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Questions and Answers
What primarily determines the level of employment and wage rate in the labor market?
What primarily determines the level of employment and wage rate in the labor market?
What is the effect of a tax on wages on labor supply?
What is the effect of a tax on wages on labor supply?
What occurs when regulations make it harder for firms to fire workers?
What occurs when regulations make it harder for firms to fire workers?
What is wage rigidity?
What is wage rigidity?
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A rise in the unemployment rate typically occurs after which of the following events?
A rise in the unemployment rate typically occurs after which of the following events?
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What type of unemployment is linked to short-run fluctuations in output?
What type of unemployment is linked to short-run fluctuations in output?
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What is the formula for actual unemployment as mentioned in the content?
What is the formula for actual unemployment as mentioned in the content?
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In the Bathtub Model equation, what do the variables E and U represent?
In the Bathtub Model equation, what do the variables E and U represent?
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What does the change in unemployment over time (∆U) depend on in the Bathtub Model?
What does the change in unemployment over time (∆U) depend on in the Bathtub Model?
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What does setting the change in unemployment to zero in the Bathtub Model indicate?
What does setting the change in unemployment to zero in the Bathtub Model indicate?
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To reduce the natural rate of unemployment, which strategy is effective?
To reduce the natural rate of unemployment, which strategy is effective?
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Which of the following best defines structural unemployment?
Which of the following best defines structural unemployment?
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What is meant by the present discounted value of an individual's lifetime income?
What is meant by the present discounted value of an individual's lifetime income?
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What is a key consequence of a positive aggregate demand shock according to the multiplier effects?
What is a key consequence of a positive aggregate demand shock according to the multiplier effects?
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Which of the following financing methods for investment spending is typically associated with more costs?
Which of the following financing methods for investment spending is typically associated with more costs?
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What does a balance sheet represent?
What does a balance sheet represent?
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What does Ricardian equivalence state about consumer behavior regarding tax changes?
What does Ricardian equivalence state about consumer behavior regarding tax changes?
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What is the relationship indicated by the IS curve?
What is the relationship indicated by the IS curve?
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What is an example of an automatic stabilizer in fiscal policy?
What is an example of an automatic stabilizer in fiscal policy?
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Which of the following is NOT a type of agency problem associated with borrowing?
Which of the following is NOT a type of agency problem associated with borrowing?
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What does leverage measure in a banking context?
What does leverage measure in a banking context?
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What does insolvency mean in financial terms?
What does insolvency mean in financial terms?
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Which of the following represents the capital requirement for banks?
Which of the following represents the capital requirement for banks?
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In the national income accounting identity, what does 𝐼𝑀 represent?
In the national income accounting identity, what does 𝐼𝑀 represent?
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What is the effect of a higher interest rate on investment according to the content?
What is the effect of a higher interest rate on investment according to the content?
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What is represented by the variable 𝐸𝑆 in the additional equations?
What is represented by the variable 𝐸𝑆 in the additional equations?
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What is the relationship between the money supply and the price level in the long run?
What is the relationship between the money supply and the price level in the long run?
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How is the velocity of money characterized in the classical dichotomy?
How is the velocity of money characterized in the classical dichotomy?
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What does the Quantity Theory of Money state about inflation rates?
What does the Quantity Theory of Money state about inflation rates?
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What is the definition of the real interest rate?
What is the definition of the real interest rate?
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What happens to prices when there is an increase in the money supply, according to the Quantity Theory for the Price Level?
What happens to prices when there is an increase in the money supply, according to the Quantity Theory for the Price Level?
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What is the equation linking money supply, velocity of money, price level, and real GDP?
What is the equation linking money supply, velocity of money, price level, and real GDP?
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What does the variable %∆M represent in the Quantity Equation for Inflation?
What does the variable %∆M represent in the Quantity Equation for Inflation?
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What can cause deflation in an economy?
What can cause deflation in an economy?
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What does the variable $a$ represent in the investment equation?
What does the variable $a$ represent in the investment equation?
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How does the gap between marginal product of capital (MPK) and the real interest rate ($r$) influence investment in the short run?
How does the gap between marginal product of capital (MPK) and the real interest rate ($r$) influence investment in the short run?
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Which parameter weights the difference between the real interest rate and the marginal product of capital (MPK)?
Which parameter weights the difference between the real interest rate and the marginal product of capital (MPK)?
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What happens to investment when the marginal product of capital (MPK) is greater than the real interest rate ($r$)?
What happens to investment when the marginal product of capital (MPK) is greater than the real interest rate ($r$)?
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What is the nature of $r̅$, the marginal product of capital (MPK)?
What is the nature of $r̅$, the marginal product of capital (MPK)?
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According to the national income accounting identity after simplification, what does the output equation become?
According to the national income accounting identity after simplification, what does the output equation become?
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What occurs when firms face a real interest rate ($R$) that is lower than the marginal product of capital (MPK)?
What occurs when firms face a real interest rate ($R$) that is lower than the marginal product of capital (MPK)?
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When analyzing the investment equation, which of the following best describes the role of $b$?
When analyzing the investment equation, which of the following best describes the role of $b$?
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Study Notes
Chapter 7: The U.S. Labor Market
- Unemployment rate: the fraction of the labor force that is unemployed.
- Formula: unemployment rate = (unemployed / labor force) × 100
- A person is unemployed if they don't have a job paying a wage or salary, actively looked for a job in the past 4 weeks, and are available to work.
Chapter 7: Supply and Demand
- Labor demand is downward-sloping due to diminishing marginal product of labor (MPL).
- Labor supply is upward-sloping because the price of leisure is higher when wages are higher.
- The intersection of labor supply and demand determines the level of employment and wage rate.
Chapter 7: The Labor Market (Graphic)
- The graph displays labor supply (LS) and labor demand (Ld) curves intersecting at a point.
- The intersection point determines the equilibrium wage (W) and level of employment (L).
Chapter 7: A Change in Labor Supply
- If the government imposes a tax on wages, the labor supply curve shifts to the left.
- Workers receive less money and offer less labor; this applies to any wage.
- For equilibrium, firms must increase wages.
Chapter 7: An Income Tax at a Rate
- The graph shows a shift in the labor supply curve (LS) to the left (LS').
- The intersection point (A) with the labor demand curve (Ld) determines the new wage (W') and employment level (L').
Chapter 7: A Change in Labor Demand
- If regulations make firing workers harder, firms demand fewer workers.
- Labor demand shifts to the left, decreasing wages and employment levels.
- Unemployment initially increases and then stabilizes as discouraged workers decline in the labor force.
Chapter 7: A Reduction in Labor Demand
- The labor demand curve shifts from Ld to Ld'.
- The new intersection point determines a lower wage (W') and lower employment level (L').
Chapter 7: Wage Rigidity
- Wage rigidity: Wages resist adjusting after a shock to labor demand or supply.
- If wages don't decrease during a labor demand shock, the labor market fails to clear, leading to a significantly lower level of employment.
Chapter 7: A Reduction in Labor Demand with Wage Rigidity
- The labor demand curve shifts from Ld to Ld'.
- The new equilibrium point (C) establishes lower employment level (L'), but the wage remains the same (W').
Chapter 7: Different Kinds of Unemployment
- Cyclical unemployment: Unemployment associated with short-run output fluctuations.
- Natural rate of unemployment: The unemployment rate that would prevail with no cyclical unemployment.
- Frictional unemployment: Joblessness occurring during the transition between jobs in a dynamic economy.
- Structural unemployment: Unemployment resulting from a mismatch between the skills of workers and the demands of jobs.
Chapter 7: The Bathtub Model
- The bathtub model illustrates how employment and unemployment evolve over time.
- Equation: Et + Ut = L, where Et = employed, Ut = unemployed, L = labor force.
- Another formula: ∆Ut+1 = SEt - fUt. Using Ut=0 solves for steady state to find U*. Using U* and L the unemployment rate can be calculated.
Chapter 7: How Much Is Your Human Capital Worth?
- The present discounted value of lifetime income is likely over one million dollars.
- Present discounted value: The value of money today needed to equal a future value.
- The formula tells how much a future payment or future payment flow is worth today given an interest rate.
Chapter 7: Present Discounted Value
- To calculate the value of a stream of equal payments over a defined period, arrange present discounted value of each period's payment into a geometric series.
- Use the formula for summing a geometric series to calculate the Present Discounted Value.
Chapter 7: Present Discounted Value (continued)
- The formula for present discounted value of a series of payments is given.
Chapter 8: Inflation
- Inflation: The percentage change in the overall price level.
- Hyperinflation: An episode of extremely high inflation (greater than 500% per year).
- Inflation rate: The annual percentage change in the price level.
- Formula: inflation rate = [(Pt+1 - Pt) / Pt] x 100 where Pt is the price level in year t.
- CPI (Consumer Price Index): A price index for a bundle of consumer goods.
Chapter 8: Measures of the Money Supply
- Monetary base: Currency plus accounts held by Banks at the central bank (reserves).
- Under the Ample Reserves framework, the banking system in the US and most economies holds ample reserves. They earn interest on these reserve balances.
- Different measures of the money supply were shown in a table.
Chapter 8: The Quantity Equation
- The quantity equation connects money and inflation, showing that the amount of money used for purchases equals nominal GDP.
- Formula: Mt × Vt = Pt × Yt, where Mt = Money supply, Vt = Velocity of money, Pt = Price level, Yt = Real GDP.
Chapter 8: The Classical Dichotomy
- The classical dichotomy: In the long run, real and nominal sides of the economy are completely separate.
- Real GDP is determined by real forces (exogenous).
- Velocity of money (V) is a constant.
- Money supply (M) is a variable.
- Y = Y where Yt is real output in year t.
Chapter 8: The Quantity Theory of Money
- The table shows 4 equations and 4 unknowns, with real GDP (exogenous), money supply, and velocity as exogenous givens.
Chapter 8: The Quantity Theory for the Price Level
- To solve the model: Plug in all exogenous variables and solve for the price level using the formula P = MV/Y
Chapter 8: The Quantity Theory for Inflation
- The quantity equation can be written as growth rates (g).
- Formula: %ΔM + %ΔV = %ΔP + %ΔY. Assume V=0, then %ΔM = %ΔP
- π*=%ΔM - %ΔY
Chapter 8: Real and Nominal Interest Rates
- Real interest rate: the marginal product of capital, measured in goods.
- Nominal interest rate: the interest rate on savings accounts, measured in dollars.
Chapter 8: The Fisher Equation
- Fisher equation: i ≈ R + π, where i = nominal interest rate, R = real interest rate, π = inflation rate.
- Nominal interest rates are generally high when inflation is high.
Chapter 8: Costs of Inflation
- Individuals hurt by inflation include those with pensions not indexed to inflation, banks issuing loans with fixed rates, and individuals with variable-rate mortgages.
Chapter 8: The Fiscal Causes of High Inflation
- The government budget constraint: G = T + ΔB + ΔM, where G=government spending, T = taxes, ΔB = change in government debt, and ΔM = change in money supply.
Chapter 8: The Inflation Tax
- Seigniorage and the inflation tax: The revenue governments collect from creating new money, showing up as price level increase.
- Paid by people holding currency.
Chapter 9: The Long Run, Short Run, and Shocks
- Long-run model: A guide to how the economy functions on average. Determines potential output and long-run inflation. Potential output: Output if all factors are utilized at their maximum capacity.
- Short-run model: How the economy reacts to shocks. Determines current output and current inflation.
Chapter 9: Trends and Fluctuations
- Actual output (Yt) equals the long run trend output (Y) plus short run output fluctuations (Ỹ).
- Yt = Y + Yt
Chapter 9: Short-Run Fluctuations
- Detrended output (Ỹt): The difference between actual and potential output, expressed as a percentage of potential output.
- Y = (Yt - Y)/Y
Chapter 9: Short Run (Recessions)
- Recession: When actual output falls below potential.
- Short run output becomes negative.
- Recession ends when short-run output starts to rise again..
- Recessions typically last about 2 years with losses around $3,000 per person.
Chapter 9: The Short-Run Model
- The short-run model is based on three premises o The economy is subject to constant shocks. o Monetary and fiscal policies affect output o There is a dynamic tradeoff between inflation and output
Chapter 9: The Phillips Curve
- The Phillips curve shows a positive relationship between the change in inflation (Δπ) and short-run output (Ỹ).
Chapter 9: A Graph of Short Run Model
- The Phillips curve shows that a boom drives up inflation. A recession decreases inflation. There is a positive relationship between the change in inflation and short run output.
- The slope of the curve is empirically about 1/3.
- Output exceeding potential by 3% increases the inflation rate by 1%.
Chapter 9: Works in a Cycle
- Prices rise, increasing the inflation rate.
- Lower demand causes firms to cut costs leading to workers being laid off
- Inflation rate returns to previous level
Chapter 9: Okun's Law
- Natural rate of unemployment: The rate of unemployment that exists in the long run.
- Cyclical unemployment: Current unemployment minus the natural unemployment rate
Chapter 9: Okun's Law (formula)
- u – ù = -1/2 × Ỹ
Chapter 10: Introduction
- In the last two decades the global economy has faced two massive shocks: the global financial crisis of 2008 - 2009 & The Covid-19 pandemic of 2020.
- These introduced new concepts to macroeconomics (e.g., balance sheets and leverage)
Chapter 10: The Great Recession
- Catastrophic near-collapse of the world's financial system resulting from a systematic failure to properly assess balance sheet risk. This led to a stoppage of credit flows.
- The global financial crisis led to the Great Recession of 2007 -2009.
Chapter 10: Causes of The Global Financial Crisis
- Housing prices and a global saving glut
- Subprime lending and rising interest rates
- Previous financial turmoil
Chapter 10: The Financial Turmoil of 2008 - 2009
- Securitization: Pooling financial instruments and selling them in pieces to diversify risk.
- Bank lending standards decline.
Chapter 10: Securitization (Process Overview)
- Describes the process whereby homeowners, banks, third parties, and investors are involved in securitization.
Chapter 10: The Covid-19 Pandemic
- Economic and humanitarian disaster. Over 7 million people worldwide died, which had the greatest impact on elderly, people already in poor health, and essential workers.
- Parts of Europe, the US, and Brazil suffered losses of one out of every 300 people.
Chapter 10: Macroeconomic Outcomes Since 2007
- The Great Recession of 2008-2009 & The Covid-19 Pandemic show up in macroeconomic statistics, which include employment, GDP, and inflation stats.
Chapter 10: Nonfarm Employment in the U.S. Economy
- Graph shows the non-farm employment data over a period.
Chapter 10: U.S. Short-Run Output
- Graph shows the short-run output statistics over a period.
Chapter 10: Fundamentals of Financial Economics
- Balance sheet: An accounting tool with one side being assets and the other side being liabilities, (net worth or capital). Both sides should equal the same value.
Chapter 10: Balance Sheets (Details)
- Assets represent items of value that an institution owns.
- Liabilities represent amounts owed to someone else
- Equity/Net worth = difference between total assets and liabilities
Chapter 10: Banking Regulations
- Banks are regulated by reserve requirements (mandate that a certain percentage of deposits must be held).
- Capital requirements (Capital must be a certain fraction of assets).
Chapter 10: Hypothetical Bank's Balance Sheet
- A table of a hypothetical bank's balance sheet. Shows the assets, liabilities and equity of the institution.
Chapter 10: Leverage
- Leverage - The ratio of total liabilities to net worth
- Leverage magnifies any changes in the value of assets and liabilities.
- This principle also applies to homeowners.
Chapter 10: Leverage (Continued)
- Highly leveraged banks can have large gains from small price increases but also large losses from small price decreases.
- Many investment banks were highly leveraged before the crisis, leading to insolvency.
Chapter 11: Introduction to the Federal Reserve.
- The Federal Reserve influences economic activity in the short run.
- The Federal Reserve targets the federal funds rate.
- The Federal Reserve is highly correlated with short-term interest rates at which people borrow and lend in financial markets.
- The basic story is: Increase in interest rates -> decreases in Investment -> output decreases.
Chapter 11: Setting Up the Economy
- The national income accounting identity (Yt + IMt = Ct + It + Gt + EXt).
- Yt = output
- IMt= imports
- Ct = consumption
- It = investment
- Gt = Government spending
- EXt = exports
Chapter 11: Setting Up the Economy
- Five additional equations are needed to solve the model to determine output and other factors:
- Ct = ācYt
- Gt = āgYt
- EXt = āexYt
- IMt = āimYt
- It = āi – b(Rt-r)
- ā represents exogenous variables.
Chapter 11: The Investment Equation
- The equation used for calculation of investment It is = āi – b(Rt - r). The parameters will vary depending on model needs.
- āi= the share of potential output that goes to investment
- Rt= real interest rate
- r= marginal product of capital.
Chapter 11: Marginal Product of Capital (MPK)
- Marginal product of capital (MPK): Amount of additional output the firm can produce by investing in more capital.
- In the long run, MPK = r (the marginal product of capital).
- MPK is exogenous and time invariant in investment calculations.
Chapter 11: Deriving The IS Curve
- Start with the national income accounting identity (Yt + IMt = Ct + It + Gt + EXt).
- Substitute the five other equations into the initial equation,
- Simplify and determine the short-run output calculation (Ỹt).
Chapter 11: Deriving The IS Curve (part 2)
- The gap between the real interest rate and the MPK determines output fluctuations.
- The parameter ā (aggregate demand shock).
- The result is an IS curve that shows output fluctuations based on the real interest rate.
Chapter 11: Using The IS Curve
- Changes in the real interest rates move the economy along the IS curve.
- These interest rate changes lead to changes in borrowing costs, demand, and investment.
Chapter 11: A Change in The Interest Rate
- If interest rates rise, borrowing costs rise, investment demand falls, and short-run output falls.
- This move is demonstrated as a movement up along the IS curve.
Chapter 11: An Increase in the Real Interest Rate
- Graph shows a movement along the IS curve resulting from an increase in the real interest rate.
Chapter 11: Aggregate Demand Shock
- If technological advancements lead to a rise in business optimism, there will also be an increase in demand for capital.
- This will increase investment (at given R), and rise in the aggregate demand parameter ā, and shift the IS curve to the right.
Chapter 11: Micro Foundations of IS Curve
- Individuals prefer smooth consumption over time.
- Permanent-income hypothesis: Consumption is based on average income over time, not current income.
- Life-cycle model: Consumption is based on average lifetime income, not income at any one time.
Chapter 11: Consumption
- Options A and B (Consumption): Consumer optimization choices with varying consumption patterns and income sources.
- Permanent income hypothesis predicts that smoothing consumption over time will be the most optimal choice for the consumer.
Chapter 11: Multiplier Effects
- Consumption depends on temporary changes in income.
- Ct = āc + xỸt
- This leads to a multiplier effect that gives the new IS curve
- Y = (1/1-x) x [a - b(Rt - r)]
Chapter 11: Agency Problems
- Investment financing can use cash flow, borrowing, and agency problems. Problem arises due to asymmetrical information between parties involved.
- Two types of problems are: adverse selection and moral hazard.
Chapter 11: Fiscal Policy
- Automatic stabilizers: Transfer spending programs (e.g., unemployment insurance, Medicare).
- Timing and the "no free lunch" principle influence the impact of fiscal policy.
Chapter 11: Ricardian Equivalence
- Consumer behavior is analogous to permanent income hypothesis
- Behavior is based on present value of government tax collection.
- Example provided about government purchasing more teachers and effect on net benefit of the consumers.
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Description
This quiz explores key concepts in labor economics, including employment levels, wage rates, and the effects of taxes and regulations on the labor market. Examine theories of unemployment, the Bathtub Model, and the implications of aggregate demand shocks on wages. Ideal for students of economics looking to solidify their understanding of labor market dynamics.
