Chapter 1: A Tour of the World

Output

level of production of economy as whole – and its growth rate

Unemployment rate

proportion of workers in economy who are not employed and are looking for jobs

Inflation rate

rate which average price of goods in economy is increasing over time

Recession

a decrease in output

Productivity

output per hour worked (output per hour)

Rate of Productivity Growth

rate of growth of output per hour

Trade Deficit

difference between imports and exports

Chapter 2: A Tour of the Book

First definition of GDP

value of the final goods and services produced in the economy during a given period

Second definition of GDP

sum of value added in the economy during a given period

Labor Income

revenues that go to pay workers

Capital Income (Profit Income)

the rest of the revenues that go to the firm

Third definition of GDP

sum of incomes in the economy during a given period

Nominal GDP

sum of the quantities of final goods produced multiplied by their current prices

Real GDP

sum of quantities of final goods multiplied by constants (rather than current) prices

GDP Growth

rate of growth of real GDP

Expansion

period of positive GDP growth

Recession

period of negative GDP growth

Employment

number of people who have a job

Unemployment

number of people who don’t have a job but are looking for one

Labor Force

sum of employment and unemployment

Labor Force = Employment + Unemployment

L = N + U

Unemployment Rate

ratio of number of people who are unemployed to the number people in the labor force

Unemployment Rate = Unemployment/Labor Force

u = U/L

Current Population Survey (CPS)

large survey of households to compute unemployment rate

classifies a person as unemployed if he or she does not have a job and has been looking for a job in the past four weeks

Not in the labor force

those who do not have a job and are not looking for one

Discouraged workers

unemployed people who give up looking for a job and are therefore no longer counted as unemployed

Participation Rate

ratio of labor force to total population of working age

Inflation

sustained rise in general level of prices

Price level

general level of prices

Inflation Rate

rate at which the price level increase

Deflation

sustained decline in price level (negative inflation)

GDP Deflator

in year t, Pt, is defined as the ratio of nominal GDP to real GDP in year t

Pt = (Nominal GDPt)/(Real GDPt) = ()/(Yt)

Index Number

the GDP deflator

Consumer Price Index (CPI)

index measures the average price of consumption

Cost of Living

the average price of consumption

Chapter 3: The Short Run

Consumption (C)

good and services purchased by consumers

different buyers for these goods

Investment (I)

sometimes called fixed investment to distinguish from inventory investment

Government spending (G)

purchases of goods and services by federal, state, and local governments

does not include government transfers

Imports (IM)

purchases of foreign goods and services by domestic consumers, firms, and government

Exports (X)

purchases of domestic goods and services by foreigners

Net exports (trade balance)

difference between exports and imports

(X – IM)

Trade surplus

exports exceed imports

Trade deficit

exports and less than imports

Inventory investment

difference between goods produced and goods sold in a given year

difference between production and sales

Total demand for goods (Z)

total demand for goods = consumption + investment + government spending + exports - imports

Z ≡ C + I + G + X – IM

Disposable income (Y_D)

income that remains after consumers have received transfers from the gov’t and paid their taxes

Y_D ≡ Y – T

Y is income

T is taxes paid minus gov’t transfers received by consumers

Consumption (C) is a positive function of disposable income (Y)

C = C(Y_D)

(+)

Relation between consumption and disposable income

C = c₀ + c₁Y_D

Propensity to consume (c₁)

marginal propensity to consume

gives the effect an additional dollar of disposable income has on consumption

slope of line is propensity to consumer

(c₀)

what people consume if their disposable income in the current year were equal to zero

if Y_D equals zero, C = c₀

Endogenous variable

variable depends on other variables in the model and are therefore explained within the model

Exogenous variable

variable that isn’t explained within the model but is given

Fiscal policy

choice of taxes and spending by the government

described with taxes (T)

Equilibrium condition

Y = Z

Z = c₀ + c₁(Y – T) + Ῑ + G

Y = c₀ + c₁(Y – T) + Ῑ + G

Autonomous spending

[c₀ + Ῑ + G – c₁T]

Multiplier

1/(1-c₁)

multiplies autonomous spending

Dynamics of adjustment

formally describing adjustment of output over time – that is, writing the equations

Saving

sum of private and public savings

Private savings (S)

savings by consumers is equal to their disposable income minus consumption

S ≡ Y_D – C

S ≡ Y – T – C

S = -c₀ + (1 – c₁)(Y – T)

Public saving

equal to taxes (net of transfers) minus gov’t spending

T – G

Budget surplus

if taxes exceed gov’t spending

public saving is positive

IS relation

“investment equals saving”

what firms want to invest must be equal to what people and the gov’t want to save

Equilibrium in the goods market

production = demand

investment = savings

Propensity to save

( 1 – c₁)

tells us how much of an additional unit of income people save

Chapter 4: Financial Markets

Money

use for transactions

pays no interest

two types in real world

Currency

coins

bills

Checkable deposits

bank deposits on which you can write checks

Bonds

pay a positive interest rate (i)

cannot be used for transactions

Money market funds (Money market mutual funds)

pool together funds of many people

funds are then used to buy bonds – typically gov’t bonds

Income

what you earn from working plus what you receive in interest and dividends

Flow

expressed in units of time

e.g. weekly income, monthly income, yearly income

Saving

part of after-tax income that you do not spend

flow

Savings

plural

synonym of wealth

value of what you have accumulated over time

Financial wealth (wealth)

value of all financial assets minus all financial liabilities

in contrast to income or savings

Investment

term economists reserve for purchase of new capital goods, from machines to plants to office buildings

Demand for money (M^d)

amount of money people want to hold

M^d = L(i)

(-)

_d stands for “demand”

Nominal income ()

income not adjusted to inflation

Demand for liquidity (L(i))

(-)

negative function

increase in interest rate decreases demand for money, as people put this wealth into bonds

Treasury bills (T-bills)

in the US, bonds issued by the gov’t promising payment in a year or less

Price of a bond today

_B

_B stands for “bond”

price of the bond today is equal to the final payment divided by 1 plus the interest rate

Interest rate on the bond

i = (par value - )/

“Bond markets went up today”

price of bonds went up and interest rates went down

Financial intermediaries

institutions that receive funds from people and firms and use those funds to buy financial assets or make loans to other people and firms

Reserve ratio

ratio of bank reserves to bank checkable deposits

Bank money

liabilities of central bank are the money it has issued

Bank runs

depositors at other banks panic and withdraw money from their banks, forcing them to close

Federal deposit insurance

the US gov’t insures each account up to ceiling of $100,000

Narrow banking

would restrict banks to holding liquid and safe gov’t bonds, such as T-bills

How much to hold in currency and how much in checkable deposits

CU^d = c M^d

D^d = (1 – c) M^d

fixed proportion of money is currency

c

fixed proportion of checkable deposits

(1 – c)

demand for currency

CU^d

demand for checkable deposits

D^d

Demand for reserves

R = θD

Reserve Ratio

θ

amount of reserves banks hold per dollar of checkable deposits

Reserves of bank

R

Denote dollar amount of checkable deposits

D

Demand for reserves by banks

R^d = θ (1 – c) M^d

second component of demand for central bank money

Demand for central bank money

H^d

H^d = CU^d + R^d

H^d = cM^d + θ(1 – c)M^d = [c + θ (1 – c)] M^d

H^d = [c + θ (1 – c)] L(i)

demand is equal to sum of the demand for currency and demand for reserves

Demand for reserves

R^d

Supply of central bank money

H

H = H^d

H = [c + θ (1 – c)] L(i)

Equilibrium condition that supply and demand for bank reserves are equal

H – CU^d = R^d

Federal funds market

market for bank reserves, where interest rate moves up and down to balance supply and demand for reserves

Federal funds rate

interest rate determined in this market

Money multiplier

c + θ (1 – c)

overall supply of money of therefore equal to central bank money multiplied by money multiplier

High powered money

increases in H lead to more than one-for-one increases in overall money supply and therefore are high powered

Monetary base

overall money supply depends ultimately on a “base” – amount of central bank money in economy

Chapter 5: Goods and Financial Markets: The IS-LM Model

Investment function

I = I(Y, i)

(+, -)

investment (I) depends on production (Y) and interest rate (i)

increase in output leads to an increase in investment. Increase in interest rate leads to decrease in investment

IS curve

relation between interest rate and output is represented by downward-sloping curve

equilibrium in the goods market implies that an increase in the interest rate leads to a decrease in output

Real money supply

money stock in terms of goods, not dollars – that is equal to the real money demand

(M/P) = YL(i)

LM curve

relation between output and interest rate is represented by the upward sloping curve

IS relation

supply of goods must equal the demand for goods

how interest rate affects output

Y = C(Y – T) + I(Y, i) + G

LM relation

supply of money must equal demand for money

how output affects interest rate

(M/P) = Y L(i)

Fiscal contraction (fiscal consolidation)

government decides to reduce budget deficit and does so by increasing taxes while keeping gov’t spending unchanged

Fiscal expansion

increase in deficit, either due to an increase in gov’t spending or to a decrease in taxes

Monetary expansion

increase in money supply

Monetary contraction (tightening)

decrease in money supply

Monetary-fiscal policy mix (policy mix)

combination of monetary and fiscal policies

Confidence band

solid line in the center of the band gives the best estimate of the effect of the change in the interest rate on the variable we look at in the panel

two dashed lines and the tinted space between the dashed lines represent a confidence band

band within which the true value of the effect lies with 60% probability

Appendix 1: An Introduction to National Income and Product Accounts

GDP

market value of the goods and services produced by labor and property located in the US

GNP

market value of goods and services produced by labor and property supplied by US residents

Receipts of factor income from the rest of the world

income for us capital or us residents

Payments of factor income to the rest of the world

income received by foreign capital and foreign residents in the US

Net National Product (NNP)

difference between GNP and NNP is depreciation of capital, call consumption of fixed capital

National income

income that originates in the production of goods and services supplied by residents of the US

Indirect taxes

sales taxes

Compensation of Employees

labor income; goes to employees

Corporate Profits and Business Transfers

profits and revenues minus costs (including interest payments) and minus deprecation

Net Interest

interest paid by firms minus interest received by firms, plus interest received from rest of the world, minus interest paid to the rest of the world

Proprietors’ income

income of sole proprietorships, partnerships, and tax-exempt cooperatives

Rental income of persons

income from rental of real property, minus depreciation on this real property

Personal consumption expenditures

sum of goods and services purchased by persons resident in the US