question
Labor force(L)
answer
The sum of employment and unemployment
question
Employment (N)
answer
The number of people who have a job
question
Unemployment (U)
answer
The number of people who don't have a job, and have last looked for work during the last 4 weeks, and are available for work.
question
π’πππππππ¦ππππ‘ πππ‘π
answer
ππππππππ¦ππππ‘/πΏππππ πΉππππ
question
πΈπππππ¦ππππ‘ ππππ’πππ‘πππ πππ‘ππ
answer
πΈπππππ¦ππππ‘/ πΆππ£πππππ ππππππ π‘ππ‘π’π‘πππππππ§ππ ππππ’πππ‘πππ
question
Discouraged worker
answer
Would like to be employed
Has given up searching
No longer counted as unemployed, rather not in the labor force
Has given up searching
No longer counted as unemployed, rather not in the labor force
question
Inflation Rate
answer
the rate at which the price level increases
question
Deflation
answer
decrease in the price level
question
calculating πΌπππππ‘πππ πππ‘π
answer
πΆπ’πππππ‘ πππππ πΏππ£ππ β ππππ£πππ’π πππππ πΏππ£ππ/ ππππ£πππ’π πππππ πΏππ£ππ
question
πΊπ·π ππππππ‘ππ ππ π¦πππ π‘
answer
πππππππ πΊπ·π ππ π¦πππ π‘/π
πππ πΊπ·π ππ π¦πππ π‘
question
Computing the inflation rate
answer
Calculate GDP deflator and use percentage change formula
question
Consumer Price Index (CPI)
answer
Measures the average price of consumption or cost of living
question
calculating CPI
answer
πΆππΌt= πΆππ π‘ ππ π΅ππ πππ‘t/ πΆππ π‘ ππ π΅ππ πππ‘base
question
Calculate the inflation rate using the percentage change formula
answer
πΆππΌtβ πΆππΌt-1/πΆππΌt-1
question
CPI vs GDP deflator differ due to...
answer
Imported goods not included in GDP deflator
Example: oil
Investment goods not included in CPI calculations
Example: tractor
Example: oil
Investment goods not included in CPI calculations
Example: tractor
question
Trouble With Inflation
answer
All prices don't increase at the same rate
Affects real wages
Affects relative prices
Affects real wages
Affects relative prices
question
Okun's Law
answer
the negative relationship between output growth and unemployment
question
Phillips curve
answer
the negative relationship between the inflation rate and the unemployment rate
question
Consumption includes...
answer
Goods - tangibleβ’
Nondurablesβ’
Durablesβ’
Services - intangibleβ’
Rent or imputed rent
Nondurablesβ’
Durablesβ’
Services - intangibleβ’
Rent or imputed rent
question
Investment
answer
Does NOT refer to stocks and bonds
Mostly purchase by businesses
Or consumers for business purposes
New homes are included
Inventory Investment
Inventories are remainder of what is produced that is not sold
Can be positive or negative
Mostly purchase by businesses
Or consumers for business purposes
New homes are included
Inventory Investment
Inventories are remainder of what is produced that is not sold
Can be positive or negative
question
Government Spending
answer
Government consumption and investment purchases...
National defense
Public employees
Roads
Bridges
National defense
Public employees
Roads
Bridges
question
govt spending does NOT include
answer
taxes and transfers!
question
Net Exports
answer
the difference between exports and imports
question
Trade balance = Exports - Imports
answer
Exports > Imports is a trade surplus
Imports > Exports is a trade deficit
Imports > Exports is a trade deficit
question
Demand for Goods
answer
π β‘ C + I + G + (X β IM)
question
demand for goods assumptions
answer
Firms produce identical goods
Firms supply any amount of the good at price level P
Closed economy, no foreign consumption or production
Firms supply any amount of the good at price level P
Closed economy, no foreign consumption or production
question
Consumption decisions depend on:
answer
Disposable Income πΆ = πΆ(YD)
Necessities
Consumer's feelings about the future
Necessities
Consumer's feelings about the future
question
Consumption (C)
answer
πΆ = π0+ π1(πD)
question
Investment (I) and variables
answer
Two types of variables in the model---
Exogenous - determined outside of the model
Endogenous - determined within the model
Exogenous - determined outside of the model
Endogenous - determined within the model
question
Government Spending (G)
answer
Fiscal policy
Combination of G and T
T affects disposable income
Government spending (G) and taxes less transfers (T) are exogenous
Combination of G and T
T affects disposable income
Government spending (G) and taxes less transfers (T) are exogenous
question
Equilibrium
answer
Production equals demand for goods equals supply of goods
π = π
π = π
question
Output increases by the multiplier times
answer
the initial increase in spending
question
dynamics allow for
answer
inventories!
Increase in demand doesn't lead to increase in production
Firms draw down inventories first
Slow adjustment
Increase in demand doesn't lead to increase in production
Firms draw down inventories first
Slow adjustment
question
Private Savings (S)
answer
Income less taxes plus transfers less consumption
π β‘ π β π β πΆ
π β‘ π β π β πΆ
question
Public Savings
answer
Taxes minus transfers less government spending
T β G
T β G
question
Investment and Saving
answer
π=πΆ+Μ
πΌ+Μ
πΊ
question
marginal propensity to save
answer
(1 β π1)
question
Private Saving Equation
answer
π=βπ0+(1βc1)(πβπ)
question
Revisiting Marginal Propensity to Consume
answer
Lower income, higher marginal propensity to consume
Higher income, lower marginal propensity to consume
Higher income, lower marginal propensity to consume
question
Consumption depends positively on disposable income
answer
An increase in consumption creates a multiplier effect
question
Money
answer
medium of exchange, used to pay for transactions
question
income
answer
labor earnings plus interest income and dividends
question
saving
answer
part of disposable income that you do not consume
question
Financial wealth
answer
financial assets minus financial liabilities
question
investment
answer
purchase of new capital goods
question
Financial investment
answer
purchase of shares of stock or assets other than investment
question
Choice between holding bonds and holding money
answer
Split depends on two things ....
Transactions
Interest rate
Transactions
Interest rate
question
Role of the central bank
answer
Central bank is the institution that manages monetary policy Control money supply through open market operations
question
Central bank Expansionary policy
answer
Increase money supply by buying bonds
question
Central bank contractionary policy
answer
Decrease money supply by selling bonds
question
Interest rates and bond prices are related
answer
The interest rate should equal the return of the bond
Principal minus price divided by the price
Bonds with a higher price have a lower return Bond prices and interest rates are negatively related
Principal minus price divided by the price
Bonds with a higher price have a lower return Bond prices and interest rates are negatively related
question
Central bank money
answer
Currency - demanded by people
Reserves - demand by banks
Reserves - demand by banks
question
Discount rate
answer
rate at which banks can borrow from the Fed
question
Zero lower bound
answer
the rate at which the nominal interest rate cannot fall below
question
Liquidity trap
answer
interest rate is too low, monetary policy doesn't work
question
Money demand is negatively correlated with the interest rate
answer
The interest rate represents the opportunity cost of holding money
question
Central bank controls monetary policy
answer
Through open market operations (In old limited reserves framework)
Through administered rates (In new ample reserves framework)
Through administered rates (In new ample reserves framework)
question
In limited reserve framework buying bonds increases the money supply and lowers the federal funds rate
answer
Selling bonds decreases the money supply and increases the federal funds rate
question
Bond prices and interest rates are
answer
negatively related
question
Investment depends on...
answer
Sales, or output π
Interest rate, π
Interest rate, π
question
Investment positively related to sales
answer
If demand is high, firms produce more
If demand is low, firms produce less
If demand is low, firms produce less
question
Investment negatively related to the interest rate
answer
Interest rate is the cost of borrowing
Higher cost of borrowing, firms borrow less
Lower cost of borrowing, firms borrow more
Higher cost of borrowing, firms borrow less
Lower cost of borrowing, firms borrow more
question
rewriting output-- Demand for goods is an increasing function of output
answer
Consumption increases with output
Investment increases with output
Investment increases with output
question
what causes a shift in the IS curve
answer
fiscal policy....
- taxes T
- government spending G
consumer confidence c0
- taxes T
- government spending G
consumer confidence c0
question
if u increase taxes, what happens to IS curve?
answer
shift left
question
how does modern monetary policy work
answer
Fed adjusts the money supply to target an interest rate
Fed increases money supply in the case where real income increases
Fed increases money supply in the case where real income increases
question
IS Curve:
answer
Equilibrium in the goods market
π=πΆ(πβπ)+πΌ(π,π)+Μ πΊ
π=πΆ(πβπ)+πΌ(π,π)+Μ πΊ
question
LM Curve:
answer
Equilibrium in financial markets
π=Μ π€
π=Μ π€
question
budget deficit
answer
G-T
question
Shifts in IS Curve due to Fiscal Policy
answer
Fiscal contraction (or consolidation) means a decrease in the budget deficit
- Decrease spending
- Increase taxes
Fiscal expansion means an increase in the budget deficit
- Increase spending
- Decrease taxes
- Decrease spending
- Increase taxes
Fiscal expansion means an increase in the budget deficit
- Increase spending
- Decrease taxes
question
Shifts in LM Curve due to Monetary Policy
answer
Monetary expansion means to lower the interest rate
- Shift the LM curve down
- Increase the money supply
Monetary contraction or tightening means to raise the interest rate
- Shift the LM curve up
- Decrease the money supply
- Shift the LM curve down
- Increase the money supply
Monetary contraction or tightening means to raise the interest rate
- Shift the LM curve up
- Decrease the money supply
question
Monetary policy expansion leads to
answer
a fall in the interest rate
question
federal funds rate
answer
the rate that banks charge other banks when they lend excess reserves
question
limited reserve regime
answer
primary monetary policy tool is open market operations: buying and selling gov't bonds
question
ample reserve regime
answer
primary monetary tool is interest on reserve balances (IORB), supply monetary policy tool is overnight reserve repurchase agreement (ONRRP)
question
in an ample reserve framework, expansionary policy looks like
answer
decrease in IORB, decrease in ONRRP, decrease discount rate
question
in an ample reserves framework, contractionary policy looks like
answer
increase OIRB, increase ONRRP, increase discount rate
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