Macroeconomics 2

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Macroeconomics 2
2014-03-22 14:52:48
Macro test
Macroeconomics test
Macroeconomics test 2
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  1. Great Depression
    GDP dropped 25%, Since GDP has risen 500%
  2. Rule of 70
    • 70/1%= 70 years to double
    • 70/2%= 35 years to double
  3. Total Factor Productivity
    1/2 of 2%
  4. Natural Resources
    Important but not critical-Ex: Nigeria: lots of resources, poor.  Japan- Few resources, rich
  5. Thomas Maltus
    Land is fixed, population is ever growing; eventually there will not be enough land to feed people- Starvation
  6. Possible reasons for slow down of the 70's
    • 1. Not yet fully adjusted to computer revolution
    • 2. Baby boomers enter workforce, reducing ave. age+ experience levels.
    • 3. OPEC: quadrupled oil prices in 1973
  7. GDP per Capita=
    GDP/Pop. Size= Common measure of living standards.
  8. Medium American Family household income
    1900: $6,100.. / 2010: $50,000
  9. What causes your country's growth rate to increase?
    Increasing labor productivity.  Increasing the amount of " stuff "- Goods and Services produced by each worker
  10. 3 ways to increase labor productivity
    • 1. Increase physical capital ( Give shoemakers shoe machines)
    • 2. Increase Human Capital ( Education and Knowledge)
    • 3. Increased technological progress
  11. Aggregate Production Function
    GDP= ( Capital, Labor, Tech. Progress )
  12. Diminishing Returns
    Equipment makes big difference in productivity.  It increases output per worker
  13. Japan and Mexico growth rate
    • Japan- 1.9%
    • Mexico- 1.3%
    • In 1820, Mexico was wealthier tun Japan, now just the opposite
  14. Why do different nations grow at diff. rates
    • 1. Savings- Money you can save can be used to buy investment goods ( Machinery ) which increases worker income by increasing worker productivity.
    • 2. Education
    • 3. Research+ Development
  15. The role of government in promoting economic growth.
    • 1. Infrastructure Subsidies:  Bridges, Roads, Water
    • 2. Education Subsidies:  gov. pays for the great bulk of primary and secondary education
    • 3. R+D Subsidies: technological progress done by gov. agencies
    • 4. Maintain a sound financial system
    • 5. Protect Property Rights:  Gov. has to protect intellectual property rights
    • 6. Political Stability/ good governance
  16. Success Since WWII
    • Germany+Japan ( Rebuilding )
    • The East Asian Tigers: S. Korea, Taiwan, Hong Kong, Singapore.  Because of savings, education and technology adoption.
  17. Failures Since WWII
    Latin America, Subsaharan Africa
  18. Reasons for failure in Latin America
    Low Savings, Little investment in education, and political turmoil
  19. Reasons for failure in Sub-Saharan Africa
    • 1. Political Instability:  Civil
    • 2. War- Causes destruction of infrastructure, education facilities
    • 3. Property Rights Violated- ( Productive business socialized or taxed to death, removing incentive to invest to increase the productivity of the economy.
    • 4. Tropical Diseases:  Reduce ability to work.
  20. Contra View
    Jeffery Sachs: Poverty causes the reasons for failure not vice-versa
  21. Since 2000
    Seems to be a turn around.  More political stability- More demand for African produced goods
  22. Firms that create physical capital
    • ( Fabrics, Machine, office buildings, houses )
    • They usually do it with other peoples money- Savings
  23. Savings + Investment
    They are always equal. This is called the savings- investment- spending identity
  24. Recall- GDP=
  25. Total Income=
    Total Production, Total Spending
  26. What can be done with your total income?
    • Spend part on consumer goods.  You pay part in taxes- Govt. purchases goods with taxes.
    • You also save part
  27. Our International trade balance is
  28. Demand Curve
    How many loans people will want at different interest rates. ( How much they want to borrow )
  29. Shifts in Demand for Loanable Funds
    • 1) Changes in business opportunities
    • 2) Changes in government borrowing
  30. What is the major factor that causes interest rates to go up and down?
  31. Nominal Interest Rate
    What you see advertised in the paper
  32. Real Interest Rate
    What banker need to earn to cover expenses
  33. Fisher Effect
    Changes in expected inflation changes nominal interest but not Real rates
  34. What does inflation to to both supply and demand
    It cause them both to shift
  35. Financial Markets
    Places households invest current savings and accumulated savings wealth
  36. Investment
    Can be in financial assists ( Stocks, Bonds ) or physical assets ( buying a house )
  37. Bank Loans
    Assests for the bank ( they own it ) Liabilities for the borrower ( they owe it )
  38. 3 tasks of any financial system
    • 1) Transaction costs
    • 2) Risk
    • 3) Illiquidity of investments ( difficulty selling for cash )
  39. Liquid
    Can be quickly converted to cash
  40. Illiquid
    Can't be quickly converted
  41. Reducing Transaction Costs
    • Time spent negotiating a deal.  Verifying Borrower's credit and ability to pay back.
    • Drawing up legal documents
  42. Reducing Risk- Most people are...
    Risk Adverse
  43. Risk Adverse
    Losses bother them more then ( equal ) gains make them feel good.
  44. To get people to invest their money you have to
    Find ways to reduce the risk
  45. Diversity
    Don't put your money in one thing
  46. Loans
    Lending agreements between a single lender and borrower. ( Student loan, car, house. )
  47. Bonds
    An I.O.U. issued by a borrower- indicates a fixed rate of interests to be paid, loan repayment becomes due.
  48. Which is easier to sell, bonds or individual loans?
  49. Loan Backed Securities
    " Bundels " of mortgages, student loans, are to back bonds.  Issued by banks, to get more money to lend off
  50. The guarantee the bonds interest + principal will be repaid depends on...
    How likely the underlying loans will be paid off
  51. Stocks
    A share in the ownership of a company.  It is your asset if you own it.  It is the company managements liability. ( Same thing they owe to others ).  They pay higher returns over time then bonds.  Riskier then bonds.  
  52. Bonds have a
    1st LIEN on company revenue
  53. Mutual Funds
    Professional investors pick a portfolio of the stocks/ bonds they think will pay off the best.  You then buy shares in their mutual fund.
  54. Company
    Each share gives you a partial ownership of hundreds of stock shares
  55. Advantages
    Diversification professional stock selection ( for a fee )
  56. Pension funds, life insurance funds
    Work like mutual funds: You pay premiums, but professional investors use them to buy stocks/bonds.  Out of investment earnings they pay you pension or death benefits.
  57. Banks
    Take money from deposits, invest in, mostly by making individual loans,some from investment in Gov't bonds.
  58. Banks advantages
    Liquidity ( now deposits everyday, so bank doesn't mind if you withdraw.  Also, low transaction costs.
  59. Technicality on Gov.
    Gov. spends $ on more than just goods and services.  It also spends $ on Transfers/ ( Social Security pension payments ).
  60. Total gov spending
    G: g+S + G: transfers
  61. For U.S. to import more than it exports, U.S. has to
    • 1. Borrow foreign money.
    • 2. Get foreign money by selling assists( Rockefeller center in NYC.) ( Net flow of foreign savings into U.S. )
  62. If U.S. wants to sell more to foreign countries than it buys from them, U.S. must
    • 1. Lend $ to foreigners
    • 2. Buy assets owned by foreigners ( Buy down town Tokyo. )  ( Net outflow of U.S. savings from the U.S. )
  63. What drives spending on consumer goods
    • 1. Disposable income
    • 2. Wealth- If your wealth goes up you spend more.
  64. Consumption function =
    C= $ amount * ( y-t ) + wealth
  65. After WWII, what did the consumption function do
    Shifted upward, b/c of interest in wealth during the war.
  66. What did cheap interest rates do during 1998-2006
    Caused the housing boom
  67. What do interest rates affect
    • You investment decision through Opp. cost, even if you save for you new car or factory.
  68. The accelerator
    The effect of GDP/ income growth on investment. :  The more business see income growing, the more they think it will result in Increased demand for their product, so the more new factories they build ( investment ) to supply the product
  69. Production capacity
    The closed factories are to operating at full capacity, the more a change in income, ( the accelerator effect ) will increase investment 
  70. GDP=
    C=I. also GDP= Total income= Disposable income ( Y-D )
  71. Consumption function also equals
    C= A + MPC * ( YD )
  72. Balance sheet economic effects
    Debits $100- Increase your income.  Credits $100- Increase in GDP.  Causes increase in demand
  73. What does the increase in demand have
    A multiplier effect
  74. Multiplier Effect
    Depends on how much of your income you normally consume
  75. MPC formal definition
    Marginal propensity to consume.  The % of any increase in disposable income you spend. ( Rather then save )
  76. Shifts in autonomous consumption can...
    Can shift the consumption function
  77. ( y-t ) =
    Disposable income
  78. Changes in you expected income can lead to...
    Can lead to changes in your " c " now.
  79. Interest rates
    The lower interest rates are, the more you can afford to borrow to finance a new home or factory
  80. Suppose businesses planned to spend $500 on investment ( machines, factories )
    Iplanned = $500
  81. Aggregate expenditure planned this year is
    AEplanned = Consumption spending+ Planned investment spending
  82. 300+ .6 (GDP )
    • C+ Ip
    • 300+ .6 +IP
  83. Life Cycle functions
    They assume the reason most people save is so they have some thing to spend in their old age, when they are no longer working.
  84. Investment Spending
    Not as big a % as GDP as consumption, but much more volatile.  Most recessions start with a fall in investment spending.