MACROECONOMICS

Constant returns to scale means what for economic profits ?

economic profits = 0

why did we switch calculated to chain weighted GDP ?

changes in relative prices

a reduction of the federal funds rate is generally considered

expansionary monetary policy

coupon rate formula ?

coupon rate = i/ p p = par value

what is the Currency - deposit ratio cr ?

cr = C/D it reflects the preferences of households about how much money .....

what is the benefit of unemployment insurance ?

creates better matches with jobs, because the unemployed workers can hold out for the job thats right for them better matches lead to higher productivity and higher incomes

Shocks to LM curve ?

credit card

Money demand goes____ when interest rates are high

down

Unemployment insurance increases the amount of_____ and raises _____.

frictional unemployment natural rate

output per capita Y/L grows at rate Y/L = y* x E rate of growth of y

g 0 + g = g

(b) A fisherman catches one fish and sells it to a restaurant, but the fish rots in the restaurant and leads to no additional sales of fish meals. Determine the effect on U.S. nominal GDP:

GDP increases

(c) A fisherman catches one fish and sells it to a Japanese restaurant in the U.S. for $100. The restaurant then serves you a sushi meal for $150. Determine the effect on U.S. nominal GDP:

GDP increases

(d) An Apple factory based in Hong Kong produces a computer and sells it to the U.S. government. Determine the effect on U.S. nominal GDP:

GDP increases

(f) General Motors produces a new jet engine and sells it to Boeing for $10 million. Determine the effect on U.S. nominal GDP:

GDP increases

(h) Boeing produces a jet and sells it to the U.S. Army for $200 million. Determine the effect on U.S. nominal GDP:

GDP increases

A fisherman catches one fish and sells it to you for $100 (you eat it raw). Determine the effect on U.S. nominal GDP:

GDP increases

(i) The U.S. Army sells one of its used jet planes to Delta Airlines for $20 million. Determine the effect on U.S. nominal GDP:

GDP is unaffected by the sales of used goods.

g) Boeing produces a new jet and sells it to British Airways for $200 million.

GDP remains the same because it is sold outside the U.S.

The average rental price of housing drops by 30%. What is the effect on GDP ?

GDP will decrease because housing services are included in GDP.

Formula for the present value of money ?

Present Value = FV/ (1+ i )^n FV stands for furture value

what kind of unemployment arises because firms fail to reduce wages despite an excess supply of labor ?

structural unemployment

G = T What can you say about the government's budget ?

the government has a balanced budget.

what is Economic profit ?

the income that remains after firms have paid the factors of production.

Frictional ?

Unemployment that occurs because workers are changing jobs.

FORMULA TO DETERMINE REAL WAGE RATE ?

W/P

Formula for MPL ?

W/P

Cyclical Unemployment ?

the increase or decrease in unemployment due to the natural fluctuations of output as the economy moves through the business cycle.

an increase in the federal funds rate is generally considered

a tightening of monetary policy contractionary

output in the short run is determined by ___ in the IS LM model ?

how much is demanded

The price of existing bonds is ___________ correlated With _________ ?

inversely market interest rates

when interest rates go up what happens to investments ?

investment will also increase

3 forms of depreciation ?

physical depreciation workforce growth: with more workers the available amchines have to be split among more workers Efficiency growth: the available machines

shifts to AD curve

policy changes or shocks

how does population growth affect capital per person ? how does depreciation affect capital per person ? how does investment affect capital per person ?

pop growthcauses capital per person to cpital per person decrease depreciation causes capital per person to decrease investment causes capita per person to increase

government increases G ? What is the impact on the market for loanable funds.

public savings decrease private savings dont change, national savings shift left interest rate goes up disposable income is unchanged so C is unchanged as well An increase in G must be met by an equal decrease in I. crowds out private investment one for one. the demand of loanable funds does not change the supply shifts left

ex-ante real interest rate

r = i - Epi

3 ways government can finance its spending

raise revenue through tqxes borrowing from the pub;lic print money (seignorage)

At its most basic level, the Solow model shows that in the long run an economy's _____ determines the size and therefore the level of production.

rate of savings of capital stock

interest = ?

100/r

higher rate of job finding

lower unemployment

MPL for the Cobb- Douglas function formula ?

(1 - α) A K^α L^-α

Nominal GDP ? Formula

(Deflator x Real GDP)/100

What is the GDP Growth rate formula ?

(GDP in year 2 / GDP in year 1) - 1

Economic Growth rate formula ?

(GDP2 - GDP1)/GDP1

M(money supply) = ?

(cr+1/cr +rr) x B B = monetary base cr = currency deposit ratio rr = reserve ratio

national income account identity ?

(national saving)Y-C-G = I (demand for loans)

nominal gross interest rate formula ?

1 + i = y/x

real interest rate formula ?

1+ r = (y/Pt+1)/(x/Pt) = 1+i/1+pi nominal interest rate - inflation rate Pt = price r = i - pi

Variables that cause shifts in Labor Demand ?

1. Consumer preferences and demand for products 2.Technology 3. Price of other inputs and factors of production( land,raw materials and capital)

What are the factors of Production ?

1. Land/Raw materials 2. Labor 3. Capital 4. Entrepreneurship

main goals of the Fed ?

1. Promote sustainable output and employment 2. Promote stable prices

Feds instruments that affect the reserve deposit ratio

1. Reserve requirements 2. The interest rate on reserves banks keep at the Fed

What is economic growth rate determined by ?

1. The amount of productive resources available 2.Technology

Criteria for Unemployment ?

1. They don't have a job 2. they ARE looking for a job 3. They are available for work

bank uses its funds how ?

1. as reserves 2. by making some loans to firms /entrepreneurs or consumers 3. buying securities, government or corporate bonds or other financial instruments.

what are the three parts of investment ?

1. business expenditures 2.New residential housing 3. changes in business inventories

Criteria that shifts the labor supply curve ?

1. changes in preferences or income 2.changes in population 3.changes in the prices of related goods and services. 4. changes in expectations

Chain- weighted GDP formula ?

1. estimate GDP using current yr as base yr. 2.estimate GDP using previous yr as base yr. 3. multiply them together and square root

Functions the Fed performs ?

1. lender of last resort to commercial banks 2.Regulates the money supply 3.holds deposits of banks 4.supervises the banking system 5.Provides check-clearing services

Causes of wage rigidity ? (reasons why rages can be too high)

1. minimum wage laws 2. the monopoly power of unions 3.Efficiency wages (high wages make workers more productive)

3 purposes of money ?

1. store of value 2. unit of account (money is a yardstick with which we measure economic transactions). 3. medium of exchange

Who is not included in the labor force ?

1. students 2.discouraged workers

Shortcomings of GDP ?

1.GDP only counts activity that happens inside the money economy. Many of the most important types of economic activity (including food production, education, raising children, even transportation) happen both inside and outside the money economy, and these are not included in GDP. 2. GDP aggregates figures based on price, not value. Sales of the same goods or services at a higher price contribute more to GDP, even though they contribute equally to the wealth available in a country. 3. GDP measures only production, and does not measure the destruction, loss, or using up, or squandering of wealth or resources. GDP is thus measuring only "half the equation" (less than half when considering the first point above) when it comes to what is affecting the total amount of wealth in a country. 4. Per-capita GDP measures only average prosperity and does not address disparities in wealth, income, and resource distribution.

What are the tools of the Fed ?

1.Open market operations (purchase and sale of government securities in the open market by the Fed) 2.Reserve requirement 3.Discount rate

factors that will lead to a shift in the money demand curve.

1.Real GDP (greater the real gdp the greater the demand for money) 2.Price Level (higher the price level the greater the demand for money. 3.Economic expectations 4.Transfer cost 5. Preferences

Criteria for financial assets ?

1.Something you can own 2.something of monetary value 3. that monetary value is derived from a contractual claim

What are the weaknesses of CPI ?

1.Substitution Bias 2. Quality adjustment

what are the reasons that higher wages increase productivity

1.better paid workers can afford a more nutritious diet (mostly applies to poorer countries) 2 .high wages reduce labor turnover( by paying a high wage the frequency with which workers quit decreases saving the firm time and money hiring and training new workers) 3. A higher wage improves the average quality of the firms workforce( if a firm reduces its wages the best employess might find jobs elsewhere) 4. the higher the wage the greater the cost to the worker of getting fired

Feds instruments that affect monetary base ?

1.open market operations 2. Lending reserves to banks

What are the assumptions of the Solow model ?

1.time 2. Closed economy (no trade) 3. Only one good in the economy 4. Labor is fixed 5. Parameters such as savings rate and depreciation rate are given and not determined 6. Exhibits constant returns to scale 7. Per worker production function is characterized by positive and diminishing returns to scale. 8.F(0,0) = 0, F(0,L) = 0, F(K,0) = 0

money multiplier formula ?

1/r r = Reserve ratio

money multiplier formula ?

1/r r= reserve ratio

18. If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals: A) 1,000. B) 2,500. C) 3,000. D) 5,000.

18. C

If the production function has constant returns to scale, then... What formula shows this scenario ?

F(K,L) = (MPK x K) + (MPL x L)

Eulers theorem what is it

F(K,L) = MPL x L + MPK x K if the production function has constant returns to scale

m = factor of proportionality = money multiplier ?

=((cr+1)/(cr+rr)) M= m x B

. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget surplus or deficit. D) rate of economic and accounting profit.

A

12. If output is described by the production function Y = AK^0.2L^0.8, then the production function has: A) constant returns to scale. B) diminishing returns to scale. C) increasing returns to scale. D) a degree of returns to scale that cannot be determined fr .

A

13. If Y = AK^0.5L^0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.

A

21. Other things equal, an increase in the interest rate leads to: A) a decrease in the quantity of investment goods demanded. B) no change in the quantity of investment goods demanded. C) an increase in the quantity of investment goods demanded. D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

A

24. The nominal interest rate is the: A) rate of interest that investors pay to borrow money. B) same as the real interest rate. C) rate of inflation minus the real rate of interest. D) real rate of interest minus the rate of inflation.

A

27. All of the following actions increase government purchases of goods and services except the: A) federal government's sending a Social Security check to Betty Jones. B) federal government's sending a paycheck to the president of the United States. C) federal government's buying a Patriot missile. D) city of Boston's buying a library book.

A

29. In the classical model with fixed income, if the interest rate is too low, then investment is too ______ and the demand for output ______ the supply. A) high; exceeds B) high; falls short of C) low; exceeds D) low; falls short of Page 5

A

34. Issuing bonds is called ______ financing, while issuing stocks is called ______ financing. A) debt; equity B) real; nominal C) capital; investment D) private; public

A

43. Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will: A) lower investment and raise the interest rate. B) raise investment and lower the interest rate. C) lower both investment and the interest rate. D) raise both investment and the interest rate.

A

WHAT ELSE IS THE MPL CURVE ?

A FIRMS LABOR DEMAND CURVE.

WHAT IS CONSTANT RETURNS TO SCALE ?

A PRODUCTION FUNCTION HAS CONSTANT RETURNS TO SCALE IF AN INCREASE OF AN EQUAL PERCENTAGE OF ALL FACTORS OF PRODUCTION CAUSES AN INCREASE OF OUTPUT OF THE SAME PERCENTAGE. EX. WE GET 10% MORE OUTPUT IF WE INCREASE BOTH CAPITAL AND LABOR BY 10%.

MPL ( MARGINAL PRODUCT OF LABOR) = ?

F(K,L+1) - F(K,L)

14. In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases. D) average labor productivity decreases

B

16. Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively

B

17. If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals: A) 2,500. B) 2,800. C) 3,500. D) 4,200. Page

B

19. Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by: A) 85. B) 425. C) 500. D) 525.

B

20. Total investment in the United States averages about ______ percent of GDP. A) 10 B) 15 C) 20 D) 25

B

3. The production function feature called "constant returns to scale" means that if we: A) multiply capital by z1 and labor by z2, we multiply output by z3. B) increase capital and labor by 10 percent each, we increase output by 10 percent. C) increase capital and labor by 5 percent each, we increase output by 10 percent. D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

B

30. In a closed economy, private saving equals: A) Y - C - G. B) Y - T - C. C) Y - I - C. D) Y - T.

B

33. If income is 4,800, consumption is 3,500, government spending is 1,000, and tax revenues are 800, private saving is: A) 300. B) 500. C) 1,000. D) 1,300.

B

37. In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______. A) increases; increases B) increases; does not change C) decreases; increases D) decreases; does not change

B

5. When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor: A) supply curve is horizontal. B) supply curve is vertical. C) supply curve slopes up to the right. D) demand curve slopes up to the right. Page 1

B

6. A competitive, profit-maximizing firm hires labor until the: A) marginal product of labor equals the wage. B) price of output multiplied by the marginal product of labor equals the wage. C) real wage equals the real rental price of capital. D) wage equals the rental price of capital. .

B

7. The real wage will increase if: A) the supply of labor increases. B) the productivity of labor increases. C) the price of output decreases. D) the supply of capital decreases.

B

8. An increase in the supply of capital will: A) increase the real rental price of capital. B) decrease the real rental price of capital. C) increase the productivity of capital. D) decrease the real interest rate

B

9. Economic profit is zero if: A) all factors are paid their marginal products and the law of diminishing returns is valid. B) all factors are paid their marginal products and there are constant returns to scale. C) all firms maximize profits and none are competitive. D) all firms maximize profits and all factors are paid their marginal products.

B

Which of the following will decrease the quantity of money demanded by consumers and businesses ? A.An increase in incomes B.An increase in interest rates C. A decrease in interest rates D.An increase in the demand for money E. An increase in the supply of money

B

monetary base ?

B = C + R

WHY DOES THE MPL GRAPH SLOPE DOWNWARD ?

BECAUSE MPL DECLINES AS L INCREASES

Asset of the Fed ?

Bonds

10. Accounting profit is: A) economic profit minus the return to capital. B) equal to economic profit. C) economic profit plus the return to capital. D) equal to the economic return to capital.

C

15. In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purchases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment.

C

2. The two most important factors of production are: A) goods and services. B) labor and energy. C) capital and labor. D) saving and investment.

C

26. Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be: A) 240. B) 700. C) 760. D) 970.

C

32. National saving is: A) private saving. B) public saving. C) private saving plus public saving. D) private saving minus public saving.

C

36. According to the model developed in Chapter 3, when taxes decrease without a change in government spending: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases.

C

4. If bread is produced by using a constant returns to scale production function, then if the: A) number of workers is doubled, twice as much bread will be produced. B) amount of equipment is doubled, twice as much bread will be produced. C) amounts of equipment and workers are both doubled, twice as much bread will be produced. D) amounts of equipment and workers are both doubled, four times as much bread will be produced.

C

41. If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.

C

The demand for money will fall if A. The real interest rate falls B. People expect Deflation C. The real interest rate rises D. The GDP deflator rises E. real GDP rises

C

What is the GDP Formula ?

C + I + G + X-M

M = ? or ?

C+D ((cr+1)/(cr+rr)) x B

When GDP is rising, money demand will most likely A. Increase as consumers demand more money as a financial asset B. Decrease as consumers demand more money for transactions C. Increase as consumers demand more money for transactions D. Decrease as consumers demand more money as a financial asset.

C.

Money Demand Varies... A.Directly with prices and inversely with output B. Inversely with prices and output C. Directly with the price level and output D.Does not vary with prices or output

C.Directly with price level and output

Consumption is a function of disposable income formula

C= C(Y-T)

FORMULA TO DETERMINE THE CHANGE IN PROFIT FROM HIRING AN ADDITIONAL UNIT OF LABOR ?

CHANGE IN PROFIT = CHANGE IN REVENUE - CHANGE IN COST = (P X MPL)

FORMULA TO DERTERMINE THE INCREASE ION PROFIT FOR RENTING AN ADDITIONAL MACHINE ?

CHANGE IN PROFIT = CHANGE IN REVENUE - CHANGE IN COST = (P X MPK - R)

investment makes ____ increase ? according to the Solow Groth model

Capital ΔK = I - δk

Liabilities of the Fed ?

Currency

() Boeing produces a new jet and sells it to Madonna for $200 million.e Determine the effect on U.S. nominal GDP:

GDP increases

11. In fourteenth-century Europe, the bubonic plague: A) reduced the population of Europe by about one-half. B) substantially increased economic output in Europe. C) substantially increased real rentals on land in Europe. D) substantially increased real wages in Europe. Page

D

22. When economists speak of "the" interest rate, they mean: A) the rate on 90-day Treasury bills. B) the rate on 30-year government bonds. C) the "prime" rate on loans. D) no particular interest rate, since it is assumed that various interest rates tend to move up and down together.

D

23. The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of: A) $200,000 at 8 percent. B) $100,000 at 12 percent. C) $100,000 at 8 percent. D) $200,000 at 12 percent. Page

D

25. The real interest rate is the: A) rate of interest actually paid by consumers. B) rate of interest actually paid by banks. C) rate of inflation minus the nominal interest rate. D) nominal interest rate minus the rate of inflation.

D

28. The equation Y = C(Y - T) + I(r) + G may be solved for the equilibrium level of: A) income. B) consumption. C) government purchases. D) the interest rate.

D

31. Public saving is: A) income minus consumption minus government spending. B) disposable income minus consumption. C) disposable income minus government spending. D) government revenue minus government spending.

D

35. Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6 (Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is: A) 5 percent. B) 8 percent. C) 10 percent. D) 13 percent. Page

D

40. If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.

D

42. The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving: A) rises by $40 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $40 billion.

D

Structural Unemployment ?

Occurs when the labor force cannot provide workers with the skills and abilities employers need.

Classical diichotomy implies that nominal variables_____ real variables what is it called ?

D not affect monetary neutrality

As price level decreases the value of money.... A. Decreases so people want to hold less of it B.Increases so people want to hold more of it C.Stays constant, so people want to hold less of it D. Increases , so people want to hold less of it E.Decreases so people want to hold more of it

D.increases, so people want to hold less of it.

When interest rates are 20% the demand for money is A.High and getting higher B.Higher than it would be if interest rates were 2% C. Constant. D. High but falling quickly E. Lower than it would be if interest rates were 2%

E

When the supply of money is unchanged, an increase in the demand for money leads to... A.Higher money supply B.Lower money supply C.no change in interest rates D.Higher interest rates E. Lower interest rates

E

rate of growth of output per person is ?

E= g

How is the income of the economy distributed from firms to households ?

Each factor of production is paid its marginal product, and these factor payments exhaust total output. Total output is divided between the payments to capital and the payments to labor, depending on their marginal productivities.

Formula for accounting profit ?

Economic Profit + (MPK x K)

GNP = ?

GDP + our income abroad - our income here

If People get (somewhat) tired of eating out and cook excellent paella at home (by following instructions on youtube) once a month instead of going to McDonald's. What is the effect on GDP ?

GDP will decrease because the momney they were spending at Mcdonald's was included in GDP and now that they are making their own meals at home, that money is no longer included in GDP with the exception of money spent on ingredients.

Sbar = ?

I(r)

increase in g expenditures shifts

IS curve up

Are Farmers producing & selling crops (even if the crops later rot or spoil-so long as they are sold) included in GDP ?

Included

Is Buying a new suit (regardless of whether or not you ever wear it) included in GDP ?

Included

Is Hiring a contractor or skilled tradesperson to do repairs or improvements on your home included in GDP ?

Included

Is buying a meal at a restaurant (regardless of whether or not you eat it) included in GDP ?

Included

is Hiring a babysitter or paying a daycare center for child care included in GDP ?

Included

How does Aggregate Supply tend to behave in the short run ?

Inelastic upward sloping

Capital Accumulation Solow equation ?

K t+1 = Kt -ξK + It

capital stock graph

K* is the steady state level of capital

MPL decreases as what increases ?

Labor

Labor Force Participation Rate formula ?

Labor force( U + E)/ Adult Population

According to the Baiumol tobin model the higher i is the ____ money i want to hold ? So v is ____?

Less higher

Money supply = ?

M = C + Deposits

M2 ?

M1 + !. Savings Deposits , (money market accounts) 2. Time Deposits, CD's = certificates of deposits) 3. Money Market funds

Slope of the consumption function ?

MPC

Formula for MPK ?

MPK = F(K+1,L) - F(K,L)

TO MAXIMIZE PROFIT FORMULA ?

MPK = R/P

WHAT IS THE SLOPE OF THE PRODUCTION FUNCTION ?

MPL

What does the slope of the production function equal ?

MPL = deltaY/ deltaL

Firms maximization formula

Max PF(K,L) - WL - RK

money demand for QTM Ms/p = ?

Ms/p = y/z(r+Epi)

GDP Deflator ?

Nominal GDP/Real GDP

countries that have higher capital per capita have higher _____ ?

Output y = k/y

first order condition for labor choice formula ?

P (αF(K,L)/αL) - W = 0

DEMAND FOR LABOR IS DETERMINED BY WHAT FORMULA ?

P X MPL = W OR MPL = W/P

Formula for the future value of money ?

PV x (1+i)^n PV = present value

average nominal holdings in Baumol-Tobin ?

PY/2

if he goes to the bank n times a month to withdraw money what is his average money holdings according to Baulmol- Tobin model ? what about his total cost ? money demand ?

PY/2n TC = i(PY/2n) + nPC Md/p = root(yc/2i) c= cost of going to the bank.

what is key difference between baumol tobin and quatity theory of money models ?

QTM velocity is constant Baumol Velocity depends on interest rate

reserve ratio formula ?

R total amount of reserves / D total amount of deposits

total real return paid to capital owners ?

R/P x K = MPK x K

PROFIT = ?

REVENUE - LABOR COSTS - CAPITAL COSTS ( PRICE OF GOOD(P) X AMOUNT OF GOOD PRODUCED(Y)) - ( WAGES(w) X LABOR(L))(RENTAL PRICE OF CAPITAL(R) - (AMOUNT OF CAPITAL(K)).

total cost Baumol-tobin equation ?

TC= i(PY/2) + PC PC = cost of going to the bank i = nominal interest rate

What is the Cobb- Douglas function ?

TFP = Total Factory Productivity, that measures the change in output that isnt really the result of inputs. Typically this is an improvement in efficiency or technology. α and beta represent output elasticity of the inputs. Output elasticity is the change in the output which results from either a change in physical capital or labor.

(l) Taxes on capital income are abolished. What is the effect on GDP ?

Tax collection does not fall under GDP However, If capital income taxes are reduced or abolished, GDP will increase. Because of the increase in spending money people will be more willing to purchase products.

In an environment witha super abundant level of reserves the fed can no longer use the federal funds rate as a tool, so the fed uses what ?

The Fed now sets two administered rates Fed sells security to a bank 1.interest rate on excess reserves ,IOER is earned by banks on their reserve balances and bamks have little incentive to lends fiunds below this rate. .2offering rates on overnight reverse repurchase agreements

How are factor prices determined ?

The demand for factors comes from firms we now assume that the supply of factors is fixed at L and K The price of a factor is then determined

what does fiscal policy refer to ?

The government's decisions about spending and taxation

money supply is proportional to _______ ?

The monetary base

The demand curve for money A.Shifts up as price level increases B.Shifts down as Real GDP increases C. Shifts down as price level decreases D. Shifts up when transfer costs increase E. Shifts up as interest rates increase

There is a positive relationship between a shift of the demand curve and real GDP, price level and transfer costs. Thus, when price level decreases, the demand curve shifts down. C

Formula for economic profit ?

Y - (MPL x L) - (MPK x K)

what is disposable income

Y - T

WHAT IS THE PRODUCTION FUNCTION ?

Y = F(K,L)

real economic profit ?

Y = MPL x L +MPK + Profit

S = ?

Y-C-G

households divide their disposable income between consumption and saving

Y-T = C + S

Y-T-C+T-G = I What is public saving ? What is private saving ?

Y-T-C = private saving T-G = public saving

Demand for goods and services

Y^d = C+I+G C=(C(Y_T) I+I(r) G=Gbar T=T then Ybar = C(Ybar-Tbar)+ I(r) + Gbar

Is the medical care, any car repair work, and new cars purchased, and any legal fees associated with an auto accident included in GDP ?

Yes

Goods market according to the Solow model formula ? It = ? Ct = ?

Yt = Ct + It It = s(Yt) s = savings rate Yt = overall income Ct = (1 - s)Yt

Are Shipping and storage of goods included in GDP ?

almost always counted in GDP as these are considered services that are produced

depositors and debt holders have the legal right to ?

be paid first --> equity falls to 0

to deal with inflation problems what did many countries do wit the central banks ?

central banks were made independent

a + b = 1 is what kind of returns to scale ?

constant returns to scale

A Decrease in taxes ? C I public savings Private savings national savings

consumption goes up, investment has to decrease interest rates have to go up public savings decreases private savings-increases The higher the mpc the greater the impact of the tax cut on consumption. national savings goes down disposable income increases

what does monetary policy refer to ?

decisions about the nation's system of coin currency and banking.

increases in the unemployments rate are associated with ____ in gdp

decreases

a + b < 1 is what kind of returns to scale ?

decreasing returns to scale

real wage graph

demand =mpl y axis = w/p real wage x axis = labor

(excluding supplies) Working on your house yourself, or doing similar work for a friend as a favor included in GDP ?

excluded

Are People growing food in their own garden, for their own consumption, gifts, or donation to charity included in GDP ?

excluded

Is (excluding ingredient cost) Preparing a similar meal at home included in GDP ?

excluded

Is Caring for your own children or those of a friend or relative free of charge included in GDP ?

excluded

Is Giving a used suit to a friend, or donating it to charity, instead of throwing it out included in GDP ?

excluded

shocks to IS curve

exogeneous changes to the deman for goods and services expectations of the economy unexpected G or T

if the fed buys 1 million worth of bonds it ? what does it do to the prices and interest rate ?

expands B by 1 million Prices go up and reduces the interest rate

G > T

government runs a budget deficit which it fund by issuing government debt

G < T

government runs a budget surplus which it can use to pay some of its outstanding debt.

what are the determinants of income distribution ?

growing inequality

M1 Money ?

has the highest liquidity 1. currency in circulation 2.checkable bank deposits, (checking accounts) 3. Travelers checks

higher rate of job separation = has what effect on employment ?

higher unemployment

what is the fisher equation ?

i=R+π determined independently of inflation

movement along AD curve ?

increase in prices

Fed announces an increase in money supply next period velocity ____ and price level____ ? what about money demand ?

increases increases the announcement causes people to raise their expectations of inflation based on the QTM lowers money demand

when the government prints money to finance expenditure it____ the money supply which causes____ ?

increases inflation

a + b > 1 is what kind of returns to scale ?

increasing returns to scale

according to the Fisher equation,nominal interest i moves one to one with changes in what ?

infaltion

countries with higher moeny growth rates should have higher what ?

inflation rates

QTM is not responsive to what variable that the Baumol-Tobin model is responsive to ? What variable is constant in the QTM ?

interest rate velocity of money

Unexpected inflation has what affect on wealth ?

it redistributes wealth among the population between creditors and debtors

In what ways does a bank obtain resources ?

its owners who provide capital by taking deposits by issuing debt

K* = K /LE

k grows at n+g L is growing at n E is growing at g

What are the per capita values according to the Solow Model for the following: kt = ? it = ? yt=? ct = ?

kt = Kt/Lt it = It/Lt yt= Yt/Lt ct = Ct/Lt Aggregate____ / Labor force (Lt)

rental price of capita______based on the augmented solow growth model ?

l does not grow

investment is the demand for what ?

loanable funds

What is the Fisher effect ?

long run real rate r is determined in the loan market: S = I(r) so r depends on G,T,Y,C but not on M. Independent of M or Pi changes in money growth or inflation do not affect r

money demand formula ?

money demand = 1/v of nominal output PtYt Money supply = Money demand= 1/v(PtYt) Pt is price level and Yt is real output v = velocity of money , ratio of GDP to nominal stock

Pt = V(Mt/Yt) the price level, the given output , is therefore determined by the _______, and all other things equal, an increase in the money supply is associated with a proportional increase in _____

money stock prices

When the Fed sells government securities what happens to the money supply ?

money supply goes down

unemployment is ___correlated with GDP

negatively

Are houses that are resold included in GDP ?

no

Are items produced at home included in our GDP ?

no

are Transfer payments made by the government included in our GDP ?

no

are illegal sales included in our GDP ?

no

are intermediate goods used to produce other goods included in our GDP ?

no

are sales of foreign goods included in our GDP ?

no

are sales of used goods included in our GDP ?

no

money demand is inversely related to ?

nominal interest rate

in the slightly longer run prices are

not fixed they adjust to shocks and policy

income households recieve =

output of the economy Y

An increase in the savings rate does what according to the Solow growth model ? draw a graph that illustrates this

produces higher growth/y but only temporarily

w/p = mpl = 6y/6l partial derivative = AK^aE^1-alpha(1-a)L^-a = AK^a/L^aE^a (E) = AK^a E- capital per effective worker x E

real wage = AK^a E- capital per effective worker x E rate of growth of wages = rate of growth of output per capita A -= constant growth E grows at rate g

An investment pr0ject is profitable if its .....?

revenue from future productions exceeds its cost(Payments for borrowed funds).

if the fed wants the decrease the amount of money in the economy it will ..?

sell government bonds

countries with higher savings rate reach higher ?

steady states

explain how inflation increases the variability of relative prices How does inflation make the economy work less efficiently ?

suppose that a restaurant changes prices only every january if there is inflation during the year then the relative price of the meals compared to other forms of consumption will decrease as we go from january to December. Relative prices will vary more than they would if there were no inflation. Relative prices reflect consumers tastes and the scarcity of resources and they determined how much is produced of everything

ΔK = sy - δk according to the Solow model what is sy and δk ?

sy = investment per capita δk = depreciation per capita

What production function describes how actual economies turn capital and labor into gdp ?

the Cobb-Douglas production function.

What is the MPK ?

the amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant.

Taking averages over a long period of time, QTM predicts the average inflation rate is equal to ?

the average money growth minus the average output growth rate

What is the definition of MPC (Marginal Propensity to Consume) ?

the change in consumption when disposable income increases by one dollar

Formula for the marginal propensity to save ?

the change in savings / the change in disposable personal income.

the separation of real and nominal variables into separate blocks of analysis is called ?

the classical dichotomy

Demand Deposits ?

the funds people hold in their checking accounts

what is seignorage

the revenue from printing money ?

leverage ratio = ?

total assets / bank capital lower leverage ratio is better

What is the definition of wealth ?

total assets owned by an individual minus the total liabilities they owe.

when interest rate goes up what happens to total savings ?

total savings do not change

higher inflation is strongly associated with more____?

variable inflation

total real wages paid to labor ?

w/p x L = MPL x L

when is there hyperinflation?

when annual inflation exceeds 50%

when is the ex- ante real interest rate equal to the ex-post real interest rate ?

when expected inflation = actual inflation

when is monetary neutrality not a good choice ?

when measuring the short run

Is the incremental rate by which everyone's insurance premiums go up as a result of an automobile accident that results in more payments to insurance companies included in GDP ?

yes

are goods and services produced and sold by foreigners within our domestic borders included in our GDP ?

yes

Is rental housing included in GDP ? what about the owner ?

yes For owner occupying the housing the government estimates its rental value the owner pays rent to himself.

Are intermediate goods produced during the year but not used/sold yet included in GDP ?

yes, later when the inventory good is used

the labor force grows at a constant rate

ΔL/L = gL = n

MGK for Cobb-Douglas production function ?

αAK^α-1L^1-α