Midterm Topic 1

Question 1

What does macroeconomics look at?

Answer 1

Focus on the structure and performance of economies and government policies. It tries to predict and explain causal links between aggregate variables (economic production, employment, fiscal expenditures, monetary aggregates, trade flows).

Question 2

Economic growth

Answer 2

the growth in the economic standards of living that occurs over substantial periods of time [can also be expansion of output over time, explaining long-run economic trend of an economy]

Question 3

Labor productivity

Answer 3

output produced per unit of labor input

Question 4

Two main causes for the positive US long-run economic trend

Answer 4

1. increase in population

2. increase in labor productivity

Question 5

Business cycles

Answer 5

short-run fluctuations in GDP, including recessions (downward phases) and booms (upward phases)

Question 6

Recession

Answer 6

the period of time when actual output in an economy falls below potential output and has not yet started to recover

Question 7

Boom

Answer 7

the period of time when actual output in an economy raises well above potential output

Question 8

Depression

Answer 8

an extremely severe recession that is marked by rising unemployment

Question 9

Unemployment

Answer 9

A spell in which an individual who would like to be working is actively searching for a job but is not employed

Question 10

Unemployment rate

Answer 10

Rate that measures the number of people who are unemployed as a fraction of the labor force (which excludes children, students, and retired seniors)

Question 11

Inflation

Answer 11

The rate at which the aggregate price level in an economy increases

Question 12

Deflation

Answer 12

A negative rate of inflation and implies a decline of the aggregate price level in an economy

Question 13

Hyperinflation

Answer 13

Extraordinarily high rates of inflation, such as 100% or more per year.

Question 14

Globalization

Answer 14

A broad term that is used to describe the rising extent to which national economies interact through international trade of goods and services and international financial flows

Question 15

Closed Economy

Answer 15

An economy that is not open to international trade or has no significant trade relationships

Question 16

Open economy

Answer 16

An economy that has extensive trading and financial relationships with other national economies

Question 17

Fiscal policy

Answer 17

government spending and taxation and is determined by government

Question 18

Monetary policy

Answer 18

growth of the money supply and is in most countries determined by central banks

Question 19

Central bank

Answer 19

organization that is responsible for the monetary policy in a country

Question 20

Central bank independence

Answer 20

the idea of good monetary policy asserting that the central bank should be politically separate from the government branches that determine spending and taxation

Question 21

Main elements of macro research

Answer 21

1. Research question
2. Assumptions
3. Implications of theory (predict behavior and outcomes)
4. Empirical test (compare implications with data)
5. Predictions for policy analysis

Question 22

Positive analysis

Answer 22

Analysis that tries to explain and predict real-world phenomena.

Question 23

Testing positive statements, conducting empirical tests

Answer 23

Exogenous variables and parameters (input) are used to develop an economic model that makes predictions about endogenous variables (output). [Examples include Regression Analysis and Google maps.]

Question 24

Normative analysis

Answer 24

tries to evaluate outcomes and states that are desirable. Relate to value judgments of “desirable” and cannot be right or wrong–they cannot be tested and should be clearly stated.

Question 25

Social objective

Answer 25

an objective that in principle is shared by social consensus. [ex: efficiency, social justice, like distribution of income and economic opportunities, macroeconomic stability}

Question 26

Why Macro is controversial

Answer 26

Variety of thoughts caused by... 1. differences in the methodology of the positive economic analysis 2. differences in the normative reasoning of what would be desirable outcomes

Question 27

Main source of disagreement between Classicals and Keynesians

Answer 27

1. the empirical question of how quick prices and wages adjust after economic shocks 2. what the role of public policy would be in such environments.

Question 28

Classical approach

Answer 28

the overall economy achieves efficient economic outcomes if there are free markets. After an exogenous shock, wages and prices adjust quickly and the market returns to an equilibrium. There is only a limited role for government in the economy (securing property rights, providing market places, potential regulation of market failure or public good provision).

Question 29

Keynesian approach

Answer 29

Great Depression-inspired--persistent unemployment occurred because wages and prices adjust slowly ("sticky"), which leaves markets for longer periods out of equilibrium and do not clear labor markets. Government should intervene to restore full equilibrium employment.

Question 30

shock

Answer 30

an unexpected change to the underlying parameters of a model or the underlying parameters of an economy (e.g. tech, oil prices, war, natural disasters, etc.) [can be demand shocks or supply shocks]