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Introduction to Macroeconomics Exam 2 Study Guide

by: Trevor Locke

Introduction to Macroeconomics Exam 2 Study Guide ECON 0110

Marketplace > University of Pittsburgh > Economcs > ECON 0110 > Introduction to Macroeconomics Exam 2 Study Guide
Trevor Locke
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Extensive Exam 2 study guide for Introduction to Macroeconomics.
Introduction to Macroeconomic Theory
James Kenkel
Study Guide
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This 5 page Study Guide was uploaded by Trevor Locke on Tuesday December 1, 2015. The Study Guide belongs to ECON 0110 at University of Pittsburgh taught by James Kenkel in Spring2015. Since its upload, it has received 155 views. For similar materials see Introduction to Macroeconomic Theory in Economcs at University of Pittsburgh.


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Date Created: 12/01/15
Introduction to Macroeconomics Exam 2 Study Guide: Yd = C + S S = Y - C f(Y) = C f(Y) = a x Y + b = C C = a x Y + b MPC = change in C / change in Y MPS = change in S / change in Y Autonomous consumption: consumption that occurs when income is zero Inflation Relative Price Interest: the dollar amount paid by borrowers to lenders Interest rate: interest per year as a percentage of amount loaned Nominal interest rate: the interest rate not adjusted for inflation Real Interest Rate: the interest rate adjusted for inflation Full retirement age: 67, benefit cut 30% if 62 Gross Domestic Product: the market value of all final goods and services produced in the U.S. in a given year Intermediate goods: goods that are produced by one firm for use in further processing by another firm Labor force participation rate: labor force as a percentage of the civilian non institutional population (labor force / civilian non institutional population) Frictional: unavoidable, need better info Seasonal: construction, road builders Structural: change — long term Cyclical: stimulate, fiscal, monetary The Multiplier and Equilibrium: section 15 Emphasis on lecture notes 12-18 Labor force = employed + unemployed Unemployment rate = unemployed / employed + unemployed Labor force participation rate = employed + unemployed / employed + unemployed + not interested, not in labor force New entrants Re-entrants Job leavers Job losers Inflation Disinflation Stagflation Deflation: a decrease in the average level of prices, hurts debtors (must repay debts with more valuable dollars) Hyperinflation: very high inflation, inflation > 50% per month, caused by a very rapid increase in the money supply Effects of hyperinflation: cash becomes almost worthless, bonds have no value, people avoid holding cash, people avoid being paid in cash, barter is prominent Measuring inflation we overstate causes: -Demand Pull (60s) -Cost Push (70s) Indexing: increasing contracted payments automatically to take into account inflation Indexed contracts: -Union wage contracts -Social security benefits -Federal income tax brackets -Capital gains are not indexed One bad effect of indexing: -it can sustain inflation -suppose inflation occurs: usually, this causes wages to rise. This causes production costs to increase. As a result, producers raise prices. This leads to a new round of inflation. Process repeats -inflation becomes self-perpetuating Inflation causes US products to become more expensive The reported inflation rate tends to overstate the true inflation rate: indexed wages rise too fast, other workers seek similar increases, social security benefits rise too fast, tax brackets rise too much, treasury will lose tax revenue Reasons why we overestimate the inflation rate: 1. We underestimate quality improvement 1. medical care, cars, computers 2. We don’t take substitution into account *** Equilibrium Level of Output: the level of output in which planned or desired purchases by consumers, businesses, governments and foreigners equals actual aggregate output -when the economy is in equilibrium, producers have no incentive to increase (or decrease) output Equilibrium: aggregate planned expenditures = total actual output The Equilibrium Condition is: Ye = C + I + G + NX Output = Y = Income GDP = C + I + G + (X - M) (actual output = amount people want to buy) The Autonomous Spending Multiplier in a Model with No Taxes -Autonomous spending: autonomous spending is any spending which is not induced by, or influenced by, the level of income or the size of the economy -Induced spending: any increase in the level of spending that is related to an increase in the level of income or the size of the economy How the Magnitude of the Multiplier is reduced by the Crowding Out Effect: -the multiplier analysis presented thus far overstates the magnitude of the multiplier -thus, the multiplier analysis presented thus far overstates the power of the fiscal policy change in Y / change in G = 1 / 1 - MPC = multiplier spent 400 mil on tunnel / get 100 mil in output = multiplier is 4 (the ratio) Idea behind multiplier: stimulate the economy The Crowding Out Effect as a Result of Displaced Private Spending …of Higher Interest Rates t = average tax rate Yd (disposable income) = Y - t Assume T = ty Should we have a balanced budget amendment? -the argument against a balanced budget amendment -it’s destabilizing -argument in favor: -spending restraint The Burden of the Debt: who eventually pays for government projects? -current taxpayers Real GDP = ( nominal GDP / price index ) x 100 Net National Product = Nominal GDP - Depreciation Consumption (C) C = purchases by consumers 1. Non-durables (food, gasoline, clothing) 2. Services 3. Durables (cars, appliances, furniture) Gross Private Domestic Investment I = purchases by businesses Three Categories: 1. New plant and equipment expenditure 2. New residential construction expenditures 3. Changes in business inventories G = Government Purchase of Final Goods & Services -Federal, state and local -Transfer payments are NOT included Net Exports = Exports - Imports NX = X - M Trade surplus is x > M Trade deficit if X < M GDP = C + I + G + NX GDP = C + I + G + (X - M) Inventory: -items produced that have not yet been sold -items are counted in the year they are produced Change in inventory = inventory at end of year - inventory at start of year = total production during year - total sales during year Increase in inventory: more was produced than was sold during a given year Gross investment includes the value of all new tools and equipment, even those that were produced to replace worn out tools and equipment Net investment = gross investment - depreciation *** CRITICAL INFO: MPC = change in C / change in income Change in C = MPC x change in income a x Yd + b = C Savings = disposable income - consumption Multiplier = change in equilibrium output / change in autonomous spending Multiplier = 1 / (1 - mpc) Change in autonomous spending = change in equilibrium output / multiplier2 Inflation Rate = change in prices / original price Growth Rate = “ GDP = C + I + G + NX Ye = (1 / 1 - mpc) x (C + I + G + NX) Real GDP = nominal GDP / price index


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