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