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Macroeconomics Final
Macroeconomics
72
Economics
Undergraduate 1
06/10/2013

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Term
Financial Account
Definition
transactions that comprise of the buying and selling of assets
Term
Current Account
Definition

International payments for goods and services (i.e. exports and imports), factor income (e.g. repatriated profits), and transfers (e.g. direct cash transfers between countries)

Term
Merchandise Account Balance
Definition
Exports of goods - Imports of goods (ONLY)
Term
Purchasing power parity (PPP)
Definition
The nominal exchange rate at which a given basket of goods and services would cost the same in each country
Term
NAIRU
Definition

Non-Accelerating Interest Rate of Unemployment, levels of unemployment below which inflation rises

Term
Aggregate price level
Definition

Original cost in U.S. dollars x (New cost/Old cost)

Term
Real exchange rate
Definition

Country A’s currency per U.S. dollar x (price level of U.S./price level of Country A)

Term

Short-run Phillips curve: a FALL in commodities prices leads to.... 

Definition

a POSITIVE supply shock, which lowers the aggregate price level and reduces inflation.

Term

Short-run Phillips curve: a RISE in commodities prices leads to...

Definition

a NEGATIVE supply shock, which raises aggregate price level and increases inflation

Term
What does the Long-Run Phillips curve look like?
Definition
Vertical
Term
Why won't people lend money at a negative nominal interest rate?
Definition
People are better off simply holding their cash
Term

Cost-push inflation

Definition

inflation caused by an increase in the price of an input with economy-wide importance

Leftward shift of the SRAS curve (negative supply shock)

Term

Demand-pull inflation

Definition

inflation caused by a rightward shift of the AD curve

“too much money chasing too few goods”

Term

Output gap

Definition

% difference between actual output and potential output 

Term

Okun’s Law

Definition

there is an inverse relationship between the output gap and the difference between actual and the natural rate of unemployment

Term

Phillip’s curve

Definition

Illustrates the negative relationship between inflation and unemployment in the short run

Term
How does a negative supply shock affect the short run Phillip's curve?
Definition
shifts UP
Term
How does a positive supply shock affect the short-run Phillip's curve?
Definition
shifts DOWN
Term
What are two things that shift the short-run Phillip's curve?
Definition
supply shocks and expected future inflation
Term
How does higher expected future inflation affect the short-run Phillip's curve?
Definition
shifts UP
Term
How does lower expected future inflation affect the short-run Phillip's curve?
Definition
shifts DOWN
Term
Current Account + Financial Account =
Definition
0
Term
How do you calculate GDP?
Definition
Y = C + I + G + (N-X)
Term
Loanable Funds Theory
Definition

capital will tend to flow from countries with low interest rates to countries with high interest rates

Term
Liquidity trap
Definition

monetary policy is ineffective because the nominal interest rate cannot fall below zero

Term
Rule of 70
Definition
70/(percent growth rate)
Term

What does the classical model of the price level assume? 

 

 

Definition

the real quantity of money (M/P) is always at its long-run equilibrium value

Term
Are discouraged workers considered unemployed?
Definition
No, they are no longer looking for a job
Term
Underemployed
Definition
those working part-time that are able to work full-time but unable to find jobs
Term
Natural rate of unemployment
Definition
Frictional + Structural unemployment rates
Term
Cyclical unemployment =
Definition
Actual Unemployment Rate - Natural Unemployment Rate
Term
What is the consumption function?
Definition
C = A + MPC x YD
Term
How do you calculate the multiplier?
Definition
m= 1/(1-MPC)
Term
Change in GDP with tax
Definition

 1/(1-MPC(1-tax))

Term
Change in GDP by transfers
Definition
MPC/(1-MPC)
Term

When MPC is large, multiplier is....

Definition
LARGE
Term

When MPS is small, multiplier is...

Definition
LARGE
Term
MPC=
Definition
change in Consumer spending/disposable income
Term
Short-Run Aggregate Supply Curve (SRAS)
Definition
Upward sloping because of sticky wages, constant unit costs
Term
Long-Run Aggregate Supply Curve (LRAS)
Definition
All prices (even wages) flexible in the long run.  Vertical line at potential output
Term
In the long run, inflationary and recessionary gaps are self-correcting. Why?
Definition
Nominal wages rise in order to close an inflationary gap or fall in order to close recessionary gap
Term
In the long run, nominal wages are:
Definition
Flexible because contracts and informal agreements are renegotiated in the long run.
Term
What is the effect of Expansionary Fiscal Policy?
Definition
Increases AD by shifting curve to the right
Term
Mone
Definition
Term
What is the effect of Contractionary Fiscal Policy?
Definition
Decreases AD by shifting curve to the left
Term
What are the tools of fiscal policy?
Definition
Taxes, Transfers, Government Spending
Term
What happens when the Fed sells T-bills?
Definition
decreases monetary supply, increases the interest rate
Term
What happens when the Fed buys T-bills?
Definition
increases money supply, decreases interest rate
Term
Expansionary monetary policy
Definition
Need a fall in interest rates to have AD increase. Increase the MS by buying T-bills on the open market 
Term
Contractionary monetary policy:
Definition
Need a increase in interest rates to have AD decrease. Decrease the MS by selling T-bills on the open market 
Term
Planned investment spending:
Definition

investment spending that businesses intend to undertake in a given period

Term
Unplanned Inventory Investment
Definition
When sales differ from expectations
Term
If sales are less than expected, how does this affect the Unplanned Inventory Investment?
Definition
positive UII; increase inventories
Term
If sales are more than expected, how does this affect the Unplanned Inventory Investment?
Definition

negative UII; decrease 

inventories to meet current sales demand

Term
Actual investment =
Definition
planned investment + UII
Term
How are investment spending and the interest rate correlated?
Definition
Negatively (they move in opposite directions)
Term
What is the main policy tool of the Federal Reserve?
Definition
Changing the interest rate
Term
What is the opportunity cost of holding money?
Definition
The interest rate
Term
What happens when the opportunity cost of money increases?
Definition
Investment spending goes down
Term
Medium of exchange
Definition
asset we hold for the purpose of acquiring goods and services.
Term
Store of value
Definition
asset to hold purchasing power over time
Term
Unit of account
Definition
common measure on which to base our economics decisions
Term
Commodity money
Definition

money that has intrinsic value 

 Ex: gold and silver coins

Term
Commodity-backed money
Definition

money that has no intrinsic value 

but is guaranteed to be converted to something with value 

Ex: US money during the gold standard 

Term
Fiat money
Definition

no intrinsic value but society agrees that it is the 

official means of payment 

Ex: current paper money in the US 

Term
M1 (money aggregate)
Definition
Currency in circulation + checkable demand deposits + traveler’s checks
Term
M2 (money aggregate)
Definition

M1 + “near-moneys” 

Near-moneys: assets that can easily be converted into cash but cannot be directly used as a medium of exchange 

Ex: savings accounts, time deposits (CDs), money market accounts 

Term
What is a bank?
Definition
Financial intermediary that uses the liquid deposits it takes in from households to finance the illiquid investments of borrowers 
Term
How do banks create money?
Definition
By making loans
Term
What is the required reserve ratio in the US?
Definition
10%
Term
The Fischer Effect
Definition
the expected real interest rate is unaffected by the expecture future rate of inflation
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