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The flashcards below were created by user
angelitics
on FreezingBlue Flashcards.
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Ante Real Interest Rate
What is expected. R = i - E π
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Post Real Interest Rate
Actuals. R= i-π
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When borrowers and lenders negotiate loans they do not know what future inflation will be.
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Fisher Effect Formula. Explain.
i = R + Eπ. If the real interest rate is constant then the nominal interest rate (i) moves one-for-one with changes in expected inflation (Eπ).
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What is the opportunity cost of holding money?
- Difference between the Rate of return (r) and the return of holding money (- Eπ).
- Opportunity cost = R + Eπ
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5 Real variables
- Y= income
- C= consumption
- I= investment
- w/p= mpl (marginal productivity of labor)
- r/p = mpk (marginal productivity of capital)
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Classical Dichotomy
separation between real and nominal variables
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3 Nominal Variables
- p= price level
- w= wages
- π = inflation
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Money neutrality
Under the classical dichotomy changes in money supply (M) are neutral i.e. cannot effect real variables in the long run.
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Marginal Productivity of Capital (MPK) formula (real rent of capital) and def.
MPK = R/P (rent / price level) . MPK is the change in output for a unit change in capital input.
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Under perfect competition:
Workers earn _____?
Capital earns ________?
Formula income?
- Y= MPL * L + MPK * K + Economic Profit
- (economic profit is zero under perfect competition and constant return to scale)
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Keynesian consumption function. Expain.
Marginal Propensity to Consume (MPC) How much consumption changes by for a unit of increase in disposable income (YD ). Y-axis is consumption, x-axis is Yd slope is MPC [C= c(Y-D)] which is positive slope.
Earn more you consume more.
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What is the slope of the consumption function?
MPC
C= c(y-d)
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Investments.
Who invests?
How do they invest?
- Both firms and households invest.
- Firms invest by changing capital stock and inventories
- Households invest by buying a new house.
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Real Interest Rate Formula
R = i - π ( real interest rate = nominal interest rate - inflation)
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Affects of low real interest rate?
Low interest rate mean that people are willing to invest. Investments is inversely (negatively) the real interest rate.
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How do government spend?
What do government payments?
- Spend by purchasing goods and services.
- Government makes welfare payments, unemployment payments, and other payments.
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T=G
T>G
T<G
Explain.
- Taxes and Government spending is in Balance Budget.
- Taxes in greater than Government spending Government Surplus.
- Taxes in less tan government spending, government deficit.
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National Savings (s) formula
S = Y-C-G
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Private Savings
Public Savings
National savings formula
- Private savings + Public Savings = National savings
- (y-c-t) + (t-g)
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What is M1 and M2?
- M1 (monetary aggregate) = highly liquid= C+DD+ travelers check+ and other deposits
- M2 = less liquid= M1+ savings+ small time deposits + shares in money market funds
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What is the Quantity Equation Formula
MV=PY
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What is the Real money demand Quantity theory
- (M/P)D =kY
- The demand for real money balances is proportional (k) to income (Y).
- As income increases real money balances increases.
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What happens if velocity and price level is kept constant in the Quantity Equation.
If money supply increases, income also increases. Typically in the short run.
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What happens when income and velocity is kept constant in the Quantity Equation Formula?
When money supply increase, price level increase. Typically happens in the long run.
Note: increasing the money supply and increasing the price level will result in inflation.
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sE=fU. Explain
Number of people losing jobs = number of people finding jobs
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Halls Model Labor Force formula. Explain. What happens if we decrease unemployment rate?
- U/L= s/(f+s). Unemployment rate depends on the rate of jobs separation and job finding.
- If unemployment rate is decreased the we can see a decrease in job separation and increase in job finding.
- (increasing the number of people findings jobs and decreasing the number of people losing jobs)
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What are some reasons for unemployment? (frictional unemployment)
- People have different job preferences
- imperfect job information
- geographical preferences
frictional unemployment: time taking to find a new job
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What does public policy do?
- reduce frictional unemployment by employing as many people by:
- posing job information about position available
- unemployment benefits- unemployed are paid a fraction of their wages.
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What is an example of structural unemployment?
Wage rigidity= wages are not flexible and do not adjust to market conditions.
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Explain how minimum wages comes about. Graphically.
Classical approach minimum wages is flexible while in the kaizen it is slow to adjust.
- y-axis = w/p
- x=axis = L
- slope (negative) = DL
- kept constant= Lbar (x-axis) line SL you get a (w/p)* = wages are in equilibrium.
- Minimum wage (w/p)min is found above the wage equilibrium.
- A binding minimum wage Wmin is imposed so the real wage is above (w/p)*
- Supply of labor (w/p)min is Lbar, and Lmin workers are hired.
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Structural unemployment formula. Explain.
- Structural unemployment= Lbar- Lmin
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Minimum wages affect low skilled workers such as teenagers.
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Long rum unemployment in the US is typically____?
6%
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Finding a Job is not _____________.
Job search is an example of _______________.
Wage rigidity is a ____________________.
- instantaneous
- structural unemployment
- frictional unemployment
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Disadvantages to unemployment?
- unemployment is a waste of resources
- difficult to reduce structure and frictional unemployment
- public policy sometimes increases unemployment rate for example unemployment insurance.
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