MACRO ECON EXAM 3 UGA

how find unemployment rate?

# unemployed/# in labor force x 100

percent change in real value equation

% change in nominal value - % change in prices

output gap equation

(actual output - potential output/ potential output) x 100

how to find rev of this year given cpi of this and last year? (converting numbers)

(cpi this yr/ cpi last yr) x revenue of year you are changing

how to find GDP deflator?

(nominal GDP/ real GDP) x 100

how to find PCE deflator?

(nominal PCE/ real PCE) x 100

what is PCE deflator used for?

-(personal consumption expenditure deflator) -the Federal Reserve sets its inflation target using the (PCE) deflator -It uses a slightly different basket of goods and services compared to the CPI -basket not fixed = no substitution bias

what is outlet substitution bias?

-As the structure of retailing changes, people switch to buying from cheaper sources, but the CPI,, does not take account of this outlet substitution -ex. walmart vs publix

bargain wage on graph?

-above market clearing -is structural unemploy

what is indexation?

-automatically adjusting wages, benefits, tax brackets, etc. to compensate for inflation

Before Fiat Money, people used:

-barter: goods for goods exchange -commodity money: has intrinsic value (ex. gold coins)

what factors are a relative price inc?

-because demand increases or -because supply decreases.

what is new goods bias?

-improvements occur every year -part of rise in the price is payment for improved quality, not inflation. -the CPI counts all the price rise as inflation.

Costs associated with expected inflation include the following:

-menu costs (producer). -shoe-leather costs (consumer).

what is new goods bias?

-new goods that were not available in the base year appear -if they are more expensive than the goods they replace, they cause an upward bias into the CPI. -contradicts cost benefit principle

how bad is the bias for CPI?

-overstates inflation by 1.1 percentage points a year in 90s

How are changes in business prices measured? (two ways)

-producer price index (PPI) -GDP deflator

what is PPI?

-producer price index (PPI) -tracks the price of inputs into the production process.

why is barter costly?

-requires a double coincidence of wants -hard to find good trade

what is inflation rate?

-the annual percentage increase in the average price level (i.e. the growth rate of the price level). -AKA. the percent change in price level from one year to the next

what is commodity substitution bias?

-the market basket of goods used in calculating the CPI is fixed -does not take into account consumers' substitutions away from goods that have relative prices increasing.

Which inflation measure is used by forecasters?

-they use core inflation -excludes food and energy. - either Core CPI or Core PCE

what is CPI?

-tracks the average price consumers pay over time for a representative "basket" of goods and services. -shows cost of living adjustments

causes of structural unemployment

-wages over market clearing wage, creates labor surplus

what are the steps of CPI construction?

1. -figure out what types of goods people buy 2. -collect prices from the stores where ppl shop 3. -tally up price of basket of goods/services 4. -calculate inflation rate

3 main causes of inflation

1. A general increase in demand - aggregate demand, not individual good demand 2. An increase in the price of widely used inputs - (ex. oil prices, which inc input costs for most producers) - decreases aggregate supply as opposed to individual goods supply 3. An increase in the money supply

3 causes of frictional unemployment

1. Job-search resources 2. Skills mismatch /geographical mismatch 3. Unemployment insurance and other income support

Examples of when you should focus on real variables

1. To analyze whether you are becoming better paid (real wage) 2. To assess whether your stocks have become more valuable (real wealth) 3. To evaluate whether your sales staff are performing better (real revenues)

3 institutional causes of structural unemploy

1. Unions keep wages high for some workers. 2. Job protection regulations make it hard to fire workers. 3. Minimum wage laws prevent wages from falling to the market-clearing wage.

if it gives demand and supply equation...

1. make equal to each other 2. solve for w 3. compare w and the minimum wage given. whichever is higher you plug into the euqation

Which inflation measure is used for cost-of-living adjustments?

CPI

what is the headline measure of inflation?

CPI

what is okun's rule of thumb?

For every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage point.

'store of value':

Money can be saved to use later.

'unit of account':

Money is a common unit used to measure economic value. -better for opp. cost principle

'medium of exchange':

Money is used to buy goods and services.

what is the fisher equation? real rate.

Nominal rate - Inflation rate

what does the federal reserve use?

PCE

pov your competitor and you are both having rising input costs... what price measure do you use?

PPI

marginally attached workers

Someone who wants a job, has looked in the past year, but isn't actively seeking work.

equilibrium unemployment rate

The long-run unemployment rate to which the economy tends to return

lagging indicators

Variables that follow the business cycle (GDP) with a delay

what are leading indicators?

Variables that tend to predict the future path of the economy (GDP)

if pos output gap is ___%, the gdp will be...

____% above potential GDP

efficiency wage? (meaning and effect)

a higher wage paid to encourage greater worker productivity. -cause structural unemployment but can also lower total labor costs.

how to find today's dollars?

another time's dollars x price level today/ price level over time

what does okun's rule look on graph for unemploy rate and output gap?

as output gap rises, unemply rate falls half as much

producer or consumer: shoe leather costs

consumer

okun rules

cyclical= - (1/2) * Output gap,,,,,,,,,,, actual= frictinal+structural+cyclical

annualized rates

data converted to the rate that would occur if the same growth rate had occurred throughout the year.

effect on purchasing power

decline in purchasing power

cyclical unemployment

due to a temporary downturn in the economy.

are expansions or recessions more gradual?

expansions

Money in the United States Today is...

fiat money (has no actual value)

if inflation is unexpectedly low, how is income redistributed?

form borrowers to lenders

how to find natural unemployment rate?

frictional + structural

actual unemployment formula

frictional UE + structural UE + cyclical UE

if inflation is unexpectedly high, how is income redistributed?

from lenders to borrowers

what is high unemployment's effect on gov spending?

government receives lower tax revenues but spends more.

marginally attached

has been looking recently but stopped

The higher the minimum wage, as compared to the equilibrium wage, struct unemploy is...

higher

is labor market import or export market?

import

how find labor force participation rate?

labor force/working age population x 100

which indicator follows the business cycle with a delay? ex. unemplyment rate

lagging

which indicator predicts future of economy? ex. stock market

leading

is core CPI more or less volatile?

less bc it excludes food/energy

is the PCE inflation percentage on graph usually higher or lower?

lower; bc it adjusts for substitution bias

pos output gap occurs when...

means actual output is above potential output: the economy is using its resources with intensity.

Equilibrium unemployment is the same as...

natural

are real or nominal measured in dollars?

nominal

real or nominal?: stated interest rate without a correction for the effects of inflation

nominal

A variable measured in current dollars is a...

nominal variable

neg output gap occurs when...

occurs when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment.

Which inflation measure is used for monetary policy?

personal consumption expenditure deflator

how to find inflation rate?

price level this year - price level last year / price level last year x 100

producer or consumer: menu costs

producer

what is the main factor inflation effects?

purchasing power of money

real or nominal are used to make most decisions?

real

real or nominal?: interest rate in terms of changes in your purchasing power

real

A variable that has been adjusted to account for inflation is a...

real variable

what is nominal wage rigidity?

reluctance to cut nominal wages

as actual output falls lower below potential output, unemployment...

rises

The business cycle refers to the:

short-term fluctuations in economic activity.

what is the output gap?

the difference between actual and potential output, measured as a percentage of potential output (in %):

what's a real interest rate?

the interest rate in terms of changes in your purchasing power

potential output

the level of output that occurs when all resources are fully employed at their sustainable levels.

An economy's potential output level is:

the output that is possible when all resources are fully employed at their sustainable levels.

what's a nominal interest rate?

the stated interest rate without a correction for the effects of inflation

How do we compare monetary values over time when prices are changing? What is the formula?

today's dollars formula: (price level today/ price level over time) x (another time's dollars)

what is the difference between demand and supply?

total unemployment

what is a GDP deflator?

tracks the price of all goods and services produced domestically.

frictional unemployment

unemployment that occurs when people take time to find a job

structural unemployment

wages don't fall to bring labor demand and supply into equilibrium

supply tells you

want to work

what is hysteresis?

when a period of high unemployment leads to a higher equilibrium unemployment rate.

demand tells you how many people

will work

3 reasons that CPI might overstate true inflation rate

•New goods bias •Quality change bias •Commodity substitution bias & Outlet substitution bias