Macro Ecn Study Notes

Topics: Monetary policy, Federal Reserve System, Economics Pages: 10 (2863 words) Published: August 7, 2013
Economics 10A Problem Set 1

Analytical Graph: Used to illustrate complex relationships among two or more variables. Most analytical graphs address functional relationships in which the variables considered are assumed to be causally related.

Balance sheet: An accounting record of the assets and liabilities of an individual or firm.

Bond: Documents issued by government or corporations promising to pay certain amounts of money to the holder at specific future dates.

Budget: Summarizes constraints (e.g., income) on spending, or a budget may be a plan on what will be purchased, or a record of how much was spent.

Capital: Economic capital includes productive transformations of natural resources. Capital includes all construction, and machinery and equipment.

Ceteris Paribus: Economists use the Latin phrase ceteris parebus to mean, “All else held constant.” Following methodology formalized by Alfred Marshall, economists invoke ceteris paribus extensively in their analyses, especially in partial equilibrium models. Contrast with general equilibrium and mutatis mutandus.

Complement: Goods that are consumed together, such as tennis racquets and balls, hot dogs and mustard, left shoes and right shoes, and cars and gasoline. A negative cross-price elasticity of demand exists between complementary goods.

Consumption: Usually adds up to the spending by households for goods that gratify human wants. In macroeconomics, the total of all consumers’ spending is also termed consumption. In discussions of economic growth, however, “consumption” sometimes refers to any current use of goods or resources that “uses-up” (absorbs) the goods or resources so that they are not available at a later time, in contrast to “saving” or “investment,” by which goods or the services of resources are available at later points in time. Thus consumption and saving are not differentiated by whether private households or government spend, but rather by whether the goods are “used up” now or later. In this approach, C + I = C + S = Y = GDP.

Cyclical: The cyclical deficit is the difference between government revenues and outlays that emerges because the macro economy is operating below its potential.

Deficit: A budget deficit exists when government revenue is less than its outlays, and may be financed by the federal government a: (a) by having the Treasury issue bonds, which entails an increase in government debt, or (b) by printing new money (monetary base), whereby the central bank purchases the Treasury bonds. The budget equation for the federal government can be summarized as G = T + ΔB + ΔMB. In the United States, whether the budget deficit (G-T) is covered by net new national debt (Δ in Treasury bonds) or by printing monetary base (ΔMB) is determined by the open market operations of the Federal Reserve System. Deflation: Reductions in the average level of prices are referred to as deflation.

Demand: Demand reflects the amounts of a good that people are willing and able to buy, given the prices and choices available to them.

Dependent variable: The value of a dependent variable is contingent upon the value of other variables, which are called independent variables. If variables are determined interdependently, then the function is an implicit function. For example, a very simple demand function for a specific good can be written as Qd = f(P), or an equally valid demand function addressing the same good can be written as P = g(Q).

Discount rate: The discount rate is the interest rate (d) the FED charges member banks when they borrow money from FED “discount windows” that operate in each Federal Reserve District Bank. Although the district banks set the discount rate as a matter of law, the Federal Reserve System’s Federal Open Market Committee has de facto control over this rate.

Discount factor: In a multi-period model, agents may have different utility functions for consumption (or other experiences) in...
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