# Macroeconomics Flashcards Preview

## Macroeconomics > Macroeconomics > Flashcards

Flashcards in Macroeconomics Deck (51)
1
Q

Nominal Interest Rate (R)

A

rate at which you can exchange dollars today for dollars tomorrow. the interest rate that you earn (or pay) on a loan

The nominal rate is often set by: real interest rate + expected inflation.

2
Q

Real Interest Rate (r)

A

rate at which goods today can be traded for goods tomorrow. the nominal interest rate adjusted for inflation.

3
Q

Fisher Effect

A

the idea that an increase in expected inflation drives up the nominal interest rate, which leaves the expected real interest rate unchanged

4
Q

Fisher Equation (Finding Interest Rates)

A
5
Q

Liquidity

A

refers to the ease with which an asset can be used to purchase a good or service

6
Q

Consumer Price Index (CPI)

A

cost of a basket of goods purchased by an average urban consumer (likely overestimates inflation)

7
Q

Problems with CPI

A
• changes in quality of goods and services
• introduction of new goods and services
• CPI tells you the cost to but the same things, not the cost to achieve the same utility
8
Q

Consumption Deflator

A

reflects the average price for the goods and services that indiviudals actually buy (likely underestimates inflation)

9
Q

Inflation π

A

refers to increases in the overall level of prices in the economy

10
Q

Inflation Formula

A

CPIt+1 - CPIt / CPIt

11
Q

Inflation: Country Comparisons

A
• inflation almost always positive
• varies across countries
• strong correlation between inflation and increase rate of money supply
• Inflation rate typically less than growth rate of money supply
12
Q

A

employment is in steady state when unemployed find work at the same rate the employed are losing jobs.

u* = σ/(σ+ φ)

13
Q

Job Finding Rate (φ)

A

probablility that a given unemployed individual will be employed next period.

φ is dominant source of changes in unemployment. Responsible for 2/3 of increases in unemployment. D

Average duration of unemployment 1/φ

14
Q

Job Loss Rate (σ)

A

probability that a given employed individual will be unemployed

Average duration of employment 1/σ

15
Q

Is job creation and loss good for productivity?

A

Yes, job creation and destruction serve to reallocate jobs from less to more productive establishments.

As much as half of overall productivity growth in the economy comes from the reallocation of jobs across establishments

16
Q

Labor Force

A

Unemployed + Employed

17
Q

Employment Statistics: Total Population

A

U+E+N

N= not in labor force

18
Q

Participation Rate

A

(E+U)/Pop x 100

19
Q

Unemployment Rate

A

U/(U+E) x 100

or

U/LF x 100

20
Q

Labor Supply Effects: Wages Decrease

A

It depends on the individual

incomes effect is -, substitution effect is +

On average the two effects cancel each other out. In the last 50 years real wages have doubles and hours are the same

21
Q

Labor Supply Effects: Increase in Z/Investments

A

If non-earned income increases labor supply decreases.

22
Q

Implications of labor supply model

A

using taxes to pay for something that everyone consumes has negative effects on overall labor supply.

23
Q

Labor Supply Effects: Changing Taxes

A

the same as changing wages. If the assumption holds, them the income and sub effect cancel out and the end result is no effect.

24
Q

Labor Supply

A

(P)rice x (C)onsumption = (W)ages x (L)abor + (I)nvestments

PC = WL+I

25
Q

Demand for real money supply

A

Md = (P)rice x L(R-,Y+,TC+)

L (real money balances) is a function of the Rate, Income (Y), and Transaction Costs.

As rate increase L decreases, as Y increases L Increases, as TC increases L increases.

26
Q

Transaction Costs

A

How easy it is to turn interest bearing assets into cash. Higher TC increase demand for cash. If ATMs and Credit Cards disappeared I would want to have more cash on hand.

27
Q

Open Market Operations

A

transactions in which the Fed exchanges money for government securities, specifically treasury bills.

28
Q

Fed: Increasing Money Supply

A

Fed buys treasuries, injecting money nto the economy

29
Q

Fed: Decreasing Money Supply

A

Sells treasuries, extracting money from the economy

30
Q

Buying Treasuries is like printing money

A

If the Fed buys government treasuries, then it pays interest on those treasuries directly to the treasury department. Thus it’s like creating new money.

31
Q

Money Supply Measure used by the Fed

A
• Currency: the volume of currency held by the public (households and …rms.)
• M1: currency held by the public in addition to demand deposits and travellers checks.
• M2: M1 plus saving deposits, money market accounts and some time
• deposits.
32
Q

Currency Ratio (cr)

A

currency/deposits

I have \$20 in my wallet and \$1000 in a bank.

33
Q

Reserve Ratio (rr)

A

Reserves/deposits

Fed sets minimum but banks can choose to keep more reserves

A individual deposits \$1000 in the bank. The bank keeps \$100 as reserves and lends the other \$900. rr=100/1000

34
Q

Monetary Base (B)

A

Currency + Deposits

Fed controls both of these through monetary policy.

35
Q

Money Multiplier to Determine M1

A

M1 = ((cr+1)/cr+rr))xB

B is controlled by the Fed and the money multiplier is determined by the actions of individuals.

36
Q

Money Multiplier

A

(cr+1)/(cr+rr)

Determined by the preferences of banks and individuals

the larger rr, the lower the multiplier

the larger cr, the lower the multiplier

if people prefer more cash, then they have less in banks which means less lending, which means lower multiplier.

37
Q

IS-LM Comparative Statics: Increase in R

A

Income (Y) and (I)nvestment decrease

38
Q

IS-LM Comparative Statics: Decrease in R

A

(I)nvestment and (Y) Income Increase

Firms have less incentive to save and borrowing becomes cheaper so they start more new projects.

39
Q

IS-LM Comparative Statics: Increase in Y

A

the level of savings increases so R decreases.

More supply than demand.

40
Q

IS-LM Comparative Statics: Decrease in Y

A

level of savings decreases reducing the supply of money (via the multiplier) so R goes up.

41
Q

Seignorage

A

the real revenue gained from printing money

42
Q

Limits of Seignorage

A

After a certain point printing money decreases the amount a government can buy.

The slice of the pie you get is bigger but the size of the pie gets smaller. So there is a golden rule.

It acts as a regressive tax, it raises the price of all goods on the economy, and hurts those who are more cash dependent (low income).

43
Q

Cost of inflation

A
1. shoe leather costs: transaction costs increase because you need more frequent purchases or trips to the bank to avoid costs
3. Costs from lack of indexing: minimum wage is not indexed to inflation so each year is a pay cut for these workers.
44
Q

Benefits of Inflation

A
1. positive π helps the labor market function better
2. it’s more difficult to directly cut a workers pay. With inflation no raise is equal to a pay cut.
45
Q

Hyperinflation

A

monthly inflation over 50%.

46
Q

Causes of Hyperinflation

A
1. Fiscal shortfalls drive hyperinflation. Deficits need to be paid.
2. Fiscal policy is the only way to fix it.
1. Can be caused by huge shocks to the budget.
1. drastic reduction in revenues
2. natural disasters
3. huge payment increases
1. Germany had to make large payments after WWI.
47
Q

Importance of Stable Inflation Rates

A

Unstable inflation rates will actually affect todays inflation.

If the Fed does a temporary change in inflation to make paying its debts easier, it will lose trust when it tells banks that is will keep it stable after. Then banks will not trust the Fed and the expected inflation will be different from the Fed target.

48
Q

IS-LM: What happens to C if Investment decreases?

A

Theoretically ambiguous, because a decrease in I ⇒decrease in Output (Y) ⇒ decrease in C. But decrease in investment leads to a decrease in R, which increase C.

In real life the first effect dominates, so C decreases.

49
Q

Short run vs Long run changes in Money Supply

A

Short run: M increases ⇒ R decreases and Y increases

Long Run: M increases ⇒ P increases ⇒π increasing ⇒R increasing.

50
Q

IS-LM: Investment and Savings

A

Investment (r drives Y), Savings (Y drives r)

r increases ⇒ I decreases ⇒Y decreases

more expensive for firms to borrow and better to save money then spend

r decreases ⇒I increases ⇒ Y increases

51
Q
A