Introduction to Macroeconomics

goal of policy in the short run: to limit fluctuation in economic activity around the long run trend instead of succumbing to the business cycle fluctuations

goal of policy in the long run: to affect the long run rate of economic growth (GDP)

type of policy: changes in government purchasing/ net taxes designed to either stabilize or grow the economy

type of policy: changes in interest rates/money supply by the federal reserve to either stabilize or grow the economy

economic growth, full employment, price stabilization

the increase in our production of goods and services that occurs over long periods of time

gross domestic product/ total value of all final goods and services produced for the marketplace during a given period, within the nation's borders

gross domestic product over population/the value of the goods and services that the average US person can consume each year

fluctuations in real GDP around the long term growth trend (increase or decrease)

output rising, real GDP rises

output falling, real GDP falls

severe, long term recession

% increase in average price levels

the process of combining different things into a single category

tangible (can be stores) goods that have a useful life of at least three years

tangible (can be stored) goods that have a useful life of less than three years

intangible (cannot be stored) used up immediately as the service concludes

measures a quantity at a moment in time ie:wealth

measures a quantity per time unit ie: personal income

good used in producing final goods (inputs)

a good sold to its final user

a variable measured in dollars without adjustment for the dollar's changing value

a variable measure in dollars with adjustment for the dollar's changing value

the % by which GDP would increase or decrease if it increased or decreased the same amount as it did between 1st and 2nd quarter *4 for the entire year

3 month quarter measure*4 for entire year measure

measuring GDP by adding the value of goods purchased by each type of final user, uses spending on all final goods and services in the economy
1. consumption good and services purchased by households: good durable and non durable, services, including imputed items (items for which no payment was made, value must be estimated, housing provided by owner estimate rental value, food produced and eaten on farms, not sold to marketplace)
2. private investment purchased by businesses and households: plant, equipment, and software, residential construction, changes in business inventories as large companies may not sell all inventory in the same period=C+I=y
3. government goods and services purchased by government agencies
4. national income and product identity GDP(y)= C+I+G+NX

spending by federal, state, and local governments on goods and services

any payment that is not compensation for goods, services, or resources

the revenue a firm receives minus the cost of intermediate goods it buys

payments to the owner of resources (land, labor, capital, entrepeneurship) that are used in production

unemployed if not working an actively searching for work

short term joblessness due to being between jobs or just (re)entering the job market

short term joblessness due to changes in seasons, weather, or tourism patterns

adjustment to a variable in order to reflect predictable, standard changes (GDP or unemployment rate)

long term joblessness due to a mismatch in skill or geography between the unemployed and employers

long term joblessness due to changes in production (recession) over the business cycle

when there is zero cyclical unemployment (structural, seasonal, or frictional can be positive)

level of output the economy could have produced if it were functioning at full employment

any time where gdp is lover than potential and/or unemployment is below the normal level

those who have a job or are looking for a job

% of labor force without a job
unemployed/labor force=unemployed/(unemployed+employed) *100

workers that are working part time but searching for a full time position

Individuals who are not working, looked for a job in the last year, want a job, but have given up looking because they believe they cannot get a job

survey given to business establishments to measure the number of jobs created or lost

total employed/population over 16 *100

average levele of prices in the economy

Series of numbers used to track a variable's rise or fall over time (each represents a period)
=value of measure in current period/value of measure in base period *100

index of cost through time, of a market basket of goods purchased by the typical household
CPI=cost of market basket in current period/cost of market basket in 1983 (base period) *100

the percentage change in the price level from one period to the next

real wage= nominal wage in year/cpi in year *100

% increase in lender dollars each year

% increase in lenders purchasing power

long term unemployed population, % of labor force that has been without a job and looking for a job >15 weeks

short term unemployed population, % of labor force that has been without a job and looking for a job <15 weeks

unemployed population+discouraged worker population/ labor force+ discouraged worker population

unemployed population+marginally attached worker population/labor force+marginally attached worker population

unemployed population+marginally attached worker population+involuntary part time worker population (economic reasons)/ labor force+marginally attached worker population+involuntary part time worker population

CPI that leaves out food and energy

costs to businesses as a result of inflation, such as needing to reprint menus and catalogues with new prices which takes money and time

time and money used to manage wealth which goes up when inflation is high

nominal gdp / real gdp *100

gdpdeflator 2(current year)-gdpdeflator 1(base year)/ gdpdeflator 1(base year) *100

creditors are recieving less than expected in purchasing power, while debtors are paying less in purchasing power than expected

creditors are recieving more than expected in purchasing power, while debtors are paying more in purchasing power than expected

a macroeconomic model that explains the long run behavior of the economy where nominal and real variables are modeled separately (in a dichotomy)

changes in the money supply do not affect real variables, only the rate of inflation or price level (nominal variables)

lowest wage for which a worker will enter the labor force

Critical
all markets clear
Simplifying
all factors of production are fixed (population, capital, technology)
labor is the only variable input
all workers equally productive
economy is closed

prices in the market adjust until supply=demand and there is 0 surplus or shortage

economy does not enchange in activity with other nations, no imports or exports, no borrowing or lending with foreigners or foreign institutions

economy engages in activity with other nations, imports, exports, and borrowing and lending with foreigners or foreign institutions

relationship showing how much total output can be produced with different quantities of labor

total spending will be sufficient to purchase the total output, becuase as soon as a product is created, the value of that product becomes factor payments, therefore supply creates its own demand

includes all intentional investment firms make, not changes in inventory
Ip=I (private investment spending)- change in inventories

total government tax revenue available for purchases (not allocated to transfer payments like social security)
T=total tax revenue- transfer payments

income households have for expenses after taxes are taken out
disposable income=total income-net taxes

the portion of disposable income that is not spent on goods and services
S=disposable income-C

things that reduce total spending below total income (household savings, net tax revenue)

spending on a country's output from sources other than households (government purchases, planned privated investment)

lowest wafe for which a worker is willing to join the labor force

where economy's savings are available to those that need additional funds

includes hourseholds's private savings in banks, government bonds, and shares of corporate stocks, borrowers pay loaners interest on repayments of these funds, upward sloping, as interest increases, so does the supply of funds

includes business's planned investment spending, government funds in budget deficit, downward sloping, as interest increases, demand for fund decreases

when government spending (G) is more than net tax revenue (T) deficit=G-T

when government spending (G) is less than net tax revenue (T) surplus=T-G

when government spending (G) equals net tax revenue (T) balance=G=T

issue securities to the financial market (sell securities to the public

selling securities to a bank/intermediary

using profits/ retrieved earnings to fund growth

legal claim on future income or assets typically of a company or individual

simple loan paid for by borrower from lender with a principle and interest

(P) the amount of the loan

the additional money a borrower much pay on a loan provided by a lender

when a saver purchases ownership in a firm and are paid money if the firm liquidates

something of value that is owned by an individual, government, or firm

an obligtion or debt to another individual, government, or firm

record of assets, liabilities, and equity of a firm

liability+equity

when a household transfers ownership to another household with stocks

a rise in standard of living due to a number of possible policy and economy changes

if a variable is gorwing by x% per year, it will double in 70/x years

1. Labor Productivity
2. Average Hrs
3. Employment Population Ratio (EPR)
4. Size of Population

output/hour=total output/total hours worked

total hours/total employment number

total employment/population number

productivity*average hours*epr*population

productivity*average hours*epr

% change productivity+% change average hours+% change EPR

total capital stock/total employment

reduce corporate profits tax
increase investment tax credits

decrease capital gains tax
switch from income tax to consumption tax

tax on all profits a firm makes

tax on profits earned when a financial asset is sold at more than acquisition price

tax placed on income a household spends rather than saves, instead of income tax

economic growth in advanced countries that is the result of technological changes from new discoveries
do not depreciate over time, are not subject to diminishing returns

economic growth in poor countries that is the result of adopting technologies and discoveries in advanced countries

decline in one secotr's spending caused by an increase in another sector's spending

dollar for dollar change in one sector's spending in response to another's increase in spending

-reduce income tax
-reduce social safety net worth (social security, unemployement benefits)
-increase child care and elder care
-increase retraining and relocation subsidies

-increase employment subsidies to firms to help employ more workers

-increase investment in loanable funds market: decrease corporate income tax,increase investment tax credit
-increase private savings in loanable funds market: decreases taxes on dividends, decrease taxes on capital gains, decrease worth of social safety net social security and unemployment benefits, move to tax on consumption rather than savings, reduce government budget deficit (maybe)

stock of equipment and structures workers use to produce goods and services

-make it cheaper, direct provision of 1st and 2nd education
-subsidies for college
-lower interest rates to reduce costs

knowledge and skills acquired through education, training, and experience

an asset widely acce[ted as a means of payment

anything acceptable as payment for goods and services

value of currency and coins held by the non-bank public

value of checking accounts of individuals and firms (d1)

value of savings accounts and cash in vaults and atms

a form in which wealth can be held

unit for measuring how much something is worth

began in 1913 to be the monetary autority of the United States, charged with creating and regulating the nation's supply of money

money that is not backed by silver or gold, rather declared to be a means of payment and have value by the government

a business that specialized in brokering between savers and brokers

a promise to pay back any borrowed funds signed by the government or a business

a promise to pay back borrowed funds signed by the household or a business

sum of cash in the vault and deposits and in the federal reserve accounts, must hold required reserve ratio

the % of checking accounts a bank mst hold as reserves

when a bank holds more than the RRR in order to produce flexibility to increase loans if interest rates rise

nations principal monetary authority responsible for controlling the money supply, in the us comprised of 12 federal reserve districts each with their own federal reserve bank

a committee that decides the us monetary policy regarding interets rates, inflation, employment, gdp, and can change the money supply

purchases or sales of government bonds by the fed to influence the money supply

-support research facilities and university basic research to invent new inputs, outputs, or methods of production
-tech innovation must be adopted (can be knowledge, like assembly line, or standardized parts and precise tools)
-not limited

-has lots of K and H
-based on tech change growth, discovery based growth, slower rate
-r&d subsidies, support basic research
-policies to increase K and to protec IP

-experiences high rate of catch-up growth due to low K and H
-can growth through increase in H (literacy, education) or K (tech that is not new but new to them)
-limited becuase of extreme poverty(limits on savings and investments), government corruption, poor institutions, and high population growth

money that is based on the intrinsic value of a good that has value in and of itself, such as cattle, gold, or silver

the ease with which an asset can be converted into money

open market operations purchase bonds B increases, sell bonds B decreases
discout rate reduce min interest banks pay on fed loans more borrowing, B increases, increase min interest banks pay on fed loans less borrowing, B decreases

reserve rate decreases M increases and m increases because m=1/ rrr, reserve rate increases M decreases because m decreases becuase m=1/ rrr

when depositors withdraw banks for fear of closure out of one bank

when depositors withdraw banks for fear of closure out of many banks at once

the quantity of money determines the value of money

very rapid inflation >50% per month, caused by rapid growth in M, occurs during perids of instability, post war and USSR

government spending plus all transfer payments and interest payments on debt,

profit the government makes on having a monopoly on printing money, the ability to print money to pay for debts not in the budget (tell the gov to buy an amount of bonds from central bank and central bank spends the money)

in cases of hyperinflation, the tax is represented by the purchasing power lost by holding a currency whose value is dropping rapidly

the one for one relationship between the inflation rate and nominal interest rate, as inflation increases, so does the nominal interest rate, and vice versa

loan in which the payment is paid in one full payment with interest

bond where there is 1 payment of the value in full at maturity

bond where portions of the bond are paid in portions or installments

liquidity of the bond (municipal less liquid), taxes on the bond (municipal less liquid), and the time to maturity

the price of one currency in terms of another

an exchange rate that is determined by the market for the currency without government intervention

an exchange rate that is determined by the market for the currency with government intervention

exchange rate determined by government intervention for value

change in tastes for foreign goods, more popular D more, less popular D less
change in real gdp of domestic country(income), higher gdp/income D more, lower gdp/income D less
change in relative price level, domestice price level rises D more, domestic price level decreases D less
change in relative interest rates, domestic interest rises D less, domestic interest decreases D more
cha ge in expected future e, foreign expected to rise D more, foreign expected to decrease D less

change in tastes for US goods increases in popularity, supply more pounds
change in UK gdp (income) higher income supply more, lower income supply less
change in relative price level, US price level increases UK supply less, US price level decreases UK supply more
change in relative interest rates, UK interest rates increase supply less, UK interest rate decreases supply more
change in expected e, pound appreciates supply less, euro depreciates supply more

foreign appreciates
domestic depreciates

foreign depreciates
domestic appreciates

taste change and gdp change, happens over quarters or years

interest rate and expectations of changes in e, happens over days or weeks

price level changes

the theory that the e will adjust in the long run until the average price level is the same for the two countries

an exchange rate set with an official value, that is interfered with by the government whenever it deviates fro the official value

the worth of a currency in terms of a nother currency used as a bench mark value

no interference

there will be a surplus of the currency, which means the government will buy the excess currency, increasing demand and decreasing the official international reserves, currency overvalued

there will be a shortage of currency, which means the government will sell excess currency, increasing supply and increasing the offical international reserves, currency will be undervalued

when you have a fixed excahnge rates, prioritizing the offical value means that when you buy the currency, you automatically decrease the monetary base, and when you sell the currency, you increase the monetary base

add buying restrictions to decrease demand, or selling restrictions to decrease supply

buy ccurrency to increase demand

sell currency to increase supply

real gdp rising

real gdp falling

real gdp> potential gdp

real gdp<potential gdp

highest value of real gdp in the cycle

lowest value of real gdp in the cycle

from peak to peak or trough to trough

demand for output fall so demand for labor falls, more people work part time involuntarily
wages cannot fall to clear the labor market becuase of contract periods and morale associaited with pay cuts, instead they do layoffs

demand for output rises so demand for labor rises, fewer people work part time involuntarily
wages cannot rise to clear the labor makret becuase of the high costs which can lead to inflation

increas G to compensate for lost C, or decrease T to increase C, which keeps demand from falling drastically, and is temporary until C revives

Increase M1 to decrease r and S, so that C rises, keeps ddemand from falling but can cause inflation

total level of planned spending in the economy, which may or may not be equivalent to actual spending

disposable income increases, c increases
disposable income decreases, c decreases
movement

wealth increases/stock and houses prices increases, c increases
wealth decreases/stock and houses prices decreases, c decreases
movement

r increases, c decreases--> more savings so less disposable income, borrowing is more expensive so less, C decreases
r decreases, c increases--> less savings so more disposable income, borrowing is less expensive so more, C increases
shift

optimism increases, c increases--> if job security or expectations of a raise or promotion are iminent, then c increases
optimism decreases, c decreases--> if job security is perilous or a pay cut or firing are iminent, then c decreases

positively sloped relationship between real consumption and disposable income

the consumption lebel when income is 0

T is a lump sum
change in wealth, r, or expectations effects only a, not b, so c shifts in those cases

wealth increases, CF shifts right
r decreases, CF shifts right
optimism increases, CF shifts right

line to show aggregate consumption at each level of income

change in income will cause a movement along the curve
I, G, and NX are fixed

when Iu>0 invetories rises, so AE<Y, so Y will fall so that AE=Y
when Iu<0 inventories fall, so AE>Y, so Y will rise so that AE=Y
when Iu=0 invertories are stable so no change to Y as AE=Y

if Y<Yfe cyclical unemployment >0, recessionary gap
if Y >Yfe cyclical unemployment <0, inflationary gap
if Y=Yfe cyclical unemployment=0, no gap

1-size and frequency of the shocks
2-size of the multipliers, larger means more unstable, smaller means more stable

features of the economy that reduce the expediture multipliers and effect on spending, cause an overestimate of the multipliers
include taxes increasing with income and social safety net decreasing with income, which causes a portion of the increase in income to not result in an increase in spending, dragging thereal multipliers down, spending on imports increasing as incomes increasing, so a portion of income increase is not a result of an increase in gdp , and forward looking behavior causing people to not increase their consumption with an increase in income, causing real expenditure multipliers to be lower.

features of the economy that increase the expenditure multipliers and effect on spending, causing an underestimate of the multipliers
includes changes in assets and wealth, as increase in wealth also impacts comsumption, as does increase in price on homes and stocks , and output and planned investment, as while we assume planned investment is not affectetd by y, it is, as if y rises, there will be more investment spending,causing a further increase in Y

changes in g or t that reduce business cycle fluctuations

gdp<gdp potential, so increase g or decrease t to increased ae

gdp>gdp potential, so decrease g or increase t to decrease ae

changes in income, wealth, or price level

changes in M1 set by the fed, changes in open market ops, discount rate, reserve requirement, interest on reserves

a decreases, Ip decreases, NX decreases

a increases, Ip increases, NX increases

In the short run, MS is set by fed, and I shifts in accordance with Md

i target is set by the fed, and Ms is adjusted by the fed in accordance with shifts in Md

market where banks with excess reserves lend to banks who need reserves

rate of interest chargfed when a bank lends to another bank, used by the fomc to determine the target interest rate

Y< Y potential so AE needs to increase, decrease federal funds rate target which will increase a, Ip, NX, and therefore Y

Y>Ypotential so AE needs to decrease, increase federal funds rate target which will decrease a, Ip, NX and therefore Y

there are temporal lags in data, recognition, decision making, transmission, and effectiveness due to the moving parts are people involved with making policy, so the impact of the monetary policy will not always be the same.

a defect of slump monetary policy where nominal interest rates have hit 0% and the AE curve cannot shift upward anymore

monetary policy that results from an ineffectiveness in adjustment of the interest rate targets and money supply to influence target interest rate

where the fed buys other securities that have interest rates other than zero to decrease the target interest rate , for instance is long term securities have a positive interest rate, the fed will buy more to increase demand, which decreases the interest rates

if B increases, so will M1 via the money multiplier system, so the bank lending will increase, effectively decreases interest rate and increasing AE

if you decrease interest on reserves, banks will be less inclined to hold excess reserves and instead increase their lending, which will lead to a decrease in I and increase AE

the fed can increase inflation to decrease expected real interest rates on securities, which will decrease all i and will tend to increase AE (but will take causing an inflationary gap, so is a last resort)

downward sloping curve that is part of the aggregate demand and supply model that summarizes the AE and money market, and shows demand at a given price level

Upward sloping curve that is part of the aggregate supply and demand model that shows the supply constraints in the economy ajnd displays output (y) vs. price level

the long run aggregate supply curve is a perfectly inelastic curve that displays the level of aggregate suppy at various price levels when Yfe

if a, Ip, G, or NX (variables in AE ) increase then AE shifts down and AD shifts right
if a,Ip, G, or NX (variables in AE) decrease, then AE shifts up and AD shifts left
If Ms shifts up, r+i decreases, AE shifts up, and AD shifts right
if Ms shifts down, r+i increases, AE shifts down, and AD shifts left

Sticky wages theory, as wages grow slower than prices of goods and are renegogiated intermittently, so as prices rise, costs of labor do not rise as fast, leading to an increase in marginal revenue as supply increases

if input prices (energy, food, wages) increase, MD increases, so AS shifts left
if input prices (energy, food, wages) decrease, MD decreases, so AS shifts right

a change in spending that causes AD to shift

a change in input prices that causes AS to shift

a shock to AD or AS that causes an increase in Y

a shock to AD or AS that causes a decrease in Y

increase in spending cause AD to shift right
y>Yfe, p>peq, u3<natural u3
wages will increase in the next renegogiation
AS shifts left, causing Y to decrease and P to increase
wages increase over and over til AS has shifted so Y=Yfe

decrease in spending causes AS to shift left
Y<Yfe, p<peq, u3<natural u3
wages decrease (even with sticky wages, when some resign and others are rehired at a lower wage, takes longer) in the next renegotiation
AS shifts right, causing Y to increase and P to decrease
wages decrease over and over til AS has shifted so Y=Yfe

when autoadjustment is not enough, government can increase G, decrease T, increase M, or decrease i target

when autoadjustment is not enough, government can decrease G, increase T, decrease M, or increase i target

must have tradeoff between price lebel and full employment
expansionary policy= AD shifts right so y=yfe but P increases
contractionary policy=AD shifts left so y<yfe but P=p

expansionary policy--> p=p but y>yfe
contractionary policy--> p<pbecuase ad shifts leftso y=yfe

a graph that indicates the trade offs between unemployment and inflationthrough restructuring tha AD and AS for u to be on the x axis and pi on the y axis

occurs when expected inflation changes

inflation rate where the central bank sets a target inflation rate used to manage expectations of inflation so that staibility is easier to achieve as the phillips curve wont be shifting

inflation that is not occuring where there is no target inflation rate to manage expectations

caused by tight monetary policy used to drive down inflation rates, resulted in recessionary gap of 7.9% and cyclical unemployment of 4.5%, rapid recovery

caused by end of credit boom and housing boom, which let to increase private debt that was unsustainable, resulted in recessionary gap of 5.5% and cyclical unemployment of 5.1%, slower recovery

perfectly inelastic because the stock of houses, not sales or new construction, shifts only occur with changes in other facets of home buying, changes in home demand

downward sloping becuase as interest costs decline so does price, shifts if level of rent, i, average income, expectations of future prices, and tastes for homeownership change

greater control of living expenses and environment

non liquid asset, propery taxes, interest costs (interest lost when not selling, interet paid on any loans)

debt acrrued or taken out to purchase an asset, aids in profitable return rates

loan secured by real estate property

when a borrower defualts on a real estate property held under mortgage the bank can seize the property as its own

mortgages that were sold to private investment banks, placed in a trust, and then sold as bonds to bondholders

a mortgage with and adjustable floating rate based off the rate market

when houses go on sale for low prices to ,iquidsate all assets in a trust

bank that doesn't take deposits

reduction of consumption, to try and pay off debts and rebuild net worth