Econ 116 Flashcards
(131 cards)
1
Q
GDP: Formula
A
Quantities produced * prices that year
2
Q
GDP: not counted
A
- Underground economy
- Produced at home
- Unsold things count as inventory
- Used goods
3
Q
GDP: how to find housing
A
impute rents from people who own houses
4
Q
Real vs. Nominal GDP
A
Real has a reference year. Only use prices for that reference year.
5
Q
GNP Formula
A
GNP = GDP + Net factor payments
6
Q
GDP Deflator Formula
A
Deflator = Nominal GDP/Real GDP
cyPcyQ/byPcyQ
7
Q
CPI Formula
A
CPI = byQcyP/byQbyP
8
Q
why does CPI overestimate inflation?
A
- New Products
2. Quality improvements
9
Q
National Income
A
C+I+G+NX
10
Q
National Savings
A
Y-C-G
11
Q
Income Identity
A
S=I
12
Q
Y function
A
Y = F(K, L)
13
Q
wage identity
A
W/P = MPL
14
Q
rental rate identity
A
R/P = MPK
15
Q
MPL (CRS)
A
(1 − α)Y /L
16
Q
MPK (CRS)
A
aY/K
17
Q
share going to workers
A
= (1 − α)
18
Q
share going to capital
A
a
19
Q
Cobb-Douglass form
A
F = K^a * L*1-a
20
Q
Functions of Money
A
Store of value
Unit of account
Medium of exchange
21
Q
Money Supply Function
A
M = C+D C = currency D = demand deposits
22
Q
Monetary Base function
A
B = C+ R C = currency R = Reserves ( what banks have not lent)
23
Q
How can the Fed influence lending
A
- OMO
- Discount Rate
- Reserve Requirements
- Interests paid on reserves
24
Q
Money supply formula
A
M = (cr+1/cr+rr) B cr = C+D rr = R/D
25
Identity of the economy
MV = PY
26
What changes inflation according to MVPY?
M
27
Ex ante interest rate
| what does this mean
r = i-Epi
| real interest rate before things realize
28
Ex post interest rate
| what does this mean
realized itnerest rate
| r= i-pi
29
Fisher Equation
r = i-pi
30
Equation showing Money demand using MVPY
M/P = L(i,Y) (ISLM)
M/p varies with Y and V
Y varies independently, V varies on i
31
Costs of inflation expected
1. Shoeleather cost: burden of making additional trip to the bank
2. Menu costs: cost from changing displayed prices.
3. Relative price distortions because you know inflation is coming so you don't bother changing prices
4. Unfair tax treatment: taxes like capital gains unajusted
5. Inconvenience of comparing to other time periods
32
Seigniorage
the revenue raised from printing money
33
Cost of unexpected inflation
1. Arbitrary redistribution of purchasing power. ie. borrowers paying lenders back in less valuable money.
2. Increased uncertainty. HIgher inflation is more unpredictable
34
Benefit of inflation
Nominal wages allows real wages to reach equilibrium levels without nominal wage cuts so labor market is cleared.
35
Hyperinflation
>50%
36
Leverage ratio
assets/capital
| 1/lev ratio --- % what the bank will do to fail
37
Investment in bank: total increase in money supply
1/rr*deposit
38
Bank capital
Owner's equity
39
Equilibrium unemployment
fU=sE
f job finding
s job separation
40
unemployment rate
U/L = 1/1+f/s
41
Frictional unemployment
Frictions in the job search to find,
apply for job,
and sectoral shifts
42
Structural unemployment
Wage rigidity due to min wage,
unions,
effeciency wages
43
Solow Model Formula @ steady state
```
savings = break-even investment
sf(k)= (δ + n + g)k when dk = 0
```
44
What is δ, n, g
δ: depreciation
n= population growth, dL/L
g = technological growth, dE/E
45
National income identity
```
Y = C + I
i = sy
```
46
capital per effective worker: symbol, equation, steadystate growth rate
k = K/(LE), grows 0
47
Output per effective worker: symbol, equation, steadystate growth rate
y = Y/LE, grows 0
48
output per worker symbol, equation, steadystate growth rate
Y/L = y * E
| grows by g
49
Total output
| equation, symbol, steadystate growth rate
Y = LE*y
| grows by n+g
50
Goldern Rule
MPK(k*) = (δ+n+g)
51
conditional convergence
countries converge to their own steady states
52
Endogenous growth model
Y= AK
53
A in endogenous growth model
A = output for each unit of capital
54
Investment and depreciation in endogenous growth model; equation of capital accumulation?
Investment = sY
Depreciation = δK
Equation of motion: sY-δK
55
deltaY/Y = ...(endogenous growth model
deltaY/Y = sA-δ
56
Two sector model:
Manufacturing: Y = F [K, (1 − u)EL]
Research: ΔE = g(u)E
57
Equation of capital accumulation(two sector model)
```
ΔE = g(u)E
u = fraction of labor in research
```
58
u and s in two sector model
s affects income but not growth rate
| u affects income and growth rate
59
Long run vs. short run
Long run: Y is fixed
| Short run: P is fixed
60
Long run Prices:
P = M^d * V * (1/Y)
61
Keynesian Cross supply and demand
Supply: P = P' (fixed)
Y = C(Y − T') + I' + G'
Y is variable
62
What is planned expenditure
C(Y − T') + I' + G'
63
Draw Keynesian cross
desktop
64
Draw a reduction in aggregate demand (AD AS curve)
desktop
65
Multiplier: government expenditure
∆Y = ∆G'/ (1 − MPC) > ∆G
66
In the short run equilibrium if Y> Y', in the LR prices will
rise
67
In the short run equilibrium if Y
fall
68
In the short run equilibrium if Y= Y', in the LR prices will
remain constant
69
Multiplier: taxes
∆Y = -- (MPC * ∆T/1-MPC)
70
ISLM Assumptions: Supply and demand
Supply: P = P' (fixed)
Demand: Y = C(Y − T') + I(r) + G'
I varies with r
71
Derive IS graph with two changes in r
desktop
72
Derive LM graph with two changes in r
desktop
73
Equations that are used for LM
```
(M/P)^d = L(r, Y ) Money Demand
(M/P) = M / P' Money Supply
```
74
Equations that define IS-LM Summary
```
Y = C(Y-T') + I(r) +G IS
M/P = L(r,Y) LM
```
75
1. Changes in IS in the long run (right shift)
| 2. Changes in LM in the long run (right shift)
1. IS shift right: AD shifts right
| 2. LM shifts right: AD shifts right
76
How can fed increase AD?
| Details
```
Raise M.
LM shifts right
r decreases
I increases (I(r))
Y increases -- AD shift right
```
77
How can government increase AD?
G or T
r decreases when IS shifts right
Y increases so AD shift right
78
IS shock occurs. What happens?What is the long run solution?
Desktop
79
SRAS equation
Y = Y' + α(P − EP)
a is a positive parameter
EP is expected price level
P is actual price level
80
Phillips Curve
| Define terms
```
π = E[π] − β(u − un) + ν
β is a constant
Eπ expected inflation
un is the NRU
u is actual unemployment
v is supply shock
```
81
Demand pull inflation
− β(u − un)
82
Cost push inflation
+ ν
83
Sticky Price Model
P = s[EP} + (1-s )*[P+a(Y-Y')
s[EP} = set by sticky price firms
(1-s )*[P+a(Y-Y') set by flexible price firms
84
Imperfect Information model: what happens when P>EP
produces more: thinks relative price has risen:
| Thus, Y increases
85
Adaptive expectations
People chain last year's inflation rate and believe that it will play a factor in this year's inflation rate
pi = pi-1 instead of epi
86
Rational expectations
People take into consideration monetary and fiscal policies (all informaiton available)
87
Sacrifice Ratio
how much of a year's real GDP must be foregone to reduce inflation by 1 percent.
ratio usually = 5
5* inflation reduction = GDP loss
88
Hysteresis
negative shocks will increase the NRU over time
89
MPC
Marginal propensity to consume
| [0,1]
90
APC
Average propensity to consume
| Decreases with total income
91
Consumption equation
C = C' + cY
| C' initial consumption
92
2 Period Fisher Model of Consumption
| slope?
C1 + C2/(1 + r) = Y1 + Y2/(1 + r)
| slope = Marginal rate of substitution: -(1+r)
93
Life cycle hypothesis equation
C = (W+RY)/T
W is present wealth
R is number of years individual earns income
Y is income
94
Permanent income hypothesis
| Consumption? APC?
```
C = aY^p
P = permanent income Y = income
APC = (aY^p)/Y
```
95
Random walk hypothesis
Changes in consumption over time should be unpredictable given the permanent income hypothesis
96
What does the permanent income hypothesis show
Consumption is proportional to permanent income. Permanent income implies taking debt to smooth consumption.
97
Cost of capital
T otal cost = pK(i + δ − ∆pK/pK)
* opportunity cost: i · pK (we use i because it is in nominal term: dollars)
* depreciation cost: δ · pK
* loss of values: −∆pK
98
Net investment
In(MPK −pK/p(δ + r))
99
I (investment)
In(MPK −pK/p(δ + r)) + δK
δK added to investment to cover depreciation
100
Problems to measure debt
1. inflation
2. capital assets
3. unaccounted liabilities
4. business cycle
5. ricardian equivalence
101
Capital assets (debt)
if assets increase, debt will decrease
| NOT counted ind ebt. Problem.
102
uncounted liabilities (debt)
things not counted in debt. Insured deposits (FDIC)
103
Inflation's result on debt
Nominal debt grows at the rate of inflation, piD (D = real debt)
104
Business cycle on debt
Increases in debt may be good to stabilize the system. Unclear effects
105
Ricardian equivalence
If the government tax cuts today people will have to pay higher taxes in the future. So tax cuts don't have much of an effect.
106
Problems with ricardian equivalence
1. People do not care for the future
| 2. Borrowing constraints. Tax cuts help people smooth out their income.
107
Reasons for budget deficit/surplus
1. Autostabilizers
2. Tax smoothing; consistent taxes during recessions and expansions
3. Shift burden of investment to future generation, who will benefti
108
Inside lag
Time between a shock to the economy and POLICY action RESPONDING to the shock
109
outside lag
time between policy response and actual EFFECt on economy
110
Autostabilizers
have no lag; income tax, unemployment insurance
111
Lucas critique
Hard to figure out people's expectations to a policy change.
112
Arguments for policy conducted by rule
1. policy makers are self interested.
| 2. inconsistency and loss of trust over time with discretion
113
Rules for monetary policy
1. keep MS growth rate constatnt
2. target nominal gdp
3. target inflation
114
Financial intermediaries
mutual funds, banks
| way of getting direct resources from savers to borrowers
115
Debt finance
Firms issuing bonds
116
Equity finance
Firms issuing stocks
117
Asymmetric information
one agent has more information than the other.
118
Moral hazard:
hidden action, doing things that other parties cannot control
119
Adverse selection
Hidden information; people with more to lose/ more information use the system to help themselves, harming people with less information
120
Monetary, Fiscal response to a crisis
Monetary: increase M, lower interest rate, lender of last resort, taking on risky loans
Fiscal: increase G or T, insuring deposits
121
Private Saving
Y-T-C
122
Public Saving
T-G
123
Trade Balance
```
S-I = NX (modification from S=I)
Y-C-G-I = NX
```
124
Policies that lead to a trade surplus?
Raise Savings, lower investment
125
Currency appreciation
Strengthening of the currency against anothers
126
Currency depreciation
WEakening of the currency against anothers
127
Real Exchange rate formula
Real exchange rate = (Nominal exchange rate * Price of domestic good)/ price of foreign good
E = e x P/P*
128
How are NX and the exhcange rate related
NX is a decreasing function of E;
| NX(E)
129
Purchasing Power Parity
E=1; goods should cost the same in real terms
130
Problems against PPP
1. Shipping costs
2. Producs differ.
3. Some goods aren't easily tradeable
131
Profit level (investment)
R/P - Pk/P(r+δ) = MPK - Pk/P(r+δ)
