question
layout
answer
75 minutes
27 questions
20 mult choice and true/false
(most mult will be from 12 and 7, and maybe like 5 questions from 18)
7 short answer questions
(most from 18)
2 extra credit short answer questions
chapters 12, 17, and 18
know equations!!!
27 questions
20 mult choice and true/false
(most mult will be from 12 and 7, and maybe like 5 questions from 18)
7 short answer questions
(most from 18)
2 extra credit short answer questions
chapters 12, 17, and 18
know equations!!!
question
chapter 12
answer
long-run economic growth
question
standard of living
answer
y/population = (real output, aka GDP)/ population
growth rate in real GDP per person shows the growth in the level of the standard of living over time
standard of living measures both well-being of the nation and the individuals
most important factor determining standard of living is PRODUCTIVITY
growth rate in real GDP per person shows the growth in the level of the standard of living over time
standard of living measures both well-being of the nation and the individuals
most important factor determining standard of living is PRODUCTIVITY
question
PRODUCTION FUNCTION
answer
Solow Growth Model
Y = A * F(K, L, H, N)
Y is real gdp or output
A is technology
K physical capital
L is labor
N natural resources
F () just shows how K,L,H,N work together
shows how output is created in an economy (supply side)
Y = A * F(K, L, H, N)
Y is real gdp or output
A is technology
K physical capital
L is labor
N natural resources
F () just shows how K,L,H,N work together
shows how output is created in an economy (supply side)
question
labor productivity
answer
Y/L = real output GDP / Labor input
labor input can be employment or hours
shows the quantity of goods/services produced from each unit of labor input
explains differences in living standards around the world
labor input can be employment or hours
shows the quantity of goods/services produced from each unit of labor input
explains differences in living standards around the world
question
per capita production function
or
LABOR PRODUCTIVITY
or
LABOR PRODUCTIVITY
answer
Y/L = A * F(K/L, H/L, N/L, 1)
Same as production function, just divided by labor, making it labor productivity.
Increases to anything on the right side of the equation leads to long-run productivity growth! Thus, grows standard of living
Same as production function, just divided by labor, making it labor productivity.
Increases to anything on the right side of the equation leads to long-run productivity growth! Thus, grows standard of living
question
labor productivity variables
answer
A is technology
Makes physical/human capital and natural resources more efficient, increasing productivity and boosting long-run GDP
ex.
Farming today vs 200 years ago Improving capital used to farm, improving productivity
K is capital
K/L is physical capital per worker (like equipment).
More capital a worker has, more they can produce.
H is human capital
H/L is human capital per worker, like education
The more education/experience someone has, the more productive the worker is
N is natural resources
N/L is natural resources per worker
The more natural resources a worker has, the more they can produce.
Kind of strained, can't really increase these except by mining more
1 is labor divided by labor
Makes physical/human capital and natural resources more efficient, increasing productivity and boosting long-run GDP
ex.
Farming today vs 200 years ago Improving capital used to farm, improving productivity
K is capital
K/L is physical capital per worker (like equipment).
More capital a worker has, more they can produce.
H is human capital
H/L is human capital per worker, like education
The more education/experience someone has, the more productive the worker is
N is natural resources
N/L is natural resources per worker
The more natural resources a worker has, the more they can produce.
Kind of strained, can't really increase these except by mining more
1 is labor divided by labor
question
how can you increase these productivity factors??
answer
GOVERNMENT
Encourage investment in physical/human capital
ex.
Tax breaks, subsidies, or research grants for tech
Encourage production efficiency by protecting property rights and maintaining political stability.
No one wants to invest in your country if it's going to be in an uproar in a month
Encourage investment in physical/human capital
ex.
Tax breaks, subsidies, or research grants for tech
Encourage production efficiency by protecting property rights and maintaining political stability.
No one wants to invest in your country if it's going to be in an uproar in a month
question
capital per worker and output per worker graph
(K/L) AND (Y/L)
(K/L) AND (Y/L)
answer
Increasing always, but increases less and less
Demonstrates diminishing returns to capital.
Will always add to productivity, but adds less and less each time,
so Concave down
ex.
Family and shoveling driveway
Demonstrates diminishing returns to capital.
Will always add to productivity, but adds less and less each time,
so Concave down
ex.
Family and shoveling driveway
question
catch-up effect
answer
Countries that start off poor tend to grow more rapidly than countries that start off rich
so productivity slope is a lot faster for these countries than first world ones,
shows diminishing marginal returns
so productivity slope is a lot faster for these countries than first world ones,
shows diminishing marginal returns
question
chapter 17
answer
determinants of money?
question
value of money
answer
1/P
P is price level
1 is $1
as prices increase, value of money decreases
P is price level
1 is $1
as prices increase, value of money decreases
question
money GRAPH
answer
Money demand.
downward sloping
as prices increase (value of money decreases), you demand more money to pay for the higher priced goods.
so prices, and thus demand, increase as you move left across x-axis
Money supply
vertical, set by the Fed.
An increase in the money supply by the Fed (open market purchase of gov bonds) will shift the money supply curve to the right
When you shift, move from M1 to M2
downward sloping
as prices increase (value of money decreases), you demand more money to pay for the higher priced goods.
so prices, and thus demand, increase as you move left across x-axis
Money supply
vertical, set by the Fed.
An increase in the money supply by the Fed (open market purchase of gov bonds) will shift the money supply curve to the right
When you shift, move from M1 to M2
question
QUANTITY THEORY OF MONEY
answer
Quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflation rate
THEREFORE, AN INCREASE IN THE MONEY SUPPLY CAUSES INFLATION
Remember, inflation is the increase in all nominal prices, this includes wages!!
THEREFORE, AN INCREASE IN THE MONEY SUPPLY CAUSES INFLATION
Remember, inflation is the increase in all nominal prices, this includes wages!!
question
CLASSICAL DICHOTOMY
answer
Variables can be separated into real and nominal variables
Nominal variables are influenced by the quantity of money, and money is irrelevant for determining real variables
Nominal variables are influenced by the quantity of money, and money is irrelevant for determining real variables
question
MONETARY NEUTRALITY
answer
Money is neutral and does not affect real variables (under classical dichotomy)
Relevant in the long-run!! Holds in long-run, doesn't really hold in short-run
Relevant in the long-run!! Holds in long-run, doesn't really hold in short-run
question
QUANTITY EQUATION
answer
MV=P*Y
M is quantity of money or money supply
V is velocity of money (How fast $1 moves hands in economy)
P is prices
Y is real GDP
Therefore, P*Y is nominal GDP
There has to be enough money moving around in economy for each good/service to be sold
M is quantity of money or money supply
V is velocity of money (How fast $1 moves hands in economy)
P is prices
Y is real GDP
Therefore, P*Y is nominal GDP
There has to be enough money moving around in economy for each good/service to be sold
question
THE TWO ASSUMPTIONS OF THE QUANTITY EQUATION
answer
Velocity (V) is constant over time
As shown by data
Doesn't change much over time
Y is a real variable Is not affected by money in the long-run
Monetary neutrality
Therefore, when Fed increases M, P increases proportionally!
V and Y are constant, so if M increases then P has to increase
ex.
Money supply increases by 20%, prices increase by 20%
As shown by data
Doesn't change much over time
Y is a real variable Is not affected by money in the long-run
Monetary neutrality
Therefore, when Fed increases M, P increases proportionally!
V and Y are constant, so if M increases then P has to increase
ex.
Money supply increases by 20%, prices increase by 20%
question
fisher effect
answer
When Fed increases the rate of money growth (increases inflation), the nominal interest rate increases proportionately!
The real interest rate is not affected Monetary neutrality ^I = r + ^pi
Crucial for understanding changes in nominal interest rate
The real interest rate is not affected Monetary neutrality ^I = r + ^pi
Crucial for understanding changes in nominal interest rate
question
INFLATION FALLACY
answer
Inflation itself does not reduce people's real purchasing power in the long-run
Why?
Because nominal incomes rise with the increasing price level
Why?
Because nominal incomes rise with the increasing price level
question
inflation tax
answer
Revenue gov raises by printing money (purchase goods/services with new money
Not an actual tax, just increases money supply, causes inflation/hyperinflation
Not an actual tax, just increases money supply, causes inflation/hyperinflation
question
COSTS OF INFLATION
answer
shoeleather costs
(cost of time and money to get to bank to get more money)
menu costs
(cost to change prices in businesses, i.e print new menus)
relative-price variability and the misallocation of resources
(inflation caused by price variability.
distorts consumer choices when purchasing, can lead to misallocation of resources, i.e changing spending decisions)
tax distortions
(tax on profits made by selling asset for more than purchase price, like housing or stocks,
as well as taxes on interest income)
confusion and inconvenience
(tough to keep track of inflation)
not gonna be asked about unexpected costs, but will be asked about costs of expected inflation ^
(cost of time and money to get to bank to get more money)
menu costs
(cost to change prices in businesses, i.e print new menus)
relative-price variability and the misallocation of resources
(inflation caused by price variability.
distorts consumer choices when purchasing, can lead to misallocation of resources, i.e changing spending decisions)
tax distortions
(tax on profits made by selling asset for more than purchase price, like housing or stocks,
as well as taxes on interest income)
confusion and inconvenience
(tough to keep track of inflation)
not gonna be asked about unexpected costs, but will be asked about costs of expected inflation ^
question
chapter 18
answer
open economy
question
open economy
answer
Economy that interacts freely with other economies around the world
Y=C+I+G+NX NX=X-M
Net exports
Exports-imports
Trade surplus
Positive net exports NX>0 Exports>imports
Trade deficit
Negative net exports NX<0
Imports>exports
Y=C+I+G+NX NX=X-M
Net exports
Exports-imports
Trade surplus
Positive net exports NX>0 Exports>imports
Trade deficit
Negative net exports NX<0
Imports>exports
question
FOREIGN DIRECT INVESTMENT
FDI
FDI
answer
capital invested and operated by foreign firm
ex.
Ford (US company) opens and operates a car factory in Mexico
ex.
Ford (US company) opens and operates a car factory in Mexico
question
FOREIGN PORTFOLIO INVESTMENT
FPI
FPI
answer
Investment financed with foreign money but operated by domestic residents
More common than FDI
Includes bonds and stocks
ex.
McDonald's funds opening a company in Mexico, but is operated by a Mexican company
More common than FDI
Includes bonds and stocks
ex.
McDonald's funds opening a company in Mexico, but is operated by a Mexican company
question
Net capital outflow
NCO
NCO
answer
Purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Equation
NCO = purchase of foreign assets by domestic residents - purchase of domestic assets by foreign residents
Purchasing foreign assets through FDI or FPI
ex.
When Ford (US company) establishes a factory in Mexico, NCO increases as US capital flows to Mexico (FDI)
McDonald's funds a new store in Mexico, NCO increases as capital flows to Mexico (FPI)
NCO = NX
Equation
NCO = purchase of foreign assets by domestic residents - purchase of domestic assets by foreign residents
Purchasing foreign assets through FDI or FPI
ex.
When Ford (US company) establishes a factory in Mexico, NCO increases as US capital flows to Mexico (FDI)
McDonald's funds a new store in Mexico, NCO increases as capital flows to Mexico (FPI)
NCO = NX
question
NOMINAL EXCHANGE RATE
NOMINAL ER
NOMINAL ER
answer
The rate at which a person can trade a currency for another currency from a foreign country
Expressed as number of foreign currency to one domestic currency
ex.
If 1 US dollar is worth 80 Japanese yen, nominal exchange rate is 80/1 = 80 yen per USD
Expressed as number of foreign currency to one domestic currency
ex.
If 1 US dollar is worth 80 Japanese yen, nominal exchange rate is 80/1 = 80 yen per USD
question
REAL EXCHANGE RATE
REAL ER
REAL ER
answer
Function
Real ER = e P/P
E is nominal ER
P is domestic price
P* is foreign price
Shows the rate at which countries can trade goods/services with each other
When real er < 1 goods/services cheaper in domestic markets
When Real ER > 1, more expensive in domestic markets
Real ER = e P/P
E is nominal ER
P is domestic price
P* is foreign price
Shows the rate at which countries can trade goods/services with each other
When real er < 1 goods/services cheaper in domestic markets
When Real ER > 1, more expensive in domestic markets
question
DIFFERENCE BETWEEN REAL AND NOMINAL ER
answer
Nominal er measures the rate at which a person can trade different currencies
Real ER measures the rate at which a person can trade goods/services between countries
Real ER measures the rate at which a person can trade goods/services between countries
question
PURCHASING POWER PARITY
PPP
PPP
answer
In the long-run, a unit of any given currency should be able to buy the same quantity of goods/services in all countries
All countries should have same real cost
Aka, the real ER should be equal to 1 E P/P = 1
Shows that the real value of currencies can buy same amount of goods/services regardless of the country
Otherwise, arbitrage opportunities exist
All countries should have same real cost
Aka, the real ER should be equal to 1 E P/P = 1
Shows that the real value of currencies can buy same amount of goods/services regardless of the country
Otherwise, arbitrage opportunities exist
question
arbitrage
answer
buy from cheaper country/area and sell in more expensive countries/areas
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