Macro exam 2 - study guide for exam PDF

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Business Cycle

Expansion

Recession

Production (GDP)

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Price Level

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Unemplyoment

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Expenditure Approach: Y=C+ I+ G + NX ● C- Private Consumption (largest component) ○ About 70% of US GDP ○ Final good and services that we buy ○ Not included: used and intermediate goods ●

I- Investment (business investment) ○ 17-18% ○ Fixed business investment (machinery, factories) ○ Not included: stocks and bonds bc don’t create value

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G- Government Spending ○ 17-18% ○ Not included: Transfer payments (social security, unemployment benefits)

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NX- Net Exports (correction factor) ○ Exports - what they import ○ About -5% of US GDP ○ NET EXPORTS= EXPORTS - IMPORTS ○ When exports>imports, trade surplus

ADD Indirect taxes LESS subsidies (enters +) , ADD back depreciation (enters +) Flaws of GDP calculations: 1. Limitation as measure of total production: a. Not always illegal, avoid takes b. Black Market c. Household production 2. Limitations as a measure of standard living: a. Leisure b. Crime c. Pollution of natural resources Real GDP- use base year prices WHEN PRICES RISE, NOMINAL GDP> REAL GDP LABOR FORCE PARTICIPATION RATE #of ppl in labor force/ # of ppl in the working age pop x100 UNEMPLOYMENT RATE #of ppl unemployed/# of ppl in labor force x100

EMPLOYMENT-TO- POP RATION #of ppl who are employed/# of ppl in the working age pop x100 #of ppl in labor force= employed + unemployed ppl Working age pop= employed+ unemployed + not in labor force 1. Frictional Unemployment- leaves a job to make skill w what will make u happy (short time) 2. Structural- lost bc of tech 3. Cyclical- due to changes in business cycle, C.U>0 economy in recession, C.U GDP, inventory shrinking, firms increase production and employment REAL GDP> AE, inventories growing, firms decrease production and employment

Production Function: Slope gives us growth rate CHANGES Market of labor graph shift supply line 1. Increase in labor supply- increase in total production 2. Increase in the # of hours per worker 3. Increase in the working age pop 4. Increase in the employment to pop ratio 5. Increase in immigration Production graph movement along the line 1. Increase in labor productivity- workers can produce more goods and services 2. Increase in human capital (better health care,education,etc) 3. Increase in physical capital 4. Increase in tech (saving, research, and development) CLASSICAL GROWTH THEORY- temporary NEOCLASSICAL- exogenous growth model NEW GROWTH- profit driven Loanable Funds REAL INTEREST RATE: NOMINAL INTEREST RATE- INFLATION Downward sloping- as IR decreases, firms are willing to borrow more money for projects, Rate of Return>IR Supply of loanable funds- as IR increases, ppl more willing to save

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When gov runs a budget surplus, S shifts right, RI decreases→ priv investment increases, and priv savings decreases WHen gov runs budget deficit, D shifts right, RI increases→ priv investment decreases, savings increase (crowding out effect) → raise IR, and decrease investment

Short Run Aggregate Supply- upward sloping because of 1. Sticky wages- P level increase, real wages decrease 2. Sticky prices- P level increase, fixed is cheaper ● Firms can take advantage of short- lived increase in profits Aggregate Demand ● Wealth effect- decrease P, the real value of our savings/income decreases ● Intertemporal substitution effect(interest rate effect)○ If P increases, value of $ decreases, then the IR increases, then D for goods/services decreases Shifters of LRAS ● Increase full employment quantity of labor, LRAS to the right ○ Increase in labor force, shrunk frictional and structural unemployment ○ Increase stocks of physical capital LRAS to right ○ Increase tech and innovation, LRAS to right ○ Increase in human capital, LRAS to right Shifter of SRAS ● Increase in cost important wages and inputs, SRAS to left Shifters of AD ● Consumption ○ Increase in disposable income, increase AD ○ Increase in expected future prices, increase AD ○ Increase in the real interest rate, decrease AD ○ Increase in expected future income, increase AD ○ Increase in household wealth, increase AD ●

Private investment ○ Increase in the RI, decrease AD ○ Increase in profitability, increase AD

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Net Exports ○ Increase in exchange rate, decrease demand (dollar appreciates- increase imports- decrease nx) ○ Increase in the relative level of income, decrease AD ○ Increase in (domestic) real interest rate, decrease AD

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Gov Spending ○ Increase in gov, increase AD ○ Decrease in taxes by the gov, increase AD

Aggregate Expenditure ● Consumption 1. Disposable income- as it increases, c increases 2. Wealth- as it increases, C increases 3. Inflation (Deflation)4. Expected Future income- as it increases, C increases 5. Real interest rate- as it increases, C decreases

● Investment 1. Real interest rate- as it increases, I decreases 2. Profitability of Investment- as rate of return increases, I increases/ as taxes(on capital)increases, I decreases ● Net Exports 1. Exchange rate- as it increases, NX decreases (x decreases, I increases) 2. Disposable income- as it increases, NX decreases 3. Real Interest Rate- as it increases, NX decreases 4. Demand for goods and services- as it increases, NX decreases (imports increases) Macro eq occurs where Real GDP=AE ● I and G are not dependent on changes in real gdp ● C- largest component of AE (65-70%) → autonomous and induced ● NX- as gdp increases, imports increase and AE decreases/ NX decreases, and GDP increases MPC= change in C/change in XD MPS= change in S/ change in YD ●

Actual investment> planned investment, Real GDP > AE→ I>PI inventories increase, unplanned increase in inventories ○ Companies will want LESS inventories next semester, output will decreases

Actual investment net investment Gross domestic product= sum up everything except imports and depreciation Net Domestic Income and Factor Price= GDP- depreciation- net taxes Decrease by more than the amount we get to compensate taxes and exports Potential GDP is independent of P level...