Macroeconomics

Question 1

Nominal Interest Rate (R)

Answer 1

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.

Question 2

Real Interest Rate (r)

Answer 2

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

Question 3

Fisher Effect

Answer 3

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

Question 4

Fisher Equation (Finding Interest Rates)

Answer 4

Question 5

Liquidity

Answer 5

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

Question 6

Consumer Price Index (CPI)

Answer 6

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

Question 7

Problems with CPI

Answer 7

• 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

Question 8

Consumption Deflator

Answer 8

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

Question 9

Inflation π

Answer 9

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

Question 10

Inflation Formula

Answer 10

CPI_t+1 - CPI_t / CPI_t

Question 11

Inflation: Country Comparisons

Answer 11

• 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

Question 12

Employment: Steady State

Answer 12

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

u^* = σ/(σ+ φ)

Question 13

Job Finding Rate (φ)

Answer 13

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

Question 14

Job Loss Rate (σ)

Answer 14

probability that a given employed individual will be unemployed

Average duration of employment 1/σ

Question 15

Is job creation and loss good for productivity?

Answer 15

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

Question 16

Labor Force

Answer 16

Unemployed + Employed

Question 17

Employment Statistics: Total Population

Answer 17

U+E+N

N= not in labor force

Question 18

Participation Rate

Answer 18

(E+U)/Pop x 100

Question 19

Unemployment Rate

Answer 19

U/(U+E) x 100

or

U/LF x 100

Question 20

Labor Supply Effects: Wages Decrease

Answer 20

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

Question 21

Labor Supply Effects: Increase in Z/Investments

Answer 21

If non-earned income increases labor supply decreases.

Question 22

Implications of labor supply model

Answer 22

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

Question 23

Labor Supply Effects: Changing Taxes

Answer 23

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

Question 24

Labor Supply

Answer 24

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

PC = WL+I

Question 25

Demand for real money supply

Answer 25

M^d = (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.

Question 26

Transaction Costs

Answer 26

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.

Question 27

Open Market Operations

Answer 27

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

Question 28

Fed: Increasing Money Supply

Answer 28

Fed buys treasuries, injecting money nto the economy

Question 29

Fed: Decreasing Money Supply

Answer 29

Sells treasuries, extracting money from the economy

Question 30

Buying Treasuries is like printing money

Answer 30

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.

Question 31

Money Supply Measure used by the Fed

Answer 31

* 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.

Question 32

Currency Ratio (cr)

Answer 32

currency/deposits I have $20 in my wallet and $1000 in a bank.

Question 33

Reserve Ratio (rr)

Answer 33

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

Question 34

Monetary Base (B)

Answer 34

Currency + Deposits Fed controls both of these through monetary policy.

Question 35

Money Multiplier to Determine M1

Answer 35

M1 = ((cr+1)/cr+rr))xB B is controlled by the Fed and the money multiplier is determined by the actions of individuals.

Question 36

Money Multiplier

Answer 36

(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.

Question 37

IS-LM Comparative Statics: Increase in R

Answer 37

Income (Y) and (I)nvestment decrease

Question 38

IS-LM Comparative Statics: Decrease in R

Answer 38

(I)nvestment and (Y) Income Increase Firms have less incentive to save and borrowing becomes cheaper so they start more new projects.

Question 39

IS-LM Comparative Statics: Increase in Y

Answer 39

the level of savings increases so R decreases. More supply than demand.

Question 40

IS-LM Comparative Statics: Decrease in Y

Answer 40

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

Question 41

Seignorage

Answer 41

the real revenue gained from printing money

Question 42

Limits of Seignorage

Answer 42

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).

Question 43

Cost of inflation

Answer 43

1. shoe leather costs: transaction costs increase because you need more frequent purchases or trips to the bank to avoid costs 2. menu costs: costs to producers of changing prices (reprinting menus) 3. Costs from lack of indexing: minimum wage is not indexed to inflation so each year is a pay cut for these workers.

Question 44

Benefits of Inflation

Answer 44

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.

Question 45

Hyperinflation

Answer 45

monthly inflation over 50%.

Question 46

Causes of Hyperinflation

Answer 46

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.

Question 47

Importance of Stable Inflation Rates

Answer 47

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.

Question 48

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

Answer 48

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.

Question 49

Short run vs Long run changes in Money Supply

Answer 49

Short run: M increases ⇒ R decreases and Y increases Long Run: M increases ⇒ P increases ⇒π increasing ⇒R increasing.

Question 50

IS-LM: Investment and Savings

Answer 50

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