Intro to Macroeconomics NYU Midterm
GDP
(gross domestic product) measures the total income of everyone in the economy - market value of all final goods and services produced within a country in a given period of time
when is a price ceiling binding?
If it is below the equilibrium price
foreign direct investment
Investment made by a foreign company in the economy of another country
foreign direct investment (FDI)
Investment made by a foreign company in the economy of another country.
risk averse
Reluctancy to take any kind of risk
opportunity cost formula
Return on Most Profitable Investment Choice - Return on Investment Chosen to Pursue.
Law of supply
Tendency of suppliers to offer more of a good at a higher price
present value (PV)
Value today of a future cash flow
Opportunity Cost
Whatever must be given up to obtain something
shoe leather costs
When inflation is high, the value of money kept in savings tends to decrease
when is a price floor binding?
When it is above equilibrium
Components of GDP
Y= C+I+G+NX y= total output of a ocuntry C= consumption from households I= purchase of capital goods to be used in the future G= gov spending NX= net exports (exports - imports)
Bond
a formal contract to repay borrowed money with interest at fixed intervals
market for loanable funds
a market in which savers supply funds to those who want to borrow price $ --> real interest rate
unit of account
a means for comparing the values of goods and services
quantity theory of money
a theory about the connection between money and prices that assumes that the velocity of money is constant
Marginal Benefit
additional benefit from the one last unit of action
marginal cost
additional cost from the one last unit of action
A high debt-to-GDP ratio would imply
amount of debt is greater than the national income
money multiplier
amount of money the banking system generates with each dollar of reserves
informational efficiency
asset prices rationally reflect all available information
efficient market hypothesis
asset prices reflect all publicly available information about the value of an asset
Law of demand
at a higher price, consumers will demand a lower quantity of a good
positive statements
attempt to describe the world as it is
normative statements
attempt to describe the world as it should be
central bank
bank that can lend to other banks in times of need
comparative advantage
being able to produce goods and service with a lower opportunity cost than the other
absolute advantage
being able to produce goods and services more efficient than another
financial intermediaries
bridge savers and borrowers when they can't engage directly in financial markets
firms
buy/hire factors of production, and use them to produce
monetary neutrality
changes in money supply don't affect real variables
random walk
changes in stock prices are impossible to predict from the available information
bonds
debt instrument longer terms --> riskier higher credit risk--> pay higher interest rates w inflation protection--> pay lower interest rates
Who gains and loses if inflation rate is higher than expected
debtors gain - people who take out loans because the value of money is higher when they borrow vs when they return creditors lose - get back less than what they lent
bowed inward
decreasing opportunity cost
a bank run happens when
depositors simultaneously lose trust in banks and run to withdraw their money
cyclical unemployment
deviation of unemployment from its natural rate
when a price ceiling is binding there is...
excess demand in the market
when a price floor is binding there is...
excess supply in the market
trade surplus
exports greater than imports
trade deficit
exports less than imports
balance sheet
financial statement summarizing a firm's assets, liabilities, and equities
mutual fund
fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets
future value (FV)
future equivalence of a sum of money today
inflation
increase in overall level of prices
substitutes
increase in price of one will increase the demand of the other
slope bowed outward means
increasing opportunity cost
Does the elastic or inelastic side bear more of the tax burden?
inelastic
real interest rates
interest rates that are corrected for the effects of inflation
nominal interest rates
interest rates without a correction for the effects of inflation
foreign portfolio investment
investment financed with foreign money but operated by domestic residents (buying stocks)
nominal variables
lemonade stand - the price you put on the cup, doesn't account for inflation and prices of other things
real gdp
measures prod of goods and services at constant prices from a base yr
nominal gdp
measures prod of goods and services at current prices
PPI (producer price index)
measures the cost of a basket of goods and services bought by firms
gdp deflator
measures the current level of prices relative to the level of prices in base yr formula: nom/real gdp x 100
core cpi
measures the overall cost of consumer goods and services, excluding food and energy
CPI (consumer price index)
measures the overall cost of goods and services bought by a typical consumer
reserve requirement
minimum reserves that banks must hold against deposits
index fund
mutual fund that buys all stocks in a given stock index
Fisher effect
noticing that when interest and other earnings start to go up so do the costs, aka inflation
externality
one's consumption or production of a good affects bystanders
world price
opportunity cost in the rest of the world
The slope of a PPF represents what?
opportunity cost of one good in terms of another
household
own the factors of production and sell/rent them to firms for income -buy and consume goods and services from firms
flat money
paper, no intrinsic value but represents value
stock
partial ownership of a company
moral hazard
people become more reckless when insured
determinants of productivity
physical capital per worker human capital per worker natural resources per worker technological knowledge
menu costs
printing new price tags and menu's costs money
complements
products which are bought and used together, when price of one rises they both do, decreasing demand
inferior good
quantity demanded at any given price decreases as consumer income increases
normal good
quantity demanded at any given price increases as consumer income increases
productivity
quantity of goods and services produced from each unit of labor input - ultimate source of living standards
leverage ratio
ratio of the bank's assets to capital
domestic price
reflects the opportunity cost of producing a good domestically
adverse selection
riskier people are more likely to get insurance
financial markets
savers can directly provide funds to borrowers
financial markets
savers provide funds to borrowers
elasticity
sensitivity of one variable to another high - greater than 1.0 low - less than 1.0
laffer curve
shows the relationship between the size of the tax and tax revenue
utility
subjective measurement of satisfaction from consuming goods and services
Problems with CPI
substitution bias, introduction of new goods, unmeasured quality change
commodity money
takes the form of a commodity with intrinsic value
real variables
the price of the cup in consideration of other factors like inflation, costs of production, etc
financial system
the system that allows the transfer of money between savers and borrowers
national savings
the total income that remains in the economy after paying for consumption and government purchases
deadweight loss
the total loss of producer and consumer surplus from underproduction or overproduction
Rule of 70
time needed to double an amount of money w compounded interest rate is 70/r%
capital outflow
when a domestic resident buys a foreign asset
speculative bubble
when an asset price is systematically above its fundamental value
hyperinflation
when inflation is super high (>50% per month)
tax distortion
when taxes affect the choices business owners make, with inflation it makes it harder because taxes take up a bigger part of your profit due to other costs rising
tarrifs
when the gov imposes taxes on imported goods -create deadweight loss
market failure
when there is market power, externality, or imperfect information. not efficient
relative-price distortion
when there's confusion about prices due to inflation and markets are less able to allocate resources to their best use