Macroeconomics Exam #2 Study Guide
Macroeconomics Exam #2 Study Guide eco 105
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This 6 page Study Guide was uploaded by Daniel Hong on Sunday November 22, 2015. The Study Guide belongs to eco 105 at Pace University taught by Mark Weinstock in Fall 2015. Since its upload, it has received 96 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.
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Date Created: 11/22/15
Macroeconomics Study Guide Chapters 2nd half of 6 7 and 8 2nd Half of Chapter 6 Consumer Price Index CPI Consumer Price Index a price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer 0 What the CPI basically does is that it compares the purchasing power of the different years 0 Meaning how much is 10 worth now in 2015 than it did back in 1950 0 CPI can tell us which year is better off for that 10 We first need to know this Real GDP Nominal GDP GDP De ator De ator Prices in that year year 2 Prices in the base year year 1 So The CPI in 1950 9 50 The CPI in 9 220 Salary of a pilot of 1950 9 20000 Salary of a pilot of 2015 9 80000 Which year is better off 1 De ator 50 220 227 2 Real Salary 20000 227 881057 The salary of 1950 is better because of a stronger purchasing power What goes in the numerator is the year to check In ation In ation the percentage rate of change in the price level 0 Basically what is the difference of the price changes from one to the other We can find this out by using the in ation rate with very simple math In ation rate price index 2 price index 1 price index 1 0 It s like nding the percentage change De ation negative in ation or the fall of prices of goods and services An example of de ation would definitely be the Great Depression that lasted from 1929 to 1941 Anticipated In ation the in ation that is expected 0 Basically if you predicted it it will come true Unanticipated In ation the in ation that is not expected 0 Basically if you predicted it it will not come true Chapter 7 Classical Models economic models that assumes wages and prices adjust freely to changes in supply and demand 0 This model is in regards to an economy at full employment An economy at full employment 0 Does not mean that there are absolutely no unemployed workers out there 0 This is because there will always be frictional and structural unemployment 0 Only unemployment that is not around is cyclical unemployment o Frictional and Structural unemployment will always be around because that s how the economic world works of there always being a mismatch of workers and jobs as well as people searching for the correct candidates to take the job position The study of how production actually occurs is called the production function Production function the relationship between the level of output of a good and the factors of production that are inputs to production 0 The stock of capital is very important for more output of production 0 But the level of capital machines and equipment all depend on investments 0 Human efforts both physical and mental all counts as labor Capital will wear down as more people uses them The principle of diminishing returns applies to this because the more a company invests on more machines to be more productive output will increase but at a decreasing rate Capital is one of the key factors of production Another factor when it comes to hiring new labor all depends on the real wage Real Wage the wage rate paid to employees adjusted for changes in the price level 0 Basically their purchasing power when they get paid for their work 0 So the more productive that a firm produces the higher their wages will be But it is also the decision of the workers to decide how long must they work The Labor Market Equilibrium This is basically when the labor supplied and the labor demanded are equal 0 The marginal principle applies here because firms must be aware on how much labor they hire if it does not exceed their cost When it comes to immigration not only would the population would increase but also they would work at any given wage Full Employment Output the level of output that results when the labor market is in equilibrium and the economy is producing at full employment In the United States the estimation of the natural rate has varied between 5 and 65 percent If either the supply of labor or the stock of capital increases than the level of potential output in an economy will increase When it comes to high taxes it can be arguably said that it can hurt the economy in the United States and reduce the level of output and production Higher taxes can lead to less employment 0 Which then can lead to fewer output 0 So higher taxes leads to lower output 0 Also firms can also be taxed for the amount of labor that they hire Chapter 8 For the country s economic performance GDP growth is very critical Per capita per person man woman and child Capital Deepening increase in the stock of capital per worker o This can happen with investments Technological Progress more efficient ways of organizing economic affairs that allow an economy to increase output without increasing any input Human Capital the knowledge and skills that is acquired by a worker through education and experience that is then used to produce goods and services Over the long term it is believed that capital deepening and technological progress can increase GDP per capita The Growth Rate is the percentage rate of change of a variable from one time to the other Basically 1 You take the GDP in year 2 and subtract it from the GDP in year 1 this is the numerator 2 Then take the GDP in year 1 this is the denominator and perform the division Growth Rate GDP of year 2 GDP of year 1 GDP of year 1 GDP 11 years later 1 g A n GDP for the economy N the amount of years G the growth rate N exponent the amount of years GDP for the economy is what it tells you what the GDP is for that given time Rule of 70 that the output will double in 70X years 0 X is the percentage rate of growth Years to double 70 percentage growth rate Convergence process of when poorer countries closes the gap between the richer countries in terms of real GDP per capita o This happens when poor countries wants to catch up or meet on the same page of other countries that are better off than they are The Bathtub Model Included in the bathtub model are 0 Investment 0 Capital 0 Depreciation The drain that fills the bathtub with water represents investments This is because one needs to invest to increase the stock of capital The tub itself with water represents the stock of capital The more water that is in the tub than the more capital there are for workers to use to increase production However the more you use capital the quicker it will wear out depreciate This is what the drain that drains the water from the tub represents An economy is better o with an increase in the stock of capital Then workers can get higher wages along with GDP increasing in the economy Government spending can affect the process of capital depending on government spending and taxation Technological Progress Technological progress can mean in a couple of ways New phones better than the old one can be considered as one way The invention of light and the creation of light fixtures illuminating the walkways can be another To even an employee coming up with a new avor of a drink These all tie up to one common idea New ideas new inventions and a whole new way of doing things Growth Accounting a method to determine the contribution to economic growth from increased capital labor and technological progress The scale of the market research and development spending and monopolies can all contribute to in uence technological spending When it comes to property rights without clear property rights there are no clear incentives to invest in the future Which can lead to no clear investments in capital which then leads to fewer output