Macro Hourly 1

Microeconomics is the study of [blank_start]individual[blank_end] behavior, as consumers, workers, employers, the company, as competitors while macroeconomics is study of [blank_start]aggregate[blank_end] outcomes of individual choices.

What is aggregate output and income? What is the abbreviation and symbol we use for it?

What is the abbreviation for unemployment? [blank_start]U[blank_end]

The abbreviation P stands for price level and Pdot (dot above the P) stands for the inflation rate or the rate of change of price level.

What the does abbreviation e stand for?

What does the abbreviation i stand for?

For demand: - Embargo [blank_start]reduces[blank_end] our imports and exports - War [blank_start]provides[blank_end] demand for munitions, supplies for soldiers - High tariff (tax on imported goods) means [blank_start]lower[blank_end] IM, higher domestic demand, lower U - Retaliation by foreigners imposing tariffs on our exports means [blank_start]lower[blank_end] domestic demand, higher U - Higher minimum wage, more disposable income for workers, [blank_start]higher[blank_end] demand for goods, lower U

For supply: - Change in technology considered [blank_start]beneficial[blank_end] for demand for labor (supply of jobs) - Labor-saving change in technique (obsolete skills) will [blank_start]reduce[blank_end] employment - High taxes send companies out of business - Weather conditions affect supply - High business taxes mean fire workers – if this affects costs - Technological change cuts costs, [blank_start]raises[blank_end] output and N (employment) - Labor-saving change in technique [blank_start]raises[blank_end] U - Higher minimum wage, higher costs, [blank_start]higher[blank_end] U - Runaway shops – company moves abroad, [blank_start]higher[blank_end] U here

What is epistemology?

What is the blank page approach?

How characteristics of information help us decide what's true?

Positivism approach is using the scientific method and normative science (asking a question and determining how to solve it).

A paradigm is a system of thinking, a conceptual framework, a mindset, a worldview, school of thought. It shapes what you see and how you understand it.

Perfect Competition (Classical Macro) 1) Price-takers, passively respond to market price, no market power to set the market W or P 2) [blank_start]Homogeneous[blank_end] product, workers 3) No [blank_start]barriers[blank_end] to exit or entry 4) [blank_start]Large[blank_end] number of companies/consumers/workers 5) [blank_start]Perfect[blank_end] information, perfect foresight

Imperfect Competition (Keynes' Macro) 1) Price-makers, significant market power; 4-firm ratios of 20-30% of market enough for significant market power 2) Product [blank_start]differentiation[blank_end] is a conscious marketing strategy 3) Significant market barriers to [blank_start]entry[blank_end] 4) Many industries, only a [blank_start]few[blank_end] large firms 5) Uncertain – information is costly and not necessarily reliable; future [blank_start]cannot[blank_end] be known

PPF stands for [blank_start]Production[blank_end] Possibility Frontier. It refers to the [blank_start]supply[blank_end] side of the economy. A hidden assumption is that there is [blank_start]full[blank_end] resource utilization. To figure out PPF, we need to know resources (land, labor, capital), technology, and institutional context.

Real Capital ([blank_start]K[blank_end]) is the produced means of production such as equipment, physical plant (land, factory, buildings, etc.), and inventories (raw materials, or semi-finished products or materials).

For using PPF and graphing the changes in it: - Move along: [blank_start]Change[blank_end] in people’s choices (preferences), Companies choose to [blank_start]reallocate[blank_end] resources, increase in one and decrease in another - Shift in or out (left or right): based on the “givens”: resources, technology, institutions; either symmetric or asymmetric - Operate under the PPF: under utilization of the resources, [blank_start]below[blank_end] the curve, not reaching full potential

What is the formula for percent change? ([blank_start]final[blank_end]/[blank_start]initial[blank_end] -1) * [blank_start]100[blank_end]

What is the formula for finding Real Variable? ([blank_start]Nominal[blank_end] Variable/P index)*[blank_start]100[blank_end]

adjustable-rate mortgages – usually permit a 2 %-point increase in i in any year. ARMs are not a perfect protection against inflation.

Direct lending is through the bond market. Borrowers sell bonds, lenders buy bonds, and that cuts out the banking intermediaries. That’s why this is called [blank_start]disintermediation[blank_end]. Bond issuer decides on Face value, term value of bond. Bond-holders find that the Pb ([blank_start]price[blank_end] of the bond on the market) tends to [blank_start]fall[blank_end] when inflation heats up because higher inflation means higher nominal i. Formula for determining face value of bonds are Pb (1+i) = Pfv.

Inflation is the [blank_start]increase[blank_end] of prices and assets. Deflation is the opposite and it [blank_start]increases[blank_end] the burden of debt. Both are bad to have.

To count as unemployed, you have to be [blank_start]available[blank_end] to work full-time, not employed, and [blank_start]actively[blank_end] seeking employment. “[blank_start]Workforce[blank_end]” means those who are employed. “[blank_start]Labor[blank_end] force” means those who are potentially employed, but includes currently unemployed. If you are a [blank_start]discouraged[blank_end] worker (given up looking for a job) you are not in the labor force. If you are a full-time [blank_start]student[blank_end] you are not in the labor force. Homemakers are considered [blank_start]available[blank_end] to work full-time and [blank_start]prison[blank_end] population is not available to work.

Business cycles last 2-11 years. Expansion (of output) is about 3x length of recession/contraction (of output). Recession is defined as 2 sequential quarters of decline in output. Peak is the high point of output. Trough is the low point for output.

Layoffs are considered [blank_start]cyclical[blank_end] U – workers are laid off and await recall. Their job will be there again when the economy picks up. Depressions—they last 11-26 years, but spaced 40-60 years apart. Hit hard the advanced capitalist countries, especially the [blank_start]upstart[blank_end] country. Seasonal U – we know there are recurring patterns of [blank_start]higher[blank_end] U in the summer and in January/February after the holiday sales boom.

[blank_start]Cyclical[blank_end] unemployment is when people are laid off (company plans to rehire you when economy turns up). It’s a cyclical downturn. Frictional U – search for a new job by worker and employer takes [blank_start]time[blank_end], not a frictionless world. Especially true for new entrants, some jobs become vacant when people retire, quit, are fired. Has to do with job turnover, and LF turnover. Structural U – when there’s a [blank_start]mismatch[blank_end] between the workers looking and the jobs available. Mismatched skills, mismatched locations.

What is the formula for finding incidence unemployment rate? U rate = [blank_start]incidence[blank_end] rate * [blank_start]duration[blank_end]

Label the circular flow diagram.

Demand is [blank_start]downward[blank_end]-sloping because of preferences and affordability. Substitution effect: as an item becomes [blank_start]cheaper[blank_end], it becomes worth it to buy more of that item, less of a substitute. Income effect: as an item becomes cheaper, you can afford to buy [blank_start]more[blank_end] of it.

Supply is [blank_start]upward[blank_end]-sloping because of [blank_start]congestion[blank_end], as you try to supply more and hire more resources, you only have so much room in your workplace.

Diminishing marginal utility of goods, or rising marginal disutility of saving, the less you are consuming and more you are saving, the harder it is to give up more present consumption and save unless without a good [blank_start]incentive[blank_end].

What are some leakages for households and businesses (firms) in the circular flow diagram?

What are some injections for businesses (firms) in the circular flow diagram?

There are three approaches for GDP accounting. [blank_start]Product[blank_end] Approach is GDP = C + I + G + (EX-IM) = C + I + G + NX. [blank_start]Income[blank_end] approach is GDI = [W’s + distributed profits + interest + rent] + [CCA + retained profits] + indirect business taxes (e.g., payroll taxes) = GDP. [blank_start]Value[blank_end]-added Approach is value added at any stage of production = Value of that output minus the value of direct produced inputs at that stage of production.

Perfect Competition, embraces [blank_start]laissez-faire[blank_end], or the government letting the economy alone. From that perspective, the invisible hand of the market process works because the economy is an egalitarian and fair playing field. Small Mom & Pop grocery stores. Imperfect Competition believes there are large corporations with significant market power, but they are still technologically constrained, just like smaller firms. They think there are natural [blank_start]limits[blank_end] on firms’ size. Imperfect Competition agrees with PC that consumers are unconstrained rational individuals freely making [blank_start]choices[blank_end]. Strategic Competition believes that large corporations rather than individuals are [blank_start]unconstrained[blank_end], companies seem to be able to expand without constraint into larger and larger conglomerates. Therefore more extensive government [blank_start]intervention[blank_end] on the supply side as well as demand side is necessary. Also, consumers’ households are constrained by the need to earn a living, since most have no independent means of support.

Additional HIDDEN assumptions we need to make explicit, to differentiation PC/IC from Strategic Competition and Keynes: PC/IC side 6) Owner/Operator (“the firm”) 7) Diminishing returns: Given fixed K stock (factory, equipment, plant), more employees are hired, workplace gets [blank_start]congested[blank_end], and productivity (output/hour) [blank_start]declines[blank_end] . 8) Companies [blank_start]maximize[blank_end] (short-run) profits 9) Companies pay for, people sell their labor-services or work on the labor market 10) Atomistic Rational individuals [blank_start]maximize[blank_end] their well-being (utility) subject to constraints of initial endowments 11) WORLDVIEW: INDIVIDUAL, and CHOICE PREVAILS

Additional HIDDEN assumptions we need to make explicit, to differentiation PC/IC from Strategic Competition and Keynes: Strategic Comp version 6) [blank_start]Separation[blank_end] between ownership and management, so potential conflict of interest between owners and managers (or different objective functions, i.e., goals); it matters for differentiating financial from real investment 7) Constant returns: There is typically [blank_start]excess[blank_end] capacity (unutilized equipment). Manager has choices – shifts, overtime. Given an optimal staffing ratio for equipment. For K/L, you expand output by expanding the hours each piece of equipment is used. 8) Strategic companies seek [blank_start]long[blank_end]-run profitability, willing to sacrifice short-run profits for long-run gain. Investment reflects such long-run strategic planning, not a short-run profit-maximization algorithm; matters for real investment, and for business failures 9) people sell their time and potential on the labor market, companies hire and pay for a resume, for workers’ potential. Actual labor-services are performed at work. It’s management’s job is to make sure there is the appropriate level of work intensity and quality of work performance 10) Choices are made by [blank_start]households[blank_end] of a given class, which have needs, are socially constrained and motivated, and depend on the internal dynamics of household itself 11) HOUSEHOLDS/CLASSES in social context, and NEEDS PREVAIL “With so much to choose from you’d think you’d have a choice”

Stocks vs. Flows - What are stocks?

Stock vs. Flow - What are flows?

A flow of [blank_start]saving[blank_end] (per year) is amount of money a household puts aside in a given year for repaying debt or increasing wealth while a stock of [blank_start]saving[blank_end] is past accumulation of saving. A flow of [blank_start]investment[blank_end] is the amount of money businesses put into increasing/replacing worn out plant, equipment, and inventories while a stock of [blank_start]capital[blank_end] is amount of plant, equipment, and inventories accumulated from the past.

Keynes’ Theory of Investment – different from Neoclassical. I is the most volatile part of GDP. The [blank_start]timing[blank_end] of investment is just as important as the incentive to invest. Driven by competitive process in your industry, companies need to I to stay alive as a going concern, the decision question is timing (less about if, more about how much and when).

Classical theory of saving: you’re only willing to save more if you’re paid a [blank_start]higher[blank_end] interest rate – theory of time preferences. Keynes: In fact, households save because they have [blank_start]needs[blank_end] as households, not individuals; we are mortal, we have a life-cycle (raise a family, buy a house, send kids to college, retire). It smooths the income received, despite the fact that prime age to work is 22-60. Life-Cycle Hypothesis – people need to [blank_start]save[blank_end] over their life for big-ticket items like cars, homes, college education, or for when you won’t have income coming in – retirement. Permanent-Income Hypothesis – people’s [blank_start]expenditures[blank_end] depend on their average or usual income, not temporary rises or falls. Substitution effect: [blank_start]higher[blank_end] price of something leads to change in quantity you choose. Income effect: [blank_start]higher[blank_end] P of something means you can “afford” a different amount.

The Saving Function: S = Sa + mpsY(d). Sa is [blank_start]autonomous[blank_end] saving, mps is marginal propensity to save. mps is the [blank_start]slope[blank_end] of the saving function where (change of S/change of Y).

The Consumption function can be derived from the saving function. C = Ca + mpcY. Ca is autonomous [blank_start]consumption[blank_end]. Ca = -Sa. mpc is marginal propensity to consume (1-[blank_start]mps[blank_end]) and Y is income.

The Aggregate Expenditure (AE) function is AE = C+I+G+NX(EX-IM). It can also be written as AE = [blank_start]A[blank_end] +mpcY where mpcY is induced AE.

So Production = demand So y = GDI = GDP = AE Or [blank_start]Ys[blank_end] = AE Slope of Ys = [blank_start]1[blank_end]

PC/IC has [blank_start]Diminishing[blank_end] Returns in L market, full K [blank_start]utilization[blank_end] and [blank_start]Short[blank_end]-run profit maximization. While Strategic has [blank_start]Constant[blank_end] returns, [blank_start]excess[blank_end] capacity and Strategic choices for [blank_start]long[blank_end]-run/sustainable profitability. Diminishing returns are as the company highers more people there is an increase in labor hours while the MPL (marginal product of labor) is diminishing. MPL is change of output/change of labor hours so APL (average product of labor = total output/total labor-hours) is also diminishing. That means there will be rising costs.

Equilibrium will be where both conditions are met, where the two lines [blank_start]cross[blank_end]. There is no further tendency to [blank_start]move[blank_end].

The Income Tautology formula is Y = C + S + T, or Y = C + S.

Equilibrium GDP is Y = A*MULT. MULT formula is MULT = 1/(1-mpc) = 1/(mps).

Real interest formula is ireal = (inominal – (inflation rate))

I = I(E, i, confidence) Keynes’s Investment function S = ΔNW = Δ (Assets – Liabilities) Keynesian Saving – anything that adds to net worth

What affects GDP?

What is the value added-approach?

What is autonomous saving?

If there is dissaving, then what can be said about the relationship of consumer spending to personal income?

What is the definition of equilibrium in macroeconomics?

Why does an initial increase in aggregate expenditure of $l0 million lead to an increase in national income of more than $l0 million? Explain the economic process behind the multiplier as if to someone who never had the course.

To realize a targeted real interest rate, bond-buyers who will become bond-holders have to [blank_start]lower[blank_end] their offer price to buy bonds, to realize a higher (nominal) interest rate, to cover inflation. The bond market falls when there is [blank_start]inflation[blank_end]. Higher inflation rate, higher nominal interest rate expected in bond market to cover inflation, reduced prices of bonds in the marketplace. Bond-holders [blank_start]hate[blank_end] this. It means their portfolio of bonds falls in value when there is [blank_start]inflation[blank_end].

There is a conflict of interest between industry and finance over inflation: borrowers (industry, most households) do not mind a little [blank_start]inflation[blank_end], since it reduces the real carrying costs of debt. Lenders (finance, especially bond-holders), [blank_start]hate[blank_end] inflation for reducing their real interest earnings or even forcing them to choose between capital loss and illiquidity on bonds.