ECN Final Exam
Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn?
$242.5. Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Of this amount, 3% is lost to inflation, which means that Bertha earns only $250 x (1 - 0.03) = $242.5.
formula for unemployment rate
(# of employed)/(# of unemployed + # of employed)
to convert into "todays $"
(Amount of other year x price level today)/price level in other year
Inflatio Rate formula
(CPI this year-CPI Last year)/CPI last year x 100
economic growth rate formula
(current value/past value)^1/n-1 n=number of periods
How is inflation measured
(current year-past year)/past year
how to find real income tax rate with nominal interest rate
(nominal interest rate x income tax rate)= y ; nominal interest rate-y
Labor force participation rate formula
(the number of people employed + the number of people unemployed) divided by the adult noninstitutionalized population.
tax multiplier eqn
-mpc/1-mpc
differemces between GDP deflator and CPI
1.Treatment of imports Imports are part of the CPI but not GDP 2. Treatment of capital goods CPI does not have capital goods, but GDP deflator does 3. Basket of Goods Changes regularly for GDP deflator, but CPI is about every 3 years output vs consumption reported the same amount
government spending multiplier equation
1/(1-MPC)
Suppose the MPC is .9. there are no crowding out or investment accelerator effects. If the government its expenditures by 30 billion then by how much does aggregate demand shift to the right? (if the previous scenario still applies) If they decrease taxes by 30 billion, how much does it shift to the right?
300 billion, 270 billion
GDP deflator
= (Value of all goods and services produced in the economy this year using this year's prices/Value of all goods and services produced in the economy this year using the base year's prices) x 100 (this year at this years prices/this year at base prices)x 100
CPI for any year
Cost BASKET current year/Cost BASKET base year ) x 100
GNP=
GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
After the increase in money supply the ultimately shifts money demand to the right,
GDP goes up and unemployment goes down
Arbitrary Redistributions of Wealth
Higher than expected inflation leads to money to transfer form lenders to borrowers and vice versa
Quality Bias
If the quality of a good deteriorates from one year to the next while its price remains the same, the value of a dollar falls, because you are getting a lesser good for the same amount of money. Similarly, if the quality rises from one year to the next, the value of a dollar rises. this tend to overstate CPI
difference between wealth and exchange rate effect
In the case of the wealth effect, a change in the price level changes the real value of money. The exchange-rate effect begins with a change in the interest rate.
Tax distortions
Inflation makes nominal income grow faster than real income Taxes are based on nominal income levels and some do not quickly adjust for inflation So inflation causes people to pay more in taxes, even when their incomes do not increase Say you buy a stock for $30 twenty years ago and resell it for 130. to the gov, you made 100. but in today's1 dollars, the original investment was $50, so you only made 80, but you're still taxed on $100.
What is M2
M1 and less liquid assets: bonds, mutual funds, etc
Real GDP per person formula
Nom GDP/GDP deflator = real GDP/population x 100 = per person
The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest?
The government takes 10% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.10) = 7.2%. Thus the after-tax real interest rate is 7.2% - 1% = 6.2%.
nominal tax interest rate thing
The income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation. Because the after-tax real interest rate provides the incentive to save, saving is much less attractive in the economy with high inflation.
The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?
The income tax treats this entire nominal interest of 4% + 2% = 6% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 6% - (6% x 0.25) = 4.5%. The after-tax real interest rate is 4.5% - 2% = 2.5%.
Why do people believe in the inflation fallacy?
When prices rise, buyers of goods and services are worse off but at the same time, sellers are better off. Because most people earn their incomes by selling their services, such as their labor, inflation in incomes goes hand in hand with inflation in prices. Thus, inflation does not in itself reduce people's real purchasing power.
GDP equation (production/capital resources)
Y = AxF(K,L,N,H)
GDP equation
Y= C+I+G+NX
Which of the following events would shift money demand to the right
a increase in the price level
how to monetarily increase interest rates
decrease money supply by selling bonds
for a given real interest rate, an increase in inflation makes the after tax real interest rate
decrease, which discourages savings
how to get productivity (eqn)
divide the quanity of output by the hours worked
Outlet Bias
does not capture what people actually pay: costco, tj maxx, thrift shops, etc
A pople who are temporarily absent from their job and people who work without (pay qualifies too) pay in a family member's business are considered
employed
Misallocation of resources
firms don tall change their prices at the same time, so relative prices can vary in the short run and mis-allocate resources
Natural Rate of unemployment: what is/formula
frictional + structural unemployment
what does consumption include
household spending on goods and services: durable and nondurable goods, not new houses. education is counted as a service for consumption
Whats is Money Demand
how much of our wealth we hold as money. Money demand goes up as interest rates go down, if money demand goes up, prices go up, if real income goes up, money demand goes up because it costs less to hold our wealth as money. you can hold your wealth in accounts and in commodities.
What does leverage ratio mean
if a leverage ratio is 20 that means for every $1 of capital that the bank owners have contributed, the bank has $20 in assets. of the $20 in assets, $19 are financed with borrowed money
The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will decrease if the price level
increases by less than expected so that firms believe the relative price of their output has decreased.
the factor that causes money demand to go down if it goes up
interest rate
If the money supply goes up...
interest rate goes down, investment goes up, and GDP goes up (expansionary)
the reason high interest rates cause cut back in GDP
is because people are holding all their money in stock and bonds and interest bearing account and not spending it. thus, production is not demanded and GDP goes down.
Confusion and Inconvience
its just hard to plan and measure things when they are changing so drastically
increase in capital stock shifts what
long and short run aggregate supply
frictional unemployment can be
long run
over the last few decades, americans have chosen to cook less at home and eat more and restaurants. Due to this change in behavior, by itself has increased
measured GDP by the value added by the restaurant's preparation and serving of the meals
The Fed's Primary task is...
monitor each banks financial condition and facilitate bank transactions by clearing checks
New Goods Bias
new goods are not represented until basket is updated. some new object takes everyone by storm and it isnt shown.
how to find real interest rate
nominal interest rate minus inflation
Real interest rate formula
nominal interest rate-expected inflation rate
inflation rate is defined as the
percentage change in price level from the previous period
interest rates and price level have what type of relationship
positive (if one goes up, so does that other)
the two factors that cause money demand to go up if they go up and vice versa
price and real income
What two things go up when the AGDC goes to the right
prices and GDP
an economic expansion caused by a shift in aggregate demand causes
prices to rise in the short run, and rise even more in the long run
what is investment in the language of macroeconomics
purchase of new capital, such as equipment and buildings
what is saving in the language of macroeconomics
purchase of stocks and bonds
ver time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called
substitution bias
the velocity of money is
the average number of times per year a dollar is spent
Menu Costs
the cost of changing the actual menu of the restaurant or retail store for something like that. they might accept lower or higher earnings because it costs too much to change everything.
the labor force participation rate tells
the fraction of the population that has chosen to participate in the labor market
What is M1
the most liquid form of money: currency, demand deposits, travelers checks, etc
Shoe Leather Costs
the resources wasted when inflation encourages people to reduce their money savings: the time and money to open accounts, move things around, etc
What most closely fits an economist's definition of "money"?
the set of assets in an economy that people regularly use to buy goods and services.
Rule of 70
to find how long it will take to double: 70/x years
When the Fed decreases the money we expect interest rates
to rise and stock rices to fall
if someone is layed off but is expecting to be called back they are
unemployed
MPC equation
change in consumption/change in income
equation for after tax real interest rate
after tax nominal interest rate-inflation rate
how to calculate real income after inflation
amount x (1-inflation rate)
how are leverage and assests related
an increase in assets will increase the owners equity by multiplying the leverage rate and asset increase/decrease rate together.
Leverage ratio
assests/captial
To increase money supply the Fed could
auction more loans to banks