ECN Quiz 3 Syracuse University Jerry Evensky

5. Explain why in the AE equations, some variables are preceded by a plus sign (+) while others are preceded by a minus sign (-).

"+" signs means it adds to aggregate expenditure(C, I,G) while "-" signs reduce aggregate expenditure (T,M)

12. Explain what "to heat up" means in the macroeconomy and explain what causes this to occur.

"to heat up" means that there is pressure on the economy. What causes the economy "to heat up" is the more we try to push the economy beyond its sustainable capacity the greater these pressures which could lead to inflation.

15. Describe a global financial panic. Explain the underlying conditions and kinds of events that can lead to such a panic. Describe an example.

( had trouble finding??????? page 206)

6. Explain the "b(P*Y)" in the consumption equation. (Prolly on exam)

(P*Y) or NOMINAL AGGREGATE INCOME P = price level Y = Real GDP b = is the Marginal Propensity to Consume (1-b) is the portion used for savings b(PY) - is the share of the current aggregate income that is spent on consumption b = consumer confidence if b increase, c increase, which increase and shifts AD

4. Describe the different perspectives of an interventionist and non-interventionist with respect to macro policy. Identify the source of these different perspectives. Prolly on exam

(Prolly on exam) Interventionist: A belief that due to market failure and market power there can be problem in markets. and that government is capable of constructive policy to address these problems Non-interventionist: believes governments should have a "hands off" policy towards the economy. All will be well if government doesnt intervene in the economy. There is a balance between being an interventionist and non-interventionist and people are placed on a continuos spectrum of these two extremes. The basis for these difference lies in different assumptions.

3. On an appropriately labeled Macro Picture, show graphically and explain how the AD line will shift if AE increases, if AE decreases.

(Show graph)

7. Identify what (X-M) stands for. Specify the condition of trade and the net effect of trade on the AE when (X-M) > 0, when (X-M) < 0, or when (X-M) = 0.

(X - M) = TRADE BALANCE (X - M) > 0 = TRADE SURPLUS. Effect on AE - adds to aggregate expenditures - SHIFTS AD TO THE RIGHT (X-M) = 0 = trade is in balance. Effect on AE - aggregate expenditures is neutral - AD DOESNT SHIFT (X-M) < 0 = TRADE DEFICIT. Effect on AE - reduces aggregate expenditures - SHIFTS AD TO THE LEFT

2. Give an example of an event that would shift AS. Describe the event and, using an appropriately labeled Macro Picture, show and explain how the event you've described would affect the macroeconomy.

(do later, but might be good question on test) page 210 in textbook

18. Ceteris paribus, describe how a specified change in the short rate capital supply and/or inflationary expectations will shift the long term capital supply line.

1: Suppose the short rate supply line goes down. Ceteris paribus, give the premiums, the falling short rate line pulls the long line down. 2: Suppose inflationary expectations rise. Ceteris paribus, given the short rate supply line and the waiting premium, the increasing inflationary expectations shift the long rate supply line up

17. Identify the three factors that determine the level of long term capital supply. (Prolly on exam)

1: The level of the short term supply line 2: the waiting premium 3: the inflationary expectations premium

4. Explain how unfolding events can dramatically shape budget decisions. Give an example.

A government's budget position is a political decision made in the context of both domestic needs and interests, and international realities. But on rare occasions dramatic international events can impose themselves and define the direction of the budget decision-making process. Budget goes to defense, military contracting, ect. All of these get an increase An example of this is when Japan attacked Pearl harbor. It set off an unprecedented expansion in government spending as the United States geared up for war very quickly. The government budget position went from a slight deficit in 1940 to a huge deficit in 1944

9. Identify and explain each letter in the consumption function. (Prolly on exam)

C = Aggregate Nominal Consumption - The aggregate of domestic household consumption P = Price level - The general position of prices in the economy at any point in time Y = Real GDP - The value of production measured in constant dollars and therefore allowing for meaningful comparison of the value of production overtime b = Marginal Propensity to Consume - Based on permanent income, the amount of a person spends on non-esstial goods and items A = autonomous consumption - consumption out of accumulated wealth; spending funds on consumption that are not coming from one's current income.

35. Explain and show graphically how the depression of the Great Depression contributed to the depths the U.S. economy sank into.

Demand in the capital market would shift to the LEFT?????? (and explanation)

16. Define demand deficient unemployment. Explain why it is referred to as one of the villains in our macro story.

Demand-Deficient unemployment: a situation where there are not enough jobs for everyone who wants one. It is referred to as one of the villains in our macro story because unemployment makes life difficult at best and tragic at worst.

11. Define: expected rate of return. Give an example.

Expected Rate of Return: the expected monetary benefit of any investment expressed as a percentage return per year. Example: if in a year you expect to make $110 on a $100 investment, your expected rate of return is 10%

2. Describe how the U.S. budget is determined.

In the U.S. the government's budget position is determined by the Congress and the President through a budget process that begins with a Presidential proposal, waves its way through both House of Congress in parallel processes, converges through a joint committee of both Houses into a single budget bill, and then goes to the President for her signature. If she signs it, there is a budget. If not, negotiations ensue until she agrees with the Congress on a budget, or until Congress can pass a budget over a Presidential veto. Short: congress determines the budget

23. Define indexing. Describe how people use indexing to protect themselves from inflation. Give an example. Identify why it's called indexing.

Indexing: automatically adjusting wages, benefits or other forms of monetary payments to changes in the price level. The reason why it is called indexing is because the price level changes are often measured using indexes. An example of this would be if my wage is indexed, and in a given year inflation goes up by 10%, my salary goes up 10% automatically to keep up with inflation.

19. Define inflation, deflation.

Inflation: is a rise in the overall level of prices in the economy and therefore a fall in the purchasing power of money. Deflation: is a fall in the overall level of prices and therefore a rise in the purchasing power of money.

22. Define: international capital flows. (Prolly on exam)

International Capital Flows: The flow of FINANCIAL CAPITAL(or liquidity) from one country's CAPITAL MARKET to another country's capital market. (These flows are becoming more significant in their impact on individual nations as advances in global communications enable financial capital to flow across international boundaries much more quickly) (dont need this but useful)

26. Describe the conditions that, ceteris paribus, lead to flows of international capital into a country. Give examples. (Prolly on exam)

International capital flows enter into a nations capital market when conditions there seem to be full of opportunities and thus it appears to be a great place to loan funds. (We also see flows into a country when political or economic instability in some other country makes people with funds in that unstable place nervous and so they move their funds to a safe haven to escape the risk.) Political instability would lead to an outflow in a nations capital market and lead to an inflow to a safer capital market. Examples: A peace that people truly believe will be real and enduring. The prospect of peace makes that nation a more stable place and makes the prospects for a productive future much brighter, so expectations become much more positive - shifting the long term capital market demand to the right.

1. Identify the source of shifts in the short run aggregate supply line.

International events, terrible weather might increase the cost of producing agricultural goods, a broad and dramatic failure of national computing networks due to a virulent virus. SHORT: Factor markets price increase - rise price in commodities(food, gas, ect.)

1. Explain why international trade exists.

International trade exists there are GAINS FROM TRADE when individuals or nations specialize and then exchange surpluses.

2. Explain why most international trade requires exchange of currencies.

International trade requires exchange of currencies because people in other countries do no live in a dollar-denominated market. They need their domestic currency to shop in their world, and so they need to be paid in their domestic currency.

4. On an appropriately labeled Macro Picture, show graphically and explain the position of the LAS.

It is vertical because the full sustainable capacity is determined by the society's current endowment: the quantity of available natural resources, labor, and capital. It is independent of the price level

14. Describe how perceptions of risk of default affect interest rates.

Risk of default affect interest rates because people like me look a lot riskier than U.S. government so I pay a higher interest rate than the government would pay for the same exact loan. To an extreme if the risk perception becomes very high, it's possible that no one would be willing to lend at all (dont need this part but good to know)

11. Describe the wealth effect and its role in determining the aggregate level of consumption.

The wealth effect is perceived wealth. In the United states many individuals' wealth is held in the form of stock or as equity in their home. As the paper value of these assets goes up and individuals feel more wealthy, they feel less of a need to save and more comfortable consuming out of income. This in turn rises the aggregate level of consumption. The wealth effect can also have the opposite effect. A contractionary wealth effect made people pull back on consumption as they saved more to reestablish their wealth. This reduced the aggregate level of consumption. (Do i need this second part or just the first part?????)

25. Explain why international capital flows are playing a bigger and bigger role in the economies of individual nations.

These flows are becoming more significant in their impact on individual nations as advances in global communications enable financial capital to flow across international boundaries much more quickly. Capital inflow will also create jobs.

3. Comment on the following statement: I bought a piece of art from Mexico for dollars right here in town, so that international trade did not require any exchange of currency.

This piece of art form Mexico was probably imported and already adjusted to the price in dollars so there didnt need to be any exchange of currency

13. Explain the following statement: with frictional and structural unemployment the problem is not a lack of jobs. (Prolly on exam)

This statement is half true. The problem with frictional unemployment is not the lack of jobs but the issue is the search time. The problem with structural unemployment is a mismatch between people's skills and jobs' requirements.

5. Define: tight labor market. Describe how such a labor market condition affects the negotiating position of workers. Identify which workers may not enjoy this good negotiating position.

Tight Labor Market: there are plenty of jobs but there is also inflation. The tight labor market affects the negotiating position of workers because the workers can ask for a raise. In which an employer wants to keep you she has to in effect bid for you. To be attractive, the wage offer you get, out to least keep you up with inflation, and probably more. The workers who may not enjoy this negotiating position are low-skilled sectors of the labor market that are left behind. ( this is last part right?)

6. Explain what it means for a currency's value to be allowed to "float" in the foreign exchange market.

To "float" means to adjust freely, the foreign exchange market will reach an equilibrium at which the quantity supplied equals quantity demanded (Is this right?)

23. Explain the relationship between international capital flows and entry or exit into a nation's capital market. Describe examples.

When you enter in a nations capital market, for there that nation there is an inflow. When you exit a nations capital market, for that nation there is an outflow. Examples: (anything on the spot this is kind of easy)

2. Describe the relationship between conditions in the microeconomy and conditions in the macroeconomy.

When you take all the micro adjustments, with our nice assumptions, you get the macro picture. The conditions of the micro economy where we analyze the labor market,the surplus of labor supply in the micro labor market leads to demand-deficient unemployment in the macro economy

13. Ceteris paribus, tell the same stories about the U.S. economy as described in Objective 14, but let the shift in demand for financial capital be in the Japanese capital market.

Where is objective 14???????

9. Given the euros/dollar exchange rate, identify the dollars/euro exchange rate.

the euros/dollar is the reciprocal of dollars/euro (Is this right?)

10. Distinguish the three kinds of unemployment by their respective causes. (Prolly on exam)

Fictional Unemployment: Happens because the JOB SEARCH process takes time. Because this is so there will always be frictional unemployment, even in a healthy and growing economy. Structural Unemployment: Is a mismatch between people's skills and jobs' requirements. Occurs because as economies grow they constantly go through technological transformations and geographic relocations. Structural Unemployment is an inevitable part of a healthy, growing economy, thought it can be reduced by speedily adjusting the skills and location of workers. Demand-deficeint - a bad economy

3. Define: financial capital. Distinguish financial capital from real, production capital.

Financial Capital: Liquid assets that finance the exchanges that make production possible(buying and selling factors) and purposeful(buying and selling products). (Do i need buying and selling factors and products?) The difference in financial capital from real production capital is that financial capital is a liquid exchange therefore it could be put into thousands of different channels such as paying for blueprints, books, ect. while real production capital is only a fixed in its form such as a building or a machine.

6. Explain why the market in which financial capital is exchanged for real investments is the long term capital market.

Financial capital is exchanged for real investments is exchanged for real investments in the long term capital market because the kinds of real investments we are talking about (like building a factory) generally take a significant amount of time between the loan being made and the investment actually paying off, so borrowers need a lot of time to pay back the loan.

4. Explain why financial capital is often referred to as liquidity.

Financial capital is often referred to as liquidity because financial capital can take any shape we pour it into - it is like a liquid. It could be put into thousands of different channels such as paying for blueprints, books, ect.

22. Describe hyperinflation and how it affects an economy.

Hyperinflation is a situation in which the price level rise is extraordinarily rapid. (In such circumstances people will no longer want to use that nation's money because holding money for even a short period ca mean a loss of almost all value.) In hyperinflation money is useless as a store of value, a medium of exchange, or a unit of account because its value is falling so quickly. This affects the economy because people return to a very inefficient barter process because no one trusts money.

1. Using appropriately labeled Macro Pictures, show and explain two kinds of macro shocks that can lead to unemployment.

first graph: rise in factor prices - supply side shock. AS shifts up and unemployment increases (page 210 textbook) second graph: Fall in investment - Fall in AD. AD shifts to the left and unemployment increases (page 211 textbook)

12. Ceteris paribus, using all appropriate graphs (appropriately labeled), show and explain how a shift out in the demand for financial capital in the United States affects U.S. interest rates, and (assuming some of the increased quantity supplied comes from overseas) how this in turn affects the dollar exchange rate, the trade balance, the aggregate demand and the macroeconomy. Ceteris paribus, do the same for a case of falling demand for financial capital.

(graph - page 204 in textbook) SHIFT OUT: U.S. interest rates would increase, Dollar exchange rate: dollar would get stronger Trade balance: IMPORTS would increase because the dollar buys more now and EXPORTS would decrease because everything is now more expensive for euro holders The aggregate demand in the macroeconomy: Would shift demand to the RIGHT SHIFT IN: U.S. interest rates would decrease, Dollar exchange rate: dollar would get weaker Trade balance: IMPORTS would decrease because the dollar buys less now and EXPORTS would increase because everything is now cheaper for euro holders The aggregate demand in the macroeconomy: Would shift demand to the LEFT

7. Draw and label a long term capital market picture. Explain each axis.

(graph)

5. Draw and label a euro/dollar foreign exchange market in which the euro is a commodity priced in dollars.

(graph) page 199 in textbook

13. Ceteris paribus, show how a specified shift of either supply or demand in the long term capital market changes the level of investment. Then show in our Macro Picture how this change in investment affects the aggregate economy.

(graphs) page 189 in textbook

(Prolly on exam) 1. Draw and label our Macro Picture. Identify a point as YF. Given the AD and AS lines you draw, identify the current level of real GDP (Y*) and the current price level (P*).

(need to show on graphs)

2. Show cases of an AD shift and interpret what is happening to the price level and real GDP as the line shifts. Do the same for AS. (Prolly on exam)

(need to show on graphs)

14. Describe and explain the market forces that, under normal circumstances, would slow down the outward flow of financial capital and ultimately stop it before it became a hemorrhage?

A progressively stronger euro makes it more and more expensive for capital to leave the U.S. because dollars have to be exchanged for ever more expensive euros in order to leave. Furthermore, this capital flow out of the U.S. is a capital flow into Europe. As capital flows into Europe this expands the supply of financial capital there. Ceteris paribus, this lowers the interest rate there. Thus as financial capital flows from the U.S. to Europe, the cost of going (the exchange rate) goes up and the advantage of going (the European interest rate) goes down. At some point this rising cost and falling benefit of capital movement will eliminate the advantage of leaving. At that point the flow will stop. The international capital market will have reached a new equilibrium that reflects the revised level of confidence in the U.S. economy. (Which statement is correct??????? and how could i shorten either?) page 205 As capital flows into Europe this expands the supply of financial capital there. Ceteris paribus, this lowers the interest rate there. At some point this rising cost and falling benefit of capital movement will eliminate the advantage of leaving. At that point the flow will stop. The international capital market will have reached a new equilibrium that reflects the revised level of confidence in the U.S. economy.

7. Describe the dynamic through which a tight labor market might give rise to a wage-price spiral.

A situation in which rising prices push workers to demand higher wages to maintain the real value of their incomes, then in turn higher wages push up production costs driving up process, which leads back to high wage demands and so on and so on. (this is very similar to question 6, do i need more than this?)

4. On an appropriately labeled Macro Picture, show graphically and explain the case of falling unemployment and rising price level due to increasing AD.

AD shifted to the right.

1. On an appropriately labeled Macro Picture, show graphically and explain the case of increasing unemployment due to falling aggregate demand.

AD shifts to the left. Explanation: Price level goes down and unemployment increases EXPLANATION = JUST STATING WHATS HAPPENING IN THE GRAPH (this is for the other too)

4. Identify the six components of AE. Explain what each is. Specify the letter used to stand for each of the components and whether these are measured in real or nominal terms. (Prolly on exam) DEFINITELY ON QUIZ

AE = C + I + G - T + X - M ALL OF THESE ARE MEASURED IN NOMIAL TERMS! C = CONSUMPTION - stand for the total expenditures individuals make as consumers purchasing things like clothes, food, concert tickets, new cars, and haircuts I = INVESTMENT - stand for the total expenditures private enterprises make for items such as new buildings, new equipment, and increased inventories G = GOVERNMENT SPENDING - Stands for the total amount the government spends on roads, schools, the military, ect. T = GOVERNMENT TAXATION - stands for the total funds the government takes out of the hands of individuals and enterprise in the form of taxes. X = EXPORTS - stands for the total amount of expenditures foreign buys make for a nation's products (What we send out America) M = IMPORTS - stands for the total amount of expenditures that domestic residents, enterprise, and government make for the products of other nations (What we comes into America)

2. On an appropriately labeled Macro Picture, show graphically and explain the case of falling unemployment and falling price level as AS shifts down due to falling factor prices.

AS shifts downward. Explanation: Price level goes down and unemployment

3. On an appropriately labeled Macro Picture, show graphically and explain the case of increasing unemployment and increasing price level as AS shifts up due to rising factor prices.

AS shifts upward.

1. Define aggregate expenditure. Describe the relationship between aggregate expenditure and aggregate demand. (Prolly on exam)

Aggregate Expenditure: AE - the total amount that individuals, private enterprise and governments plan to spend measured in dollars. The relationship between aggregate expenditure and aggregate demand is aggregate expenditure is the key to shifting aggregate demand, in order to understand the underlying forces that move aggregate demand we need to examine the components of aggregate expenditure.

21. Describe the relationship between domestic wealth accumulation and entry or exit into a nation's capital market. Describe examples.

An entry into a nation's capital market is an increase in accumulated wealth within a country. (A growing economy creates more wealth and thus more potential funds for the capital market.) An exit of a nation's capital market leads to a decrease of accumulated wealth in a nation. Examples: a corrupt or incompetent banking system can through graft or lack of care destroy or waste on unproductive investments, a significant amount of national wealth, thus diminishing the available financial capital.

24. Explain why international capital flows are often the most volatile source of entry or exit.

Because of the currency rate change can affect inflow and out flow in either entry or exit in the market because the investor sees potential to make money or problems that he wants to avoid

20. Distinguish a macroeconomic change in the price level from a microeconomic relative price adjustment.

At the micro level, individual prices are constantly rising and falling. this is good because such relative price changes provide signals that make it possible for individuals and firms to allocate their resources and make purchase efficiently. Conversely, a rise in the price level need not imply any change in microeconomic relative prices. If all prices doubled then the price level doubles, but relative r=prices remain the same. Short: (Better way to sum this up?) (email evensky)

7. Define: autonomous consumption. Give examples. (Prolly on exam)

Autonomous Consumption: consumption out of accumulated wealth; spending funds on consumption that are not coming from one's current income. Is also "A" in the consumption function Examples: Retirees spending their money or laid off workers spend down their wealth

27. Describe the conditions that, ceteris paribus, lead to flows of international capital out of a country. Give examples. (Prolly on exam)

Conditions that lead to flows of international capital out of a country is when political or economic instability in that country makes people with funds(financial capital) there nervous. Funds also flow out of a nation's capital market when conditions in another country become, relatively speaking, more promising. Examples: Suppose that a country has been suffering from a long and violent internal struggle. This kind of violent struggle keeps investment in the nation depressed because the difficulties of carrying on business and of protecting investments in such an environment discourage most investments

10. Explain how consumer confidence affects the aggregate level of consumption.

Consumer confidence affect the aggregate level of consumption by how good or bad the consumer's perception of the future will be. If their perception of the economy is good then the consumer will begin to spend more and, if this is the general trend in the economy, this leads to an increase in the aggregate level of consumption. If their perception of the economy is bad then the consumer will be more inclined to pull back on consumption to save more and, if this is the general trend in the economy, this leads to a decrease in the aggregate level of consumption. (Do i need this big explanation, is there a way to simplify this?)

8. Write out and name the equation that represents the sources of consumption in the aggregate economy. (Prolly on exam)

Consumption Function: C = b(PY) + A

28. Explain what the CPI is and how it's determined. (Prolly on exam)

CPI is supposed to measure the level of prices for the products consumers buy, so it includes milk but not missiles - aka stuff in the MARKET BASKET: The concept of a market basket is broadly defined to include all the things a family consumes, not just those things one can buy at a supermarket. So in addition to food it includes units of cloths, housing, transportation, entertainment, and other consumer items.

29. Distinguish the scope of the CPI and the GDP Deflator. (Prolly on exam)

CPI: is a measure of the price level for consumer items GDP Deflator: is a measure of the price level for all items included in the GDP. (CPI on test)

15. Identify the shift variables with respect to the AS line.

Changing factor prices are the shift variables of the AS line because factor prices determine the basic structure of aggregate production costs. So, for example, if wages across the economy rise, this general rise in a basic factor price will increase most industries' production costs and shift the AS line up

4. Identify how economists use comparisons of actual GDP to the potential GDP. Cite the conditions that economists define as a recession, as a depression.

Comparing the actual GDP to the potential GDP is a guage we use to measure the productive health of the economy. If the actual GDP is close to or at potential GDP then the macro economy is considered productively healthy. On the other hand, if the GDP is well below the potential GDP, then some productive resources must either be lying idle or being used inefficiently, or both - a very unhealthy condition. If the actual economy GDP has been falling for over six months that is called a recession. If there is a prolonged, deep decline in the level of GDP that is called a depression.

8. Distinguish employed, unemployed, unemployment rate.

Employed: are those people who have jobs Unemployed: people who do not have a job but want one Unemployment Rate: Measures the percentage of the labor force that is unemployed.

19. On an appropriately labeled capital market picture, show how entry into a country's capital market will shift the capital supply line.

Entry in a market will shift the capital supply line to the RIGHT

8. Describe the relationship between the two exchange rates: euros/dollar and dollars/euro.

Euros/dollar: A fall in the supply of euros implies a fall in the demand for dollars. Dollars/euro: A fall in the supply of dollars implies a fall in the demand for euros. (Look at page 201 in textbook) Does this answer the question??????

10. Describe what it means for a currency to get weaker or to get stronger. Give an example.

For a currency to get stronger, demand for that specific currency needs to increase. But if demand for that currency increases then it becomes more valuable then the currency it is being compared too. Overall a stronger currency is like buying other countries items on sale. Example: A $400 piece of Native American art costs a European tourist 200 euro at the original exchange rate of 0.5euro/$. With the change in the exchange rate to .25euro/$ the art costs that European tourist 100euro. For a currency to get weaker, demand for that specific currency needs to decrease. But if demand for that currency decreases then it becomes less valuable then the currency it is being compared too. Overall a weaker currency is like buying other countries items at a higher price. Example: A $400 piece of Native American art costs a European tourist 200 euro at the original exchange rate of 0.5euro/$. With the change in the exchange rate to 1euro/$ the art costs that European tourist 400euro.

1. Identify the basis on which the average individual determines her level of consumption.

For the average individual we can present a person's consumption as being based on the standard of living she thinks is consistent with her long term financial prospects.

4. Identify the market in which nations' currencies are exchanged.

Foreign Exchange Market (Need definition or just say foreign exchange market?)

9. Identify and explain the three different kinds of unemployment. (prolly on exam)

Frictional Unemployment: Is the case in which people are looking for jobs and there are appropriate jobs out there for them - they just have not found the jobs yet. Structural Unemployment: The case in which there are jobs but the skills and desires of job seekers don't match the available jobs. Demand-Deficent: a situation where there are no enough jobs for everyone who wants one. The classic American case of demand-deficent unemployment is the Great Depression when unemployment soared from 3.2% to 25%. One goal of the macroeconomic policy is to minimize demand-deficient unemployment because its cost to society is high. (not enough jobs)

2. Define each term and explain the distinction between: Full, sustainable capacity (potential) GDP and Actual GDP

Full sustainable capacity GDP (potential GDP) - is the greatest level of production that the whole economy can maintain over the long haul (that is, the biggest pie that nation can consistently product. and implies the microecnonomy is function at Pareto optimality Actual GDP - is how much the nation is really producing. economists compare actual GDP with full GDP to gauge the health of the macroeconomy.

6. Identify what (G-T) stands for. Specify the condition of the government's budget and the government's net effect of AE when (G-T) > 0, when (G-T) < 0, or when (G-T) = 0.

G - T = Net government budget position (G - T) > 0 = The government is spending more that it is taxing (DEFICIT). Effect on AE - adds to aggregate expenditures - SHIFTS AD TO THE RIGHT (G - T) = 0 = this is a BALANCED BUDGET. Effect on AE - aggregate expenditures is neutral - AD DOESNT SHIFT (G - T) < 0 = this is a SURPLUS. Effect on AE - Reduces aggregate expenditure - SHIFTS AD TO THE LEFT

1. Define Gross Domestic Product.

GDP - the value of all the new production in the nation during a given year. it is the broadest measure of nation's production

1. Using appropriately labeled Macro Picture and micro picture, show and explain the micro condition that must exist when there is demand deficient unemployment in the macroeconomy.

IS ON THE QUIZ KNOW HOW TO DO LIKES TO ASK THIS QUESTIONS OVER AND OVER

3. Identify the micro conditions under which the macroeconomy can get stuck in a less than full employment position.

If our nice microeconomic assumptions don't hold then the macroeconomy will get stuck at less than full employment

2. Identify the micro conditions that ensure that the macroeconomy will move back to full employment.

If our nice microeconomic assumptions hold the macroeconomy will move back to full employment

7. Define labor force, voluntarily unemployed. Explain the relationship between the labor force and the voluntarily unemployed.

Labor Force: is the term we will use for all those persons who are participating in or who are looking for an opportunity to participate in the nation's market economy. Voluntarily unemployed: Group of people who do not want a job and shout not be counted in the labor force. If you add the labor force and the voluntarily unemployed you get population of a country - mutually exclusive (the relationship)

1. Identify the market in which the level of investment is determined. (Prolly on exam)

Long Term Capital Market (KNOW THE SHIFT OF DEMAND AND SUPPLY OF THE LONG TERM CAPITAL MARKET ON QUIZ) (supply shift - firms entry and exit) (demand shift - attutude of demanders)

1. Define: long run. Comment on the following statement: It takes 20 years to reach the long run. (Prolly on exam)

Long run - is not a certain amount of time. Commenting on "it takes 20 years to reach the long run" is an incorrect statement because it could take a 100 years to reach the long run because the long run is not a certain amount of time.

15. Explain the concept: the natural rate of unemployment. Identify the relationship between the natural rate and what economists mean by full employment. Explain with an example.

Natural rate of unemployment: The sum of frictional and structural unemployment levels. it is the unemployment one would expect to find in a healthy, dynamic, growing economy. The economy is considered to be at FULL EMPLOYMENT when the unemployment rate is the natural rate of unemployment; that is, the only unemployment is either frictional or structural - NOT with zero unemployment. An example of this would be the unemployment rate being at 4.5%, so the economy is at full employment.

24. Distinguish between nominal and real values. Explain why nominal economic values can mask underlying real changes across time. (Prolly on exam)

Nominal Value: is the face value of anything Real Value: is the underlying true value Nominal economic values can mask underlying real changes across time because the face value of something measured in money may not clearly reflect its real value.

30. Describe how to take price effects out of nominal values. Given a nominal value and the appropriate price level measure, calculate the real value. (Prolly on exam)

Nominal value = (real value) X (price level) Real value = (nominal value) / (price level)

27. Identify the two methods the government uses to measure the price level. (Prolly on exam)

Price Index: Represents the level of prices for a specified "basket"(household) of items in any year relative to the level of prices for that "basket" in the base year. (a number that represents the level of price for a group of items in any year relative to the level of price for that set of items in the base year) Price Deflator: a measure of price level. An is the GPD deflator, which measure the price level for all items included in the GDP.

3. Identify the condition at which the microeconomy must be functioning if the macroeconomy is performing at full sustainable capacity (potential) GDP.

Pareto optimal General Competitive Equilibrium

2. Identify the condition of the microeconomy when the economy has reached the long run as we define it.

Pareto optimal, general competitive equilibrium (sustainable full employment) It is the macro condition that is reached when all microeconomic adjustments have been completed under our nice assumptions. Thus the macro long run represent the macro economic condition when the microeconomy has reached a Pareto optimal, general competitive equilibrium (some explanation necessary)

3. Identify and explain how parties that are not officially part of the budget position determination(But?) try to influence the budget process.

Parties try to influence the budget process by creating Political action Committee's (PAC). These PAC's can leverage access to the decision-making process by contributing to political campaigns, by media campaigns, and/or by stationing their lobbyists among the standing army of lobbyists that line the halls of Congress. Everybody wants a piece of the action

2. Explain why people go to the long term capital market for investment funds.

People go to the long term capital market for investments funds because investments cost money. It is the rare individual or enterprise that has enough funds to cover the costs of an investment, so more often that not a loan is needed in order to make an envisioned investment a reality. The capital market, if it is working well, coordinates the intentions of those who desire to borrow funds for investment with the intentions of those who have the funds that they are willing to loan. (second part couldnt hurt)

3. Define: permanent income. Describe the relationship between permanent income and consumption.

Permanent Income:

4. Describe personal financial planning.

Personal financial planning is the purposeful arraigning of one's financial portfolio in order to achieve one's financial goals (e.g. buying a home, putting your kid through college, retirement, etc.) gives one's discount rate and tolerance for risk. (do i need more than this?)

26. Explain why real values are useful for comparisons of economic data over time and nominal values are not. (Prolly on exam)

Real values are useful for comparisons of economic data over time because real values implies the actual value of the data as opposed to the face value of the data, which could be flawed.

11. Critique the following assertion: Strong currencies are good and weak currencies are bad.

Stronger or weaker currency depends on how you make your living and what you buy. Strong currenecy - are not necesarlly good becuase exports become more expensive weak currency - not nescesarlly bad becuase cheap currency attracts imports (Do i need explanation or is this enough??????)

32. On an appropriately labeled graph, ceteris paribus, show how increasingly positive expectations shift the capital market demand line. Then explain and show on an appropriately labeled Macro Picture how this change in expectations in the capital market affects the macroeconomy.

Shift in Capital Market DEMAND to the RIGHT. This would shift AD to the RIGHT as well (but intersection of the AD and AS line is before the LAS line) on the Macroeconomy (How do we explain this???????)

33. On an appropriately labeled graph, ceteris paribus, show how increasingly negative expectations shift the capital market demand line. Then explain and show on an appropriately labeled Macro Picture how this change in expectations in the capital market affects the macroeconomy.

Shift in Capital Market SUPPLY to the LEFT. This would shift AD to the LEFT as well on the Macroeconomy (How do we explain this???????)

30. On appropriately labeled graphs, ceteris paribus, show how an international capital flow out of a country affects that country's capital market and in turn its macroeconomy. (Prolly on exam)

Shift in Capital Market SUPPLY to the LEFT. This would shift AD to the LEFT as well on the Macroeconomy

29. On appropriately labeled graphs, ceteris paribus, show how an international capital flow into a country affects that country's capital market and in turn its macroeconomy.

Shift in Capital Market SUPPLY to the RIGHT. This would shift AD to the RIGHT as well (but intersection of the AD and AS line is before the LAS line) on the Macroeconomy

8. On an appropriately labeled Macro Picture, show graphically and explain how a dramatic fall in investment (I) contributed to the Great Depression.

Shifted the AD line wayyy to the left The dramatic fall of investment caused AD to move to the left. This also made real GDP fall dramatically.

9. On an appropriately labeled Macro Picture, show graphically and explain how a dramatic rise in military spending by the government shifted the economy from high unemployment of the Depression to very low unemployment. Ceteris paribus, we would expect this shift in AD to stimulate inflation - explain why it did not do so during World War II.

Shifted the AD line wayyy to the right It didn't stimulate inflation because (knowing such inflation could be expected and knowing inflation would undermine national morale) for the duration of the war the government imposed price controls and rationing on the home front in order to keep inflation in check

8. Define: short run. Identify the variables that are constant in the short run.

Short run: is a period in which the factor markets have not adjusted. Thus along the aggregate supply line, factor prices (for example wages) are constant. (Variables that shift AS) - (Email jerry about more variables)

3. Identify the level of real GDP in the macroeconomy when the long run condition has been reached.

full-employment Real GDP(YF) - and Natural Rate(some doubt but also no doubt) Thus, as we define it here, the long run is the macroeconomic condition when the economy has reached full sustainable capacity real GDP and soo....full employment, i.e., the natural rate

7. Suppose the demand for dollars by folks holding euros expands. Show what this would look like on an appropriately labeled graph in which dollars are the commodity. Show what this would look like on an appropriately labeled graph in which euros are the commodity.

graph - page 200 in text book (MEMORIZE)

2. Explain the concept of "smoothing out" consumption over time.

The concept of "smoothing out" refers too how a person may have a blip in consumption either up or down and if you are like our assumed "average" consumer your consumption will fit your expected long term income status. (is this right?) In order to achieve this smoothing they spend out of their current income and, if necessary, they spend out of their accumulated wealth or they may, on occasion, borrow. (do i need the bottom part?)

28. Explain the concept of foreign direct investment. Give an example.

The concept of foreign direct investment refers too the holders of international capital send their funds and make the actual investment themselves. Examples: Pepsi putting money into Sweden (is this example right????????)

2. Identify the relationship that the AD line represents. Explain why the AD line slopes down. (Prolly on exam)

The AD line represent the relationship between real GDP demanded (Y) and the price level (P) for a given level of aggregate expenditure (AE). The AD line slopes down because for a given level of aggregate expenditure (AE) measured in nominal terms, as the price level (P) falls the given amount of nominal spending (AE) will buy more and more real GDP (Y).

13. Describe what the AS line represents.

The AS line represents the positive relationship between the output price level(P) and real GDP supplied, when basic factor prices are constant. (The relationship is positive because as output approaches and surpasses YF pressures on the cost of production grow.

1. Identify the conditions that determine the government's budget position.

The condition that determines the government's budget position is how much it spends and how much it taxes. (G - T) (Need more than this?)

9. Explain why the long term capital demand line slopes down.

The demand line slopes down because as the interest rate rises fewer and fewer investments have expected rate of return that beats the interest rate. So, ceteris paribus, the quantity of financial capital demanded for the purposes of investments falls

10. Describe the issues surrounding the l segment of our AS line that are central to the larger debates about macro policy. Explain why these issues are so important for this policy debate.

The issues surrounding the L segment is the idea of when "L" segment ends is when the economy has reached is full sustainable capacity - aka natural rate. The problem with saying this is that different people have different ideas of when the economy is at full sustainable capacity - having different ideas about the natural rate

11. Describe why job search takes time, and how this relates to frictional unemployment. Give an example.

The job search takes time because a person is looking for a particular job not just any job. The job search relates to frictional unemployment because the definition of friction unemployment is the case in which people are looking for jobs and there are appropriate jobs out there for them - they just have not found the jobs yet. So people are actively looking to be the "right man for the right job". An example of this would be seeing a "help wanted" sign in a local fast food restaurant. It is honest and respectable work but it is not the job that you had in mind. This job is not why you invested all that time and money in your human capital, in your education. You pass it up. you search for a job that uses your skills fully.

17. Describe the kinds of costs demand deficient unemployment imposes on society. Give examples.

The kinds of costs demand deficient employment imposes on society is a loss of self-esteem, dependence, depression, and, in the extreme, desperation. An example of this is if a parent cannot find a job, her children will not have access to proper nutrition or health care. if a partner or parent who cannot find a job loses self-steem, the other partner and/or the child suffer with that loss.

12. Identify and explain the problem that causes structural unemployment. Give an example.(Prolly on exam)

The problem that causes structural unemployment is the mismatch between people's skills and jobs' requirements. An example of this would be when the economy went from carriages to cars, there were plenty of buggy whip makers who lost their jobs, and without retraining they could not take the new mechanics jobs that became available.

15. Describe the relationship between short term interest rates and long term interest rates.

The relationship between short term interest rates and long term interest rates is that both are loans with a certain expected rate of return but the short term interest rates don't need to wait nearly as long to get you money back when compared to long term interest rates. The short term rate is the "floor" and based on the short term rate, you add premium, which gets you long term rate which is the "ceiling"

12. Describe the relationship that must exist between the expected rate of return and the interest rate for an investment to make sense. Explain. (Prolly wont be on the quiz)

The relationship that must exist between the expected rate of return and the interest rate for an investment to make sense would be a high interest rate would expect to a high rate of return. This would happen because if the interest rates were high, this looks attractive to lenders who want to make money off of interest rates for an investment because it has a high expected return rate. (which one of these two(above and below) is more right??????? they are pretty much the same but still ask) The relationship that must exist between the expected rate of return and the interest rate for an investment to make sense would be a high interest rate. This would happen because if the interest rates were high, this looks attractive to lenders who want to make money off of interest rates for an investment because it has a high expected return rate.

10. Explain the role of expectations in the long term capital demand.

The role of expectations in the long term capital demand can be deceiving because what the player might expect to happen might not happen in the real world for better or for worse.

5. Describe the role of financial intermediaries in the capital market. Identify some financial institutions that serve as financial intermediaries.

The role of financial intermediaries in the capital market is to do the day-to-day job of making the coordination of lenders to borrowers process work. Examples of financial institutions that serve as financial intermediaries are banks or mutual funds.

9. On an appropriately labeled Macro Picture, show graphically and explain the shape of the short run aggregate supply (AS) line. Do this by interpreting movement along the line from segment to segment.

The shape of the short run AS line represents the relationship between the amount of real GDP the economy is actually supplying, Y, and the effect that this level of production has on the level of output prices, P, when factor prices are constant. K SEGMENT - anywhere along the K segment (of the aggregate supply line) the real GDP supplied is significantly below potential GDP, YF. Lots of "slack" - such as empty factories and unemployed workers. L SEGMENT - Along L segment things begin to change. Bottlenecking - put costs pressures on the production process as enterprise need to wait for intermediate goods to arrive. This L segment of the AS line represents this by the way it starts to turn up the AS line approaches the LAS. The shape of this segment determines how far the economy can be pushed without causing inflation and where the L segment ends determines when the economy has reach its full sustainable capacity. M SEGMENT - Along the M segment of the AS line the economy has passed the limits of its full sustainable capacity, YF. It can do this for some period of time, but it cannot sustain this level of production given the current endowment because people and machines are being worked harder than they can sustain in the long run. This overall leads to INFLATION. The steep upturn in the AS represents the fact that at some point more pressure creates lots of heat(inflation), but ver little light(production). Along the M segment of the AS line the economy has passed the limits of its full sustainable capacity, YF. M segment puts pressure on the economy, pressure leads to heat and heat leads to inflation

5. Identify the source of aggregate income in the economy and how we measure it in our model. (Prolly on exam)

The source of aggregate income is determined by the amount of production in the economy, because the funds paid for that production become people's income. This is measured in (P*Y) or NOMINAL AGGREGATE INCOME P = price level Y = Real GDP

8. Explain why the long term capital supply line slopes up.

The supply line slopes up because, Ceteris paribus, the higher the interest rate the better a capital market looks to a lender, so as the interest rate rises the quantity of capital supplied increases

7. Describe the sustainability challenge posed by economic growth.

The sustainability challenged by economic growth is, is sustained growth possible for humankind given our finite resources? Today we face the prospect that such growth is not in fact sustainable because it will make the earth unlivable. Long run policies are a long run to a dead en if they do not address the very long run issue of sustainability.

11. Interpret the term "slack" with respect to the macro economy. How would a "slack" condition be represented in our Macro Picture.

The term "slack" refers to an economy with lots of empty factories and unemployed workers. Our "slack" condition would be represented in our Macro Picture by the K segment.

14. Identify what is assumed constant along a given AS line.

The thing that remains constant along the given AS line is that factor prices are constant.

18. Identify how much (roughly) the unemployment rate in the U.S. rose from 1929 to 1933 as the Great Depression took hold of the country.

The unemployment rose from 3.2% to 25% percent.

21. Identify and explain the efficiency and the equity costs that inflation or deflation impose on an economy.

Undermining the usefulness of money constitutes the major efficiency cost of inflation. When inflation is high money loses value quickly, so people are less willing to hold money or accept money or use it as a measure of value. Thus inflation undermines money's ability to function as a store of value, as medium of exchange, and a unit of account. There are also equity costs to inflation because inflation can redistribute wealth. anyone who is being paid a constant amount of money - a fixed wage for a job or fixed retirement benefit - will lose in the face of inflation because the value of money a person receives is less and less as time goes on.

5. Define: very long run. Identify changes that can occur in the very long run that shift LAS. Give examples. Show how growth in capacity is represented in our Macro Picture.

Very long run: as the period in which the endowment and/or technology change thus shifting the LAS Ex. Examples of this would be the pool of available natural resources expands with exploration and discovery, improving technology increases the productivity of this growing endowment, and during periods of accelerated investment. (already said this in definition, should i repeat myself or just give one example?) The LAS would shift to the right in our macro picture (this is correct)

6. Define: wage-price spiral.

Wage-price Spiral: a situation in which rising prices push workers to demand higher wages to maintain the real value of their incomes, then in turn higher wages push up production costs driving up process, which leads back to high wage demands and so on and so on. (A cycle in which wages chase prices and prices reflect higher wages) (Just this "cycle quote" or the whole process explained)?

16. Identify the premiums that are added on to the short rate line to establish long rates. Explain each premium.

Waiting Premium: lenders want to be paid for their waiting on long loans. Inflationary Expectations Premium: A charge for supplying their funds in the long term market

14. Explain the following statement: frictional and structural unemployment are both consistent with a dynamic, growing, healthy economy. Identify how each kind of unemployment can be reduced. (Prolly on exam)

Want to have fricticional unemployment becuase it is good that people are taking their time to look for jobs. It is also good to have structural unemployment because that means technology is advancing and put people out of work because they dont have the most up to date skills. Way to solve: frictional - reduce the amount of time it takes to find jobs Structural: to retrain and quicker adapt newer technology

1. If the web of connections that makes up the economy is a micro phenomenon, explain why we study the economy at a macro level. Identify and describe a non-economic example of the contrast between micro and macro perspectives and the value of each.

We study the economy at the macro level because macroeconomics is a valuable tool for aggregating the micro reality to get a reel for the wholeness of society's experience. Macro economics is to micro economics as the study of a forest is to the study of a forest is the study of its trees. A forest is made up of trees, but it is more than the sum of its trees. There are characteristics of a forest, such as size, maturity, growth rate, and sustainability that transcend any particular tree. Yet because these characteristics have implications for the strength and stability of the forest as a whole in the face of environmental disturbances, they have a bearing on the well-being of every tree in the forest.

25. Explain the following statement: Changes from year to year in nominal GDP may reflect changes in real production (the actual physical output), the price level, or both. (Prolly on exam)

What this statement means is the problem with comparing nominal GDP from year to year is that if the nominal values changes, cannot know wether the change represents a real change in society's production, a change in price level, or both. ERGO nominal GDP is not a good measure

6. Describe how economic growth is represented in our Macro Picture.

When the LAS shifts to the right because it represent an expansion of the economy's potential GDP

3. Identify and describe the four basic aggregate questions our macroeconomic model is designed to explore.

Why doesn't the the economy always produce to its full capacity? Why are some society's resources (like people) sometimes unemplyed? what cause employment to persist? (do these questions later)

8. Explain why workers ask for indexed wages in the face of a wage-price spiral. Describe the effect of such indexing on the spiral.

Workers ask for indexed wages in the face or wage-price spiral because indexed wages automatically adjust wages, benefits or other forms of monetary payments to change in the price level. This would contribute to the spiral - more money more inflation

34. Explain and show graphically how achieving peace in previously a war-torn nation can, ceteris paribus, increase investment and improve macroeconomic conditions.

Wouldn't this be the same answer for as question 32??????