Macroeconomics
rename
Updated
2006-10-28 00:38
Section I
| Term | Definition |
|---|---|
| Macroeconomics | The 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: Simple | All New Production in the economy during a quarter/year |
| Real GDP: Full | The 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 definition | Anyone who wants a job, but doesn't have a job |
| Unemployment: Payroll survey definition | Any person released from the payroll of approximately 160,000 companies or government agencies surveyed each month. |
| Inflation | Change in the Average Level of Prices, not one price. It causes the purchasing power of money to decline. |
| Inflation Measures | Basket 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 |
|---|---|
| Hyperinflation | price increases over 1000 percent a year |
| Business Cycle | The fluctuation in the economy, commonly observed through changes in real GDP and Unemployment |
| Recession | Real GDP decreases, while U increases |
| Expansion | Real GDP increases, while U decreases |
| Business Cycle Theories | Seek 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 Economics | Show 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
| Name | Equation |
|---|---|
| Unemployment Rate | # Unemployed/ (# Employed + # Unemployed) |
| Classical Economics | Y = f(L, K)(K - Capital L - Labor) |
| Keynesian Economics | Y = 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 Economics | Y = 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 Economics | P = f(w, μ, MPL)(MPL - marginal product of labor in the aggregate, derived from an aggregate production function) |
| Real Interest Rate | ireal = inominal - E(rinflation) |
| Nominal Interest Rate | inominal = ireal + E(rinflation) |
| The Taylor Rule | Federal 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 Rule | Compare 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: PPP | PUK/ PUS = PPPUK/US |
| What is Causing the Deficit? | (X - M) = [S+(T-G)] - I |
Section IV
| Term | Definition |
|---|---|
| Goal of Keynesian Economics | Classical 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 Monetarists | Keynesians 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 Economics | Reintroduce 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 Economics | Give 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 |
