Ec3113 exam 1

If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are -$1,910, then government purchases are:

$2977

money demand function

(M/P)^d=L(r,Y) (M/P)^d, real money demand, depends negatively on r and positively on Y ("L" is used for the money demand function because money is the most liquid asset)

public saving

(T-G) government revenue minus gov spending

private saving

(Y-T-C) disposable income minus consumption

capital requirement

A minimum amount of bank capital mandated by regulators

exogenous variable

A variable determined outside the model Y, Ps

establishment survey

BLS surveys business establishments to track the number of jobs that have been added and lost

government purchases

G=T - gov purchases equal taxes-transfers - balanced budget G>T - budget deficit G<T - budget surplus

Simple money demand function

M/P=kY

currency, demand deposits, travelers checks are

M1

Quantity Theory of Money Equation

MV=PY

constant returns to scale

Y2=zY1 the situation in which a firm's long-run average costs remain unchanged as it increases output

increasing returns to scale

Y2>zY1 situation in which output more than doubles when all inputs are doubled

national income accounting

Y=C+I+G+NX measurement of the national economy's performance, dealing with the overall economy's output and income

production function

Y=F(K,L) shows how much output (Y) the economy can produce from K units of capital and L units of labor - reflects economy's level of technology - constant returns to scale

diminishing marginal returns

a level of production in which the marginal product of labor decreases as the number of workers increases

GDP deflator

a measure of the price level GDP deflator=100 x nom GDP/real GDP

endogenous variable

a variable that is explained by an economic model P, Qd, Qs

demand deposits

balances in bank accounts that depositors can access on demand to make transactions, such as checking accounts M1

economists can calculate US unemployment rate by using

both household survey and establishment survey

if the fed announces it will raise the money supply in the future but doesnt change today's money supply

both the nominal interest rate and current price level will increase

CPI overstates inflation

by about 1.1% per year

the inflation tax is paid

by all holders of money

in a fractional reserve banking system, banks create money when they

make loans

the two most important factors of production are

capital and labor

twos most important factors of production

capital and labor

the minimum amount of owner's equity in a bank mandated by regulators is called a _____

capital requirement

inventory investment

change in value of firms inventories

a country that is on a gold standard uses

commodity money

assume velocity is

constant

C

consumption

Reasons GDP may exceed GNP

country has borrowed a lot from abroad or foreigners have done lot of investment in the country country has large immigrant labor force

why GNP may exceed GDP

country has done lots of lending/overseas investment and is earning lots of income from foreign investment many citizens have left the country to work overseas, their income counted in GNP, not GDP

currency-deposit ratio

cr=C/D The ratio of the amount of currency that people choose to hold to the amount of demand deposits they hold at banks.

money base

currency in circulation plus reserves B=C+R

compared with real gross GDP during a recession, real GDP during a depression:

decreases more severely

investment is the ______ for loanable funds

demand investment depends on interest rate, quantity of loanable funds also depends on interest rate

the price received by each factor of production is determined by

demand and supply of factors

the price recieved by each factor of production is determined by

demand and supply of factors

money growth rate

determines inflation rate

Consumption depends on

disposable income (Y-T)

with a C-D production function, the share of output going to labor

doesnt depend on the amount of labor in the economy

with a CD production function, the share of output going to labor:

doesnt depend on the amount of labor in the economy

in the US today, real GDP per person, compared with 1900 is about

eight times higher

when someone purchases a 90-day treasury bill, they cannot know the

ex post real interest rate

macroeconomic models are used to explain how

exogenous variables influence endogenous variables

government purchases and taxes are the

exogenous variables set by fiscal policymakers

net exports (NX)

exports-imports equals net spending from abroad on our own goods/services

when the Fed increases the interest paid on reserves, it:

increases the reserve-deposit ratio (rr)

inflation____ the variability of relative prices and ____the efficiency of all the allocation of resources

increases, decreases

I

investment

in the US, the money supply is determined by

jointly the Fed and by the behaviors of individuals who hold money and of banks where money is held

money demand parameter

k

when people want to hold a lot of money for each dollar of income and money changes hands infrequently

k is large v is small

according to the neoclassical theory of distribution, in an economy described by the CD function, workers should experience high rates of real wage growth when

labor productivity is growing rapidly

workers should experience high rates of real wage growth when

labor productivity is growing rapidly

The costs of reprinting catalogs and price lists because of inflation are called:

menu costs

GNP=GDP _______income earned domestically by foreigners_____ income that nationals earn abroad

minus, plus

the money supply will increase if the

monetary base increases

the characteristic of the classical model that the money supply doesnt affect real variables is called

monetary neutrality

loanable funds

money available for lending and borrowing. "price" is the interest rate

hyperinflations are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is a governments

need to generate revenue to pay for spending

NX

net exports

An economy's factors of production and its production function determine the economy's:

output of goods and services

an economy's factors of production and its production function determine the economy's

output of goods and services

for any variables X and Y

percentage change in (X x Y) = % change in X + percent change in Y

Reserve-deposit ratio:

rr=R/D

to reduce the money supply, the fed

sells government bonds

given that M/P=kY, when the demand for money parameter, k, is large, the velocity of money is _______ and money is changing hands ________

small, infrequently

a graph of the inflation rate in the US over the 20th century shows

some periods of deflation mixed with mostly positive rates of inflation before 1955 but only positive inflation after 1955

Residential fixed investment

spending by consumers and landlords on housing units

investment (I)

spending on (newly produced) capital, an asset used in future production, includes business and residential fixed investments, inventory investment

business fixed investment

spending on plant and equipment

An assumption of _______ is more plausible for studying the short-run behavior of the economy, while an assumption of ______ is more plausible for studying the long-run, equilibrium behavior of the economy.

sticky prices, flexible prices

capital

stock of equipment and structures used in production

the assumption that factor's supply is fixed will imply that the factors

supply curve is vertical

the assumption that the factors supply is fixed, implies the factor's

supply curve is vertical

an increase in the price of imported goods will show up in

the CPI but not GDP deflator

an increase in the price of goods bought by firms and the gov will show up in

the GDP deflator but not CPI

marginal product of labor

the additional output a firm produces as a result of hiring one more worker MPL=F(K,L+1)-F(K,L)

marginal product of labor (MPL)

the additional output produced by 1 additional unit of labor

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1 between 0 and 1 if MPC=0.7, MPS is 0.3

in the classical model, with fixed output, the supply and demand for goods and services are balanced by

the interest rate

in the classical model, with fixed output, the supply and demand for goods and services are balanced by:

the interest rate

in the classical model, according to the quantity theory of money and the fisher equation, an increase in money growth increases

the nominal interest rate

in a C-D production function, the marginal product of capital will increase if

the quantity of labor increases

in a CD production function, the marginal product of capital will increase if

the quantity of labor increases

velocity of money

the rate at which money changes hands

consumption function

the relationship between consumption spending and disposable income C=C(Y-T)

Investment Function

the relationship between the amount businesses plan to invest and the economy's income I=I(r)

value added

the value of output minus the value of the intermediate goods used to produce that output

quantity theory of money

theory that changes in the quantity of money lead to changes in nominal expenditure

Gross National Product (GNP)

total income earned by the nation's factors of production, regardless of where located GNP=GDP+ factor payments from abroad-factor payments TO abroad

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

unit of account

real wage of labor (real rental price of capital) is the price per unit of labor (or capital) measured in:

units of output

the real wage of labor (or real rental price of capital) is the price per unit of labor (or capital) measured in

units of output

consumption (C)

value of all goods/services bought by households including: - durable goods (long lasting, car) - nondurable goods (short lasting, food) - services

Why the CPI may overstate inflation

- Substitution bias (CPI uses fixed weights, so it cannot reflect consumer's ability to substitute toward goods whose relative prices have fallen) - Introduction of New Goods (The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights) - Unmeasured changes in quality (Quality improvements increase the value of the dollar but are often not fully measured)

assume the cobb douglas production function is parameter a=0.3. if capital and labor are paid their marginal products, they receive the shares of income:

0.3 and 0.7

CPI=

100 x (cost of basket in current year/cost of basket in base year)

if nominal GDP in 09 is $14 trillion and real GDP in 09 is $11 trillion, what is the GDP deflator

127

if the currency-deposit ratio =0.5 and the reserve deposit ratio =0.1, the money multiplier equals

2.5

market clearing

An assumption that prices are flexible, adjust to equate supply and demand.

demand equation

Qd = D(P,Y) shoes the quantity of consumer demand is related to price of goods and aggregate income

variables

Qd= quantity buyers demand Qs= quantity producers supply P= price Y=agg income Ps= price of input

supply equation

Qs=S(P,Ps) shows the quantity of producers supply is related to the price of goods and price of the input

discount rate

The interest rate on the loans that the Fed makes to banks

real money balances

The quantity of money expressed in terms of the quantity of goods and services it can buy; the quantity of money divided by the price level (M/P).

transactions velocity of money

The ratio of the dollar value of all transactions to the money supply.

investment depends on

The real interest rate I=I(r)

Velocity formula

V=PT/M where P- price T- transactions M- money

notation

W=nominal wage R= nominal rental rate P=price of output(price level) W/P= real wage R/P=real rental rate

decreasing returns to scale

Y2<zY1 situation in which output less than doubles when all inputs are doubled

money multiplier formula

amount of new money that will be created with each demand deposit, calculated as 1/Reserve ratio (rr)

If bread is produced by using a constant returns to scale production function, then if the:

amounts of equipment and workers both doubled; 2x as much bread will be produced

Fisher effect

an increase in expected future inflation drives up the nominal interest rate

in the classical mode, with fixed income a decrease in the real interest rate could be the result of

an increase in taxes

in the classical model, with fixed income a decrease in real interest rate could be the result of

an increase in taxes

classical model

assumption that wages and prices adjust to clear markets and that monetary policy doesnt influence real variables

G

gov spending

public saving is

government revenue minus gov spending

the unemployment rate

has never been 0 in the US

based on money growth rate and inflation rate in the US over decades, we can conclude that decades of high money growth tended to have ____ rates of inflation and decades of low money growth tended to have ______ rates of inflation

high, low

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment

higher, an increase

quantity theory of money and fisher equation show

how money growth affects nominal interest rate

government spending (G)

includes all gov spending on goods/services excludes transfer payments (unemployment)

the demand for real money balances is assumed to

increase as real income increases

a competitive, profit maximizing firm hires labor until then

price of output multiplied by the marginal product of labor equals the wage

a competitive, profit-maximizing firm hires labor until the

price of output multiplied by the marginal product of labor equals the wage

in the long run

prices are flexible

in the short run

prices are sticky- adjust sluggishly in response to supply/demand changes magazine publishers change prices ever 3-4 years

stock

quantity measured at a point in time (US capital stock was 10 trillion on jan 1,2021)

flow

quantity measured per unit of time us investment was 2 trillion DURING 2021

to end hyperinflation, a country may need fiscal reforms---a new gov trying to reduce its reliance on seigniorage by

raise taxes and cut spending

what is a variable measured in the physical unit

real interest rate

Fisher Equation

real interest rate = nominal interest rate - inflation rate