Macroeconomics Final Exam Review
Subjects of Macroeconomics
GDP, CPI, Unemployment Rate, Relationship between various policies
Examples of Macroeconomic Problems
What is the nature of inflation?
What makes GDP grow?
How does government spending affect unemployment?
How does monetary policy affect the welfare of citizens?
Is macro separate from micro?
Fact based (i.e. does not have any value). Statements do not have to be correct, but they must be able to be tested, proved or disproved.
Subjective and value based. Opinion based (i.e. they cannot be proved or disproved).
Is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole.
Refers to the actions the government takes in the economic field (i.e. Interest rates, government budgets, and labor markets).
Is a study of a particular Time in place which provides the economy with facts.
Keynes Revolution in Macroeconomics
is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy).
Long run macroeconomic models
The theory of economic development.
Short run macroeconomic models
The theory of economic fluctuations.
Methods of GDP measurement
C + G + I + NX = GDP
Gross National Product – the sum of all goods and services produced in a nation in a year (including citizens outside the country).
Doesn’t measure free time, environmental pollution, etc.
Doesn’t include the black market.
Doesn’t count like the amount of revenue made by individuals working outside the country.
GDP gives room for manipulation.
Human Development Index, measure of quality of life using factors like life expectancy, literacy, access to clean water, income, etc. This is an alternative to GDP.
Purchasing power parity. An alternative to GDP.
Net economic welfare. An alternative to GDP
Gross national output. An alternative to GDP.
What is inflation?
A rise in the general level of prices in an economy.
How to measure GDP
CPI (consumer price index) and PPI (producer price index).
A contraction of economic activity resulting in a decline of prices.
a curve showing the relationship between the inflation rate and the unemployment rate. It is based on real data.
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
Deviations from the natural rate of unemployment based on normal fluctuations in the business cycle.
Occurs when you have job skills that do not match the job requirements.
Wages are too high and market is out of equilibrium.
natural rate of unemployment. percent of unemployed people when the economy is producing its potential output of real GDP.
Non-Accelerating-Inflation Rate of Unemployment. It refers to the lowest achievable rate of unemployment without adding upward pressure on the CPI rate of inflation.
Quantity Theory of Money
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
Assumptions of QTM
Proportional – All the money will be doubled.
Full informational – everyone is informed/has the same level of knowledge.
Information goes backwards – depends on path dependency.
GDP adjusted for inflation.
GDP measured in current prices.
Equation of exchange
MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output of goods and services produced in an economy.
An economic theory holding that variations in unemployment and the rate of inflation are usually caused by changes in the supply of money.
Older Monetarist Program
Money supply should be increased every year at the same pace of economic growth.
Assumptions of the Monetarist Program
If you increase the money supply you will have inflationary forces.
Predictable policy is a good policy.
Rules are better than discretion.