Macroeconomics Second Midterm Study Notes

A labor market characterized by many job separations and hires, and a high turnover of workers entering and exiting unemployment.

A labor market with few job separations and hires, and a stagnant pool of unemployed workers.

The average amount of time a person spends unemployed, typically around 2 months in the US.

Someone who is out of the labor force but is willing to work if a job opportunity arises.

The percentage of the population that is employed.

Higher expected prices lead to higher wages, increasing costs and prices, driving a cycle of inflation.

Shows the relationship between the price level and the quantity of output supplied in an economy.

The level of output that an economy produces when unemployment is at its natural rate.

The price level that firms and workers anticipate.

The total demand for goods and services in an economy at a given price level.

The value of assets owned by households adjusted for the price level.

Spending by consumers on goods and services.

A model used to illustrate the relationship between interest rates, output, and the price level in an economy.

A monetary policy that lowers interest rates and increases the money supply, leading to increased investment and economic growth. In the short run, this leads to increased output (Y) and prices (P), and in the medium run, output stabilizes at the natural level while prices continue to rise. This also causes a shift in demand composition, with consumer spending (C) dropping and investment (I) rising due to lower interest rates.

Government policies like decreasing spending (G) or raising taxes (T) that aim to reduce aggregate demand. This initially lowers output (Y) and prices (P) in the short run, and in the medium run, output recovers to the natural level while prices fall further. This also leads to a decrease in consumer spending (C) due to lower income levels.

After a short-run impact (expansion or contraction), the economy self-corrects over the medium run by bringing output back to the natural level (Yn). This is due to the adjustments in prices, wages, and expectations, which impact aggregate supply and demand, ultimately pushing the economy back to equilibrium.

Economic policies have different impacts over different time horizons. The short run focuses on immediate changes in output and prices, while the medium run emphasizes how the economy adjusts to these changes and eventually reaches a new equilibrium.

A mathematical relationship showing how inputs (like labor and capital) are combined to produce output. It captures the productivity of an economy.

When you increase all inputs by a certain percentage, output increases by the same percentage.

As you add more capital, output increases, but at a slower pace. Each additional unit of capital contributes less to production.

Economic growth achieved by increasing the amount of physical capital in a country, such as machinery, equipment, and infrastructure. More capital leads to higher output.

Economic growth driven by advancements in technology or innovation, leading to more efficient production and higher output per input.

A situation where high inflation and a recession occur simultaneously. It's a troublesome combination, as it hinders economic growth.

The difference between the price a firm charges for a good and its production cost. It represents the profit margin per unit sold.

The long-term average level of unemployment in an economy, influenced by factors such as job search, labor market frictions, and structural changes.

An increase in markup leads to a higher natural rate of unemployment. This is because firms become less likely to hire workers when their profit margins are larger.

A higher natural rate of unemployment results in a lower natural output level. This is because the economy is operating at a less efficient level with fewer workers being employed.

This paradox suggests that once basic needs are met, higher income alone may not guarantee greater happiness. Instead, relative income compared to others plays a significant role.

Output per person, also known as per capita output, is a better measure of living standards compared to total output. It accounts for population growth, providing a better comparison across time and countries.

Purchasing Power Parity (PPP) adjusts values for the purchasing power of different currencies. This is especially important when comparing economic data across countries with different price levels.

The AD curve of an open economy is flatter than a closed economy's AD curve because changes in domestic demand affect net exports.

The multiplier effect in an open economy is smaller than in a closed economy because some of the increased spending leaks out to foreign countries through imports.

An increase in foreign demand leads to higher output and net exports in the domestic economy.

Consolidating a budget deficit through government spending cuts leads to higher consumption, unchanged investment, lower government spending, and increased net exports.

Consolidating a budget deficit through tax hikes leads to lower consumption, unchanged investment and government spending, and increased net exports.

Higher foreign prices result in a real currency depreciation (our currency becomes cheaper), leading to lower consumption, unchanged investment and government spending, and increased net exports.

Lower domestic interest rates initially lead to higher net exports due to currency depreciation, but the increase in prices may offset this effect over time.

Under a fixed exchange rate regime, lower foreign interest rates lead to higher investment, but the effect on net exports remains uncertain. Prices may rise, offsetting the initial increase in net exports.