Macro Exam 1

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Boing builds an airplane to be sold next year

Investment

Boing sells an airplane to US Air Force

government purchases

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and sells it to a baker for $3. The baker uses the flour to make bread and sells it to an engineer for $6. The engineer eats the bread. What is the value added by each person. What is the bread's contribution to GDP?

$2 added by miller $3 added by the baker Contribution to GDP: $6 b/c GDP measures the consumption of all finished goods

unemployment rate formula

(# unemployed persons/ labor force (includes employed and unemployed)) x100

Real GDP Formula 2014

(2014 price of apples x 2014 quantity of apples) + (2014 price of oranges x 2014 quantity of oranges)

Real GDP for 2015 w/ base year 2014

(2014 price of apples x 2015 quantity of apples) + (2014 price of oranges x 2015 quantity of oranges)

labor force participation rate

(labor force/ adult population)x 100

Growth Rate formula

(new - old)/ old

Inflation Rate formula

(new − old)/old × 100 *Using two GDP deflator numbers or CPI numbers

GDP deflator formula

(nominal GDP/ real GDP) x100

Nominal GDP formula 2014

(price of apples x quantity of apples) + (price of oranges x quantity of oranges)

What makes the demand for an economy's output of goods and services equal the supply?

Equilibrium interest rate

Closed classical economy (increase in govt purchases)

No change in Y No change in C Decrease in S Decrease in I Increase in r

Small open classical economy (increase in govt purchases):

No change in Y No change in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon

Suppose that house price drop significantly and households feel less wealthy, leading to a decrease in autonomous consumption. Analyze the effects of this change in household behavior on real output, unemployment, consumption, national saving, investment, and the real interest rate in a closed classical economy.

No change in Y No change in U Decrease in C Increase in S Increase in I Decrease in r

Use the closed classical economy to analyze the effects of a decrease in taxes

No change in Y No change in U Increase in C Decrease in S Decrease in I Increase in r

Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (c) Decrease in taxes

No change in Y No change in U Increase in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon

Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (d) Increase in autonomous consumption

No change in Y No change in U Increase in C Decrease in S No change in I (r = r*) Decrease in NX Increase in epsilon

Use the closed classical economy to analyze the effects of an increase in government purchases

No change in Y No change in U No change in C Decrease in S Decrease in I Increase in r

Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (a) Decrease in government purchases

No change in Y No change in U No change in C Increase in S No change in I (r = r*) Increase in NX Decrease in epsilon

Analyze the effects of a one-time decrease in the level of the money supply in a closed classical economy. In particular, what happens to real output, unemployment, consumption, national saving, investment, the real interest rate, and price level?

No change in Y No change in U No change in C No change in S No change in I No change in r Decrease in P

Use the classical model of a small open economy to analyze the effects of the following on real output, unemployment, consumption, national saving, investment, the trade balance, and real exchange rate. (b) One-time increase in the domestic money supply

No change in Y No change in U No change in C No change in S No change in I (r = r*) No change in NX No change in epsilon

Large open classical economy (increase in govt purchases):

No change in Y (same in both cases) No change in C (same in both cases) Decrease in S (same in both cases) Decrease in I (from closed) Increase in r (from closed) Decrease in NX (from small open) Increase in epsilon (from small open)

If inflation falls from 8 to 5 percent, what happens to real and nominal interest rates according to the Fisher effect?

Nominal = 3% Real = no change

Functions of money

a store of value, a unit of account, medium of exchange

store of value

a way of transferring purchasing power from the present to the future

Boeing sells an airplane to Amelia Earhart

consumption

Boeing sells an airplane to American Airlines

consumption

Boeing purchases a new computer from IBM

investment

I purchase a newly constructed house

investment

What determines consumption?

level of disposable income

commodity money

money that is intrinsically useful and would be valued even if it did not serve as money (i.e. gold)

Fiat money

money that is not intrinsically useful and is valued only because it is used as money (i.e. dollar bills)

Boeing sells an airplane to Air France

net exports

Fisher Effect

real interest = nominal rate - expected rate of inflation

What determines investment?

real interest rate

medium of exchange

the item widely accepted in transactions for goods and services

unit of account

the measure in which prices and other accounting records are recorded

Nominal Exchange Rate

the rate at which one country's currency trade for another country's currency

Real Exchange rate

the rate at which one country's goods trade for another country's goods

What determines the natural rate of unemployment?

the rate of job separation the rate of job finding

frictional unemployment

the unemployment that results because it takes time for workers to search for the jobs that best suit their skills and tastes

structural unemployment

the unemployment that results from rage rigidity and job rationing


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