MACRO CHAPTER 8-11

Wealth Formula

Assets - Liabilities

Sydney purchases a newly issued, two-year government bond with a principal amount of $20,000 and a coupon rate of 3 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 2 percent coupon rate?

Coupon payment = 3% * 20000 = 600 Prevailing interest rate = 2% The cash inflow provided by the bond is $600 after one year, and ($20000+600) after two years. Discount the ($20000+600) to the one year before maturity: (20000+600)/(1+2%)=20196

Although the tech industry is known for its rapid growth, it is not immune to ____________ unemployment. During economic downturns, companies may cut back on technology investments and lay off workers in areas like software development and IT.

Cyclical

What type of unemployment is the following: A computer programmer is laid off because of a recession.

Cyclical unemployment

Y=

INCOME

VMP=

MP x P (prices of output * marginal product)

T=

NET TAXES PAID TO GOVERNMENT

National income GDP is divided into

Private income = GDP - net taxes; Government income = net taxes; (net taxes = taxes - government transfer payment)

public savings formula

Public Saving = T- G (net taxes- government spending/purchases)

value of marginal product=

VMP= ('P'output)x(MP)

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve-deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______ government bonds.

When the Central Bank wants to increase the money supply, it must purchase government from the public. To compute the amount of the purchase it uses the equation: MS = currency held by the public + (bank reserves/desired reserve-deposit ratio). In this case, currency held by the public is unchanged, so the increase MS by 500 comes from (bank reserves/desired reserve-deposit ratio): (x/0.10) = 500, where x is the increase in bank reserves. In this case x = 50, so an open-market purchase of 50 is appropriate.

National Savings formula

Y-C-G

Private Savings Formula

Y-T-C (income-taxes-consumption)

Which of the following events will decrease the domestic real interest rate in an open economy?

an increase in domestic saving

C=

consumption

money supply formula

currency held by public + bank deposits/desired reserve- deposit ratio

Hurricanes can cause widespread damage to infrastructure, housing, and businesses. As a result, many businesses may be forced to suspend their operations temporarily due to physical damage, power outages, or other factors related to the hurricane. This disruption can lead to temporary job losses as employees cannot work in these affected areas. What type of unemployment is this?

cyclical unemployment

A decrease in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

decreases; increases

College or university graduates who are actively searching for their first professional job may experience ____________ ____________ as they transition from their educational institutions to the job market.

frictional unemployment

The costs of unemployment are lowest (and perhaps even negative) for

frictional unemployment

G=

government spending/ purchases

Increasing wage inequality results when international trade leads to ___________ wages for workers in exporting industries and________ wages for workers in importing industries.

higher; lower

As the real interest rate increases, the quantity of saving supplied ______ and the quantity of saving demanded ____.

increases; decreases; Interest rate is the price of money. In another word, interest rate is benefits of saving, and costs of investment

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the ____ _________. Decreases risk level leads to lower required rate of return, and thus causes discounted cash inflows (present value) of the stock to be higher.

risk premium

bequest saving

saving done for the purpose of leaving an inheritance

precautionary saving

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

life-cycle saving

saving to meet long-term objectives such as retirement, college attendance, or the purchase of a home

As technology evolves, certain jobs may become obsolete. For instance, the widespread adoption of automation in manufacturing can lead to ________ ______________ for assembly line workers who lack the skills needed to operate and maintain automated machinery.

structural unemployment

net taxes

taxes minus transfer payments

The demand for labor depends on

the marginal product of labor; the price of output produced

Globalization

the process by which businesses or other organizations develop international influence or start operating on an international scale.

frictional unemployment

the short-term unemployment associated with the process of matching workers with jobs

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves