Econ Final

Short Run Effects of Expansionary Fiscal Policy

When nominal GDP increases, Money supply increases (money demand curve shifts RIGHT, even tho supply is same) --> higher nominal interest rate (i), leads to crowding out

Recessionary Gap

Y actual < Y Potential Price Level decreases Unemployment ABOVE natural rate

Inflationary Gap

Y actual > Y Potential Price Level increases Unemployment BELOW natural rate

Productivity

Y/L --> (GDP/ Number of labor hours)

Disposable income (Y^D)

Y^D = (Y - T) + TR (Y-T) = total taxes TR = total returns

Crowding out

nominal interest rate (i) increases --> real interest rate (r) increases --> C, I, NX decreases --> AD decreases/ shifts LEFT (sorta)

Per Capita GDP

per capita GDP = GDP/ population

Cyclical Unemployment

ppl are looking for jobs but no one is hiring, aka Recession

Consumption Function

the relationship between consumption spending and disposable income

Absolute convergence

two factors of tech transfer and poor countries attracting more capital ALONE will allow countries to converge

Domestic Financial Account

what foreign country buys from us - What we buy from foreign country out - in)

Where do short run Phillips curve and long run Phillips curve intersect

where Actual Inflation = Expected Inflation

Working age population

working age pop = labor force + not in labor force

The nominal interest rate is the a. interest rate corrected for inflation. b. interest rate as usually reported by banks. c. real rate of return to the lender. d. real cost of borrowing to the borrower.

B

Labor force

Labor force = employed + unemployed

Labor Force participation rate

Labor force participation rate = labor force/working age population

What is MPC

MPC = change in consumption/ (change in (Y-T) + TR) aka = change in consumption/ change in Y^D Disposable income = Y^D = total taxes + Total Returns

Current Account

Negative of (-) financial account

NAIRU

Non accelerating Inflation Rate of Unemployment - unemployment rate at which the inflation rate has no tendency to increase or decrease

Nominal GDP

P1Q1 + P2Q2 ... PnQn

Real GDP

P1bQ1 + P2bQ2 ... PnbQn

frictional unemployment

People in between jobs

Structural unemployment

People's skills are out of date/ they need to be retrained

Convergence

Poor countries catch up to rich countries

Philips curve

Shows tradeoff btw unemployment and inflation - offers policy members a menu of choices because it affects AD - Vertical in long run - slopes downward in short run

Marginal Propensity to Consume (MPC)

The slope of the consumption function: The amount by which consumption spending changes when disposable income changes

Unemployment Rate

Unemployment Rate = number unemployed/ Number in labor force

Calculating Current Price of a Past Price

Value in time (t) + n dollars = value of time (t) dollars SO (Pt + N) / Pt --> later yr/ earlier year

Levels form of Velocity

Velocity = Nominal GDP/ Money Supply OR (P x Y)/ M --> MV = PY

Balanced Trade

When exports = imports

Government spending (G) increases --> AD???

Increases or shifts RIGHT

Interest Rate (r) decreases--> Consumption (C) increases--> Investment (I) increases--> Net Exports (NX) increases --> AD ???

Increases or shifts RIGHT

Taxes (T) decrease --> AD ???

Increases or shifts RIGHT

Inflation

Inflation: Economy's overall price level rising Inflation = (P in later year - P in earlier year/ P in earlier year) x 100

Investment

Investment = change in K

Change in money supply

Change in money supply = change in total deposits + Change in cash held by public

Change in total deposits

Change in total deposits = 1/ (R + E) x Initial change in Reserves

Household wealth

Household wealth = household assets - household liabilities

Y dom (Domestic GDP) DECREASES

Imports (IM) decreases, (X-IM) increases, NX increases

Y dom (Domestic GDP) INCREASES

Imports (IM) increases, (X-IM) decreases, NX decrease

In the short run, open-market purchases by the Fed a. increase the price level and real GDP. b. decrease the price level and real GDP. c. increase the price level and decrease real GDP. d. decrease the price level and increase real GDP.

A

Growth Rate of Population

% Change in GDP - % Change in population

Growth rate of per capita GDP

% change in GDP/ population

Growth Rates form of velocity

% change in M + % change in V = % change in P + % Change in Y ****** In the long run % change in V = 0 AND * change in M does NOT affect % change in Y

Long run growth rates form of velocity

% change in M = % change in P + % Change in Y OR % change in P = % change in M - % Change in Y AKA Inflation = % change in M - % Change in Y

GDP Deflator

(Nominal GDP/ Real GDP) x 100

Wage increase (buying power in new year compared to old)

(old wage x new CPI) / Old CPI

Real percentage increase

(old wage x new CPI) / Old CPI = x Use answer from above equation, subtract is from NEW wage, divide by old wage, then x100 [(New wage -x)/ old wage] x100

What determines productivity

- Capital - human capital ( knowledge and skills acquired through education and training) - Technological change - increases the quantity of outputs firms can produce with given inputs

Short run Phillips curve

- Downward sloping cause everywhere on the curve, expected inflation is the same *** BUT ppl's expectations can be wrong - Monetary policy can reduce unemployment rate below natural rate by making inflation greater than expected

Environmental approach to development

- Geography - Disease - Climate - Inaccessibility of trade routes (aka landlocked) - Lack of natural resources - Policy implications (foreign aid)

Influences of natural rate of unemployment

- Gov policies (training programs, Unemployment compensation, labor marker policies, minimum wage laws) - labor unions (keep wages above equilibrium) - Efficiency wages (wages set by employer above equilibrium to make workers more efficient)

Expansionary Fiscal Policy

- Gov spending (G) increases - Taxes decrease - And/ or Transfer Payments (unemployment compensation, social security, etc) increase G increases, TR increases, Taxes decrease, disposable income increases, Consumption spending increases, AD increases

Tax multiplier

- MPC/ 1 -MPC

For movement up and down curve:

- Price level (P) increases --> GDP (Y) decreases - Price level (P) decreases --> GDP (Y) increases

Wealth Effect

- Price level (P) increases --> purchasing power of household wealth decreases --> Consumption (C) decreases--> Aggregate expenditure (AE) decreases - and vice versa

Interest Rate Effect

- Price level (P) increases--> Interest Rate (r) increases--> Consumption (C) decreases, Investment (I) decreases, Net Exports (NX) decreases--> AE decreases - and vice versa

International Trade Effect

- Price level (P) increases--> real exchange rate (e) increases--> Net Exports (NX) decreases--> AE decreases - and vice versa

Institutional Approach to development

- sounds legal system - stable political system - monetary stability - reduced corruption

3 approached of development

1) Environmental Approach 2) International trade approach 3) Institutional approach

Why do we expect convergence

1) Technological transfer 2) Poor counties attract more capital

MPS (marginal propensity to save)

1- MPC

3 sources of technological change

1. better machinery - computers software, machine tools 2. Increase in human capital - Education, training experience 3. Better organization and management of production

Government Spending multiplier

1/ (1-MPC)

Money multiplier

1/ (R + E) * R = reserve requirement *E = Excess Reserves

International Trade approach to development

2 dimensions of integration - capital flows --> financial capitals, FDI - Trade in goods and services --> import substituting industrialization *** this approach is in favor of globalization

Rule of 70

70/ Growth Rate = years it take GDP per capita to double

In the long run, changes in the money supply affect only a. prices. b. output. c. unemployment rates. d. All of the above.

A

Which of the following would not be associated with an adverse (or negative) supply shock? a. the long-run Phillips curve shifts left b. unemployment rises c. the price level rises d. output falls

A

Suppose that the real return from operating factories in Ghana rises relative to the real rate of return in the United States. Other things the same, a. this will increases U.S. net foreign investment and decrease Ghanaian net foreign investment. b. this will decreases U.S. net foreign investment and increase Ghanaian net foreign investment. c. this will only increase U.S. net foreign investment. d. this will only increase Ghanaian net foreign investment.

A is this cause our investment in them is doing well and their investment is us is doing badly?

Global funds market

A global fund is a fund that invests in companies located anywhere in the world including the investor's own country. A global fund often seeks to identify the best investments from a global universe of securities. Global funds may also be passively managed. A global fund can be focused on a single asset class or allocated to multiple asset classes. Read more: Global Fund https://www.investopedia.com/terms/g/globalfund.asp#ixzz5EZAjrW1v Follow us: Investopedia on Facebook

Contractionary Monetary Policy

Actions which DECREASE the money supply - Fed SELLING treasury bonds --> Nominal interest rate (i) increases --> r (interest rate) increases --> Consumption decreases, investment decreases, Net exports decreases --> AD decreases ( shifts LEFT)

Expansionary Monetary Policy

Actions which INCREASE the money supply - Fed BUYING treasury bonds --> Nominal interest rate (i) decreases --> r (interest rate) decreases --> consumption increases, investment increases --> NX increases --> AD increases (shifts RIGHT)

Trade surplus

An excess of exports over imports

Trade deficit

An excess of imports over exports

If a country has business opportunities that are relatively attractive to investors in other countries, we would expect it to have a. both positive net exports and positive net foreign investment. b. both negative net exports and negative net foreign investment. c. positive net exports and negative net foreign investment. d. negative net exports and positive net foreign investment.

B

If a country's saving rate declined, the other things the same, in the long run it would have a. lower productivity, but not lower real GDP per person. b. lower productivity and lower real GDP per person. c. lower real GDP per person, but not lower productivity d. neither lower productivity nor lower real GDP per person.

B

If purchasing-power parity holds, a dollar will buy a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity.

B

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct.

B

A steep short-run aggregate supply (SRAS) curve a. means the majority of prices in the economy are not flexible. b. implies that expansionary fiscal policy will have a larger effect on GDP than if SRAS were flatter. c. implies that an expansionary open market operation by the Fed will have a bigger impact on the price level than if SRAS were flatter. d. means that a contractionary open market operation will have no impact on economy in the short run.

C

If the Fed conducts open-market purchases which of these three increases in the short run: interest rate, prices, and investment spending? a. interest rates, prices, and investment spending b. interest rates and prices, not investment spending c. prices and investment spending, not interest rates d. interest rates, not prices nor investment spending

C

If the economy is in long-run equilibrium and then the Fed sells bonds, a. the price level will increase and real GDP will decrease. b. the real exchange rate will increase in the short run. c. the price level will decrease and real GDP will be unchanged in the long run. d. the price level will decrease and unemployment will decrease in the long run.

C

If the marginal propensity to consume (MPC) goes up, then a. a given increase in government spending will have less impact on equilibrium GDP. b. a given increase in taxes will have less impact on equilibrium GDP. c. a given increase in government spending will have more impact on equilibrium GDP. d. a given increase in the money supply will result in a smaller increase in total deposits.

C

In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Italian adult non-institutionalized population was 45.020 million, the labor force was 24.065 million, and the number of people employed was 22.105 million. According to these numbers, the Italian labor-force participation rate and unemployment rate were about a. 45.1%, 8.1% b. 45.1%, 4.4% c. 53.5%, 8.1% d. 53.5%, 4.4%

C

MPC Slope

Change in C / Change in Y^D

Which of the following shifts aggregate demand to the right? a. an increase in government expenditures or a decrease in the price level b. a decrease in government expenditures or an increase in the price level c. an increase in government expenditures, but not a change in the price level d. a decrease in the price level, but not an increase in government expenditures

C

Consumption function

C = f[(Y-T), (Y-T)^e, r, Wealth, Price leve OR disposable income, expected future dispoasble in come, interest rate...

CPI

CPI = (cost of basket in that month/ cost of basket in base period) x 100

Foreign Portfolio Investment

Capital Investment financed with foreign money but operated by domestic residents Ex: investing in a foreign company

Foreign Direct Investment

Capital Investment owned and operated by a foreign entity ex: a factory or office building for a company operated in another place

Natural Rate Hypothesis

Claim that unemployment eventually returns to its normal/ natural rate regardless of inflation rate - based on vertical LRAS - LRPC is vertical cause no tradeoff btw unemployment and inflation

Contingent Convergence

Countries will catch up/ converge if other conditions are present

Current Account

Current Account = (-) Financial Account OR = - (capital in - capital out) OR = - Net capital inflow

If money growth does not affect real GDP, and velocity is stable, an increase in the money supply creates a proportional increase in a. real GDP only. b. nominal GDP only. c. the price level only. d. Both the price level and nominal GDP.

D

Expected Income (Y^e) increases--> Consumption (C) increases, Investment (I) increases --> AD ???

Increases or shifts RIGHT

Foreign GDP (Y for) Increases --> Exports (X) Increases --> Net Exports (NX) increases--> AD???

Increases or shifts RIGHT

Domestic GDP (Y dom) Increases --> Imports (IM) increases --> Net Exports (NX) decreases--> AD???

Decreases or shifts LEFT

Expected Income (Y^e) decreases--> Consumption (C) decreases, Investment (I) decreases --> AD ???

Decreases or shifts LEFT

Government spending (G) decreases --> AD???

Decreases or shifts LEFT

Interest Rate (r) increases--> Consumption (C) decreases--> Investment (I) decreases--> Net Exports (NX) decreases --> AD ???

Decreases or shifts LEFT

Nominal Exchange Rate (E) Increases--> Real Exchange Rate (e) Increases --> Net Exports (NX) decreases --> AD ???

Decreases or shifts LEFT

Taxes (T) increases --> AD ???

Decreases or shifts LEFT

Per worker production function

Diminishing marginal returns to capital - if worker has little K, giving them more increases their productivity - If workers already have a lot of K, giving them more increases production fairly littler

Net Foreign Investments (NFI)

Domestic residents' purchases of foreign assets minus foreigners' purchase of domestic assets

Monetary Policy

Done ONLY by the Fed

Fiscal Policy

Done by the Treasury Dept, at the direction of the legislative or executive branch

Long Run Phillips curve

Expectations CATCH UP to reality, the unemployment rate goes back to natural rate WHETHER inflation is low or high

Natural rate of unemployment

Frictional + Structural

Contractionary fiscal policy

G decreases, TR decreases, Taxes increase, Disposable income decreases, consumption decreases, AD decrease

All other things being equal, if the Fed buys bonds a. aggregate expenditure will decrease. b. aggregate demand will decrease. c. aggregate expenditure will increase d. aggregate demand will increase

d

r us (US interest rate) INCREASES [relative to rest of world]

demand for $ increases, Nominal interest rate (E) increases, Real interest rate (e) increases, Exports (X) decreases, Imports (IM) increases, NX decreases

Real Exchange Rate (e)

e = (P dom x E)/ P for

IF Purchasing Power Parity holds

e = 1 --> E = P foreign - P domestic if e>1, then E is TOO HIGH

Y for (Foreign GDP) DECREASES

exports (X) decreases, (X-IM) decreases, NX decreases

Real interest rate (e) INCREASES

exports (X) decreases, Imports (IM) increases, Net Exports (NX or X - IM) decreases

Y for (Foreign GDP) INCREASES

exports (X) increases, (X- IM) increases, NX increases

Real interest rate (e) DECREASES

exports (X) increases, Imports (IM) decreases, Net exports (NX or X-IM) increases

Growth Rate

growth rate= real GDP (later yr) - real GDP (earlier yr)/ real GDP (earlier yr)

i= nominal interest rate r= real interest rate π = inflation rate

i = r + π OR r = i - π