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Macroeconomics
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Terms, definitions, and concepts related to Macroeconomics.
Term (memorize) Definition (memorize) Macroeconomics The attempt to explain how and why the total exchanges between firms and households (the economy) grow (long-term) and fluctuate (short-term) overtime. Real GDP: Simple All New Production in the economy during a quarter/year Real GDP: Full The monetary value, not including the increase in prices, of all spending on (household consumption, firm investment, government purchases, and purchases by foreigners - exports) or all income earned from (household wages and firm profits) the value added to production (intermediate goods or services) by people within a country (and not counting value added by foreign goods or services - imports) during only the past (backward looking) year/quarter. Unemployment: Simple definition Anyone who wants a job, but doesn't have a job Unemployment: Payroll survey definition Any person released from the payroll of approximately 160,000 companies or government agencies surveyed each month. Inflation Change in the Average Level of Prices, not one price. It causes the purchasing power of money to decline. Inflation Measures Basket Indexes measure it, including:Consumer Price Index Producer Price Index Personal Consumption Expenditure Index (Used by Fed) "Forward Looking" Indicators Manufacturer's New Orders: Durable Goods Initial Weekly Jobless Claims Retail Sales and Food Services Excluding Motor Vehicles and Parts Dealers Bond Spreads to gauge inflation Capacity Utilization
Question (memorize) Answer (memorize) Hyperinflation price increases over 1000 percent a year Business Cycle The fluctuation in the economy, commonly observed through changes in real GDP and Unemployment Recession Real GDP decreases, while U increases Expansion Real GDP increases, while U decreases Business Cycle Theories Seek to explain Production fluctuations:Supply and output Demand and output Supply and Demand Employment fluctuations Flexibility or non-flexibility of the real wage (W/P)) Classical Keynesian Monetarism New Classical New Keynesian Goal of Classical Economics Show that exchanges between households and firms are self adjusting and self equalizing ("invisible hand") Attributes of Classical Economics Supply creates its own demand (Say's Law) Wages and prices are flexible, so economy adjusts very quickly Excess supply leads to fall in price Real Wage rises, causing unemployment Firms lower nominal wage so as to reduce unemployment and return market instantly to equilibrium No good explanation for Business Cycle (except to say that equilibrium must return).
Name (memorize) Equation (memorize) Unemployment Rate # Unemployed/ (# Employed + # Unemployed) Classical Economics Y = f(L, K) K - Capital Keynesian Economics Y = C + I + G + (X-M) C - Consumption Monatarists %ΔM * %ΔV = %ΔP * %ΔY Where V is constant, P is fixed in short-run, and %ΔY is fixed in the long-run (around 3%) New Classical Economics Y = A * Kα * L(1-α) Where A is "total factor productivity": growth in production not accounted for by changes in K or L. In short, technological change. New Keynesian Economics P = f(w, μ, MPL) MPL - marginal product of labor in the aggregate, derived from an aggregate production function Real Interest Rate ireal = inominal - E(rinflation ) Nominal Interest Rate inominal = ireal + E(rinflation ) The Taylor Rule Federal Funds Rate Target = E(rinflation ) + equilibrium real federal funds rate + 0.5 (inflationdesired - inflationactual ) + 0.5 ((gdppotential - gdpactual )/gdppotential ) Where inflation, potential gdp, and real gdp can be found at FRED Equilibrium real federal funds rate (rate consistent with long-term full employment) was assumed 2% Taylor Desired Inflation rate is most likely 2% "Back of the Envelope" Taylor Rule Compare Federal Funds Rate to Real GDP growth rateIf FFR > Real GDP growth rate, expect rate decrease. If FFR < Real GDP growth rate, expect rate increase If inflation below 2% and FFR > Real GDP growth rate, expect big cut. If inflation above 2% and FFR > Real GDP growth rate, expect small cut. If inflation below 2% and FFR < Real GDP growth rate, expect small increase. If inflation above 2% and FFR < Real GDP growth rate, expect large increase. Law of one Price: PPP PUK / PUS = PPPUK/US What is Causing the Deficit? (X - M) = [S+(T-G)] - I
Term (memorize) Definition (memorize) Goal of Keynesian Economics Classical Economists can't explain Depression Attributes of Keynesian Economics Demand creates Supply Wages and Prices are "sticky" so economy can get stuck in a disequilibrium. Why Sticky? Business Cycle Results from Shocks to demand (ex: decline in consumer confidence, erratic expectations, "animal spirits") If households and firms won't spend, who will? Goal of Monetarists Keynesians can't explain Stagflation (The combination of a rise in the price level and a fall in real GDP) Attributes of Monetarists Demand determines production in the short-run Supply determines production in the long-run Wages and Prices are flexible, but expectations are "adaptive" Business Cycle results from Changes in Money Supply, but inflation is the long run result Goal of New Classical Economics Reintroduce Classical with Micro-foundations Attributes of New Classical Economics Supply determines production in long-run and short-run (like classical) People have "rational" not "adaptive" expectations regarding wages and prices Business Cycle results from changes in A (also called the Solow residual). Goal of New Keynesian Economics Give Keynes Micro foundations (to counter New Classical) Attributes of New Keynesian Economics Demand determines production in the Short-run Supply determines production in the Long-run The presence of rational expectations means wages and prices, though still sticky, adjust faster than Keynes recognized. Why are Wages and Prices Sticky? Menu Costs Coordination failure (firms wait for each other to lower prices/ workers will be unwilling to be the first to take pay cut) Staggered Price Adjustments (wage and price adjustments not done at once, but are staggered "fairness" to customers
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