Macroeconomics 1

A falling overall level of prices.

Drawbacks: Discourage people from spending (holding money back because it gains value over time)

When overall level of prices changes slowly or not at all

The basis for measuring inflation.

Examples: PPI, CPI and GDP Deflator

Number of people not employed but actively looking for a job

(excludes discouraged workers, marginally attached workers, and underemployed)

would like to be employed and have looked for a job in the recent past but are not currently looking for work (e.g. discouraged workers, nonworking people that are not looking for a job because there are currently no suitable jobs available). 

Involuntary part-time workers who would prefer to work full time but cannot find a job

A period in which real GDP is growing but unemployment rises, often follows recessions

Unemployment due to the time workers spend in job search (e.g. taking the first job offered not always makes sense).

Unemployment that results when there are more people seeking jobs in a particular labor market than there are jobs available at the current wage rate.

Minimum wages, labor unions, efficiency wages, side effects of government policies such as unemployment benefits, and mismatches between employees and employers lead to structural unemployment

Inflation leads to a higher number of transactions. Increased costs of transactions caused by inflation are known as shoe-leather costs

Most things we buy have a listed price. Changing a listed price has a real cost, called menu cost. Although modern economies can do that electronically, those costs still exist

Money works as unit of account or standard of value. However, this value changes continuously. The unit-of-account costs of inflation are the costs arising from the way inflation makes money a less reliable unit of measurement

The process of bringing the inflation rate down. Is difficult and costly! Can only brought down by sacrificing large amounts of aggregate output and imposing high levels of unemployment.

Physical Capital: Manufactured resources such as buildings and machines.
Human Capital: Refers to the improvement in labor created by the education and knowledge embodied in the workforce. More important than physical capital.
Technological Progress: The advance in the technical mans of the production of goods and services. The most important driver of productivity

Government Subsidies to Infrastructure: roads, power lines, clean water supply and other physical capital projects provide a foundation for economic activity.

Government Subsidies to Education: Government spending on education to add value to the human capital.

Government Subsidies to R&D: Especially in more advanced countries, important R&D is done by government agencies as well.

Maintaining a Well-Functioning Financial System: Government play an important role in making private investment spending possible.

Says that differences in real GDP per capita among countries tend to narrow over time because countries that start with lower GDP per capita tend to have higher growth rates. However, this is no guarantee of rapid growth!

Holds only when other things that affect economic growth (education, infrastructure, property right, etc.) are held equal!

the total amount of funds borrowed by federal, state, and local governments in the financial markets.

A paper claim that entitles the buyer to future income from the seller. Also a liability from seller’s point of view. Examples: Loans, bonds, stocks, bank deposits.

A tangible object that can generate future income

Changes in perceive business opportunities: Change in belief about payoff of investment spending can increase/decrease the amount of desired spending.

Changes in government borrowing: If government runs a budget deficit, demand for loanable funds rises.

When a government budget deficit drives up the interest rate which leads to reduced investment spending

Changes in private savings behavior: When people decide to save money instead of spending/investing it.

Changes in net capital inflows: Capital flows in and out of a country can change as investors’ perceptions of that country changes.

Reducing Transaction Costs. Putting together, negotiating, and executing

Reducing Risk. Uncertainty about future outcomes. A risk-averse person is more sensitive to a loss than to a gain of equal dollar amount

Providing Liquidity. How quickly an asset can be converted into cash

Asset prices embody all publicly available information

Buying stocks when they are underpriced and selling them when they are overpriced

The study of how people make (predictable) mistakes in their decisions.

Overconfidence: Having misguided faith that they are able to spot a winning stock.

Loss Aversion: Being unwilling to sell an unprofitable asset and accept the loss.

Herd Mentality: Buying an asset when its price has already been driven high and selling it when its price has already been driven low.

An increase in expected future inflation raises the nominal interest rate one-to-one so that the expected real interest rate remains unchanged.

Owning a wide range of assets whose returns are based on unrelated, or independent, events.

Pooling individual loans and selling shares of those pools as bonds. Provides greater diversification and liquidity (since bonds can easily be converted into cash)

Consumers plan their spending over a lifetime (save more money while earning more). à Changes in Aggregate Wealth (AW) affect the CF!

Higher aggregate price level reduces the purchasing power of households’ wealth and consequently reduces consumer spending

The wealth effect makes households hold more money and thus leads to a rise of the IR. Higher IR leads to less investment (↓demand for loanable funds) and more savings (↑supply of loanable funds). High IR also decrease exports and increase imports

• Changes in expectations
• Changes in wealth
• Size of the existing stock of phsyical capital
• Fiscal Policy
• Monetary Policy

• Changes in commodity prices
• Changes in nominal wages
• Changes in productivity