# Summary Macroeconomics

ISBN-10 1292115238 ISBN-13 9781292115238
269 Flashcards & Notes
2 Students

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## Summary 1:

• Macroeconomics
• Manfred Gartner
• 9781292115238 or 1292115238
• 2016

• ## 2.1 the circular flow model

• What is the most important goal of macroeconomics?
To develop and understanding of what makes income differ between countries, and what makes them grow or fluctuate over time
• The steady state income is the level of income that is generated:
A) if all factors of production are being used at normal rates
b) if the economy's capital stock is at its long run equilibrium level
• Potential income is the income that
Can be produced with current labour and capital. The capital may or may not have reached its equilibrium level
• The business cycle refers to
Recurring fluctuations of income relative to potential income
• A boom describes
Rising income, relative to potential income which culminates in a peak
• A recession describes
Decling income, relative to potential income which bottoms out at a trough
• The production function is
A mathematical formula showing how the use of labour and machinery generates output
• We assume that at current prices, firms produce excactly the amount of output that is demanded. The short run AS-curve is therefore
Assumed to be horizontal
• In the long run however, labour and capital utilization will have to return to normal levels and put a lid on the output that can be produced, no matter what the prices level is. This makes the long run AS curve
Vertical
• Describe all the steps of the circular flow model
The circle begins with income Y on the left. Taxes reduces this to disposable income Y - T, and savings to consumption C= Y - T - S. Taking away imports leaves C - IM. Additions of exports, investment and government expenditure in the circle's lower segment gives total expenditure as C + I + G + EX - IM.
• The sum of all planned demand is called
Aggregate expenditure
• The sum of all planned and unplanned demand is called
actual expenditure
• Aggregate expenditure only equals income if firms succeed in setting output to a level that does not require them to undertake any
Unplanned investmetn in the form of undesired inventory changes. Income Always equals actual expenditure, because if nobody wants to buy the firms production, the firms would be forced to buy themselves
• ## 2.2 income determination: a first look

• EX - IM = NX is a good first approximation of
the current account CA
• The marginal propensity to consume says
By how much consumption rises if income rises by one unit C= cY
• Subsituting for the new C gives
AE = cY + I + G + NX
• The keynian cross is a diagram which plots
Planned expenditure against income and actual expenditure against income. Equilibrium income obtains where both lines cross
• If goverment spending or any other autonomous spending increases by 1, the AE line shifts up by 1. Income rises by delta Y>1 due to the multiplier effect. The reasoning behind this is
That the governments' spending increase of 1 not only raises income by 1. It also induces added consumption of c. Adding c to income. All these effects added up are called the multiplier delta Y = 1/(1-c)
• ## 2.3 income determination: a second look

• Disposable income is that part of income
Left to households after the payment of taxes
• If taxes and imports rise with income, the leaks out of the circular flow incrase as income rises. Hence
The AE does not increase with income as fast as it used to. This is represented in a flatter AE line, which now has slope c(1-t) - m. A flatter AE line implies a smaller multiplier
• The new multiplier can be written as
1 / s(1-t) + t + m
• More precisely and in general terms: the multiplier is the initial increase in demand, the injction, divided by
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## Summary 2:

• Macroeconomics
• Manfred Gärtner
• 9780273769958 or 0273769952
• 2013

• ## 1.2 Essentials of macroeconomic accounting

• What is aggregate output?
The total output of the economy, most easily measured as sum of all spending
• What are the three main reasons not all salary paid flows back to the firms?
- People save
- Government levy taxex
- People buy from foreign firms
• What are the three main injections into the circular flow upping the domestic aggregate output?
- Firms invest
- Government spending
• What are 'transfers'?
Transactions by the government not involving goods or services (welfare, subsidies ect)
• What equation involving all three leakages and injections, paired up, holds at all times?
(S-I) + (T-G) + (IM-EX) = 0
• What are the domestic net savings? (circular flow)
The balance of S-I
• What are the public net savings? (circular flow)
The balance of T-G
• What are the net exports? (circular flow)
The balance of IM-EX
• What are national income accounts?
They report data for GDP and its components
• When do we speak of a country in 'twin deficit'?
When both the government budget and the current account are in deficit
• ## 1.2.1 Money in the circular flow

• What is nominal income?
Income expressed in currency
• What is real income?
Income expressed in actual goods
• What is the quantity equation?
M x V = P x Y
• When do we have inflation whilst looking at the quantity equation?
When the pricelevels increase faster than the money supply
• When the aggregate supply curve is vertical,what influence does changes in price levels have on production?
Zero, since the supply curve is vertical, it will produce that amount no matter the prices
• ## 1.2.2 The government budget and the balance of payments

• What is the government budget?
The planned government incomes and expenditures
• What is a countries balance of payments?
The result of trades with other countries
• Governments have an extra option for running in debt compared to individuals; what is this option?
Running in debt with the central bank
• The government budget change can be divided in two categories, give this mathematical expression:
G-T = ΔBPS + ΔBCB
Where BPS is the Government debt owed to the private sector
• What is the expression for the balance of payments does always hold?
CA + CP + OR = 0
• What does the current account measure?
The demand for domestic currency due to the in and out flows of goods and services with the rest of the world
• What does the capital account measure?
The demand of domestic currency due to the in and out flow of financial assets with the rest of the world
• What does the official reserve measure?
The demand of domestic currency due to government intervention
• if RES denotes the reserves of the central bank in foreign currency, what does OR measure? give the mathematical expression
The change in RES
OR = -ΔRES
• When the central bank of europe sells one million dollars in exchange of euros, will OR be positive or negative?
OR will be positive, since the reserves of foreign currency fall (= negative) and OR is the oppisite sign of ΔRES
• How is F, net foreign assets, defined?
net foreign assets is domestic holdings of foreign assets minus foreign holdings of domestic assets
• If F denotes the net foreign assets, what does the capital account measure? Give the mathematical formula
The change in F in opposite sign:
CP = -ΔF
• If F denotes the net foreign assets and RES the central banks reserves of foreign currency, how can EX-IM also be equated?
EX - IM = ΔF + ΔRES
• How is the equation EX - IM = ΔF + ΔRES a proof of CA + CP + RES = 0?
CA = EX - IM
CP = -ΔF
OR = -ΔRES
Hence,
CA + CP + RES = EX - IM - ΔF - ΔRES = ΔF - ΔF + ΔRES - ΔRES = 0
• How are BCB , RES and M related mathematically?
M = BCB + RES
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## Summary 3:

• Macroeconomics
• Manfred Gärtner
• 9780273717904 or 0273717901
• 3rd ed.

• ## 1.1 The issues of macroeconomics

• Microeconomics
Macroeconomics
Income: revenue derived from work and assets
Nominal income = prices P x real income Y
Gross domestic product (GDP)
Gross national product (GNP)
• Rule of 72:
As a rule of thumb, divide by 72 by the annual income growth rate (in per cent) to learn in how many years income doubles
• ## 1.2 Essentials of macroeconomic accounting

• Factors of production:
all resources used in the production of goods and services: labour, capital goods such as machines, and natural resources such as oil.

2 majors things that can go wrong with this process:

1. firms may not use all available production factors to produce output, thus leaving factors idle in the form of unemployment or slack
2. people may not want to buy all that is being produced, that is, demand may fall short of output
• Barter economy: economy without money
• Expenditure approach: measures aggregate output as the sum of all spending

Income approach: adds up all incomes as the sum of all spending
• 3 reasons why income received by households is not the same as demand for firms:

1. People save
2. Governments levy taxes
• 3 forms of injections into circular flow:

1. Firms invest
2. Government spending
• (S-I) + (T-G) + (IM-EX) = 0
• Common threads in GDP data:

1. Most countries still run sizeable budget deficits
2. In most countries, private savings exceed private investment. This is one way of financing the government budget deficit
3. About half of the countries shown here export less than they import. In those countries the net injection from the private and government sectors is neutralized by a net leakage of spending to other countries
• Twin deficits: deficits in both government budget and the current account
• Quantity equation: M x V = P x Y
• Quantity theory of money: P x Y = V x M   V is fixed, so money supply determines nominal income
• Aggregate supply curve: indicates how much output firms are willing to produce at various price levels
• Balance of payments: records a country's trade in goods, services and financial assets with other countries
• ## 3.1 The money market, the interest rate and the LM curve

• Wat gebeurt er in de money market wanneer Y toeneemt?
money demand shifts up
• Why does i has to increase when Y increases in the money market?
To keep money supply at the same level
• What is the price of money?
interest rate
• What is the money demand function?
L=kY-hi
• What is the money supply function?
M=M
• What is the LM-curve function?
i=k/h*Y-1/h*M
• Does the LM curve shift when L changes?
No
• What happens to the LM curve if there is expansionary monetary policy?
it shifts to the right
• What happens with M when i becomes exogenous?
it becomes horizontal
• What happens to the LM curve when i becomes exogenous?
it becomes horizontal
• How can the lm curve shift with exogenous i?
by changing the targeted interest rate
• What is the monetary policy rule formula?
M=M+a(i-i)
• What happens if i > targeted i?
M will decrease
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Anticipated fiscal or monetary policy does not affect
Output. All it does is have an impact on inflation
Monetary policy affects output when
Exchange rates are flexible, if it comes as a surprise
Under fixed exchange rates fiscal policy may
Temporarily affect output and income if it comes as a surprise
If simple expectations formation results in large and frequent errors, and if errors are costly, individuals are likely to move on to a
More elaborate expectations formation. One such elaborate scheme is rational expectations
The simplest version of adaptive expectations lets individuals
Expect last period's inflation to occur again next period. Forming expectations this way is simple and cheap. If inflation changes only infrequently, it may also be quite accurate
Under fixed exchange rates the aggregate demand curve has a negative slope because
A price increase reduces the real exchange rate. This appreciation creates an excess supply of domestic goods at the old level of income. Since the interest rate is fixed to the world interest rate, supply can only equal demand at a lower level of income
Under flexible exchange rates the aggregate demand curve has a negative slope because
A price increase reduces the real money supply. Since the domestic interest rate is fixed to the world interest rate, the demand for money must be reduced by a decline in income
The demand side can be represented in inflation-income space by means of
A negatively sloped dynamic aggregate demand curve DAD
An economy's supply side can be represented in inflation-income space by means of
A vertical long run aggregate supply curve EAS, and a positively sloped surprise aggregate supply curve SAS
Disinflation is
A decrease in the rate of inflation