econ 410 tamu exam 2
steady state condition
# of employed who lose/leave their jobs = # of unemployed people who find jobs (s * E) = (f * U)
E
# of employed workers
U
# of unemployed workers
L
# of workers in Workforce (E + U)
Correlation between long run average real output growth g=((Yt/Yt-1)-1))& growth rate money supply is (Mew)=
0 (almost) g on y axis Mew on X
Correlation between long run average inflation(pie symbol) & growth rate of money and supply is (Mew) =
1 (almost) pie on y axis Mew on X
In the long run, what is the relationship between inflation and average growth rate of supply?
1 for 1
Reasons for wage rigidity
1. Minimum wage laws 2. Labor unions 3. Efficiency wages
capital accumulation formula
Change in k= savings(k) - depreciation(k)
what does the solow model predict
Countries with higher rates of savings & investment will be wealthier.
M2 money
M1 money plus less immediate forms of money, such as savings accounts, money market mutual fund accounts, money market deposit accounts, repurchase agreements, and small denomination time deposits.
M1 money
Measures money that can be spent immediately: currency, coin, travelers checks, funds in checking accounts
how to find v given:Nominal GDP & money supply
Nominal GDP/Money supply
The PtYt portion in the money demand equation is =
Nominal Output/GDP
Mt
Nominal money supply in period t
What relation does average growth rate of output have towards average growth rate of money supply?
None, they are unrelated
capital accumulation
The change in the capital stock= investment - depreciation
efficency wages
above-equilibrium wages paid by firms to increase worker productivity
consumption function in solow model
c = (1-s)y
when investment is less than depreciation
capital stock decreases (change in k>0)
when investment is greater than depreciation
capital stock grows (change in k<0)
Frictional unemployment
caused by the time it takes workers to search for a job
sectoral shifts
changes in the composition/type of demand across industries or regions of the country
In a boom, the actual rate of unemployment
falls below the natural rate
In the steady state of the Solow model
if investment is just enough to cover depreciation
insiders want to
increase wage
why is f (job finding) < 1
job search & wage rigidity in theory if f was = 1, natural rate of unemployment would be = 0
Policies to reduce natural rate of unemployment should be targeted at
long term unemployed
(1-s)y
marginal propensity to consume
What are the 3 functions of money?
medium of exchange, unit of account, store of value
outsiders want to
more jobs
Are credit cards money?
no they are loans/liabilities
velocity of money formula
nominal GDP/money supply
Unemployment Insurance (UI)
pays part of a worker's former wages for a limited time after the worker loses his/her job increases frictional unemployment because it reduces the opportunity cost of being employed, the urgency to find work, reduce f (the rate of job finding) increase in steady state unemployment
economic growth does what to the standards of living and poverty
raises standards of living & reduces poverty
f
rate of job finding
s
rate of job separation
in a recession, the actual unemployment rate
rises above the natural rate
U/L (steady state unemployment) is equal to
s/s+f
quantity theory of money
states that the key determinant for inflation and price level is the quantity of money supplied/issued by the central bank
k*=k0
steady state capital stock
Efficiency wages lead to
structural unemployment (real wages are above equilibrium level)
money
the asset that people use as a means of payment
natural rate of unemployment
the average rate of unemployment around which the economy fluctuates
money velocity
the rate at which money changes hands
If real wage is stuck above its equilibrium level ..
there are not enough jobs to go around
U/L
unemployment rate
When the union wage exceeds the equilibrium wage, what occurs
unemployment results
structural unemployment
unemployment that results from real wage rigidity and job rationing
