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Macroeconomics Test 1
Chapters 3,4,10,11 of Mankiw's Macroeconomics
48
Economics
Undergraduate 1
01/10/2010

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Term
Market
Definition
a group of buyers and sellers of a particular good or service
Term
Perfectly competitive market
Definition
1) So many buyers and sellers that they each have no effect on market price—all “price takers”
2) Homogeneous product
Term
Law of demand
Definition
(C.P.) quantity demanded falls when the price rises.
Term
Normal good
Definition
a good for which (C.P.) an increase in income yields an increase in consumption
Term
Inferior good
Definition
a good for which (C.P.) an increase in income yields a decrease in demand.
Term
Substitutes
Definition
goods for which an increase in price of one yields an increase in demand for the other.
Term
Complements
Definition
two goods for which in increase in price of one leads to a decrease in demand for another.
Term
Law of supply
Definition
(C.P.) an increase in price leads to an increase in quantity supplied.
Term
Equilibrium
Definition
a situation where neither buyers nor sellers have reason to alter their behavior.
Term
Law of supply and demand
Definition
the price of any good adjusts to bring the quantity supplied and the quantity demanded for the good into balance.
Term
Absolute advantage
Definition
the ability to produce a good using fewer inputs than another producer
Term
Opportunity cost
Definition
whatever must be given up to obtain some item
Term
Comparative advantage
Definition
the ability to produce a good at a lower opportunity cost than another producer
Term
Imports
Definition
goods produced abroad and sold domestically.
Term
Exports
Definition
good produced domestically and sold abroad.
Term
Macroeconomics
Definition
the study of economy-wide phenomena
Term
Gross Domestic Product
Definition
the market value of all final goods and services produced within a country over a given time period. Measures total income and total expenditure (but not at the same time)
Term
Consumption
Definition
spending by households on goods and services
Term
Investment
Definition
spending on capital equipment, inventories, structures, and household purchases of new housing
Term
Government purchases
Definition
government spending on goods and services
Term
Net exports
Definition
spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents
Term
Nominal GDP
Definition
the production of goods and services valued at current prices
Term
Real GDP
Definition
the production of goods and services valued at constant prices.
Term
GDP deflator
Definition
a measure of price level calculated by Nominal GDP/Real GDP x 100.
Term
Consumer price index (CPI)
Definition
a measure of the overall cost of the goods and services bought by the typical consumer.
Term
Inflation
Definition
sustained increase in the economy-wide price level.
Term
Indexation
Definition
the automatic correction of a dollar amount for the effects of inflation by law or contract.
Term
Nominal interest rate
Definition
reported without a correction for the effects of inflation.
Term
Real interest rate
Definition
interest rate corrected for effects of inflation
Term
Productivity
Definition
quantity of goods and services produced from each unit of labor input
Term
Things that can change the demand curve
Definition
(TECIB)
- Income
- Prices of related goods (complements and substitutes)
- Tastes
- Number of buyers
- Expectations
Term
Things that can change the supply curve
Definition
(SETI)
- Input prices
- Technology
- Expectations
- Number of sellers
Term
GDP =
Definition
(C)onsumption + (I)nvestment + (G)overnment Purchases + (N)et E(x)ports (exports minus imports)
Term
Issues with GDP
Definition
Doesn’t cover:
1) Volunteerism
2) Underground economy
3) Income disparity
4) Leisure time
5) Externalities
6) Wealth
Term
Calculate inflation
Definition
CPInew- CPIold/ CPIold x 100 or GDPDefnew-GDPDefold/GDPDefold x 100
Term
Issues with CPI
Definition
1) Subsitution bias
2) New goods
3) Quality changes
4) Discount stores
C: CPI tends to overestimate inflation.
Term
Differences between GDP Deflator and CPI
Definition
- Differences in goods calculated
o GDP doesn’t count Volvos.
o CPI counts oil harder
o CPI doesn’t count military/government spending
- Basket updates
o CPI doesn’t count basket changes quickly enough
Term
Calculate a constant income
Definition
Babe Ruth’s salary x (Price level today/Price level in year T)
Term
Bank interest rates=
Definition
real interest rate + inflation
Term
Effects of unexpected inflation
Definition
(LWPM):
1) Hurts lenders, helps borrowers
2) Wages tend to lag behind inflation
3) Price confusion
4) Menu costs
Term
How productivity is determined
Definition
- Physical capital per worker. Tools.
- Human capital per worker. Knowledge the workers have.
- Technology. Knowledge that society has.
Term
What can be done to create the Big 3?
Definition
*1) Protect property rights. Stop "redistributive" (read "criminal") activities. People won't develop if they can't be assured control.
2) Encourage education.
3) Encourage investment.
4) Encourage foreign investment.
- foreign portfolio investment
- foreign direct investment
5) Research and development.
- technology has positive externalities
6) Encourage international trade.
Term
diminishing marginal returns
Definition
the benefit of an extra unit of input declines as the quantity of the input increases (capital, the reason US investment is less productive)
Term
economy of scale
Definition
Average cost goes down as size increases.
Term
Things that don't matter for productivity as much as you think
Definition
1) Natural resources.
- the "oil curse"-- capital intensive, labor unintensive. Concentrates power in the hands of a few.
- Dutch disease-- discovery of oil pushed up value of marc, price of other Dutch goods skyrockets, lose market share
2) Foreign aid. Tends to go through corrupt gov'ts-- they haven't developed property rights.
3) Population growth
- Thomas Malthus. More people, DMR on people, lower productivity, people starve. Assumes constant capital and technology.
Term
How do we measure technology?
Definition
Total factor productivity. The amount of growth that can't be explained by human and physical capital.
- about 2/3 of total growth
Term
What's causing the income distribution polarization?
Definition
1) Economics of superstars. Top 10% are better able to capitalize on globalizing markets and tech that demands higher skill workers.
2) Policy efforts. Income tax is less progressive than it used to be.
Term
Institutions
Definition
The incentives societies and governments create that encourage people to engage in productive and not destructive behavior
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