Mac Econ

Card Set Information

Mac Econ
2011-11-09 19:32:08
Mac Econ

Test 2
Show Answers:

  1. Inflation
    An increase in prices, on average across the economy
  2. Deflation
    A decrese in prices on average across the economy
  3. Measring Inflation
    Price index where Pi = Market baske of goods x current year prices divided by Market basket of goods x Base year prices
  4. Consumer Price index (CPI)
    • The MBG consumed by the average urban house hold
    • cost of living
  5. Producer Price index (PPI)
    • The MBG is purchaes by wholesalers
    • Costs of production
  6. GPP Price deflator
    • Uses final goods and services produced in the economy
    • Base year is 100
  7. Nominal Inflation
    The value of somthing in term sof current prices
  8. Real values
    nominal value adjusted for the rate of inflation
  9. Real rate of inflation
    • Nominal inerest rate - Rate of inflation
    • i - pie
    • If rate of inflation is high then real is falling
  10. Economic effect of inflation
    • Efficiency effect: high inflation can reduce effiecnecy or productivity
    • Equity effects: the impact of inflation on real incomes where high inflation reduces real households income
  11. Types of Inflation
    • 1) Deamand Pull
    • 2) Cost push
    • 3) Expectaion inflation
  12. Demand Pull
    • High level aggregate demand, pulls price level up
    • Too much money chasing too few goods
  13. Cost Push
    • Riseing prices of inputs
    • Price of oil, increses so all prices goes up
  14. Expectaion inflation
    Inflationt hat occures because epople anticipate inflation
  15. Unemployed
    If a person has not worked and have not been looking for work during the previous 4 weeks
  16. Civilian labor force
    16 years and older who are working or looking for work
  17. Current Population survey (CPS)
    • Is how it is measured
    • survey 60000 households a month
  18. Two Qualifications regaring measure
    • 1) It dons't measure under-emplloyment (can only get partime work)
    • 2) Does not measure discouraged workers
  19. Three types of Unemployment
    • 1) Frictional
    • 2) Structural
    • 3) Cyclicale
  20. Frictional Unemployment
    people who are "in between" jobs
  21. Structural unemployment
    Due to structual changes in teh economy like technology they don't have job
  22. Cyclicle Unemmployment
    Unemployment related to level of aggregate demand
  23. The natural rate of unemployment
    • The rate of unemployment when the ecomony is at capacity
    • This is the unemployment that exists when the economy is at capacity
    • NR= Frictional + structural
    • 5 %
  24. Business Cycle
    Deviation in actual GDP from potential
  25. 4 Phases of Business Cylce
    • Conraction: downward to trough
    • Trough: the lowest point
    • Expansion: Upward to peak
    • To Peak: highest point
  26. Contraction to Trough
    Unemployment rising, Inflation down
  27. Expansion to peak
    Unemployment down, Inflation riseing
  28. If GDP falls below potential GDP what sould the government policy be?
    • Neoclassical view: Says law, Gov't policy should bre to allow the econmy to self adjust
    • Keynesian view: The Gov't whould take an action role in boosting aggregate demand
  29. Income Expenditure Modle
    • The inspiration for this modles is Keynes we assume:
    • 1) Prices in the economy are "sticky" ridjid and fixed
    • 2) Equilibrium in the economy can gall below full-employment
  30. Consumption Function
    • Keynes Posts "fundamental psychologicla law"
    • Men are disposed as a rulea nd on average, to increase their consumption as their income increases but not by as much as the increase in income.
  31. Savings
    • Savings = y - c
    • If c=y line above consumption then savings which means firms will cout back prodution and income falls; s > 0
    • If c=y line below consumption then borrowing and firms will increse production, income will rise; s < 0
  32. Aggregate demand
    45 degree c=y line
  33. Average Popensity to comsume Ratio
    • APC = c/y
    • As consumption goes up so does income but APC goes down
    • APC is 1 at equilibrum is 1
  34. The Marginal propesnity to consume Ratio
    • MPC = Change in c/Change in y
    • Additional consumptionf rom additional income
    • This is slope of consumption function
    • it is constant becaues straight line
  35. Determinents of consumption Fucntion
    • 1) Expectaion of future income
    • 2) Changes in financial wealth- value of stock and bonds
    • 3) Credit conditions
  36. Supose Households expect Income to rise
    Consumption function shitfs up so incresase in spending and income goes up
  37. Stock Prices on average increase
    Consumption function moves up because more money and boost consumption
  38. Supose housing prices falll
    They feel less wealthy and consumption falls
  39. Credit Conditions are lose
    Consumption goes up and GDP goes up because more people can take loans
  40. Investment
    • It is included exogenously inthe income-expenditures model
    • y = C + I
    • The spending by business firms on physical capital such as additions to pland, equipment, and inventories
  41. Investment demand by firms
    the firm in making an investment considers or compares the rate of return on the investment to the cost of borrowing to undertake investment
  42. Rate of Return
    • R of R
    • Revenue from project - Cost of Project / Cost of project
    • A firm will order investment projects in terms of rate of return
  43. Determinents of Investment of demand
    • 1) Level of production Capactiy: Excess capacity reduces investment demand
    • 2) Expectation future sales: If firms expect future sales to increase, this will increase investment demand
  44. Instability and Investment Demand
    • 1) Irregularity of inovation
    • 2) Variability in profits
    • 3) Varialiltiy in expectaion- uncertain bout future
  45. Income expediture Model adding investment
    • I = Iplanned + Iunplanned
    • Y = C + I
    • C = Ca + cY and I = Iplanned
  46. Surpus in Investment modle?
    • Y > C + I which means aggregate output > AEp (spending): This is Iunplanned and firms will cut back production
    • Y < C + I which means aggregate output < AEp: which is negative Iunplanned and frims will expand output
  47. To calculate Investment
    Y - (C + I)
  48. The Multiplier
    • Add Change in I to formula
    • Y = I + Chane in I
  49. Expenditures Multipler
    • Me = 1/1-mpc
    • The larger the mpc the larger Me
  50. 4 Sector Modle
    • Y = C + I + G + Nx
    • No different besides a number added
  51. Aggregate Demand
    Total spending from households, firms, gov't, and foreigh sector (Nx)
  52. Aggregate Demand Curve
    • Average of prices across economy.
    • This is GDP deflator
    • Inverse relationship between Price and GDP
  53. Why inverse relationship?
    • 1) The Real balance effect
    • 2) The Wealth effect
    • 3) The interest Rate effect
  54. The Real balance effect
    a fall in price level increases real income of households which promotes more spending on GDP
  55. The Wealth Effect
    A fall in price level increases the real wealth of households which poromtes more spending
  56. The Interest rate effect
    If price level falls then so do real interst rates. If real interest rates fall, then households, firms, gov't can borrow more easily which means more spending
  57. Determinents Aggregate Demand
    • 1) Changes in Household spending
    • 2) Changes in investment spending
    • 3) Changes in net exports (exports-inports)
    • 4) Changes in Goverment fiscal Policy
    • 5) Changes in Monetary policy
  58. Changes in Household Spendign
    • Due to changes in household expenctaion and changes inhoushole wealth
    • Ex. Housholds expect incomes to fall...shift left
  59. Changes in investment spending by firms
    • Due to expectations of firms
    • Ex. Firms expect income to fall...Shift left
  60. Changes in Gov't fiscal policy
    • Changes in governemtn spending of taxation
    • Ex. Obama passes 400 bil jobs plan...shift right, G up and T down
  61. Changes in Monetary policty
    • Changes in money supply, central bank
    • Ex. If Fed increeses supply, more spending...Shift right
  62. Aggregate Supply
    Total Production of finaly goods and services produced in the economy
  63. Short Run AS (SRAS)
    The SRAS curve will indicate a direct relationship between the price level and real GDP (Y)
  64. Determinents of SRAS
    • 1) Changs in nominal wages: wages up SRAS up
    • 2) Changes in input prices (oil): Price up SRAS up
    • 3) Changes in productivity: Technology up SRAS down
  65. Long Run AS (LRAS)
    • The level of AS when prices in the economy are fully flexile
    • Yxp indicates potential GDP: economy growing at capacity
  66. SRAS vs LRAS
    • Shows actual GDP can deviate from potential
    • Left of Yxp is positive cyclical unemployment and GDP below potential
    • Right of Yxp is negative cyclical unemployment and GDP above potential so economy beyond capacity
  67. What should policy be when not in equilibrium?
    • 1) Allow prices to self-adjust
    • 2) Creat a positive demand shock using monetary or fiscal policy
  68. All to self Adjust
    • Unemployed workers offere labor for lower nominal wage which makes SRAS fall back to LRAS
    • Results in lower wages so fims expand productiona nd can sell at lower price per unit
    • Puts back at equilibrium
  69. Create demand shock
    • Increase money suply (monetary) or increase governement spending or reduce taxes (fiscal)
    • This would move AD curve back up to origial
    • GDP would increse which reduces cyclical unemployment to 0,
    • Prices go up so inflation pressue in economy
    • Real wages of workers have decreased