Econ 302 Exam #2
unemployment rate formula
# of unemployed/ labor force *100
The dynamics of the labor market
1) for most people, periods of unemployment are relatively short 2) however, at any point in time a significant fraction of unemployed workers have been out of work for more than 6 months -many countries have developed social safety nets (e.g. unemployment insurance) -job creation and job destruction occur each month in the United States
In the U.S. labor market
-wages account for 2/3rds of per capita GDP -average wages have grown 2 percent per year for the last century
Ch 11 The IS Curve
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Ch 9 introduction to the short run
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Ch. 6 Romer Model
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Chapter 7 the labor, market, wages, and unemployment
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nominal increase vs. real increase
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example of equation for CPI
0.06 in 1900 * (100 in 2015 $/ 3.43 in 1900 $)= 1.75 in 2015 $
Works in a cycle
1) firms raises prices 2) the inflation rate increases 3) less demand for products 4) firms cut costs and lay off workers 5) inflation rate falls to previous levels
flow consistent unemployment (FC-U)
given st and ft, what unemployment rate would balance the inflow into and outflow from unemployment? Answer: FC-Ut= ft/(st+ft)
we can express the quantity equation in terms of growth rates (what is the formula)
gm + gv= gp+ gy (% change in money supply + % change in velocity = % change in price level +% change in real GDP) -assume gv=0 gv= pi or inflation pi or inflation=gm(bar)-gy(bar)
growth effects versus level effects
growth effects: changes to the growth rate of per capita output level effects: changes in the level of per capita GDP -the degree of increasing returns matters for growth effects -if the exponent on ideas is not equal to 1: -there will still be sustained growth -growth effects are eliminatedFor the years 1995-2007, if output per person in the private sector grew 2.7 percent, the contribution of the capital-labor ratio was 1.1 percent, and the change in the labor composition accounted for 0.2 percent of that growth, what was the growth rate of total factor productivity? Write your answer in percent (i.e. write 10 for 10 percent).
a balanced growth path is defined as a situation in which the
growth rates of all endogenous variables are constant
Consider two economies. Economy 1 has a steep Phillips curve and Economy 2 has a gently sloped Phillips curve. If each economy experiences an identical economic expansion, the change in _______ would increase less in Economy ______.
inflation; 2
Concluding our study of long-run growth
institutions (property rights, laws) play an important role in economic growth The Solow and Romer models -provide a basis for analyzing differences in growth across countries -do not answer why investment rates and TFP differ across countries
securitization
involves lumping together large numbers of individual financial instruments such as mortgages and then slicing them into different pieces that appeal to different types of investors -in principle, combining large number of assets can diversify the risk associated with any individual asset -one subprime mortgage may be especially risky, but if you put thousands together and only a few default, the aggregate instrument will be mostly insulated
Lyt=
(1-l)L
growth accounting 1- production function
-this creates a production function that combines capital and ideas Yt=AtKt^(1/3)Lyt^(2/3) -At can be thought of as the stock of ideas or more generally as TFP (total factor productivity)
The Great Depression
-1930s worldwide calamity- germany, austria, us, canada- 20% loss of output -the beginning of modern macroeconomics- John Maynard Keynes -also the beginning of national income and product accts (NIPA)- Simon Kuznets
Other price indexes
-CPI excluding food + energy prices -the GDP deflator
The Fed and Treasury Department Respond- March 2008
-Fed made discount loans to primary dealers -the Fed would loan up to 200 billion of Treasury securities in exchange for mortgage backed securities -helped JPMorgan Chase acquire BearStearns
how does It=aiYt-bYtRt+bYtr help us understand how the gap between MPK and the real interest rate helps determine investment?
-In the SR MPK=r and Rt can be different -If MPK=r<Rt *firms should save and not invest in capital *investment will decline -If MPK= r>Rt *firms should borrow and invest in capital *investment will increase
The Fed and Treasury Department Respond-Sept 2008
-Lehman Brothers went bankrupt -Merrill Lynch was sold to Bank of America -Fed organized an 85 billion bailout of AIG
combining the romer and solow model: overview
-Nonrivalry of ideas results in long run growth along a balanced growth path -exhibits transition dynamics if economy is not on its balanced growth path For shorter periods of time -countries can grow at different rates In the long run -countries grow at the same rate
Case study U.S. vs. Luxembourg
-United states has more researchers than Luxembourg has people -Growth rates 1960-2014 United States -2 percent per year increase in per capita GDP Luxembourg -2.8 percent per year increase in per capital GDP -All countries can benefit from all ideas, no matter where the ideas were discovered
The Phillips curve shows
-a boom (i.e. output above potential) increases inflation -a recession (i.e. output below potential) -a positive relationship between the change in inflation and SR output
if the government collects a tax on wages
-a tax on labor supply creates a wedge between the wage paid by firms and the wage received by workers -this can be understood as a shift back in the labor supply curve: at a given wage paid by firms-workers receive less and therefore supplies less labor -in practice some workers may quit their job while other continue to work full time -the reduction in labor supply raises the wage the firm has to pay to w' and reduces the level of employment to L' -a labor income tax reduces the employment-population ratio
growth accounting 2- labor hours
-adjusts growth rates by labor hours gyt-gLt (growth rate of Y/L)= 1/3(gkt-gLt)(contribution from K/L)+ 2/3(gLyt-gLt)(labor composition)+gAt (TFP growth) -TFP growth is often called "the residual" -the equation tells us that the growth rate of output per hour, Y/L, over a time period can be viewed as the sum of three terms
constant returns to scale
-average production per dollar spent is constant -doubling inputs exactly doubles output -the standard replication argument implies constant returns to scale (constant returns to scale with respect to K and L)
What are reserves
-banks hold accounts with the economy's central bank -guarantee that commercial banks have cash on hand for withdrawls -if you divide currency/person- around 4,000- no one has this in their pocket right now- a lot of currency flows outside the U.S. and through illegal activites
the production function of the romer model
-constant returns to scale in objects alone -increasing returns to scale in objects and ideas
Unregulated markets tend to
-do not provide enough resources to produce ideas- therefore they are underprovided -over produce goods that cause a positive externality and under produces goods that cause a negative externality.
A person is unemployed if he/she
-doesn't have a job that pays a wage or salary -has actively looked for such a job during the 4 weeks before the rate was measured -he/she is currently available to work -unemployment rate is based on a survey of 60,000 households
the inflation tax
-driven by the rise in price level -is paid by people holding currency
Real interest rate
-equal to the marginal product of capital (in the LR) -is paid in goods and services
Introduction to the financial crisis- outline of when it beings and how it gets worse
-financial crisis began in summer of 2007 The financial crisis worsened in 2008 -august 2007 "flight to safety" in treasury bills- risk off -mid September 2008- spread jumps all to safe securities almost simultaneously-see huge drops in indexes like the S&P -in March 2008 the fed made discount loans to primary dealers, the fed loaned up to 200 billion of treasury securities in exchange for mortgage backed securities, helped JP Morgan Chase acquire BearStearns (supported primary dealers to improve balance sheet at that time) October 2008 -Troubled asset relief program (TARP) -controversial program since it raised a moral hazard problem -this is the point where the gov knew it was going into recession- worried about quality of transactions-could only try and support big banks at this time Officially, the worst recession since the great depression began in 2007- starting in December of 2007 it was first visible in unemployment although no one realized it at the time
which of the following might explain why firms will raise prices when the economy is booming?
-firms seek to take advantage of high demand -firms need to pay laborers higher wages in order to produce more output
According to a study by Reinhart and Rogoff summarizing worldwide financial crises, a typical crisis features..
-unemployment rate increase of 7% for five years -doubling of gov debt -a 10% decline in real GDP
what are 3 other approaches that can be used to avoid the distortion associated with prices that are above marginal costs?
-governments can provide incentives for certain research by spending tax revenue to fund the research -prizes provide another alternative -subsidizing one of the key inputs in research: the education of scientists and engineers- encouraging smart people to apply their talents in these fields as opposed to law or finance
Rising return to education: the premium to having a college degree
-has been rising rapidly over the last 40 years -far outweighs the forgone wages and tuition costs
empirically the theory of neutrality of money
-holds in the long run -does not hold in the short run -since nominal prices do not respond immediately to changes in the money supply ("sticky" prices and wages)- changes in the money supply can affect the real side of the economy over short horizons -even if relative prices remain constant
What shocks to the macroeconomy have caused the global financial crisis?
-housing prices -global saving glut -subprime lending and rise in interest rates -previous financial turmoil -oil prices
consequences of globalization
-ideas can be shared more easily -more gains from trade realized -more ideas will come from developing economies
national income accounting identity
-implies that the total resources available to the economy equal total uses Yt= Ct+It+Gt+Ext-IMt
is rising college premium cause of rising income inequality?
-in 1963, the typical college graduate earned about 50 percent more than the typical high school graduate -premium has been trending upward over time especially since 1980 -by 2012, the college wage premium was nearly 100 percent- college graduates earned roughly twice as much as high school graduates
since ideas are non-rival they can be used simultaneously as
-inputs in production of goods and services -"ingredients" in the development of new ideas
if a bank is highly leveraged, it may have
-large gains (return to equity) generated by small increases in mkt prices -also large losses driven by small decrease in prices
If a gov runs large budget deficits, its debt rises
-lenders may worry the gov will have trouble paying back the loans- they may stop lending to the gov all together (gov, then has to find a way to pay for its debts so it prints more money- this leads to hyperinflation)
subprime lending and rise in interest rates
-mortgages used to buy homes -low int. rates in 1990s and early 2000s *global savings glut-capital markets in advanced countries were awash in additional saving in search of good investment opportunities- this was a huge contributor *low federal funds rate Many borrowers were "subprime" -didn't actually have the credit score or income level to afford the houses they were getting loans for -banks continued to give out these loans as agency's were rating the securities are AAA or AA and other high ratings even though they were made up of bundles of peoples homes in which they were inevitable going to default on
transition dynamics
-movement back to steady state is fastest when economy is furthest from its steady state (review from last exam Solow model)
typically, during a recession
-output is below potential for approximately 2 years equivalent to a loss of $3000/ person -between 5 and 3 million jobs are lost
Output per person and knowledge in the Romer model- how does this compare to the Solow model?
-output per person depends on the stock of knowledge -the growth rate of knowledge is constant In the Solow Model: output per person depends on capital per person
To solve this quantity theory money
-plug in all exogenous variables -solve for the price level Pt= MtV/Yt
the natural rate of unemployment
-rate that would prevail with no cyclical unemployment
The Fed..
-targets the federal funds rate -federal funds rate is highly correlated with the short term nominal int. rate at which people borrow and lend in financial markets
In the short run
-the LR is given, i.e. potential output and long run inflation are exogenous -current output deviates from potential because of economic shocks -current output and current inflation are endogenous variables
New ideas depend on
-the existence of ideas in the previous period -the number of workers producing ideas -worker productivity
the employment-population ratio
-the fraction of the civilian population over the age of 16 that is working -general increase in the employment-population ratio in the past 50 years (56% of people over the age of 16 worked in 1960 and more than 63% worked in 2007 before the start of the last recession) -this rise in unemployment was driven entirely be female workers- 35% in 1960 and peaked at 58% in 2000) -in contrast the fraction of male workers has decline from 79% in 1960 to 65% in recent years
Nominal interest rate
-the interest rate on a savings account -is paid in dollars
In the September 7th 2019 issue of The Economist writes discusses the rising labor force participation of older workers. A copy of the article is available in the Canvas module associated with Chapter 7 of the textbook. The article references a recent report by the OECD (Organization of Economic Cooperation and Development), an organization focused on economic policy in the 36 richest countries in the world. Select all the answers below that, in the eyes of the columnist, can contribute to the observed rise in the participation rate of older workers.
-the shift from defined benefit to "cheaper" defined contribution retirement plans -the rise in the statutory retirement age in many OECD countries
whats a good way to connect the ideas of the Romer and Solow model?
-think of each country as a Solow economy that sits on top of the overall trend in world knowledge thats generated by a Romer model -growth in the stock of knowledge accounts for the overall trend in per capita GDP over time -transition dynamics associated with the Solow model then allow us to understand differences in growth rates across countries that persist for several decades
If price is equal to marginal cost..
no firm will undertake the costly research that is necessary to invent new ideas
The short run model is based on 3 premises- what are they?
1) the economy is constantly being hit by shocks 2) monetary and fiscal policies affect output -policymakers can neutralize shocks to the economy -alas, they can also exacerbate the shocks 3) policies entail trade offs -output/employment -inflation
inflation rose in the 1970s because
1. large increase in oil prices- oil price shocks directly influence inflation 2.federal reserve made mistakes in running monetary policy that was too loose so the money supply grew too rapidly
Costs of inflation
1. redistributive costs 2. tax-related (since taxes are based on nominal income-real return is usually low which inf. distorts) 3. distortion of relative prices: some prices adjust quickly to inflation while others adjust slowly
what does the future hold- supply and demand shocks in the U.S. labor market
1. rise in female participation- a little more rise, but there is not much more room 2. slow but steady decline of male participation (if in prime age, not sick, not in workforce- more screen time) 3. retirement of the baby boomers 4. demographic tradition
For the years 1995-2007, if output per person in the private sector grew 2.7 percent, the contribution of the capital-labor ratio was 1.1 percent, and the change in the labor composition accounted for 0.2 percent of that growth, what was the growth rate of total factor productivity? Write your answer in percent (i.e. write 10 for 10 percent).
1.4- growth rate of per capita GDP can be decomposed into -growth rate of TFP -growth rate of capital -growth rate of workers (in this case you just subtract these 3 parameters from each other)
By August 2007 what was going on in the economy due to subprime borrowers?
16% of subprime ARMs were in default -this led to a downward spiral of the housing market
taxes are based on
nominal incomes
countries experiencing hyperinflation typically raise about _____ percent of GDP from the inflation tax
5
A change in labor demand: If the government creates regulations making it harder to fire workers...
A REDUCTION IN LABOR DEMAND CAUSES BOTH the equilibrium wage and the level of employment to decline -in our case- if gov makes it harder to fire workers- in the SR the change may reduce firings ex: if the economy undergoes a recession just after the regulations are introduced, the firm will not be able to reduce employment as easily -this situation may make firms less willing to hire labor in the first place, reducing the demand for labor in the LR
Rivalrous
A characteristic of a good according to which its consumption by one person reduces its availability (or inherent usefulness) for another person.
Detrended output
AKA short run output= difference in actual and potential output, expressed as a percentage of potential output
timing convention for recessions
Begins when actual output falls below potential -short run output switches from + to - Ends when short-run output starts to rise -short run output "shrinks" in absolute value
and increase in interest rate..
decreases investment and output
Experiment #1: Changing the Population
Changes in the population -changes in the growth rate of knowledge (an increase in population changes the growth rate of knowledge) An increase in population -immediately and permanently raises the growth rate of per capita output (refer to picture)
in the ideas sector production function a change in At=zAt^(1/2)Lat, there are
decreasing returns to the ideas stock but increasing returns overall
Housing prices (comparison from the 1990s all the way to the beginning of 2012)
From 1991-2006, -fueled by demand pressures during the "new economy" of the late 1990s and low interest rates in the 2000s and loosing lending standards-prices increased by a factor of nearly 3 between 1996 and 2006 (avg. of 10 percent per year) -national index for housing prices in the U.S. declined by 36 percent btwn 2006 and 2012
the government budget constraint
G= T+ΔB+ ΔM government funds= tax revenue + borrowing + change in the stock of money
idea diagram
Ideas -> nonrivalry -> increasing returns -> problems with pure competition
What are the endogenous variables in this case?
Lat and Lyt
resource constraint in the romer model
Lyt + Lat= L (line above) -the number of workers producing output and the number of workers producing ideas add up to the total population
disinflation
PIt+1PIt < 0
Do all prices respond to changes in money supply at the same rate
SR: they don't LR: yes, renegotiate labor contract and will catch up to changes in the money supply -when the relative prices (of goods, services, or factors) are affected, real allocations can be affected
growth in the Solow and Romer model
Solow model: transition dynamics Romer model: -does not exhibit transition dynamics -instead, has balanced growth path -constant growth rates of all endogenous variables
Wage rigidity
The failure of wages to adjust to equilibrate labor supply and labor demand- -wages that fail to adjust to clear the labor mkt- rather than failing in response to the decline in labor demand, suppose the wage remains unchanged at its original level
actual unemployment=
frictional + structural (natural) +cyclical
The Fed and Treasury Department Respond-Oct 2008
Troubled Asset Relief Program (TARP) -Controversial program since it raised moral hazard problem- these banks had brought themselves into default by leveraging themselves to high
inflation today
USA: 1.7% Switzerland: 0.1% Turkey: 9.3% Venezuela: 10%, 10,000,000% (IMI forecast) (this is extremely high)
liquidity crisis
When the housing market bubble burst, banks and financial institutions faced failure resulting in this crisis. Banks either lacked funds or were unable to make the loans to businesses and consumers necessary for the day-to-day functioning of the economy. -situation in which the volume of transactions in some financial markets fell sharply, making it difficult to to value certain financial assets and thereby raising questions about the overall value of the firms holding those assets
LetY be a good's output, X total expenditures associated with the production of a good, F ¯ the fixed cost associated with production, and C the marginal cost of production. Which of the following production functions captures these properties correctly and exhibits increasing returns?
Y=(X-Fbar)/C
any time new ideas are invented, there is
a fixed cost to produce the new set of instructions -after that, production proceeds with constant returns to scale and therefore constant marginal cost -in order for the innovator to be compensated for the original research that led to the new idea, there must be some wedge between price and marginal cost some point down the line
The romer model predicts that a decrease in population will have
a growth effect that decreases the rate of growth -ex: an increase in population results in only an increase in the growth rate -an algebraic solution shows that a decrease in population results in a decrease in the rate of growth
The consumer price index (CPI)
a price index (for bundle of goods and services) -based on basket for typical urban household -can use to evaluate value of good in 1950 in todays $ determined by measuring the price of a standard group of goods meant to represent the "market basket" of a typical urban consumer
European unemployment has increased because
adverse shocks (productivity slowdown as well)-gas price roughly 2-4 times higher than U.S. Inefficient labor mkt institutions: -more generous welfare benefits -more extensive job protection (in europe vs. america- may get severance payments even for most entry level jobs-this is not the case in the United States)
Which of the following can be used to give firms incentive to innovate? patents copyrights prizes trade secrets
all of the above
case study: institutions, ideas, and charter cities
alternative has recently been suggested by Paul Romer of Stanford University -if it is hard to move good institutions to poor people, perhaps poor people can move to places with good institutions -successful economies however, often restrict immigration -Romer suggests that new cities be established -in these charter cities, advanced economies would agree to set the rules by which the new city is administered -people from throughout the world would then be free to live and work in the new city -such cities could even be established in developing countries with a charter that grants administratvie rights to one or more advanced economies -the success of hong kong and the enormous number of people living in impoverished countries suggest that charter cities may be worth trying
Suppose that a hurricane damages some physical capital in an economy. Taking into account the effect on the marginal product of capital, our model will typically predict
an increase in short run output and decrease in potential output -typically, our model assumes that a natural disaster will reduce potential output and actual output by the same amount -HOWEVER, the MPK typically increases after a hurricane which would increase investment and as a result short-run output and a decline in potential output
inflation
annual percentage change in the price level inflation rate= (Pt+1-Pt/Pt) *100 -where Pt is the price level in year t
menu costs of inflation
are best described as the costs firms incur by having to change prices either on paper or in the computer.
new ideas are new ways of...
arranging raw materials in ways that are economically useful
cyclical unemployment
associated with short-run fluctuations in output (ex: during a recession, person gets laid off)
How the SR model works
assume policymakers can select short run output through monetary policy -idea is to avoid excess boom-recession cycles in the first place -policy change during the oil crises (where inflation was exogenous) 1979: inflation was increasing due to oil prices -monetary policy raises interest rates (short run output has to be negative to combat high inflation- throwing economy into a recession) -recession occurs in 1979- inflation + stagnation= "stagflation" WHAT YOU ACTUALLY WANT TO DO IS CREATE A SHORT (TEMPORARY) RECESSSION- didn't know this back in the 1970s because they thought inflation was negative not the change in inflation so they thought you needed to be in a permanent recession to fix the problem -in reality you don't have to permanently lower output- just change in inflation so levels can reach zero again
velocity of money assumption
assumed to be constant over time (and hence exogenous constant) Vt=V(bar) -why is it roughly constant in the real world?
increasing returns to scale
average production per dollar spent is rising as the scale of production increases -doubling input will more than double outputs -high fixed initial development costs
economic decisions are..
based on real variables - have an affect on real outcomes even though inflation is a nominal phenomenon
why does sustained economic growth occur?
because of new ideas
why is TFP growth sometimes referred to as the residual?
by measuring the growth rates of output per hour, capital per hour, and the labor force composition term, we can let this equation account for the sources of growth in any given country -WE CAN OBSERVE ANYTHING OTHER THAN TFP, WE USE OUR EQUATION AS A WAY TO MEASURE THE UNOBSERVED TFP GROWTH-this is why its called the residual
The quantity theory implies that in the long run
changes in growth rate of money lead to one on one changes in the inflation rate -empirically, this holds up both in the US and worldwide data
The quantity equation
connects money and inflation
Using the Bathtub Model to predict future unemployment
consider the alternative version of the bathtub model: change in Ut+1= stEt-ftUt
Why is there growth in the Romer model
creation of new ideas takes "standing on the shoulder of giants" effect into account -production function for new ideas has constant marginal return with respect to existing ideas -labor and ideas have increasing returns together (homogeneous of degree 2) -in contrast, capital has diminishing marginal returns in the Solow model
Bathtub model
describes how employment and unemployment evolve over time
the money supply
determined by the central bank monetary policy is exogenously given Mt=M(bar)t
fluctuations in U.S. GDP
difficult to see graphically over a long period of time -have mostly been between + or -4% since 1950
the goal of securitization
diversify risk by buying different classes of assets
Supply and demand in the labor market
downward sloping labor demand -diminishing marginal product of labor (MPL) upward sloping labor supply curve -price of leisure is higher when wages are higher
Productivity in the United States from 1995-2007
dramatic resurgence of growth after the last period of time -btwn 1995-2007 ouput per hour grew at an annual rate of 2.8 percent, early as rapidly as before the productivity slowdown -this era was marked by the rise of the web and the dot-com boom in the stock market, followed by the sharp decline in stock prices in 2001 -some have labeled this era the new economy
The great inflation of the 1970s
during the great inflation: the rate peaked just below 15 percent -the inflation tax was a small fraction of gov. spending -if gov can't raise significant resources, why would it allow inflation to rise
Case study: episodes of high inflation
episodes of high inflation tend to recur since they have deep-rooted institutional causes Hyperinflation can stop just as quickly as it starts: -"how four drinking buddies saved brazil by slowing introducing a pseudo currency and eventually replacing it as the new currency
hyperinflation
episodes of very high inflation -typically inflation > 500% per year
the amount of money used in purchases is
equal to nominal GDP
leverage mechanism for private households
equity= downpayment asset=real estate, investments liability= mortgage and other debts (student loans,etc)
nonrivalrous
even when one person uses the good, others can also use it my use of an idea doesn't inherently reduce the "amount" of the idea available to you
Output is produced using the stock of
existing knowledge At and labor Lyt
generally speaking, the rate of inflation ____ during a recession
falls-people r spending less/ there is less circulation of currency -also change in inflation < 0 during recessionary periods according to Philips model
subprime lending and the rise in interest rates
features of subprime mortgage -paid for house based on interest rates -did not have to pay large downpayment but interest rates on house could raise over time- this is why so many subprime borrowers ending up defaulting once the fed increased the rate to 5.25% from about 1.25% btwn 2004 and 2006 typical subprime borrower -loan applications did not meet mainstream standards- poor credit scores and high existing debt to income ratios -very little income able to buy very nice homes -1/5 of all mortgages subprime
if there are large fixed costs due to research and development, perfect competition does not generate new ideas because
firms need to recoup these costs through higher profits
Fisher equation
i=R+pi i=nom int rate R=real int rate pi= inflation
Graph of a reduction in labor demand with wage rigidity
if wages are rigid for some reason and don't fall to clear the labor market, the result is an even larger reduction in employment -the original wage w, labor supply exceeds labor demand; more people would like to work than are able to find jobs
The IS Curve
illustrates the negative relationship between interest rates and short run output
incentives for innovation that require prices to be greater than marginal cost
important negative consequence- example of pharmaceutical company pricing drug at 10,000 vs. the 1,000 it takes to produce it- there will always be people at 1,000 that can afford the drug, but not at the monopoly price of 10,000- these people are priced out of the market- resulting in a potentially large loss in welfare or economic well being -a single price cannot simultaneously provide the appropriate incentives for innovation and allocation of resources efficiently
The classical dichotomy
in the long run, the real and nominal sides of the economy are completely separate -in particular- real GDP in the LR is determined solely by real considerations like the investment rate, new ideas and TFP
Experiment #2: Changing the Research Share
increase in l---> increase g (bar), lower L (bar)--->yt decreases---->but g (bar) has increase in the future-----> yt increases
Prices will rise as a result of
increases in money supply decreases in real GDP
nonrivalry of ideas and the standard replication argument imply the production function will have
increasing returns to scale -the standard replication argument implies we can double output by doubling objects, but ideas are non-rivalrous and can be used in two duplicate factories simultaneously
Not all individuals/firms are affected by inflation in the same way
inflation can redistribute wealth -borrowers (including the government) with debts can pay back their loans w/ new cheaper dollars -creditors wind up losers -so can deflation, but it words the other way around (in nominal terms there is no wealth redistribution, in real terms there is)
the nominal interest rate is generally high when
inflation is high
who comprises the labor force
it is the sum of the employed and the unemployed
Lat=
lL
structural unemployment
labor market failure to match workers and firms ex:decline in manufacturing, outsourcing of production overseas, robotics replacing jobs
the intersection of labor supply and demand determines the
level of employment and the wage -if we assume there is a fixed population of people, N, then this intersection also determines the employment population ratio L/N
Insolvency
liabilities > assets equity < 0 -before the financial crisis, many investment banks were highly leveraged
what is another way for industries that do not involve innovation to drive a wedge between price and marginal cost?
like in the financial sector- trade secrets- withholding the details of a particular idea from competitors
Securitization
lumping together large sums of individual financial instruments such as mortgages and then slicing them into different pieces that appeal to different types of investors
capital requirement
mandates that the capital (net worth, equity) of the bank be at least a certain fraction of the bank's total assets
the wedge that is created between price and marginal cost down the line..
means that markets cannot be characterized by pure competition if we are to have innovation -this is one justification for the patent and copyright systems -patents reward innovators with monopoly power for 20 years in exchange for the inventor making the knowledge underlying the discovery public -this monopoly power provides a temporary wedge between the price and marginal cost that leads to profits -these profits are what provide the incentive for the innovator to innovate in the first place
Monetary Base M1 M2
monetary base= currency plus reserves M1= currency plus demand deposits (i.e. checking accounts) M2= M1 plus savings deposits and individual money mkts accts
Central bank independence- how monetary, fiscal, and central bank independence are apart of the U.S. economy
monetary policy- conducted by the federal reserve fiscal policy- president and congress central bank independence- an attempt to prevent fiscal considerations from leading to excessive inflation
Sahin and Patterson (2012)
negative gap between FC-U and U acts as an indicator of turnaround (future decrease of U)
inflation itself is never
negative, but the change in inflation is
how do taxes on wages affect the unemployment rate?
not clear -in short run, some workers will decide they don't want to work because of the income tax, so they quit their job and drop out of the labor force all together (w/out looking for another job leaving the level of unemployment changed -on the other hand, firms may lay off some workers because of the higher wage, and the unemployment rate goes up as these workers look for new jobs. We know from the S and D diagram that there are now fewer jobs out there, so not everyone will be able to find a job no matter how hard they look- as long as these workers continue to search for a job they can be considered unemployed, and therefore will reduce the unemployment rate -Ultimately, if all laid off workers become discouraged, the effect could be that the unemployment rate returns to its original value -the point is that the unemployment rate is not a perfect measure of the state of the labor market- this is why it is helpful to look at alternative statistics like the employment-population ratio
what does the Romer model divide the world into?
objects -capital and labor from the solow model -these are finite ideas -items used in making objects -these are virtually finite this distinction forms the basis for modern theories of economic growth
Deflation
occurs when inflation rates are negative gy > gm (if the growth rate of GDP is greater than the growth rate of money) or.. pi<0
Case study: digital cash
other forms of currency -frequent flyer miles -cryptocurrency -how bitcoin works
Assume that short-run output is currently -1%. You know for sure that..
output is below potential output -the economy doesn't necessarily need to be in a recession because short-run output typically remains negative for some time after the official end of a recession - has to do with business cycle dating conventions: a recession is declared over when the gap between actual output and potential output starts to shrink -moreover, the size of the output gap doesn't tell us anything about the growth rate of GDP, the growth rate could be zero, positive or negative in this case
Productivity in the United States from 1973- 1995
output per hour grew less than half as fast as it did from 1948 to 1973 at 1.6% -slowdown can be explained almost entirely by a decline in TFP growth, from a rapid rate of 2.1% before 1973 to an anemie 0.6% after -Economists refer to this particular episode as the productivity slowdown
Theory of efficiency wages
paying a wage greater than the market equilibrium wage may increase firm profits -workers may be so poor that paying a higher wage will allow them to eat more and thus become healthier, more energetic, more productive -2, when it is difficult for the firm to monitor a worker's effort on the job, paying a higher wage can ensure high effort -3, the higher wage may attract more able workers to the company, making it more productive
Shoe leather costs of inflation
people want to hold less money when inflation is high- therefore they go to the bank more so their "soles" are worn out
Why is GDP per capita lower in Europe?
people work fewer hours if working less is voluntary: -europeans enjoy leisure more -welfare is likely improve If working less is due to distortions in the labor market: -welfare is likely compromised
the long run model determines _____ output and _______, while the short run model determines _____ and _____ inflation
potential; long run inflation; current output; current inflation
structural unemployment is the unemployment that results from
prevailing labor market institutions- this is when the market fails to match up workers and employers so they are left w/out a job
if inflation is high and the Federal reserve wants to lower it, what should they do?
raise interest rates
What is the debt solution?
raising taxes- may not be politically feasible -in the U.S. the fed doesn't have a say in how much money is printed- everything is separate precisely to avoid the federal reserve promoting policies that aren't healthy for fiscal policy
Annualized rate
rate of change that would apply if the growth rate persisted for an entire year
leverage
ratio of total liabilities to net worth -magnifies any changes in the value of assets and liabilities -this principle also applies to homeowners (stress testing of major institutions- tests if the capital of the bank can weather a downturn- if they do not meet these requirements-banks has to raise additional capital
In the quantity theory of money
real GDP is assumed as exogenously given -determined by real forces i.e. investment rate Yt=Y(bar)t
R= i- pi empirically...
real interest rates have been negative at times -this implies that in the SR the real interest rate does not need to = MPK -In SR this will affect allocation of resources bc MPK typically = 0
According to Okuns law, if the Federal reserve wants to reduce unemployment, it should _______ interest rates, which would _____ output
reduce; increase
diagram denoting nonrivalrous vs. rivalrous goods
refer to image
increase in L(bar)-1
refer to image
increase in l(bar)-2
refer to image
excludability
refers to the extent to which someone has property rights over a good- possibly and idea-and is legally allowed to restrict the use of that good
when all prices in the economy double
relative prices are unchanged
What are the two key financial regulations banks are subject to
reserve requirement and capital requirement
the reserve requirement is a regulatory floor for the ratio of ________ to ________. The purpose of reserve requirements is to ____________.
reserves; deposits ensure that banks hold enough liquid assets to satisfy withdrawls from check and/or savings accounts
monetary seignorage
revenue that the government obtains from "issuing' more money (ΔM) ex: through open market operations
In the Romer model in Figure 6.2, at time t0, a change in the shape of the production function can be explained by an increase in the:
share of labor engaged in research refer to image
The federal reserve influences the level of economic activity in the..
short run
Empirically the Philips curve...
slope is about 1/3 -if output exceeds potential by 3% the inflation rate increases 1 percentage point
Outcomes of the housing bubble and recession
started in Dec 2007- first sign= unemployment By 2009 -output was 7% below potential -unemployment was more than 10% February 2010 -8.5 million jobs lost cumulatively
Who releases U.S. Labor Mkt Statistics
the Bureau of Labor Statistics (BLS) "Employment Situation" reports: -employment status -unemployment rate
What is the only difference between this production function in chapters 4 and 5
the TFP parameter has been replaced by A (with the stock of ideas At)
velocity of money
the average number of times per year that each piece of paper currency is used in a transaction
Which of the following explains why an increase in the interest rate reduces short-run output?
the cost of borrowing increases for firms and households firms reduce business investment (invest when interest rates are low to lock in low payments)
if the change in inflation is positive we know that...
the economy is in a boom, and actual unemployment is less than the natural rate of unemployment
the principle of transition dynamics in the combined solow and romer model
the farther below its balanced growth path an economy is (in percentage terms) the faster the economy will grow -the farther above its balanced growth path an economy is, the slower it will grow
In "The cost of innovation has risen, and productivity has suffered", the Economist magazine discusses research by Bloom, Jones, Van Reenen, and Webb. They find evidence that productivity growth has been fairly constant in recent decades while the number of researchers has risen very sharply. How can the Romer model reviewed in class be reconciled with this empirical evidence? Hint: Use the equations of the Romer model to answer this question.
the fraction of researcher must be rising while their productivity is declining at the same time
inflation=
the growth rate of money- the growth rate of real GDP
If a country is on its balanced growth path then...
the growth rates of all endogenous variables are constant -the growth rates of the number of workers engaged in research and the number of workers engaged in producing output are constant -the growth rate of output is constant -the growth rate of the stock of ideas is constant
how has the approach to adopting good institutions been received?
the institutions that govern how people act- property rights, the justice system, and the rules and regulations of a country are themselves ideas. -this makes institutions non-rival -the approach of adopting good institutions has proven difficult to understand-it does not seem to be in the interest of the heads of the poorest countries to adopt the rules and institutions that would substantially boost economic performance
Actual output is equal to Yt...
the long run trend ybart+ short run fluctuations ysquigly t -long run trend is potential output
Measures of money supply
the monetary base includes currency and accounts (reserves)
In the LR what is the key determinant of price level
the money supply
reserve requirement
the percentage of deposits that banking institutions must hold in reserve
which of the following is not an endogenous variable in the Romer model?
the productivity of an individual researcher (this is an exogenous variable since the fraction of the population engaged in research is)
neutrality of money
the proposition that changes in the money supply -have no real effects on the economy -only affect prices
example of a good that is non-rivalrous and excludable
the source code for Microsoft Word
growth accounting determines
the sources of growth in an economy and how they may change over time
Unemployment rate(s) in the U.S.
the unemployment rate is one of the many rates released by the Bureau of Labor Statistics/ Census Technically its called U-3 Other rates are more comprehensive: U-4: total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers U-5: total unemployed, plus discourage workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force U-6: total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force
Measuring potential output
there is no directly observable measure of potential output in an economy Ways to measure potential output: -assume a perfectly smooth trend that passes through quarterly movements of real GDP -take averages of surrounding actual GDP #s (moving avg.)
Pareto optimal allocation
under the assumption of perfect competition: cannot make someone better off without making someone else worse off -perfect competition results in Pareto optimality because P=MC
Labor Mkts Arnd the World Since 1980
unemployment in Europe is well above the rate in the United States
how do we allocate labor in the Romer model? How does this compare to the Solow model?
we assume a constant fraction of the population works in research (1-l) is producing output -the same way Solow allocated output to consumption and investment
The quantity theory of money
we often think of money as paper currency historically: -money was backed by gold -sometimes by other "precious" commodities Today: Currency is "fiat" money: i.e. government declares it is worth something and accepts it to settle tax liabilities -this is why in private transaction money has value
By the standard replication argument...
we only need to double the "objects" involved in production (amount of labor and capital)
frictional unemployment
workers between jobs in the dynamic economy ex: college graduates or people who voluntarily quit their job to find something better or different
