Intermediate Macroeconomics Exam 1 Review
Intermediate Macroeconomics Exam 1 Review ECON 2202
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This 5 page Study Guide was uploaded by Aaron Notetaker on Monday October 3, 2016. The Study Guide belongs to ECON 2202 at University of Connecticut taught by W. Pace in Fall 2016. Since its upload, it has received 134 views. For similar materials see Intermediate Macroeconomic Theory in Economics at University of Connecticut.
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Date Created: 10/03/16
(Supply and Demand Graph attached) + increase/ - decrease/ ? change is undetermined Simple cases Increase Demand Price Increase Quantity (D+) (P+) + Decrease Demand P- Q- (D-) Increase Supply P- Q+ (S+) Decrease Supply P+ Q- (S-) Complex cases D+S+ Q+ P? D+S- Q? P+ D-S- Q- P? D-S+ Q P- Endogenous variables – explained by the model Exogenous variables – go into model (affect model) Nominal GDP – expressed in current dollars Real GDP – adjusted for inflation (using a fixed year for comparison Deflator = nominal GDP/Real GDP x 100 Real GDP = current year quantity x base year prices Fisher Equation: i = nominal interest rate r = real interest rate Pi^e = expected inflation I = r + pi^e OR r = I – pi^e EXAMPLE Mortgage rate = 5%, pi^e = 2%, Real rate = 3% GDP Y = C + I + G + NX Y = GDP = total production (output) C = consumption spending (was 68.7% of GDP in 2012) (Consumers can spend or save) I = investment (was 15.2% of 2012 GDP) G = gov’t spending on goods and services (19.2% of 2012 GDP) NX = net exports = trade balance = exports – imports (can be negative) Inflation Rate - % rate of change of the price level over a particular period (pi used for inflation rate, P subscript t = price level at time t) - Pi = P t P t1 / Pt-1 = Change in P / t -1t Percentage Change Method and Inflation Rate - % change in (x X y) = (% change in x) + (% change in y) In 2013 – unemployment 7.8% (in 2016 around 4.8%), employed 58.9%, not in labor force 36% Aggregate Production and Productivity Factors (inputs) of production - Labor (L) - Capital (K) Both factors are assumed to be exogenous and fixed over time Aggregate production function (production function) – description of how much input, y, is produced for any given amount of factor inputs Cobb-Douglas production function – incorporates 2 ideas - a developed economy generally produces more with the same quantity of capital and labor than an undeveloped economy. - The shares of labor and capital income in the US have remained relatively constant over time – 70% L and 30% K Y = F (K, L) = AK^.3L^.7 where A describes productivity (‘marginals’ are slopes) MPL (marginal productivity of labor) = change in y-output / change in labor – indicates how much output increases for each additional input of labor, holding other inputs constant MPK (marginal productivity of capital) = change in y / change in K – same as MPL, but for capital holding other inputs constant Classical framework (for determining of factor prices), assumes the economy - Has perfect competition - Has a long-term equilibrium level P x F(K,L) – RK– W L Where - P = average level of the prices of goods and services - R = rental price of capital - W = wage rate Real economic profits Pi = F(K,L) – (R/P)K – (W/P)L Profit maximization – firms demand a quantity of each factor of production up until the marginal product of that factor falls to its real factor price. MPs decrease as Y increases MPK = (R/P) = r c MPL = (W/P) = w Private saving – private disposable income minus consumption expenditure Y D Y – T where YD = disposable income Y = GDP and T = net taxes (taxes – gov’t transfers – interest payments on debt) S P Y – T – C where C = consumption expenditure, Sp = private saving Private saving rate is the proportion of private disposable income that is saved S / P Y D Government spending - Gov’t investment (Ig) gov’t consumption (Cg) Gov’t saving S =GT – C (suGplus if T>G, deficit if T<G) National saving – sum of gov’t and private saving S= Y – C – G National saving rate S / Y Uses-of-saving identity S = (C + I + G + NX) – C – G = I + NX (remember that NX = exports – imports) Or as the net capital outflow identity S – I = NX Trade surplus if NX>0 Trade deficit if NX<0 To understand the link between saving and investment in the long run when all prices are flexible, we assume - The goods market is in equilibrium - A closed economy (NX=0) (no foreign sector) Y = C + I + G Subtracting C and G from both sides then give Saving = Investment Consumption expenditure (C broken into 3 categories) C = C bar+ C (Y – T, r) + - - C bar= autonomous consumption (C that is not interest rate sensitive) - Y – T = disposable income (increase in income or decrease in taxes = more spending) - r = real interest rate (some C is interest rate sensitive) Long-run aggregate output becomes Y = F (K bar)barY bar And so desired saving becomes S = Y bar– Cbar– C (Ybar– Tbarr) – G bar Investment function I = Ibar I(r) where I bar= autonomous investment Looking at how the economy responds to changes I saving and investment through changes in - Autonomous consumption A rise in autonomous consumption causes saving and investment to fall and the real interest rate to rise in the long run A fall in AC causes saving and investment to rise and real interest rate to fall - Fiscal policy A rise in taxes causes S and I to rise and r to fall A fall in T causes S and I to fall and r to rise A rise in gov’t spending causes S and I to fall and r to rise A fall in gov’t spending causes S and I to rise and r to fall A rise in gov’t budget deficits causes saving and investment to fall and real interest rates to rise - Autonomous investment Increase in autonomous investment causes S, I and r to rise (caused by optimism and tax breaks) Decrease in AI causes S, I and r to fall (caused by pessimism or raising taxes)
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