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Flashcards in Notes 2 Deck (158):
1

Unit labor cost

w x l

Y

2

Compensation =

labor cost per output + output per hour

3.7 = 1.5% + 2.2%

3

Productivity in Quarter 2

Productivity rose 2.2%

as output growth - 2.4%

exceeded hours worked growth - 0.2%

4

It is becoming __________ to get additional output from current workers

more difficult

5

With aggregate demand still rising, firms will have to ___________ hiring in 2012

increase

6

Hourly compensation

Real Hourly compensation

Hourly compensation - rose 3.7%

real hourly compensation - rose 1.7%

*inflation 2.0%

7

Growth in ______________ remain weak, giving firms incentive to hire

unit labor costs

8

Labor?

Labor is relatively inexpensive, leading to higher profits

9

Since labor is relatively inexpensive

Allows for additional capital for expansion plans to offset tighter credit conditions

10

wages = 

wages = Lcost/unit + output per hour

11

2nd quarter 2012 wages 

2.17% = 0.93% + 1.24%

12

Increase productivity ----->

increase profits

13

Price rising --------> increase profits

14

Unit labor cost -------> 

measure of inflation (roughly)

14

Single family housing starts = 

535,000

5.5% m/m

29% y/y

15

Single family permits = 

512,000

0.2% m/m

25% y/y

16

Upward momentum is building for ______________

residential construction

17

Residential construction should add _______________

0.33% to 2012 GDP growth

18

Residential Construction Factors:

Large inventory of foreclosed homes

homebuilders are more confident home sales on an upward trajectory

low level "dearth", new home inventory

rising jobs, income, and confidence

19

Proxy for new housing demand 

"measure"

Growth in construction < Growth in households

20

S (savings) = 

= Sprivate + Spublic

= Y (output) - C (consumers) - G (government)

= Investment

21

Value of total savings must equal ___________________

value of total investment

22

In U.S., we have an extremely ______ savings rate

low

23

Slonable funds

Households willingness to save

Government surplus

24

Dlonable funds

Profitable investment opportunities

25

∆technology => increase profitability => increase demand for lonable funds => increase LF exchanged and rate=> increase capital stock

26

Where does purchasing managers index want to be?

over 50

27

Purchasing Managers Index

Measures nationwide goods producing business activity

Survey of Business Activity asks: 

1. increase

2. decrease

3. or no change in inventories

28

Diffusion Index

% reporting increasing + 1/2% reporting no change

> 50 expansion

< 50 contraction

29

Current PMI (purchasing managers index)

51.5

30

What is the current PMI signaling?

Manufacturing is weak but seems to be stabilizing

31

Manufacturing is weak but stabilizing:

uncertain fiscal policy and global economic growth will weigh on manufacturers

weak foreign demand

New orders are expanding (52.3) => leading indicator

Inventories are rising slightly (50.5)

Production was slightly contracting (49.5)

employment was up (54.7)

prices paid were up (58.0)

32

New orders are expanding

52.3 - leading indicator

33

Inventories are rising slightly

50.5

34

Production was slightly contracting

49.5

35

Employment was up

54.7

36

Prices paid were up

 

58.0

37

Leading indicators: Two "gaps" are proxies of future production

1. New orders - Inventories = 1.8 (good omen for future production)

2. Production - New Orders = -2.8 (foreshadows stronger output)

38

Business have strongly balance sheets and high profits

Record high "quick ratio" = liquid assets (mostly cash) relative to short term liabilities

39

Say's law:

supply creates its own demand

40

Keynes on why GDP fluctuate in short run

aggregate expenditures (demand) determine supply

41

Budget constraint: Income + ∆debt = 

taxes + interest debt + consumption + savings

42

future income = 

∆debt

43

20 year average monthly change = 

in credit

$6.7 billion

44

August monthly change =

in credit

$18 billion

45

20 year average Y-O-Y growth rate =

in credit

7.7%

46

August Y-O-Y growth rate = 

in credit

5.5%

47

Surging credit due to:

rising non-revolving credit (financing for big ticket items)

rising auto loan and government backed student loans

increase debt => increase spending => ∆Y/Y

48

Supply side of credit

better access to credit to release pent-up demand

49

Demand side of credit

better labor market => improving financial positions (ability) => rising consumer confidence (willingness) => credit financed consumption

50

Full capacity utilization = 

82-84%

51

at Y potential

Unemployment rate = 5%

Capacity utilization = 82-84%

52

U.R > U.R natural =>

Y < Ypotential

53

In long run, Ypotential = 

f( # workers

K stock

technology

*not Price Level

54

Ypot = 

f( - normal production capacity - full employment)

55

2 simplifying assumptions of static model

no inflation

no change in long-run aggregate supply

56

Gross debt 2012 = 

$16 trillion

57

Nominal GDP 2012 = 

$16 trillion

58

Debt-to-GDP 2012 = 

103%

59

More important about debt?

debt relative to economy

60

Fed. Reserve holds

$1.9 trillion

61

SS trust bonds / treasury bill =>

$2.9 trillion

62

Public debt 2012 = 

$11.2 trillion

63

Public debt to GDP 2012:

72.5%

64

Rogoff/Reinhart public debt to GDP limit

90% limit for public debt to GDP

- would slow GDP growth by 1%

from 3% to 2%

65

Is our D/Y a problem?

default risk => no

purpose of debt: consumption or investment

Large iD (int. x Debt) => increase Taxes or decrease Government spending

High D/Y => increase int. rates => decrease inventory => decrease Y/L =>decrease ∆Y/Y

 

66

Analogy Test:

essential similarities > essential differences

67

2009 things

decrease in optimism

decrease in wealth

increase in exchange rate

decrease Yrow

68

Housing Demand drops

decrease Investment residential

shift left AD

69

Price homes fall, price stocks flat

Wealth decreases

shift AD left

70

Price of oil increases =. input price increases

shift AS to left

shift AD to left

71

Decrease Consumer/business confidence

decrease Consumption and investment

shift AD left

72

Dollar falls =>

increase exports, decrease M

shift AD right

73

Foreign economies grow 5%

increase exports

shift AD right

74

Discretionary macro policy response to 2007

Fed Reserve decrease interest rates to move AD right

doesnt work - prices rise

people dont spend because busy deleveraging

75

Automatic Mechansim

fix itself in time - milton friedman

"long run it will work itself out"

76

Discretionary Policy

Johy Maynard Keynes

long run we are all dead

77

Self-adjusting model:

When S curve shifts to the left: wages are falling

- drops morale and worker productivity

in theory: 

1. workers will accept lower wages

2. lenders accept lower interest rates

3. producers accept lower price of inputs

78

Recession:

AD to the left; AS to the left 

or

Y potential decreases

Price is low relative to production costs

 

79

Expansion:

AD to the right; AS to the right

Price is high relative to production costs

80

Labor Costs are _____ of total

70%

82

Equilibrium condition of new orders

new orders = shipments

83

shipments/sales = 

Production - ∆inventory

84

During Recession:

New and Factory Orders plummeted and companies like Chyrsler and GM had to be bailed out of bankruptcy

85

shipments = 

coincident economic indicator------good measurement of how the current economy is doing

86

New orders = 

Leading indicator of future

87

Unfilled orders = 

leading indicator of future production

88

Factory orders fell _____ in August

-5.2%

89

Nondurable good orders rose _______

2.2% (not good indicator)

90

Durable goods orders fell _______ 

-13.2%

91

Core capital goods new orders

rose 1.1%

92

business investment:

non defense capital goods, excluding aircraft

93

Leading indicator of future hiring

Core capital goods

94

Business investment spending

slowed preupitously in the 3rd quarter

95

Above 50 Business Baromete Index

expansion

96

Below 50 Business Barometer Index

contraction

97

Business Barometer Index: survey of business activity asks

Increasing

Decreasing

or No change

98

Business Barometer Index: assyne

increasing = 44.7%

No change = 10%

Decreasing + 45.3%

Index = 44.7 + 5 = 49.7

99

Business Barometer Index in September

49.7 (contraction territory)

100

Manufacturing in Midwest is _________________

contracting for the first time in 3 years

101

Vehicle production is _______________

moderating - still growing but slowing down

102

Rising uncertainty over (bbi):

Global Economy

Fiscal Cliff

103

Slumping foreign demand for (bbi): 

industrial equipment

104

New orders (bbi):

47.4

leading indicator says a turnaround is not imminent, new orders falling

105

Production (bbi) = 

55.4 

firms are keeping production in line with new orders

106

Order backlog (bbi) = 

41.6

signals weak production levels in future

107

Employment (bbi) = 

52.0

firms are hiring to ramp up production to meet demand

108

Inventories (bbi) = 

51.1

inventories are still rising

109

Prices paid (bbi) = 

63.2

building input price pressures with little "pricing power" - falling profits

110

Pricing power 

If you have this you can raise the price without losing business

111

New orders - inventories (bbi)

-3.7

Negative gap is omen for weaker production

112

New orders - Production (bbi)

-8

negative gap foreshadows weaker production

113

Shipments

Production - change in inventories

114

Production = 

F(employment)

115

Increase in expected future price level would _____________

shift supply curve to the left

116

Closed Economy investment

Y - C - G

117

A manufactuerer's unfilled orders will be unchanged if during the month

New Orders = Shipments

118

Investment in Closed Economy

Y - C - G

119

What increases the equilibrium interest rate?

Increase in the budget deficit

120

The demand for durable goods

declines by a greater percentage than does GDP during a recession

121

The response of investment spending to an increase in the government budget deficit is called __________

crowding out

122

What happens to unemployment as an economy begins to emerge from a recessionary phase of the business cycle

unemployment continues to rise

123

What will raise consumer expenditures?

An increase in expected future income

124

A decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would ________

shift demand curve out

125

When a government runds a budget deficit, we expect ________________

investment will fall

126

Financial intermediary's main function:

match households with excess funds to firms who want to borrow funds

127

An increase in the price level will

Move the economy up along a stationary short run aggregate supply curve

128

The international trade effect states that:

An increase in the price level will lower net exports

129

When price level in US rises to the price level of other countries

Imports will rise

exports will fall

net exports will fall

130

National income =

Consumption + Savings + Taxes

131

Labor Productivity

The quantity of output produced in one hour by one worker

132

The 45-degree line shows points such that

Real aggregate expenditure equals real GDP

133

Increase expectation in inflation results in:

shift the short run aggregate supply curve to the left

134

Private savings

Y + Tr - C - T

135

Countries with a strong rule of law:

have a faster economic growth

136

Increase in aggregate demand causes:

Increase in real GDP in short run

Increase in price level in short run and long run

137

Best Measure of the standard of living

real GDP per capita

138

Potential GDP

The level of GDP attained when all firms are producing at capacity

139

wL =

70% of total costs

140

wage/salary costs (70%)

rose 1.7% y-o-y

141

Benefit costs (30%)

rose 2.1% y-o-y

142

Total Compensation rose

1.8%

.7 x 1.7% + .3 x 2.1%

143

Employment Cost Index:

This will:

1. Contain broader inflationary pressure

2. Allow FED to maintain low interest rate policy

144

Rising __________________

retirement and health benefits

145

Firms are focusing on ___________________________

containing wage growth in an attempt to save costs and remain profitable

146

Firms health insurance costs are ______________

slowing as they pass along benefit costs to employees

147

_____________ will keep consumers' spending under pressure

slow wage expansion

148

_________________________ will limit wage gains going forward

Labor market slack and extended periods of weak job growth

149

________________ will push wages and salries lower and slow benefit growth

150

Deficit 2009 =

$1.4 trillion

151

1993 Deficit reduction act

Increase Taxes

Cap growth of government spending

152

Debt

sum of all deficits

153

Deficit

G - T in given period

154

If deficit to GDP = 3%

Debt

GDP

is constant

155

If deficit to GDP < 3%

Debt

GDP

is falling

156

When unemployment reaches _________, deficit to GDP rises above 3%, increasing Debt/GDP to 90%

6%

157

AFDC example of

transfer payments

158

___________ helps the US economy to be self correcting

The Federal Budget