Macro Econ
Employment to Population Ratio
(# of employed/WAP) x 100
Monetary Base
reserves + currency held by non-bank public
Inferior Good
as income increases, the demand willl decrease
Producer Price Index definition
average of the prices received by producers of goods and services at all stages of the production process
Net exports =
balance of trade + balance of service
Fractional Reserve Banking System
bank keeps less than 100% of deposits as reserves
Does Income Tax Refund affect M1 or M2 or both?
both
Largest component of Investments
business fixed investments
Cyclical Unemployment
caused by a business cycle recession, firms don't want to hire
Political Business Cycle
central bank increases money supply and therefore RGDP to help incumbent get reelected
Shifts in Demand and Supply curve for US
changes in the D for foreign produced goods and services, changes in desire to invest in rest of world (changing interest rate with rest of world), changes in the expectation of currency traders about the FV of foreign currency
GDP=
consumption + investment + government purchases + net exports
Speculators
currency traders who buy and sell FX in attempt to profit from changing exchange rate
M1
currency, notes, deposits
Excess Burden from Tax
deadweight loss from a tax
A shift money demand curve to the left will cause a ____ in real GDP
decrease
An increase in required reserves leads to a ____ in money supply
decrease
Decrease in Aggregate Demand causes ____ in monetary base
decrease
If supply curve for loanable funds shifts right what will happen to the tax on interest income
decrease
Money demand shift left will cause ____ in R GDP
decrease
When Fed sells securities banks reserves:
decrease
Appreciation of the dollar leads to
decrease in exports, increase imports, decrease in NX, decrease in AD, decrease in RGDP
Contractionary Fiscal Policy
decrease in government spending
Tighter Monetary Policy
decrease in money supply causing decrease in money and increase in federal funds rate
Currency Debasement
decrease in value of money that occurs when its supply increases rapidly
A currency drain ____ the amount of bank reserves
decreases
The US has a trade ______ with all major trading partners and a trade ____ with every region of the world
deficit; deficit
Asymmetric Information
difference in 2+ parties access to relevant knowledge
How do you find the interest for a treasury bill?
divide amount of interest earned by price paid for bill and multiply by 100
4 goals of macroeconomics
economic growth, full employment, stable prices, balanced trade
2 objectives of policy makers in designing a tax system
efficiency and equity
Tax laws affect
efficiency and equity
Federal government cutting taxes to stimulate economy can be classified as
expansionary fiscal policy
Source for Comparative Advantage
factor endowments, comparative advantage with experience
Supply Shock
factors that raise per unit production cost
Equity
fair distribution of economic benefits
Tax Incidence
tax is efficient if it imposes a small excess burden of a tax between buyers and sellers
CPI=
(expenditures in current year/expenditures of base year) x 100
Hidden Actions
1 person knows more than another about an action she is taking
Hidden Characteristic
1 person knows more than another about attributes of g&s being sold
Simple Money Multiplier
1/RR
If money supply increases at 15% and R GDP increase at 5% inflation will be
10%
CPI reference base period
1982-84
Income Effect
As P increases households can't afford the same quantity
Twin Deficits
Budget deficit leads to current account deficit
Efficient tax systems impose small ____ and _____
DWL and administration burdens
Part of the spending on Caldecott Tunnel project in California came from the American Reinvestment Act. This is an example of ___ aimed at increasing RGDP and employment.
Discretionary fiscal policy
Federal Balance Sheet Liabilities
FRNs in circulation, bank's deposits
Monetary Policy
Fed actions to change money supply and interest rates
2 problems Fed has implementing the monetary policies
Fed must operate in real time when much of the data is unknown and Fed's control
GNP is more accurate than
GDP
Boeing makes planes in the US. Some are exported and some stay in the US. If price of planes decreases then
GDP deflator will decrease and CPI will not change
If price of used cars decreases in US by 10% then the GDP deflator and CPI will:
GDP: unchanged CPI: decrease
McDonalds produces in Korea but is US owned. It is included in ___ of US and ___ of Korea
GNP and GDP
two taxpayers in same economic circumstances should pay the same level of taxes
Horizontal Equtiy
M2
M1 + savings deposits + mutual funds + deposit accounts
Allocative Efficiency occurs at
Marginal Cost=Marginal Benefit
Limitations of PPP Theory
NFX rates do not always move to ensure that a $ has same purchasing power in the rest of the world
Relative Price
OC or ratio of one price to another
Extensive Economic Growth
Obtaining more or new resources, increase in capital or increase in labor hours
Always trade with lowest
Opportunity Cost
Law of Demand
P decreases when Qd increases, P increases when Qd decreases
Future Value
PV x (1 + i)^N
Intensive Economic Growth
Quality improvement in existing resources: change in human capital (increase in experience or education), development of new technology or better way of producing
Limitations of Discretionary Fiscal Policy
Recognition Lag, Legislative Lag, Implementation Lag, Effectiveness Lag, Evaluation and Adjustment Lag
Depreciation in US FX Rate
US g&s (tourism) become cheaper relative to foreign g&s which leads to increased exports and decreased imports and increase in US NX
Appreciation of US FX Rate
US g&s become more expensive relative to US g&s, US exports decrease imports increase and decrease of US NX
Open Market Purchases
US government buys securities, treasury bills and bonds from the public
Federal Balance Sheet Assets
US government securities, gold, foreign exchange, loans to banks
Capital Inflow
US investor buys foreign bond or builds factory
Problems with measuring unemployment
Underestimates true unemployment rate due to discouraged workers and underemployed Overestimates: false claim of unemployment and over qualified people
Not in Labor Force
WAP - LF
Cyclical unemployment is the result of
a slowdown in the economy
Efficiency Wage
above market pay that a firm pays to increase productivity
Cost-Push Inflation
abrupt increase in cost of raw material or energy input
RGDP
adjusted for base year prices but curent year quantity
Capital Stock
amount of capital at nation's disposal
Currency Appreciation
an increase in the market value of one currency relative to another
Law of Supply
as P increases Qs increases; as P decreases Qs decreases
Normal Good
as income increases, demand will increase
CPI designed to track prices of g&s of
family of 4 living urban
Foreign Direct Investment
firms build or buy facilities in foreign country
Foreign Portfolio Investment
firms buy stock from foreign countries
Discretionary Fiscal Policy
fiscal action that is initiated by Congress to deliberate change in government spending programs, government borrowing or taxes to stimulate or slow economy
Normal Unemployment
frictional and structural unemployment
Changes in PPI can give early sign of
future movement in CPI
If a country experiences productivity growth with an unchanging population the GDP ____
grew
Vertical Equity
higher income should pay more than lower income
RFX Rate determines
how much a country exports and imports
Purchasing Power Parity Theory
if $ buys same amount of g&s in all countries, then the NFX rate must reflect the Ps of g&s in the countries
New York Fed
implements policy, conducts open market pertains, stores gold for foreign banks, securities
GDP Deflator is only affected by products produced ___
in the same year
Variables that shift market demand
income, prices of related goods, tastes, population and demographics, expected future prices
A shift in the money demand curve to the right would _____ Real GDP
increase
Aggregate Demand increase will cause ___ in monetary supply
increase
Decrease in discount rate leads to ____ in money supply
increase
Expansionary Fiscal Policy
increase government spending, decrease tax
Change in M1
increase in bank reserves x money multiplier - currency held by public
Currency Drain
increase in currency held outside banks
Depreciation of the dollar leads to
increase in exports, decrease in imports, increase in NX, increase in AD, increase in RGDP
Physical and Human Capital Growth examples
increase in number of machines, better technology, better skilled workers, new discoveries about the process or product
Looser Policy
increase in the money supply
Looser Monetary Policy
increase monetary base which increases money and decreases federal funds rate
When Fed buys securities in open market operation and bank reserves _____ and therefore lending ______
increase; increase
Federal Funds Rate
interest rate on interbank loans for short periods
GDP doesn't count
intermediate goods or used goods
tax revenue and tax rate have an _____ relationship
inverse; Laffer Curve
Net Income on Investments
investment income received - income paid
Law requiring workers to retire at age 50 would cause PPF to shift
inward
BLS gathers data to endure measure of inflation is right because
keeps measurement honest and fair and free of politics, billions $ are at stake for change in 1% of CPI, congressional advisory commission
Assertion
law of demand must be flawed ex) the P and Q of roses both increase in February
Poverty Line
level of annual income equal to 3x the amount of $ needed to purchase the minimum quantity of food required for nutrition; adjusted for family size and inflation
Inflation Tax
loss people suffer when inflation reduces the purchasing power of their assets
The country with Comparative Advantage has the
lowest opportunity cost
2 reasons PPP theory doesn't hold in practice
many g&s not easily transported, tradable g&s produced in different countries not perfect substitutes
Market Equilibrium
market clearing point
Signaling
market response where an informed party reveals private info to an uninformed party
Screening
market response where uninformed party to induce informed party to reveal private info
NGDP
measured in current price and quantity
CPI definition
measures average change over time in the prices a typical urban family of 4 pays for g&s they buy
As interest rate declines, stock become a _____ attractive investment relative to bonds and this causes the demand for stocks and their price to ______
more; rise
Discount Rate
only banks can borrow, discount loans
Monetary policy tools used by Fed
open market operations, changing discount rate, manipulating RRR
Structural Unemployment
persistent mismatch between the skills or attributes of workers and the requirements of job
Main sources of economic growth
physical or human capital accumulation, technological change
Variables that shift supply
price inputs, technological change, prices of substitutes, number of firms, expected future prices
Arbitrage
process of taking advantage of differences in Ps for the same item in different market
Net Benefit
producer and consumer surplus
Autarky
production and consumption; Production Possibilities Frontier compared to Consumption Possibilities Frontier
Fed fears recession and decides to stimulate spending by increasing quantity of money. If Fed wants to increase money supply by $2,000,000 when required reserve ratio is 0.2 what should they do?
purchase $400,000 in bonds (400,000 x (1/.2)
Federal Tax System Evolution
raise tax revenue, be fair, influence behavior (sin tax)
High efficiency of tax system if it
raises same amount of revenue at a small cost to tax payers
Demand Pull Inflation
rapid and sustained inflation caused by over issuance of money and too much spending for too few goods
Real Foreign Exchange Rate
rate at which the g&s of one country trade for the g&s of another
Balance of Payments
record of country's trade with other countries
If consumers decide to save more income then this will cause a shift ____ in the supply curve for loanable funds
right
Eminent Domain
right of government to take property for a necessary public use
Lump Sum Tax
same amount for everyone regardless of earning or actions of a person; considered efficient because it doesn't influence a person's decisions on how much to work
Financial Intermediaries
savers indirectly provide funds to borrowers
In circular flow diagram households are:
sellers in markets for the factors of production
If there is an investment tax credit demand curve for loanable funds will:
shift right
Frictional Unemployment
short term unemployment from process of matching workers with jobs (seasonal employee)
Lorenz Curve
shows distribution of income by arranging incomes from lowest to highest on the vertical axis and indicating the cumulative fraction of income earned by each fraction of households on the horizontal axis
When inflation is low, the gap between nominal and real interest rate is
small
Greenhouse Effect
spend now, cost finally comes 70 or 80 years later
Investment
spending by firms on new factories, office buildings, machines and households on houses
Consumption
spending by households on g&s, not including new homes; divided into services, nondurable and durable goods
GDI
sum of income payments to households
What would happen to market for loanable funds if government decreased tax rate on interest income?
supply of loanable funds would shift right and investment would increase
National Income Accounting
system used by BEA
Tax Revenue=
tax base x tax rate
Tax Revenue - Government Spending =
tax revenue -(G + transfers + debt int)
Negative Income Tax
tax system that collects rev from high income households and gives transfers to low income households
2 factors are key to determining labor productivitiy
technology and quantity of capital per hour worked
Total control of the money supply is up to
the Fed
Shoe Leather Cost
the OC of holding cash is high
Law of One Price
the P of the same g&s in different area should be the same
Marginal Cost
the opportunity cost of producing one more unit
Marginal Tax Rates
the percentage paid in taxes on an extra dollar of income
When competitive equilibrium is achieved
the total net benefit to society is maximized
Effectiveness Lag
time it takes the plan to work and feeling their effects on RGDP
Evaluation and Adjustment Lag
time it takes to evaluate if it worked or changed
OC of Inflation on society
time resources spent coping with inflation: foregone g&s, income, leisure
Recognition Lag
time takes to figure out fiscal policy actions are needed
Per Unit Production Cost
total input cost/units of output
Average Tax Rates
total tax paid/over income
Not included in Government Purchases
transfer payments, interest on debt
Net Transfers
transfers made - received
Fiscal Policy
use of federal budget
Open Market Opperations
used to change money supply
Rational Choice
uses the available resources most efficiently to satisfy the wants of the decision market at the time of decision
N FX Rate (e)
value of US $ in terms of another country's currency
Bank Reserves
vault cash + deposits with the Fed
If velocity is constant, growth rate is
zero