Macroeconomics Final Notes

unemployment rate

# of unemployed/labor force * 100

An economy is experiencing a high rate of inflation. The government wants to reduce aggregate demand by $40 billion to reduce inflationary pressure. The MPS is 0.25. By how much should the government cut its spending to achieve its objective?

$10 billion

Multiplier (other)

1/1 - MPC or 1/MPS

Approximate # of years required to double real GDP

70/annual percentage rate of growth

national income to GDP

GDP = national income - net foreign factor income + statistical discrepancy + consumption of fixed capital

The stimulus package enacted by the Federal government in 2009 was intended to:

Shift the aggregate demand curve to the right.

Which of the following is an appropriate monetary policy during a recession?

The Fed purchases government bonds from the public and the banks.

The highly influential book written by Adam Smith is titled:

The Wealth of Nations.

positive statement

The analysis of facts or data to establish scientific generalizations about economic behavior.

The existence of a "political business cycle" suggests that:

a possible cause of economic fluctuations is due to the use of fiscal policy for political purposes.

GDP gap

actual GDP - potential GDP

M1 includes...

all physical currency; paper bills, checking deposits, coins

Market System (capitalism)

allows for some government control, private ownership of resources, individuals own the factors of production, decisions based on markets

Immediate short run aggregate supply

input and output prices are fixed, no change in prices, horizontal line

Long run aggregate supply

input and output prices are flexible, vertical line

When constructing a supply curve for product X:

input costs are held constant.

An economic system:

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

Change in GDP

multiplier * initial change in spending

Short run aggregate supply

output prices become flexible, but input prices are fixed, upward sloping aggregate supply curve (focusing on this curve only)

Productive Efficiency

producers are using the least cost ways to produce, equal to cost minimizing way to produce

Allocative Efficiency

producing the right mix of products, requires productive efficiency

The basic policy-making body in the U.S. banking system is the:

Board of Governors of the Federal Reserve.

% change in real income

% change in nominal income - % change in price level

CPI (Consumer Price Index)

(cost of market basket/cost of market basket in base year) * 100

Changes in demand

*Consumer income *Prices of related goods: depends on substitutes and complementary goods *Tastes: better tastes means more demand *Expectations: an expectation of a future increase in price may cause demand to increase because they want to buy before the price rises *Number of buyers

Changes in supply

*Input (resource) prices *Technology: better technology increases the supply *Taxes and Subsidies *Expectations *Number of sellers

The money supply is backed:

*by the government's ability to keep its value relatively stable *money as debt

Five Fundamental Questions

1. What to produced? 2. How to produced? 3. Who will get the goods and services? 4. How will the system change? 5. How will the system promote progress?

Shifts of Investment Demand

Acquisition, maintenance, and operating costs: when these costs rise, the investment curve shifts to the left Business taxes: an increase in business taxes shifts the curve to the left Technological change: new technologies cause a rightward shift Stock of capital goods on hand: increase in stock of capital goods on hand causes a leftward shift Planned inventory changes: if firms plan to increase their inventories, there is a rightward shift. If firms plan to decrease their inventories, there is a leftward shift. Expectations: optimistic expectation shift the curve to the right

What would happen to the average market price and the quantity of automobiles purchased by American consumers as a result of a U.S. tariff on imported automobiles?

Average price would go up, but quantity would go down.

Cyclical unemployment

Caused by the recession phase of the business cycle.

A $20 bill is a:

Federal Reserve Note

Frictional unemployment

Individuals searching for jobs or waiting to take jobs soon. (short-term)

Normative statement

Involves value judgments about what the economy should be like; focused on which economic goals and policies should be implemented

M2 includes...

M1 Savings deposits Small-denominated time deposits Money market funds

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 increases and M2 stays the same.

"Full employment" refers to the situation when there is:

No cyclical unemployment.

Structural unemployment

Occurs due to changes in the structure of the demand for labor. (long-term)

Phases of the Business Cycle:

Peak: temporal maximum level of economic activity (output and employment) Recession: decline in economic activity that last at least 6 months Trough: temporal minimum output and employment Expansion: increase in economic activity after recession

GDP (Y) is the sum of the following:

Personal Consumption (C) Gross Private Domestic Investment (I) Government Purchases (G) Net Exports (Xn) Y = C + I + G + Xn

When government spending rises, the amount of the increase in aggregate demand primarily depends on:

The size of the multiplier

unit of account

a monetary unit for measuring and comparing the relative values of goods, one of the functions of money

inflation

an increase in the overall price level

The interest-rate effect suggests that:

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

MPC

change in consumption/change in income

Multiplier

change in real GDP/initial change in spending

MPS

change in savings/change in income

The study of economics is primarily concerned with

choices that are made in seeking the best use of resources.

Wells Fargo, J.P. Morgan Chase, and Citibank, are all primarily:

commercial banks

APC

consumption/income

Which of the following is the basic economic policy function of the Federal Reserve Banks?

controlling the supply of money

inferior goods

demand will decrease with an increase of income

Normal goods

demand will increase with an increase of income

The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for:

directing the purchase and sale of government securities.

Governments usually impose tariffs on imports to protect ______ at the expense of_____:

domestic firms, domestic consumers.

Okun's Law

every 1% of cyclical unemployment creates a 2% GDP gap

Command system (socialism or communism)

everything belongs to government, government has ownership of resources; North Korea, Cuba, China

Net Exports

exports - imports

The appreciation of a country's currency causes the prices of imports to

fall and the prices of exports to rise.

If competitive industry Z is making substantial economic losses, output will:

fall in industry Z, and firms will likely leave the market.

If a nation opens up to international trade, it will see falling prices for:

goods that it imports.

To reduce money supply, the Fed should:

raise the reserve ratio.

A recession is a decline in:

real GDP that lasts six months or longer.

In contrast to investment, consumption is:

relatively stable.

The two basic markets shown by the simple circular flow model are:

resource market and product market.

APS

saving/income

The two topics of primary concern in macroeconomics are:

short-run fluctuations in output and employment, and long-run economic growth.

The business cycle depicts:

short-run fluctuations in output and employment.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

The goal of expansionary fiscal policy is to increase:

the aggregate demand in order to raise the equilibrium GDP.

Macroeconomics approaches the study of economics from the viewpoint of:

the aggregate economy.

Monetary policy involves changing:

the money supply to affect aggregate demand

State and local governments are limited in their ability to respond to recessions because of:

the requirement to balance their budgets.

Competition is more likely to exist when:

there is free entry into and exit out of industries.

In defining money as M1, economists exclude time deposits because:

they are not directly or immediately a medium of exchange.

Real GDP measures:

total value of all final goods and services produced within the borders of a country, adjusted for price changes.

Labor force

unemployed + employed

demand/supply shock

unexpected changes in the demand/supply for goods and services

A $40 price tag on a sweater in a department store window is an example of money functioning as a:

unit of account

Contractionary Fiscal Policy

used during demand-pull inflation, Decrease in government spending with increase in taxes, creates a surplus

Expansionary Fiscal Policy

used to cope with a recession, Increase in government spending or reduction in taxes, creates a deficit