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Questions and Answers
What happens to Consumption (C) in the medium term after a fiscal contractionary policy?
What happens to Consumption (C) in the medium term after a fiscal contractionary policy?
What is the primary effect of low interest rates on investment (I) following monetary expansion?
What is the primary effect of low interest rates on investment (I) following monetary expansion?
What characterizes the short-term impact on Price (P) and output (Y) during an economic adjustment due to a fiscal contractionary policy?
What characterizes the short-term impact on Price (P) and output (Y) during an economic adjustment due to a fiscal contractionary policy?
In the medium term, after a fiscal contraction, how does government spending (G) change?
In the medium term, after a fiscal contraction, how does government spending (G) change?
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What causes the aggregate supply curve to shift over time after output is below the natural level?
What causes the aggregate supply curve to shift over time after output is below the natural level?
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What does a high unemployment rate generally indicate about the labor market?
What does a high unemployment rate generally indicate about the labor market?
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Which group is most likely classified as 'out of the labor force' according to labor market observations?
Which group is most likely classified as 'out of the labor force' according to labor market observations?
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What does the term 'average duration of unemployment' refer to?
What does the term 'average duration of unemployment' refer to?
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What happens to the proportion of unemployed individuals gaining employment when the unemployment rate is high?
What happens to the proportion of unemployed individuals gaining employment when the unemployment rate is high?
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What is the focus of economists when analyzing labor market outcomes?
What is the focus of economists when analyzing labor market outcomes?
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What does the Aggregate Production Function imply about output and labor?
What does the Aggregate Production Function imply about output and labor?
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What is the relationship between technology improvement and the production function?
What is the relationship between technology improvement and the production function?
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Which factor primarily drives growth according to the content provided?
Which factor primarily drives growth according to the content provided?
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What is the primary implication of decreasing returns to capital?
What is the primary implication of decreasing returns to capital?
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What does openness in goods markets refer to?
What does openness in goods markets refer to?
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What effect does an increase in the markup have on the natural rate of unemployment?
What effect does an increase in the markup have on the natural rate of unemployment?
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How does the price of oil impact the economy in the short term?
How does the price of oil impact the economy in the short term?
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What is the Easterlin Paradox primarily concerned with?
What is the Easterlin Paradox primarily concerned with?
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Which variable should be used to compare growth in standards of living across countries over time?
Which variable should be used to compare growth in standards of living across countries over time?
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In the medium term, what happens to consumption (C) when oil prices rise significantly?
In the medium term, what happens to consumption (C) when oil prices rise significantly?
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What adjustment is needed when measuring output per person to account for price differences across countries?
What adjustment is needed when measuring output per person to account for price differences across countries?
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What happens to government spending (G) in the economy when oil prices rise, according to the medium term effects?
What happens to government spending (G) in the economy when oil prices rise, according to the medium term effects?
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What is the primary effect of an increase in the natural rate of unemployment?
What is the primary effect of an increase in the natural rate of unemployment?
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How does an increase in the expected price level affect the aggregate supply curve?
How does an increase in the expected price level affect the aggregate supply curve?
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In relation to the natural level of output, what is true when output is below Yn?
In relation to the natural level of output, what is true when output is below Yn?
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What is the relationship between nominal wealth and consumption?
What is the relationship between nominal wealth and consumption?
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What happens to the price level when output increases above the natural level?
What happens to the price level when output increases above the natural level?
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What is captured by the aggregate demand curve?
What is captured by the aggregate demand curve?
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What occurs when wage setters expect the price level to rise?
What occurs when wage setters expect the price level to rise?
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When output equals the natural level of output (Yn), what can be said about the price level (P)?
When output equals the natural level of output (Yn), what can be said about the price level (P)?
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What effect does an increase in price level (P) have on output (Y) in the goods market?
What effect does an increase in price level (P) have on output (Y) in the goods market?
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What must occur if there is a deterioration in the government budget balance?
What must occur if there is a deterioration in the government budget balance?
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Which statement about a country with a high savings rate is accurate?
Which statement about a country with a high savings rate is accurate?
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What happens to the AD curve in an open economy compared to a closed economy?
What happens to the AD curve in an open economy compared to a closed economy?
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If consolidation is done through taxation, what is the expected effect on consumption (C)?
If consolidation is done through taxation, what is the expected effect on consumption (C)?
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When foreign prices increase, what is the impact on consumption (C)?
When foreign prices increase, what is the impact on consumption (C)?
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What is likely to happen to net exports (NX) when domestic interest rates decrease?
What is likely to happen to net exports (NX) when domestic interest rates decrease?
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Under a fixed exchange rate regime, what happens if foreign interest rates decline?
Under a fixed exchange rate regime, what happens if foreign interest rates decline?
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What likely happens to consumption (C) when government spending (G) decreases?
What likely happens to consumption (C) when government spending (G) decreases?
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Study Notes
Macroeconomics Second Midterm - Study Notes
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Labor Market Overview:
- Unemployment rates reflect the activity of the labor market, including separations (like quits and layoffs) and hires. A healthy market has many separations/hires, while a stagnant market has few.
- Average unemployment duration is about 2 months.
- Labor market flows in and out of unemployment are large relative to the number of unemployed individuals.
- Discouraged workers aren't actively searching for jobs but are available if opportunities arise.
- Economists consider employment rates, calculated as the ratio of employment to the population.
- Unemployment is relevant because: (1) employed workers face a higher risk of job loss when unemployment is high; and (2) unemployed workers have a lower likelihood of finding a job.
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Wage Determination:
- Wages are often set by collective bargaining (negotiations between unions and firms).
- Higher skill levels increase the likelihood of individual worker-employer bargaining.
- Wages generally depend on labor market conditions.
- Worker bargaining power depends on the cost to firms of finding new workers and the cost to workers of losing their job.
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Turnover Rates and Layoff Rates:
- Turnover rates are the rates at which workers voluntarily leave a company.
- Layoff rates indicate how often workers are involuntarily removed from their jobs.
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Efficiency Wages:
- Firms may pay wages above the reservation wage to decrease turnover, encourage worker commitment, and improve productivity. Effort and commitment are crucial elements of worker quality.
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Price Determination:
- Firms set prices based on costs, which are affected by the production function (relationship between inputs and output).
- Output = Employment.
- The cost of producing one additional unit equals the marginal cost.
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Natural Rate of Unemployment:
- The natural rate of unemployment is the unemployment rate where the real wage matches the real wage determined by prices.
- The natural rate is influenced by factors like unemployment benefits and the cost of laying off workers.
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Wage, Price, and Natural Rate of Unemployment Relationship:
- The natural rate of unemployment is affected by factors that either decrease or increase nominal wages.
- The graph illustrates the relationship between price and wage.
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Shifts in Wage and Price Curves:
- Changes in unemployment benefits or employer willingness to pay shift the wage setting curve.
- Shifts in the price setting curve are driven by change in markup (an increase to the price is caused by an increase in mark up).
-
Aggregate Supply (AS):
- AS relates output to prices, highlighting the relationship between output, the price level, and unemployment.
- Output and prices are linked through wage and price level responses to changes in employment and unemployment.
- Higher output leads to higher price levels and lower unemployment.
- An increase in output leads to an increase in prices and decreases in unemployment.
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Aggregate Demand (AD):
- AD combines goods market and monetary market equilibria to define equilibrium output for given prices and a set of monetary and fiscal variables.
- AD is negatively sloped. Increased prices lead to reduced wealth, lower consumption, lower investment expenditure, and therefore lower output.
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Merging AS and AD for determining Equilibrium:
- Equilibrium is found where AD and AS intersect.
- Factors shifting AD or AS curves will alter equilibrium output and prices.
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Consequences for Economic Openness:
- Openness affects domestic prices, influencing how much is imported or exported.
- It involves interaction with foreign markets and currencies.
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Consequences for AD-AS Model:
- Government policy causes shifts in the AD curve.
- Effects on the economy depend on how policy affects consumer and investment behavior.
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Monetary Expansion Effects:
- Monetary expansion lowers interest rates.
- Investment increases, and output increases.
- The price level rises as the economy moves up the AD curve.
-
Budget Deficits Effects:
- Budget deficits can lead to decreased output in the medium term.
- This can occur due to consumption (if prices go up), reduced investment, or reduced net exports.
-
Oil Price Changes Effects:
- Higher oil prices increase costs, causing higher prices and lower output.
- The effect in the short run is a price level increase and reduced output.
- The effect in the medium run is continued increases in prices, but lower output after adjustments in wages.
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Prepare for your Macroeconomics second midterm with these comprehensive study notes. Covering topics such as labor market dynamics, unemployment rates, and wage determination, this guide will help reinforce your understanding. Use these notes to excel in your upcoming exam.
