Macro Exam 1
Boing builds an airplane to be sold next year
Investment
Boing sells an airplane to US Air Force
government purchases
A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and sells it to a baker for $3. The baker uses the flour to make bread and sells it to an engineer for $6. The engineer eats the bread. What is the value added by each person. What is the bread's contribution to GDP?
$2 added by miller $3 added by the baker Contribution to GDP: $6 b/c GDP measures the consumption of all finished goods
unemployment rate formula
(# unemployed persons/ labor force (includes employed and unemployed)) x100
Real GDP Formula 2014
(2014 price of apples x 2014 quantity of apples) + (2014 price of oranges x 2014 quantity of oranges)
Real GDP for 2015 w/ base year 2014
(2014 price of apples x 2015 quantity of apples) + (2014 price of oranges x 2015 quantity of oranges)
labor force participation rate
(labor force/ adult population)x 100
Growth Rate formula
(new - old)/ old
Inflation Rate formula
(new − old)/old × 100 *Using two GDP deflator numbers or CPI numbers
GDP deflator formula
(nominal GDP/ real GDP) x100
Nominal GDP formula 2014
(price of apples x quantity of apples) + (price of oranges x quantity of oranges)
What makes the demand for an economy's output of goods and services equal the supply?
Equilibrium interest rate
Closed classical economy (increase in govt purchases)
No change in Y No change in C Decrease in S Decrease in I Increase in r
Small open classical economy (increase in govt purchases):
No change in Y No change in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon
Suppose that house price drop significantly and households feel less wealthy, leading to a decrease in autonomous consumption. Analyze the effects of this change in household behavior on real output, unemployment, consumption, national saving, investment, and the real interest rate in a closed classical economy.
No change in Y No change in U Decrease in C Increase in S Increase in I Decrease in r
Use the closed classical economy to analyze the effects of a decrease in taxes
No change in Y No change in U Increase in C Decrease in S Decrease in I Increase in r
Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (c) Decrease in taxes
No change in Y No change in U Increase in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon
Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (d) Increase in autonomous consumption
No change in Y No change in U Increase in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon
Use the closed classical economy to analyze the effects of an increase in government purchases
No change in Y No change in U No change in C Decrease in S Decrease in I Increase in r
Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (a) Decrease in government purchases
No change in Y No change in U No change in C Increase in S No change in I (r = r*) Increase in NX Decrease in epsilon
Analyze the effects of a one-time decrease in the level of the money supply in a closed classical economy. In particular, what happens to real output, unemployment, consumption, national saving, investment, the real interest rate, and price level?
No change in Y No change in U No change in C No change in S No change in I No change in r Decrease in P
Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (b) One-time increase in the domestic money supply
No change in Y No change in U No change in C No change in S No change in I (r = r*) No change in NX No change in epsilon
Large open classical economy (increase in govt purchases):
No change in Y (same in both cases) No change in C (same in both cases) Decrease in S (same in both cases) Decrease in I (from closed) Increase in r (from closed) Decrease in NX (from small open) Increase in epsilon (from small open)
If inflation falls from 8 to 5 percent, what happens to real and nominal interest rates according to the Fisher effect?
Nominal = 3% Real = no change
Functions of money
a store of value, a unit of account, medium of exchange
store of value
a way of transferring purchasing power from the present to the future
Boeing sells an airplane to Amelia Earhart
consumption
Boeing sells an airplane to American Airlines
consumption
Boeing purchases a new computer from IBM
investment
I purchase a newly constructed house
investment
What determines consumption?
level of disposable income
commodity money
money that is intrinsically useful and would be valued even if it did not serve as money (i.e. gold)
Fiat money
money that is not intrinsically useful and is valued only because it is used as money (i.e. dollar bills)
Boeing sells an airplane to Air France
net exports
Fisher Effect
real interest = nominal rate - expected rate of inflation
What determines investment?
real interest rate
medium of exchange
the item widely accepted in transactions for goods and services
unit of account
the measure in which prices and other accounting records are recorded
Nominal Exchange Rate
the rate at which one country's currency trade for another country's currency
Real Exchange rate
the rate at which one country's goods trade for another country's goods
What determines the natural rate of unemployment?
the rate of job separation the rate of job finding
frictional unemployment
the unemployment that results because it takes time for workers to search for the jobs that best suit their skills and tastes
structural unemployment
the unemployment that results from rage rigidity and job rationing