marco polo

How do we measure inflation?

% change in the consumer price index - the CPI

How do you calculate growth rates?

%change in real gdp (or real gdp per capita) = (Xtoday-Xlast year)/Xlastyear where X=real GDP or per capita real gdp

21st century housing bubble (subprime crisis)

21st century housing bubble- Housing was stable asset for long time. Home price growth ≅ wage growth rate. 21st century, home price no longer grow same rate; housing now volatile and speculative.

What was the long-run average rate of growth in U.S. real GDP? Real GDP per capita?

3% % pf growth in the long run 2% real GDP/population

SIFI (systemically important financial institution)

A SIFI is a firm that U.S. federal regulators determine would pose a serious risk to the economy in the event of its collapse.

What is Full-employment (Structural Deficit)? Why is it likely worse than the ordinary deficit?

A budget deficit that results from a fundamental imbalance in government receipts and expenditures.

Who were the Luddites (very simply) and why do they matter now?

A member of any of the bands of English workers who destroyed machinery that they believed was threatening their jobs. Today we have advanced technology which may take away jobs.

Whats a speculative asset bubble?

A spike in asset values within a particular industry, commodity, or asset class that is fueled by speculation as opposed to fundamentals of that asset class

What is meant by trickle-down economics?

An economic theory that advocates reducing taxes on businesses and the wealthy in society as a means to stimulate business investment in the short term and benefit society at large in the long term.

Animal Spirits

Animal spirits are human emotion that drives consumer confidence.

Leverage

Banks loaned people money at low down payments and when housing market crashed, people couldn't pay back and banks got bipped

How do you calculate compound growth rates?

C(1+r)^t: initial deposit (1+ int. rate)^#years invested

How do we measure the level of prices (what indices-CPI, Implicit GDP deflator)?

CPI-(Consumer Price Index) measures changes in the price level of market basket of consumer goods and services purchased by households. Implicit GDP deflator-a measure of the level of prices of all new, domestically produced, final goods and services in an economy.

What is capital? Human capital?

Capital = wealth in form of money & assets Human capital = the value of skills, knowledge, and intelligence an individual possesses

What harm does unanticipated inflation cause?

Causes wealth to transfer from lenders to borrowers & distortion of signaling function of prices Can also cause increases in taxes while real income doesn't change

Why was the yuan undervalued?

China keeps it undervalued to give China advantage in export market Increases other countries trade deficits with China

Why is Malthus' law still relevant?

Climate change/ natural disasters still happen

What is the basic idea of comparative advantage?

Countries can specialize in producing goods they have a relative advantage in (lower opportunity cost) and they trade with other countries for the other goods

How did the gold standard affect exchange rates? Balance of payments?

Countries had fixed exchange rate against other countries Gold would flow in/out of country to correct trade deficit = automatic adjustment

What are some benefits of international trade? Some of its harms?

Countries specialize in producing goods they have comparative advantage in Trade leads to increased competition and transmission of ideas and tech Domestic producers or consumers can face higher prices to sell/buy due to international trade

What are three causes or types of unemployment?

Cyclical-unemployment closely tied to the business cycle, like higher unemployment during a recession. Frictional-unemployment that occurs as workers move between jobs. Structural-unemployment that occurs because individuals lack skills valued by employers.

What can cause inflation in the short-run?

Demand and supply shocks

What determines output?

Determined by capital, labor, and productivity

What is the rule of 72? (Or 70)? How do you use it?

Determines how long it takes for an investment to double Time it takes to double = 72/g (growth rate)

Dot com bubble

Dot com bubble- The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies.

How does long-run U.S. growth generally compare with Europe? Asia? Africa?

Europe = rapid economic growth similar to US Asia = China has been growing rapidly Africa = Slower Growth

How do exports and imports affect the macroeconomy in the SR?

Exports increase aggregate demand Imports reduce aggregate demand

What are the advantages of floating exchange rates? Fixed?

Floating exchange rates auto balance supply and demand for currencies Fixed exchange rates reduce uncertainty in international trade

How and why do we discount future $ values?

Future Value (FV) = Present Value (PV) x (1+(interest rate x number of years)) •We discount because money earns INTEREST and whenever we must compare money in the future with money in the present we must discount the future value

What harm does anticipated inflation cause?

If anticipated one can index against it - salaries, prices, tax rates can all automatically increase with inflation (menu cost-the cost it takes to constantly change prices and shoe leather costs-the time and effort to counteract inflation)

Why do we have a current account deficit, and what does it imply?

Imports > exports Weakens demand and not sustainable in long run Reduces aggregate demand and jobs

How does a strong currency affect the domestic economy?

Imports are cheaper Exporters will suffer Foreign companies will gain more

What is the role of technology in economic growth?

Increase in labor productivity, more human capital, output increases, rapid increase in supply, Decrease in cost of production

What can cause inflation in the long-run?

Increase in the money supply

What is the largest source of federal government revenue? Largest spending item?

Individual income tax and Social Security.

Which is considered more dangerous, inflation or deflation?

Inflation is a necessary evil. Only high inflation is bad. (a little bit of inflation is good) Whereas, deflation is much worse, as it causes layoff and decreases purchasing power and decreasing the growth further. It's not easy to come out of that situation.

What's the difference between inflation and an increase in prices?

Inflation is ongoing, price increase in one time or short-period.

What causes the short-run Phillip's curve to shift up?

Inflationary expectations; when aggregate supply shifts left

What is loanable funds theory?

Interest rates are determined by supply and demand (savings and investment)

What was Bretton Woods?

International conference after WWII which established a fixed exchange rate system for the major currencies that lasted until the early 1970s Replaced by current mostly flexible exchange rate systems. Established IMF and World Bank

What's the short-run Phillip's curve? What policy does it imply?

Inverse relationship between unemployment and inflation, fiscal policy

Why is the LR Phillips curve vertical and what does it imply for policy?

It illustrates there is no permanent trade-off between inflation and unemployment. Policies cannot really affect anything in the long run.

What is deflation and what harm does it cause?

It is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Possible vicious cycle in which falling demand lowers prices, causing consumers and business to postpone purchases reducing demand further. Also deflation RAISES the real interest rate and further reduces investment

What is Okun's law?

It pertains to the relationship between the U.S. economy's unemployment rate and its gross national product (GNP). It states that when unemployment falls by 1% (or .5%), GNP rises by 3%.

How does an increase in saving affect the economy in the long run? (short-run?)

LR = S up -> I up -> Productivity up -> Economy up SR = S up -> C down -> D down -> Y down -> Economy down

Shadow banking sector

Lending and other financial activities conducted by unregulated institutions or under unregulated conditions

What are government entitlement programs and what LR issues do they raise?

Medicaid, Medicare, Social Security, etc.

Funding mismatch

Mismatch generally refers to incorrectly or unsuitably matching assets and liabilities

What impact does an open economy (trade) have on the effectiveness of monetary policy? On fiscal policy?

Monetary policy more powerful Fiscal policy less powerful This is due to exchange rate effects

What determines prices in the long run?

Money supply only

What's the relation between Fed credibility and inflation? Between inflation expectations and inflation? Between unemployment and inflation?

More Fed credibility -> I up -> inflation down Inflation expectations causes the expected inflation rate to occur Unemployment and inflation are inversely related

Why do we have a capital/financial account surplus and what does it imply?

Net purchases of u.s. Real and financial assets. In debt, not sustainable in long run due to fear of depreciation of us dollar

What does it take to be counted as unemployed?

People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.

What's wrong with Malthus' law? (Why hasn't it held for developed countries?)

Population grows too fast, ignores increases in capital, technology, and population control

Systemic risk

Possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.

What affects the present value of a future amount?

Present value - The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows

Deregulation

Process of removing or reducing state regulations Too big to fail/moral hazard- Institutions taking on more risk than is optimal, believe government will bear cost of failure

What role does capital play in the macroeconomy in the SR (we increase capital by investment which impacts agg D in the SR)? LR (more capital contributes to economic growth)?

SR (nominal) - Increase in AggD -> increase D in labor LR (real wage) - D and S for labor

Securitization and derivatives

Securitization is the procedure whereby an issuer designs a financial instrument by merging various financial assets and then markets tiers of the repackaged instruments to investors.

What are the determinants of exchange rates in the short-run? In the long-run?

Short run- Supply and demand for currency derived from supply and demand for goods and services Long-run- relative price level, productivity, trade barriers, import/export demand

South Seas Bubble

South Seas Bubble- Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by the later half of 1720. Simply put, a massive amount of money was lost

What determines interest rates?

Supply and Demand for loanable funds (Savings and Investment)

What is Say's law?

Supply is created by demand

Define inflation.

Sustained increase in general level of prices.

Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (CFPB) is a regulatory agency charged with overseeing financial products and services that are offered to consumers.

Financial Stability Oversight Council

The Financial Stability Oversight Council is a committee led by the U.S. Treasury Secretary that is charged with monitoring the financial system, including identifying potential threats to the country's financial stability.

What is interest?

The change for the privilege of borrowing money (expressed as a percentage)

What's the long-run Phillip's curve? What's the implication of the slope of the long-run Phillip's curve?

The long-run Phillips curve is vertical and implies that there is no tradeoff between inflation and unemployment

What is hidden unemployment, discouraged workers?

The number of people who do not have work but who are not counted in government reports, for example, people who have stopped looking for a job and people who work less than they want to.

What is productivity? Why does it matter to economic growth?

The quantity of output produced by one unit of input within one unit of time. Increased economic growth if more productivity

Define the natural rate of unemployment (NAIRU). Why does it matter?

The unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time.

Why does China's fixed exchange rate system present dangers to China?

They lose control of domestic money supply due to loss of control of monetary policy Runs risk of inflation Limit capital mobility

Tulip Mania

Tulip Mania- was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637

What is the twin deficit problem? The tri-lemma?

Twin deficit- government budget deficit may lead to current account deficit Imports- exports = (gov spending - Taxes) + (investment - saving) Tri-lemma- country can only choose 2 of 3 desirable things: Fixed exchange rate (reduces uncertainty in international trade) Discretionary monetary policy (control the money supply to control inflation) Capital mobility (allow funds to freely flow in and out of country

How do we define the unemployment rate? The Labor Force participation rate?

Unemployment rate-calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. Labor Force participation rate- the section of working population in the age group of 16-64 in the economy currently employed or seeking employment.

What is hyperinflation? What causes it? What are the consequences? What's the cure?

VERY high inflation. Money loses role as medium of exchange, must shift to barter or other currencies.

What's the relation between wages, prices and productivity?

W/P=MP or W=PxMP and %change W = % change P + % change MP.

Wealth effect

When the value of stock portfolios rises due to escalating stock prices, investors feel more secure about their wealth and spend more W up->C up->D up->p,y up

Dodd-Frank

a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008.

Free trade

aids in economics growth, comparative advantage

Taxes

can thwart private investment but increase funds available for government expenditures

Fire sale

consists of selling goods or assets at heavily discounted prices, where the seller is in financial distress.

Creative Destruction

continuous progress and improves standards of living

Political structure

determines how the government responds with fiscal and monetary policy and fluctuations in GDP

Human capital

developed through education

Property rights

economics freedom/political freedom

Neo-Classical - Solow Model

economy grows until it hits a steady state unless technology

Savings

helps growth in long run, hinder it in short run Education: develops human capital

Industrial policy

important to maximize production and employment

Research and development

leads to greater technology and output capabilities

Population growth

more population leads to greater production and technology capabilities

Classical/Malthusian

population grows geometrically, food supply arithmetically

Volcker Rule

separates investment banking, private equity, and proprietary trading sections of financial institutions from their consumer lending arms.

Natural resources

serve as determinant for supply and can hinder economics growth if in shortage

Capital

serves as part of investments

Trickle-down economics

tax breaks to higher income citizens or businesses will leave more disposable income to be transferred to the poorer members or society

Endogenous or New Growth Theory

technology change creates economic growth

What is purchasing power parity theory?

the exchange rate between two countries is equal to the ratio of the currencies' respective purchasing power

Deleveraging

the process or practice of reducing the level of one's debt by rapidly selling one's assets.

According to marginal productivity theory, what is a key determinant of the real wage (in theory)?

wages are paid at a level equal to the marginal revenue product of labor: MRP