Upgrade to remove ads
Only $35.99/year

Macroeconomics 251G Exam Review 2

Terms in this set (30)

John Keynes' famous economic quote against the long-run by classical economics.
"In the long run, we are all dead...."
Current (2021) minimum wage in the US that of NM (state); US current budget condition
US $7.25; NM: 10.50; current budget defeicit: US $3.13 t
CPI inclusion and exclusion
Consumer Price Index (CPI):inclusion of all consumer goods (e.g. imports/exports/used goods); exclusion of financial transactions
GDP inclusion and exclusion
Gross domestic Product (GDP): inclusion of all final goods/services (in the market); exclusion of used goods/unpaid/unreported/illegal activities/financial (e.g. bonds/stocks) products/government transfers
Main teaching of classical economics. Its aggregate production (AP) function - assumptions and goals.
a. Focusing on the 'long-run analysis or equilibrium' - market clears (i.e. Qd = Qs)!

b. Three key assumptions: (1) labor is the only input; (2) AP function produces and maximizes output production; (3) The 'law of diminishing returns' applies to AP.

c. Key highlights: (1) Laissez Faire policy; (2) in the long run, the economy reaches its full-employment output level; (3) it focuses on 'real' variable analysis (NOT nominal or monetary variables); (4) Long-run or short-run depends on the nature of production inputs. (5) market clears in the long run - Equilibrium!!
Key instruments of monetary policy vs. fiscal policy
a. monetary policy: Money Stock (supply); interest rate

b. Fiscal policy: Government spending; Taxation
Business cycle and its regular vs. irregular phases
a. Business cycle is the short-run economic fluctuations along the long-run economic growth trend, defined and measured by NBER.

b. Regular phases: expansion; contraction; peak; trough

c. Irregular phases: boom; recession; depression
Labor supply and demand analysis
a. labor supply (upward-sloping): the worker's willingness to supply his/her labor (hours) at different wage rates

b. Labor demand (downward-sloping): the firm's willingness to demand/hire a worker at different wage rates
GDP measure from (1) expenditure approach, (2) factor payment approach, and (3) value-added approach
a. expenditure: GDP = C+ I + G +(X-M)

b. Factor payment: GDP = Rent + Wage +interest + Profit

c. Value added: GDP is the sum of all intertemporal value differences between the production stages
Phillips Curve in the short-run analysis
The curve suggests the negative relations (trade-off) between inflation (%) and unemployment (%).
J.B. Say's economic quote about supply and demand
Say says "supply creates its own demand"
Leakage vs. Injection of the circular flow in an economy
Leakage: income earned unspent (e.g. net taxes (T) + savings (S))

Injection: all spending excluding household spending (consumption) (e.g. G+I)
The relationship between total spending and total output (income) in the classical long-run analysis
In the long-run, total spending = total income (output) for the economic equilibrium

Hint: 'equilibrium' implies '='
Types of unemployment; disguised unemployment; discouraged worker; underemployment
a. Natural unemployment: frictional; seasonal; structural

b. Unnatural unemployment: cyclical

c. Disguised unemployment: abundant labor supply without productivity

d. Discouraged worker: inactive worker after actively seeking for a job can't get one

e. Underemployment: Winnie collecting all the shopping carts at the Sam's Club parking lot as a job; mismatch the job with credential.
Stock vs Flow variables in economic study
Stock: a measure of an activity at one point in time

Flow: a measure of an activity based on a period of time or over time
Concept of 'full employment'. U.S. current unemployment rate; U.S. current LFPR.
a. Full employment: the unemployment rate is POSITIVE (due to the natural unemployment), with the cyclical unemployment rate of zero.

b. U.S. (Sept, 2021) unemployment: 4.8%

c. U.S. (Sept, 2021) Labor Force Participation Rate (LFPR): 61.6%
Measure of economic growth; interest rate vs. investment and consumption.
a. Economic growth normally displays in higher (real) GDP per capita

b. In an economy, a higher interest rate tends to discourage investment and consumption (i.e. too costly to spend/invest), vice versa.
Budget condition of an economy: surplus, deficit, and balanced budget.
a. Budget surplus: G < T

b. Budget deficit: G > T (the U.S. current condition)

c. Balanced budget: G = T
Real income vs. nominal income.
a. Real income = (Nominal income / CPI) x 100

b. Nominal term is the monetary value (or, money) one receives. Real term is when one takes the nominal term to buy goods or services with their prices (i.e. how many real goods and services one gets). CPI is often used to measure the price change.
Keynesian consumption function; MPC; MPS; the multiplier effect.
a. C = a + b * DI, where a: autonomous spending; b: slope, aka Marginal Propensity to Consume (MPC)

b. MPC = change in consumption / change in disposable income (DI); 0 <= MPC <=1.

c. MPS = Marginal Propensity to Save; 0 <= MPS <=1.

d. MPC + MPS =1.
e. The multiplier = 1/ (1-MPC)
Consumption-function or consumption-income (CI) line: movement vs. shift.
a. C = a + b * DI, where a: autonomous spending; b: slope, aka Marginal Propensity to Consume

b. CI is the aggregate (summed) term of C.

c. C or CI can be moved due to change in disposable income.

d. C or CI can be shifted due to change in other factors (e.g. T; G; I; a), but NOT disposable income.
Measure in labor force; LFPR; employment vs. unemployment.
a. Labor force = employed + unemployed.

b. LFPR = Labor force / Civilian non-institutionalized population.

c. Unemployment rate = unemployed / Labor Force.
GDP equilibrium vs. 'Keynes Cross'; AE vs. GDP vs. inventory.
a. GDP equilibrium: the equilibrium condition where GDP is equal to AE on the 45-degree line.

b. 'Keynes Cross': 45-degree line

c. AE > GDP, inventory negative, leading to increase future GDP.

d. AE < GDP, inventory positive, leading to decrease future GDP.
The goods basket of 2010 (base-year) is $400; the same basket of 2018 is $580.
a. Calculate CPI (of 2018).
Review your class handouts for formula!
$580/$400 * 100 = 145 = CPI (2018).

b. Between 2010 and 2018, calculate the price change or inflation rate.
(145-100)/100 *100 = 45%, where the base-year CPI is 100.

c. Assume in 2014, the same basket's CPI is 120, calculate the inflation rate between 2014 and 2018.
(145-120)/120*100 = 20.8%.
Per-household disposable income: $50,000 (2018); $60,000 (2020); per-household consumption spending: $36,000 (2018); $42,000 (2020).
a. Calculate MPC and MPS.
Review your class handouts for formula!

MPC = change in C / change in DI = ($42,000 - $36,000)/($60,000 - $50,000) = 0.6.
MPS = 1 - 0.6 = 0.4.


b. Given the net tax decreases $5 million (for all households), calculate the change in equilibrium GDP.
First, find the multiplier:

1/(1-MPC) = 1/0.4=2.5
2.5 * $5 million = $12.5 million = total change in equilibrium GDP.
Consumption spending: $2,000; Wages and salaries: $1,600; Rent: $200; Government purchases: $400; Business profit: $600; Exports: $800; Capital interest: $500; Private investment: $800; Imports: $1,100; Corporate tax: $400; Production stage 1 of raw materials: $900; Production stage 2 of intermediate goods: $1,500; Production stage 3 of final products: $2,900
a. Calculate GDP by expenditure approach.
Review your class handouts for formula!
GDP = C + I + G + (X - M) = $2,000 + $800 + $400 + ($800 - $1,100) = $2,900.

b. Calculate GDP by factor payment approach.
GDP = Rent + Wage + Interest + Profit = $200 + $1,600 + $500 + $600 = $2,900.

c. Calculate GDP by value-added approach.
GDP = $900 (stage 0~1 value-added) + ($1,500 - $900) (stage 1~2 value-added) +
($2,900 - $1,500) (stage 3~2 value-added) = $2,900.
Nominal GDP: $850 billion; GDP deflator: 1.256.
a. Calculate REAL GDP.
Review your class handouts for formula!
$850/1.256 = $676.75 billion.
Income conversion: Income (1975; CPI: 62.8) = $15,000; Income in 2020, CPI = 225.4.
a. Calculate today's (2020) income.
Review your class handouts for formula!
$15,000 * 225.4 / 62.8 = $53,837.58.
Income conversion: Nominal income (2018; CPI: 115) = $45,000. Calculate REAL income.
Review your class handouts for formula!
$45,000/115 x 100 = $39,130.43.
Added question: Employed persons = 560; Unemployed persons = 45.
a. Calculate the Labor Force.

Labor Force: 560 + 45 = 605.

b. Calculate the Unemployment Rate.
Review your class handouts for formula!

Unemployment rate: 45/605*100 = 7.44%.
Other sets by this creator