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Keynesian Macroeconomics
Keynesian Macroeconomics according to John Gonzalez
134
Economics
Undergraduate 1
12/12/2011

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Term
inflation
Definition
overall price level goes up
Term
deflation
Definition
overall price level goes down
Term
disinflation
Definition
rate of inflation has gone down
Term
GDP
Definition
total amount of goods and services produced in a country in a given time period
Term
Economic Growth (EG)
Definition
growth rate of GDP
Term
Symbol for Exports
Definition
Ex
Term
Symbol for Imports
Definition
Im
Term
trade balance formula
Definition
Ex-Im
Term
more exports leads to (2 things)
Definition
more jobs, higher GDP
Term
if we are importing...
Definition
we're not producing it ourselves and unemployment rises
Term
growth rate is a percent of...
Definition
change
Term
inventory
Definition
goods produced but not sold
Term
EG
Definition
economic growth
Term
bigger GDP =
Definition
bigger EG
Term
when EG goes up
Definition
employment goes up
Term
exchange rates affect
Definition
exports and imports
Term
weak currency means exports are
Definition
cheap
Term
strong currency means exports are
Definition
expensive
Term
strong currency means imports are
Definition
cheap
Term
weak currency means imports are
Definition
expensive
Term
fiscal policy
Definition
government spending and taxes
Term
monetary policy
Definition
partial control of central bank over interest rates
Term
central bank is _______ of the government
Definition
"independent" (they make their own decisions)
Term
(according to keynes) if the government spends more money...
Definition
firms produce more, GDP is greater, and unemployment lowers
Term
budget formula
Definition
T - G
(taxes) - (government spending)
<0 budget deficit
>0 budget surplus
Term
difference between real GDP and nominal GDP
Definition
real GDP - adjusted for inflation
nominal GDP - GDP before adjusting for inflation
Term
if spending goes up
Definition
firms produce more
GDP goes up
output goes up
more jobs (unemployment goes down)
Term
output symbol
Definition
Q or Y
Term
economic growth definition
Definition
change in GDP
Term
price index for gross domestic purchases measures
Definition
prices paid by US residents
Term
Aggregate Expenditure (AE)is always equal to
Definition
national income. also equal to total spending
Term
GDP formula
Definition
Y = C + I + G + X
or
Y = C + I + G + (Ex-Im)
GDP = Private Consumption + Investment (or spending on housing) + Government spending + (Exports - Imports)
Term
trade balance
Definition
exports - imports
Term
Y-T
Definition
Total consumers spending and showing disposable income.
Term
Savings formula
Definition
S = (Y-T)-C
Term
Spending balance or equilibrium
Definition
Y=C+I+G+X
Term
capital market
Definition
financial market
Term
S > 0 = ? S < 0 = ?
Definition
Saving Borrowing
Term
Trade deficit
Trade surplus
Definition
Capital inflows
Capital outflows
Term
US lending is capital
Definition
outflows
Term
CPI
Definition
Consumer Price Index - the average consumption basket
Each month calculate the basket cost – P x Q + P x Q…
Term
to calculate inflation
Definition
(new price - original price)/original price
Term
to measure nominal GDP
to measure real GDP
Definition
nominal - you do the same thing for CPI
REAL GDP - you use the base year for prices, to show EG.
Term
price index
Definition
nominal GDP / real GDP
Term
real wage
Definition
nominal wage /// base CPI x 100
Term
price index and real wage
Definition
Price Index- Nominal GDP/Real GDP
Real Wage- Nominal Wage/Base CPI X 100
Term
frictional unemployment
Definition
someone voluntarily quits their job
Term
structural unemployment
Definition
mismatch between skills of workers and skills needed in the economy
Term
cyclical unemployment
Definition
moves inverse to economic growth
Term
seasonal unemployment
Definition
people have skills only useful during certain seasons
Term
the amount firms produce depends on
Definition
amount people spend
Term
endogenous
Definition
determined within the model (we have to solve)
Term
exogenous
Definition
the value is determined outside of what we are analyzing
Term
MPC
Definition
marginal propensity to consume
change in consumption / change in income
Term
C= C (Y-T)
Definition
Term
MPS
Definition
marginal propensity to save
change in savings / change in income
Term
unemployment rate
Definition
Number of ppl unemployed / Labor Force X 100
Term
labor force participation rate
Definition
Labor Force/Working Age Population X 100
Term
CPI
Definition
Cost of CPI at current price/Cost of CPI basket at base period X 100
Term
real interest rate
Definition
Nominal interest rate – inflation rate
Term
what a central bank does
Definition
(1)controls the money supply
(2)controls interest rates
(3)conducts monetary policy
(4)bank for commercial banks
(5)controls the interbank rate
Term
who is in charge of monetary policy?
Definition
Federal Open Market Committee
Term
lombard facility
Definition
The Federal Reserve Board of the United States switched to a so-called "Lombard facility," in which the discount rate is actually higher than the targeted federal funds rate, thus creating an economic incentive for banks to look elsewhere before asking to borrow from the Fed.
Term
treasury
Definition
debt contracts issued by government
Term
income goes up
income goes down
(what happens to imports)
Definition
imports up
imports down
Term
interest rates go up
Definition
less borrowing
less spending
less investments
Term
greater income leads to greater
Definition
taxes
Term
standard of living
Definition
output/population
Term
how do you get greater PG? (Productivity growth)
Definition
1.More machines per worker
2.Better machinery
3.Increase in skills/knowledge
4.Increase human capital
Term
NREG= PG+ LG
Definition
Term
price level goes down
Definition
real income goes up >> purchasing power increases >> the economy will spend more >> which makes aggregate demand greater
Term
price level goes down
Definition
price of exports goes down >> exports increase >> aggregate demand is greater
Term
increases in AD
Definition
1.Decreases in interest rates
>Market forces
>Expansionary MP
2.Expansionary FP
>Taxes decrease
>Government spending increases
3.Exchange rates go down
4.Foreign economies expand- exports increase
5.Greater confidence of consumers
Term
price increases
Definition
>revenue increases
>profit increases
>outputs increases
>real wage decreases and you hire more workers
>which leads to higher output
Term
at maximum potential GDP, cyclical unemployment is
Definition
0
Term
Aggregate demand increases in the short run
Definition
o Price increases
Output increases and unemployment lowers
Term
Problems with inflation
Definition
Contractionary MP= interest rates decrease
Contractionary FP= Taxes increases and government help decreases
Term
problems with high unemployment
Definition
Expansionary MP = interest rates decrease
Expansionary FP = Taxes decrease, government help increases
Term
if there is an increase in spending in the short run
Definition
output increases which leads to economic growth and lower unemployment. Inflation can occur because of higher prices, and real wage goes down. Workers ask for an increase in nominal wage.
Term
When AD increases such that output>potential output
Definition
higher inflation
Term
Overheating “Demand Pull Inflation”
Definition
when strong spending leads to greater inflation.
Term
when output > potential
Definition
EG>NREG and Un
Term
when output = potential
Definition
EG=NREG and UN=NRU, full employment. Cyclical unemployment.
Term
output < potential
Definition
EGNRU there is no worry about inflation.
Term
NREG
Definition
the fastest the economy can grow without greater inflation.
Term
NAIRU
Definition
Non Accelerating Inflation Rate of Unemployment.
Term
too much EG supposedly leads to
Definition
inflation
Term
with slow EG, MP response is
Definition
to lower interest rates, borrowing and spending will increase and EG will increase, and unemployment will lower.
Term
strong AE, too fast EG
Definition
inflation rises and the MP response is to lower inflation. Borrowing and spending will decrease and output will decrease. EG will decrease.
Term
Slow EG, liquidity trap and inflation.
Definition
MP response is to lower inflation and no impact due to LT.
Term
Slow EG, LT and deflation
Definition
MP response decrease interest rate, no response due to LT
Term
cost-push inflation
Definition
a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available
Term
stagflation
Definition
slow EG, high inflation
Term
NRI
Definition
the level of interest rates that neither expands nor contracts EG.
Term
contractionary MP and Expansionary MP
Definition
used to slow down the economy
Term
greater inflation means
Definition
higher interest rates
Term
stock
Definition
ownership share of a company (equity)
Term
debt
Definition
Money owed
Term
Keep net income as retained earnings.
Definition
• Government has no retained earnings, they have to borrow. Use debt to pay for a budget deficit, or issue bonds and treasuries.
Term
bond rate of return
Definition
coupon/price of bond
Term
higher interest rates (relation to bonds)
Definition
lower bonds
Term
yield
Definition
coupon/price of treasury
Term
interest rates affect
Definition
spending of consumers
Term
interest rates are the ___ to firms
Definition
Interest rates are the cost of debt for firms
Term
interest rates go up >>
Definition
home owners borrow less, GDP goes down
Term
The central bank can control ____ interest rates.
Definition
The central bank can control short-term interest rates.
Term
borrowers include
Definition
new home buyers, corporations, consumers, and government (if budget deficit)
Term
When foreign central banks are accumulating debt
Definition
When foreign central banks are accumulating debt, you get lower interest rates.
Term
government budget increases >>
Definition
government borrowing increases.
Term
money supply
Definition
is the total amount of money available in an economy at a specific time.
Term
medium of exchange handout
Definition
Term
seigniorage
Definition
the name of the profit earned by the central bank producing money
Term
quantity theory of money
Definition
money used has to be equal to money received.
Term
M (Money Supply) x V= Inflation + Real EG
Definition
Term
dollarization
Definition
you don’t have a central bank, money is inputted into central bank
Term
assets
Definition
things you own
oEquipment
oInventories
oProperty
oInvestments
oPatents
oCash
Term
Liabilities + Stockholder Equity
Definition
things you owe
oDebt
oEquipment owed
oAccounts payable
oTaxes owed
Term
reserve requirement
Definition
% of deposits that must be kept as cash reserves.
Term
assets for bank
Definition
oCash reserves
oLoans
oStandard assets
oLoans to other banks
Term
•Liabilities + Stockholder Equity for Bank
Definition
oAll the deposits
oBorrow from other banks
oStandard liabilities
oStandard equity
Term
M= C+D
Definition
Money = Currency+ Demand
Term
excess reserves
Definition
e x D
Term
reserves
Definition
Reserve Requirement+ Excess Reserve
Term
RR= r X D
Definition
Term
central bank responsibilities
Definition
oConduct Monetary policy
oAdminister money creation
oBank for commercial banks
oSupervision and regulation of banking sector
oLender of “last resort”
oOthers
Term
Monetary policy instruments
Definition
o Reserve Requirement
o Traditional market operations
 Buys securities – pays with money = Money goes up, interest rates goes up
 Sell securities – low risk bonds. – Receive M= Money supply goes down and interest rates go up
o Lombard Fascity- Discount lending window- interest rates go up
o The interbank market and rate
 Federal Funds Mkt
 Federal funds rate
o Implicit promise of the fed in the fed funds met to any bank that wants to borrow 1%.
o Target OMO- open market operations
 Central banks buy specific bonds to drive down that specific interest rate
Term
recessionary gap
Definition
output is less than potential output
Term
the FOMC controls
Definition
The FOMC controls monetary policy
Term
floating exchange rate
Definition
market determines exchange rate
Exchange rate is determined by supply and demand
Term
pure arbitrage
Definition
A zero risk strategy
Term
strong dollar keeps ER low
this leads to
Definition
oCheaper imports
oDomestic firms feel downward pressure on domestic prices
Term
Weaker $
Definition
price of imports go up and inflation occurs
o More expensive imports in CPI
o Domestic firms tempted to increase price
Term
Regarding exchange rates, if supply/demand is lower than the exchange rate,
Definition
the government has to intervene. They have to buy Qsupply-Qdemand to make the market balance. To buy pesos for example, you must sell dollars.
•Also can use foreign reserves, which cause your FR to decrease
Term
If the central bank prints too much money that can lead to ______.
Definition
If the central bank prints too much money that can lead to inflation.
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