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PFM > Macroeconomic Theory Section A > Flashcards

Macroeconomic Theory Section A Flashcards

1
Q

Primarily, macroeconomists use microeconomic principles to study

A

long-run economic growth and (short run) business cycles

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2
Q

What are the key characteristics of models/assumptions

A

Idealised, simplified and informative (but may not always be right)

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3
Q

What are the main macroeconomic variables?

A
  1. Output
  2. Investment
  3. Employment
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4
Q

What is an endogenous variable (with examples)

A

Determined within the model, e.g. GDP, inflation, interest rate.

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5
Q

What is an exogenous variable (with examples)

A

Determined outside the model, e.g. various “shocks”, e.g. productivity shock, monetary shock.

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6
Q

What is a parameter?

A

the fixed relationship or coefficients which link the endogenous and exogenous variables

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7
Q

What is the difference between flow and stock?

A

Flow: measured during a period, e.g. investment.
Stock: measured at a point in time, e.g. capital stock

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8
Q

When should we choose a static model?

A

If the “question” at hand does not involve intertemporal interdependence, i.e. what you do now only affects the present, then we should choose a static model (“method”), e.g. labour market

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9
Q

When should we choose a dynamic model?

A

If the “question” does involve intertemporal interdependence, i.e. what you do now affects both the present and the future, then we should choose a dynamic model (“method”), e.g. capital market.

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10
Q

If a model is dynamic, what do we need to decide?

A

If uncertainty matters

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11
Q

What are ad hoc models

A
  • In the old days (1930s-1970s), the mainstream macroeconomists rely on the “ad hoc” models to establish the equation systems, e.g. IS/LM.
  • ad hoc” here refers to a modelling methodology, which formulates aggregate relationships in the model based on specific theoretical assumptions or empirical observations.
  • That is to say, an ad hoc model is built piece by piece and may not be a coherent system, because different theories are not necessarily compatible.
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12
Q

When should a deterministic model be used?

A
  • If the model is dynamic
  • If the “question” at hand focuses on the long run trend (economic growth)
  • uncertainty does not matter that much (the “less important”)
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13
Q

When should stochastic models be used?

A
  • If the model is dynamic
  • If the “question” focuses on the short run fluctuations (business cycle),
  • uncertainty and expectations are essential in modelling the cyclical behaviour
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14
Q

What do households, firms, banks and government aim to maximise?

A

Household = utility
Firms = Profit
Banks = profits
Government = minimises social welfare losses (or to maximise votes)

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15
Q

What characterises a competitive equilibrium?

A

Economic agents are price-takers

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16
Q

According to the Lucas critique, the effects of changes in economic policy…

A

Cannot always be predicted by looking at historical macroeconomic relationships

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17
Q

Which aspect of macroeconomics generates the most controversy?

A

the causes of business cycles

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18
Q

The real interest rate is

A

equal to the nominal rate of interest minus the rate of inflation.

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19
Q

What does NIPA stand for?

A

National Income and Product Accounts

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20
Q

What are the 3 approaches to measuring GDP?

A

Expenditure approach, Product approach and Income Approach

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21
Q

When a firm produces output…

A

The firm’s output contributes to GDP only to the extent that there is value-added

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22
Q

What is GDP?

A

The monetary value of final output produced during a given period of time within a country

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23
Q

What is the product approach?

A

Sum of value added of all producers

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24
Q

How can you measure GDP using the expenditure approach?

A

C + I + G + (X – M)

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25
Q

How can you measure GDP using the income approach?

A

wage + profits + interest + taxes

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26
Q

The income-expenditure identity is best paraphrased as…

A

All spending generates income

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27
Q

Inventory investment consists of

A

inventories of finished goods, goods in process, and raw materials.

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28
Q

When there is positive inflation

A

growth in nominal GDP exceeds growth in real GDP

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29
Q

Real GDP values current production at

A

base year prices

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30
Q

National saving minus private saving is equal to

A

the government surplus

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31
Q

A price index can be computed by

A

dividing a nominal variable by its real counterpart.

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32
Q

GDP and GNP may differ

A

because some income generated by domestic production may be received as income by foreign residents.

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33
Q

The value of a producer’s output minus the value of all intermediate goods used in the production of that output is called the producer’s

A

Value added

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34
Q

A business cycle peak is a

A

relatively large positive deviation from trend in real GDP.

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35
Q

Business cycle persistence refers to the property that

A

when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend

36
Q

A time series is

A

a sequence of dated measurements.

37
Q

When a macroeconomic aggregate is procyclical

A

its deviations from trend are more often of the same sign as the deviations from trend in GDP.

38
Q

If x is useful for predicting future GDP then

A

x is a leading variable.

39
Q

If the correlation between GDP and y is -0.75, we say y is

A

Countercyclical

40
Q

If the correlation between GDP and y is 0, we say y is

A

Acyclical

41
Q

A lagging variable can be recognized by the fact that

A

the turning points of GDP happen before its turning points

42
Q

If deviations from trend in a macroeconomic variable are positively correlated with deviations from trend in real GDP, that variable is said to be

A

Procyclical

43
Q

If deviations from trend in a macroeconomic variable are negatively correlated with deviations from trend in real GDP, that variable is said to be

A

countercyclical

44
Q

If a macroeconomic variable tends to aid in predicting the future path of real GDP, it is said to be a

A

Leading variable

45
Q

If real GDP helps to predict the path of a particular macroeconomic variable, it is said to be a

A

Lagging variable

46
Q

Forecasting the future path of real GDP by exploiting past statistical relationships

A

can be accomplished by the construction and use of an index of leading variables.

47
Q

Real consumption tends to be

A

procyclical and less variable than real GDP

48
Q

Real investment tends to be

A

procyclical and more variable than real GDP

49
Q

Employment tends to be

A

procyclical and less variable than real GDP

50
Q

Average labour productivity is computed as the

A

ratio of real GDP to the level of employment

51
Q

Average labour productivity tends to be

A

procyclical and less variable than real GDP

52
Q

One example of a Phillips Curve would be a

A

positive relationship between deviations from trend in the level of prices and the level of aggregate economic activity

53
Q

Employment is

A

less variable than real GDP

54
Q

Seasonal adjustment tends to

A

smooth a time series with an important seasonal component

55
Q

A dynamic decision is one that

A

involves planning over more than one time period.

56
Q

A static decision is one that

A

involves planning over one time period

57
Q

The utility function captures

A

how an individual consumer ranks consumption bundles.

58
Q

A utility function

A

needs to measure the relative amount of happiness of an individual

59
Q

What is the equation for the unemployment rate?

A

Unemployed/Labour force

60
Q

What is the equation for participation rate?

A

Labour force/working age population

61
Q

What is the GDP deflator equation?

A

100x NGDP/RGDP

62
Q

A consumption bundle

A

is a particular combination of consumption and leisure

63
Q

The property of diminishing marginal rate of substitution follows from the property that the indifference curve is

A

bowed in toward the origin

64
Q

What is a barter economy?

A

An economy without monetary exchange

65
Q

A numeraire is

A

A good used as a unit of account

66
Q

The real wage denotes

A

the number of units of consumption goods that can be exchanged for one unit of labour time

67
Q

A consumer’s real disposable income equals

A

wage income plus profit income minus taxes.

68
Q

The household budget constraint may have a kink because

A

leisure is limited by the number of available hours

69
Q

The substitution effect measures

A

the responses of quantities to changes in the relative prices of goods

70
Q

The profit-maximizing quantity of labor equates the marginal product of labor with

A

the real wage

71
Q

When the representative firm maximizes profits

A

the marginal product of labour equals the wage

72
Q

Labour demand is decreasing in the wage because

A

Labour demand is decreasing in the wage because

73
Q

What is the difference between an open and a closed economy?

A

Closed economy - no interaction with the rest of the world
Open economy - deals with international trade

74
Q

In the one-period model

A

government spending is the acquisition of goods, which the government throws away

75
Q

A competitive equilibrium is a state of affairs in which

A

economic agents are price takers and markets clear.

76
Q

In the one-period competitive model we have been studying

A

consumption is endogenous and total factor productivity is exogenous

77
Q

The production possibilities frontier represents

A

all technologically feasible combinations of consumption and leisure

78
Q

The PPF determines

A

the set of feasible outcomes

79
Q

Points on the production possibilities frontier have the property that they

A

show the maximum amount of leisure that can be consumed for given amounts of goods consumed.

80
Q

A Pareto optimum is a point that

A

a social planner would choose

81
Q

The concept of Pareto optimality is a

A

useful concept because it defines economic efficiency

82
Q

Which of the following causes the competitive equilibrium to fail to be Pareto optimal

A

proportional taxes on wages

83
Q

An increase in total factor productivity

A

increases consumption, increases output, and increases the real wage

84
Q

An increase in total factor productivity shifts the PPF

A

upward, and also changes its slope

85
Q
A

PFM (2 decks)

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