)
Nominal Interest Rateinominal = ireal + E(rinflation)
The Taylor RuleFederal Funds Rate Target = E(rinflation) + equilibrium real federal funds rate + 0.5 (inflationdesired - inflationactual) + 0.5 ((gdppotential - gdpactual)/gdppotential) - Where inflation, potential gdp, and real gdp can be found at FRED - Equilibrium real federal funds rate (rate consistent with long-term full employment) was assumed 2% Taylor - Desired Inflation rate is most likely 2%.
"Back of the Envelope" Taylor RuleCompare Federal Funds Rate to Real GDP growth rate - If FFR > Real GDP growth rate, expect rate decrease. - If FFR < Real GDP growth rate, expect rate increase. Consider whether inflation is above or below 2% - If inflation below 2% and FFR > Real GDP growth rate, expect big cut. - If inflation above 2% and FFR > Real GDP growth rate, expect small cut. - If inflation below 2% and FFR < Real GDP growth rate, expect small increase. - If inflation above 2% and FFR < Real GDP growth rate, expect large increase.
Law of one Price: PPPPUK/ PUS = PPPUK/US
What is Causing the Deficit?(X - M) = [S+(T-G)] - I

Section IV

Goal of Keynesian EconomicsClassical Economists can't explain Depression
Attributes of Keynesian Economics- Demand creates Supply - Wages and Prices are "sticky" so economy can get stuck in a disequilibrium. - Why Sticky? - Business Cycle Results from Shocks to demand (ex: decline in consumer confidence, erratic expectations, "animal spirits") - If households and firms won't spend, who will?.
Goal of MonetaristsKeynesians can't explain Stagflation (The combination of a rise in the price level and a fall in real GDP)
Attributes of Monetarists- Demand determines production in the short-run - Supply determines production in the long-run - Wages and Prices are flexible, but expectations are "adaptive" - Business Cycle results from Changes in Money Supply, but inflation is the long run result.
Goal of New Classical EconomicsReintroduce Classical with Micro-foundations
Attributes of New Classical Economics- Supply determines production in long-run and short-run (like classical) - People have "rational" not "adaptive" expectations regarding wages and prices - Business Cycle results from changes in A (also called the Solow residual).
Goal of New Keynesian EconomicsGive Keynes Micro foundations (to counter New Classical)
Attributes of New Keynesian Economics- Demand determines production in the Short-run - Supply determines production in the Long-run - The presence of rational expectations means wages and prices, though still sticky, adjust faster than Keynes recognized.
Why are Wages and Prices Sticky?- Menu Costs - Coordination failure (firms wait for each other to lower prices/ workers will be unwilling to be the first to take pay cut) - Staggered Price Adjustments (wage and price adjustments not done at once, but are staggered - "fairness" to customers

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