UM_Macro_Ordner

UNISEMINAR

Theory

Practice

Exams

Extras

Sem

inar

Introduction

Macroeconomics Academic Year 2012/2013, Block 3

Uniseminar – Macroeconomics Introduction

Welcome to Uniseminar!

IInnttrroodduuccttiioonn

Uniseminar offers EExxaamm PPrreeppaarraattiioonn SSeemmiinnaarrss,, SSuummmmaarryy SSccrriippttss aanndd

LLeeaarrnniinngg CCaarrddss for students of the Maastricht University. It is our goal to op-‐

timally prepare you for your exams and to make your own exam preparation as

efficient as possible. In order to achieve this goal, we have developed a system of

seminars in combination with an extensive summary script, which is proven for

several years by now.

In university it is often the case that there is a lot of material available for a

course and that the importance of this material is hard to evaluate. Since we, as

students, have made this experience as well, you are provided with a Uniseminar

Summary Script of the corresponding course. This folder contains all exam-‐

relevant material and it gives you a good summary of all course topics. The con-‐

tent of the folder is created by experienced Master or PhD students, who have

taught this course already several times. As a consequence, it is possible for you

to concentrate on the actual exam preparation, rather than spending hours

searching and printing the right material.

At the end of week 6 of your block, normally during the weekend, our EExxaamm

PPrreeppaarraattiioonn SSeemmiinnaarrss take place. These seminars are taught by above-‐

average students, who have already mastered their studies at the Maastricht

University and have a great deal of experience in tutoring. Since they have stud-‐

ied and taught at the Maastricht University they know exactly where potential

problems may lie and are therefore able to optimally teach you the whole theory

of the course and practice perfectly tailored examples with you. Furthermore you

can bring in your own questions during the seminar and discuss individual prob-‐

lems during the breaks.

You are able to pick up your SSuummmmaarryy SSccrriipptt aanndd LLeeaarrnniinngg CCaarrddss in ad-‐

vance of the Seminar in order to already start preparing so that you can discover

your own difficulties early enough. Later in the Seminar you will then know what

Introduction Uniseminar – Macroeconomics

your weaknesses are and be able to pay special attention to these sections or ask

questions about it. Our Summary Script and Learning Cards are updated every

year according to the current course’s content and we are always trying to opti-‐

mize the folder as much as possible.

AAbboouutt UUss

Uniseminar was by two students at the University of St. Gallen in order to make

Exam Preparation more efficient and coherent. Since 2005 we have expanded our

vision and are now offering seminars and material for an efficient exam prepara-‐

tion in Switzerland, the Netherlands, Italy and Germany.

Thanks to this longstanding experience, we were able to build up a team of highly

qualified tutors and editors and are therefore able to guarantee high quality of

exam preparation.

The team of Uniseminar is grown strongly over the years and comprehends sev-‐

eral mathematicians, statisticians and economists, who all bring a great didactical

experience. All tutors of Uniseminar have been teaching their field for years and

know exactly what is important in order to optimally prepare and pass the exam.

Uniseminar – Macroeconomics Introduction

SSuummmmaarryy SSccrriipptt This aim of this folder is to support you with your exam preparation for ‘Macroe-‐

conomics’ as much as possible. Usually it consists of five different sections. As

follows, a short overview of the content of this folder:

11.. TThheeoorryy:: The Theory Script summarizes the whole theory of the course in

a simple and understandable way. Concepts are explained with the help of

demonstrative examples. It is structured according to the seven weeks of

the course and is one of the most important parts of your exam prepara-‐

tion.

2. EExxaammss:: In this part you will find old exams of the Maastricht University,

with extensive answer keys by Uniseminar. During the seminar you will

then receive a further practice exam.

3. EExxttrraass:: In the Extras part, you will find a formula sheet as well as a glos-‐

sary that contains all the important definitions you should know.

4. SSeemmiinnaarr:: In this part, we have provided you with some notepaper so that

you can take notes during the seminar. Furthermore you will receive a

fourth practice exam during the seminar, which you can file in here. In case

you have not subscribed for the Macroeconomics seminar yet, you can do

so on our website -‐ www.uniseminar.nl -‐ at any time.

Introduction Uniseminar – Macroeconomics

MMaaccrrooeeccoonnoommiiccss

The Macroeconomics exam you are facing will consist of two parts: a closed part

and an open part. The closed part consists of 70 multiple-‐choice questions. The

open part consists of several questions, where you have to apply the theory

you’ve learned to actual problems. These actual problems are similar to the ones,

which were discussed during the analytical skills training. The closed part counts

for 70 points, the open for 30. In Macroeconomics it is crucial that you under-‐

stand the theory behind the models. Therefore you should first of all focus on the

understanding of the theory, before starting with calculations.

HHiinnttss aanndd TTrriicckkss

Here are some tips that may be helpful for your exam preparation. Many students

make typical errors when preparing for their first exams at university. We there-‐

fore want to help you to avoid these mistakes, so that you can focus on the essen-‐

tial stuff, rather than wasting your time with a preparation into the wrong direc-‐

tion!

HHooww ddoo II ooppttiimmaallllyy pprreeppaarree ffoorr aann eexxaamm??

The exams of the university are created in such a way that every student can pass them

with an average preparation time. Since there is a lot of content and time is limited,

planning is the basis of your success. You don’t need to be a genius to pass the exam, but

you should still take care of a few things and try to develop a certain discipline in the

following weeks. The subsequent hints may be helpful for you:

TTaakkee yyoouurr ttiimmee!!

It is totally normal that you will be slower in solving exercises in the be-‐

ginning. You can be sure that you will improve your efficiency and velocity

after some practice, however you should start preparing for the exam early

Theory

Practice

Exams

Extras

Sem

inar

T

Theory


Theory Uniseminar – Macroeconomics

TThheeoorryy

The Theory Script summarizes the whole theory of the course in a simple and

understandable way. Concepts are explained with the help of demonstrative

examples. It is structured according to the seven weeks of the course and is one

of the most important parts of your exam preparation. Although practice is very

important, it is even more crucial to understand the basic concepts of the course

in order to be able to calculate and understand all different kinds of exercises and

exam questions.

TTaabbllee ooff CCoonntteennttss

11 TThhee sshhoorrtt-‐-‐rruunn 11

1.1 The goods market 1

1.2 The money market 5

1.3 The IS-‐LM model 7

22 TThhee mmeeddiiuumm-‐-‐rruunn 1122

2.1 Wage setting, price setting and unemployment 12

2.2 The AS-‐AD model 17

2.3 The Philip’s curve and Okun’s law 23

33 TThhee lloonngg-‐-‐rruunn 2277

3.1 Solow Economy 27

44 EEccoonnoommiicc PPoolliiccyy 3333


12

22 TThhee mmeeddiiuumm-‐-‐rruunn

22..11 WWaaggee sseettttiinngg,, pprriiccee sseettttiinngg aanndd uunneemmppllooyymmeenntt::

TThhee wwaaggee sseettttiinngg eeqquuaattiioonn::

𝑾𝑾 = 𝑷𝑷𝒆𝒆𝒇𝒇(𝒖𝒖⊖, 𝒛𝒛⊕)

The wage demanded by the workers will depend on the expected price level, the

unemployment rate and a catchall variable called z. The role of the price level

should be obvious because no one cares about the nominal value of his wage but

of the value of his wage in term of goods. If wage setters expect a strong increase

in the price of goods they will also bargain a higher wage to keep the amount of

goods they are able to buy constant. In this case it is not the real price level but

the expected price level instead because it is assumed that wages are fixed in

advance and therefore wage setters need to include their expectations of the

future price level. The other part of the wage is a function of the unemployment

rate and the catchall variable. The unemployment rate is negatively related to the

wage because higher unemployment means that many workers are looking for a

job. Such competition for jobs decreases the wages. On the other hand if there are

only very few unemployed people firms may want to hold their employees

because it will be hard for them to find replacement. This will therefore increase

the wage. The last term, the catchall variable is defined to be positively related to

wage. It measures all other terms, which will be important in the determination

of wages, e.g. unemployment benefits. Obviously unemployment benefits will

tend to increase the reservation wage (the minimum wage necessary to make

someone take a job instead of not working) and thereby also the general wage.

TThhee pprriiccee sseettttiinngg eeqquuaattiioonn::

𝑷𝑷 = 𝟏𝟏+ 𝝁𝝁 𝑾𝑾

Uniseminar – Macroeconomics Theory

13

This equation defines how firms set the price of their products. It depends on two

things: The price of the inputs of the firm and the mark-‐up of the firm. For

simplification a one input production function is assumed, which means that

production only relies on labour. Hence capital or other products inputs are

ignored. Additionally it is assumed, that one worker produces exactly one

product, so that the wage would be equal to the price if the mark-‐up was zero.

Obviously prices of the product and the price of the only input, namely the wage,

are positively correlated. Hence a wage increase increases the costs of the firms

and is then followed by an increase in the price of the products of the firms.

Finally, the mark-‐up term puts a wedge between the costs of the firms and the

price they ask. In a perfectly competitive market, this mark-‐up would be equal to

zero, however, as soon as competition decreases firms may be able to ask a mark-‐

up and thereby make a profit.

EEqquuiilliibbrriiuumm rreeaall wwaaggee aanndd uunneemmppllooyymmeenntt::

To plot the wage and price setting equations in a space with unemployment on

the x-‐axis and the real wage W/P on the y-‐axis a bit of rewriting is necessary.

Assuming that wage setters hit the target and expect the price level correctly the

wage setting equation can be rewritten as follows:

𝑾𝑾 = 𝑷𝑷𝑷𝑷(𝒖𝒖⊖, 𝒛𝒛⊕) || Dividing both sides by P

𝑾𝑾𝑷𝑷= 𝒇𝒇(𝒖𝒖⊖, 𝒛𝒛⊕)

This expression gives us the real wage as a function of u and z. Without knowing

the exact function it is clear that an increase in u will lead to a decrease in the

real wage since the two are negatively related. The following steps are necessary

to rewrite the price setting equation also in terms of the real wage:

𝑷𝑷 = 𝟏𝟏 + 𝝁𝝁 𝑾𝑾 || Dividing both sides by W and taking the inverse

𝑾𝑾𝑷𝑷= 𝟏𝟏

𝟏𝟏 𝝁𝝁


14

By checking the rewritten form of the

price setting equation we realize that the

real wage is always equal to one divided

by one plus the mark-‐up. This equation

does not depend on unemployment.

Graphing both lines allows determining

the real wage and the unemployment

rate. As derived above, there is a

downwards-‐sloping wage setting graph, showing that an increase in

unemployment will decrease the real wage earned and a horizontal price setting

curve. This curve is horizontal because the price setting decision of firms does

not depend on unemployment and therefore the real wage in this equation is the

same for all possible unemployment rates. Recap the assumption that wage

setter expected the actual price level and that therefore the graph shows the real

wage and unemployment in this specific situation where P equals P .

TThhee nnaattuurraall rraattee ooff uunneemmppllooyymmeenntt aanndd eexxppeeccttaattiioonnss::

The concept of the natural rate of unemployment is pretty logical. As seen above,

whenever wage setters expect a price level, which is equal to the actual price

level, then the model gives a level of unemployment at the crossing point of the

two lines. This unemployment is referred to

as the natural rate of unemployment or

short 𝑢𝑢 . Hence, whenever the price level

and the expected price level are equal

unemployment is equal to its natural rate.

The situation is different if the expectations

of the wage setters are false. Recap that the

wage setters choose the expected price level

in advance when they fix their wage contracts. The following graph displays the

situation for a case in which the expected price level has been too high and is


27

33 TThhee lloonngg-‐-‐rruunn

33..11 SSoollooww EEccoonnoommyy

TThhee mmooddeell::

The Solow model is a model, which focuses on economic growth in the long run.

In the previous analysis of the short and the medium-‐run it was shown that

economic policies are able to stimulate output for a short time, but that in the

medium-‐run output will be back at its natural level. These models are suitable for

the discussion of booms and recessions but they do not allow for sustainable

economic growth. The Solow model will allow for this type of economic growth.

At the core of the model is the production function. Output depends on the

amount of capital K, the amount of workers N and the state of technology A.

Technology improves the performance of workers and is therefore multiplied

with labour. This term is then called effective labour or effective workers.

𝑌𝑌 = 𝑓𝑓(𝐾𝐾,𝐴𝐴𝐴𝐴) | dividing both sides by AN to get output per effective

worker

𝑌𝑌𝐴𝐴𝐴𝐴

= 𝑓𝑓(𝐾𝐾𝐴𝐴𝐴𝐴

, 1)

It is simply possible to drop the one at the end because it cannot change and

therefore does not change the results either.

The next step is to think how the capital stock of an economy can change. Capital

is the result of investment. If a company invests in new machines or a new plant

it increases its capital stock. Therefore the new capital that is accumulated each

year equals the amount of investment. However, investment does not come from

nowhere. Banks finance the investments of companies, but also banks cannot

simply create money and therefore the amount of investments (what banks lend

to companies) needs to equal the amount of savings (what consumers lend to

banks).

𝐼𝐼 = 𝑆𝑆


28

Individuals face two possibilities what they can do with their money. They can

either spend it on consumption of save it. Therefore the amount of savings equals

total income times the savings rate. Be sure that the savings rate is between 0

and 1 and that the consumption share equals 1-‐s.

𝐼𝐼 = 𝑠𝑠𝑠𝑠 | plugging in the production function for Y

𝐼𝐼 = 𝑠𝑠×𝑓𝑓(𝐾𝐾𝐴𝐴𝐴𝐴

)

The above is true for the accumulation of capital, however, capital also

depreciates. Think of an old machine in a factory. At some point in time this

machine is too old to produce output. This is exactly what happens to the total

capital stock, it depreciates. Assuming a constant rate of depreciation equal to 𝛿𝛿,

the change in capital is then equal to the accumulation of new capital minus the

depreciation of old capital.

∆𝑲𝑲 = 𝒔𝒔×𝒇𝒇 𝑲𝑲,𝑨𝑨𝑨𝑨 − 𝜹𝜹𝜹𝜹

This gives an expression for the change in capital, but the model is built up per

effective worker and therefore it is necessary to rewrite the equation a bit

∆𝑲𝑲𝑨𝑨𝑨𝑨 = 𝒔𝒔×𝒇𝒇

𝑲𝑲𝑨𝑨𝑨𝑨 − 𝜹𝜹+ 𝒈𝒈𝑵𝑵 + 𝒈𝒈𝑨𝑨

𝑲𝑲𝑨𝑨𝑨𝑨

The derivations needed to get to this are not included in this block. Therefore

make only sure to understand this result intuitively. The change in capital per

effective worker equals investment in capital per effective worker (note that the

production function is now also in terms of effective labour) minus depreciation,

population growth and technology growth. Especially the changes in the last

term need an explanation. The depreciation term has the same logic as before,

capital depreciates at a constant rate 𝛿𝛿 and this decreases both capital and capital

per effective worker. However, let’s think about population and technology

growth for a moment. Both increase the amount of effective workers and

therefore capital per effective worker would decrease since the denominator

increased. In order to stay constant capital per effective worker has to increase


29

by the same proportion as population and technology to make up for this. Hence

𝑔𝑔 and 𝑔𝑔 appear in the equation with a negative sign. The first term of the

equation is called actual investment because it shows how much is actually

invested to accumulate capital. The second term 𝛿𝛿 + 𝑔𝑔 + 𝑔𝑔 is called break-‐

even investment because it shows how much needs to be invested in order to

hold capital per effective worker constant. Whenever actual investment is larger

than break-‐even investment the change in capital per effective worker is positive

and therefore capital per effective worker increases. If break-‐even investment is

larger than actual investment, then we find that capital per effective worker

decreases.

In order for the economy to come to a halt the change in capital per effective

worker needs to be equal to zero. If capital per effective worker does not change

anymore output per effective worker is also constant since it only depends on

capital per effective worker. This situation is called the steady state in which it

always holds that:

𝒔𝒔×𝒇𝒇𝑲𝑲𝑨𝑨𝑨𝑨 = 𝜹𝜹+ 𝒈𝒈𝑵𝑵 + 𝒈𝒈𝑨𝑨

𝑲𝑲𝑨𝑨𝑨𝑨

How the steady state is reached becomes

more intuitive if displayed in a graph.

Whenever the economy is in a situation

beneath its steady state the actual

investment line is higher than the break-‐

even investment line. Therefore capital

per effective worker will increase until

the economy reaches its steady state.

Whenever the economy is above its

steady state, break-‐even investment is

larger and therefore capital per effective worker will decrease until the economy

is back to its steady state. This Solow model with technology is a more general


30

form of the classic Solow model without technology growth. Whenever we set

technology level A equal to one and its growth rate to zero we get the following

expression:

∆𝐾𝐾𝑁𝑁= 𝑠𝑠×𝑓𝑓

𝐾𝐾𝑁𝑁

𝛿𝛿 + 𝑔𝑔𝐾𝐾𝑁𝑁

This is exactly the same what Blanchard gets in chapter 10 and 11 if the

assumption of no population growths is also included which sets 𝑔𝑔 equal to zero.

Therefore the classical Solow model is a special case of the Solow model

including technological growth.

Additionally please note that the approach taken here is a very formal one

because it does not classify the production function. Whatever production

function is used can simply be plugged into the steady state condition of break-‐

even investment being equal to actual investment to solve for the steady state

values of K/AN and Y/AN.5

Note that in steady state output and capital per effective worker are constant

which does not mean that output and capital are constant. Output and capital

grow proportionally to the population and technology, which is a condition for

output and capital per effective worker to be constant. This also implies that

output per worker grows at a rate equal to technology growth. All this can be

summarized in the following table:

Variable Growth rate in SS (Solow model with

A)

Growth rate in SS (Solow model without

A)

K or Y 𝑔𝑔 + 𝑔𝑔 𝑔𝑔

K/N or Y/N 𝑔𝑔 Not growing

K/AN or

Y/AN

Not growing Does not exists as there is no A

5 In fact some assumptions to the returns of production function are made. As one can see in the graph the production function has decreasing returns to capital. This assumption is necessary because otherwise the accumulation of capital would lead to more and more output and there would be no steady state. The function of that would not be concave but convex and it is easy to prove that then there is no steady state.

Extras

Sem

inar

E Exams

Extras

Sem

inar

Exams


Exams Uniseminar – Macroeconomics

EExxaammss

You should start early with the calculation of exams, because you need to get a

general feeling of how the exams are built up. You will soon discover how the

exams are constructed and that there are general tendencies, which repeat from

exam to exam. In this part you will find old exams of the Maastricht University

with extensive answer keys by Uniseminar. During the seminar you will then

receive a further practice exam constructed by Uniseminar.


CClloosseedd PPaarrttss 11

2011/12 Resit 2011/12 First Sit 2010/11 Resit (incl. extensive answer key by Uniseminar) 2010/11 First Sit (incl. extensive answer key by Uniseminar) 2009/10 Resit (incl. extensive answer key by Uniseminar) 2009/10 First Sit (incl. extensive answer key by Uniseminar) 2008/09 Resit (incl. extensive answer key by Uniseminar) 2008/09 First Sit (incl. extensive answer key by Uniseminar)

OOppeenn PPaarrttss 221177

2011/12 Resit 2011/12 First Sit 2010/11 Resit 2010/11 First Sit 2009/10 Resit 2009/10 First Sit 2008/09 Resit 2008/09 First Sit

Uniseminar – Macroeconomics Exams

EExxtteennssiivvee AAnnsswweerr KKeeyy –– 1100//1111 rreessiitt

11)) –– DD::

The value added by a company is the difference between the price they can sell

the product for and the price they bought if for. More economically this is total

sales minus costs of intermediate goods. 800 − 100 = 700

22)) –– AA::

In the AS-‐relation the price level depends on output, expected prices, the mark-‐

up term and the catchall variable z.

33)) –– BB::

Demand factors explain short-‐term fluctuations in output as supply needs more

time to adapt. In the medium run, however, supply factors determine output.

44)) –– DD::

People who would like to work but gave up looking are called discouraged

workers. These people are not part of the definition of the labour force.

55)) –– CC::

The difference between nominal and real GDP is the price level. As long as the

nominal increase is higher than the real increase inflation must be positive.

66)) –– CC::

An increase in the inventory is not an investment as no additional production

possibilities follow from it.

Exams Uniseminar – Macroeconomics

77)) –– BB::

Disposable income is equal to income minus taxes and it can be used for two

things only, consumption or savings. Hence the sum of consumption and savings

must equal disposable income.

88)) –– CC::

Note that in this case there are no fixed taxes, but a tax rate. Hence the

propensity to consume is not 0.8 but 0.8 ∗ (1− 0.2) = 0.64. Therefore the

multiplier is given as .= 2.78.

99)) –– CC::

The propensity to consume is equal to the slope of the ZZ curve. Hence an

increase in the propensity to consume will make the ZZ-‐curve steeper which will

increase equilibrium income.

1100)) –– BB::

Another condition for goods market equilibrium is that investment equals

savings. The condition leads to exactly the same findings as output equal to

demand. Due to this it must hold that savings equal investments as long as output

equals demand. Points B,D and E lie on the 45° degree line and hence in those

points savings and investment are equal. Moreover, point A is above the 45° line

which means there is more demand than output and hence more investment and

consumption which hints to less savings. The logic is reversed in point C and

hence in this point savings exceed investments.

1111)) –– BB::

The bond formula is: 950 1+ 𝑟𝑟 = 1000. Solving for 𝑟𝑟 gives: 𝑟𝑟 = − 1 =

0.053 = 5.3%

Uniseminar – Macroeconomics Exams

1122)) –– BB::

If money supply is less than money demand the interest rate will increase in the

money market to bring down money demand. As interest rate and bond prices

are inversely related, an increase in the interest rate will lead to a decrease in

bond prices.

1133)) –– CC::

A contractionary monetary policy means that the money supply decreases. Hence

the central bank has to sell bonds. Moreover, as a result the interest rate will

increase.

1144)) –– AA::

If the central bank sells bonds, it is able to take the money is sold it for out of the

market. Hence the monetary base drops. The money multiplier depends only on

the reserve ratio and the share of money people wish to hold as currency.

1155)) –– CC::

An increase in the reserve ration means that less money circulates in the

financial markets as bank need to hold more money in reserves. Hence the

money multiplier goes down.

1166)) –– AA::

Real refers to the value of something in terms of goods instead of money. You can

find it by dividing the nominal value by the price level, in terms of the money

supply this gives .

Extras

Sem

inar

E

Extras


Extras Uniseminar – Macroeconomics

EExxttrraass

In this part you find several extras that will be very helpful for your exam

preparation. In this course you will a formula sheet that contains all the relevant

formulas as well as a glossary with all important definitions.


FFoorrmmuullaa SShheeeett 11

GGlloossssaarryy 55

Uniseminar – Macroeconomics Extras

1

GGooooddss mmaarrkkeett::

𝒀𝒀 ≡ 𝑪𝑪+ 𝑰𝑰+ 𝑮𝑮+ [𝑿𝑿− 𝑰𝑰𝑰𝑰] with: 𝑪𝑪 = 𝒄𝒄𝟎𝟎 + 𝒄𝒄𝟏𝟏×(𝒀𝒀 − 𝑻𝑻)

TThhee ggooooddss mmaarrkkeett mmuullttiipplliieerr::

𝟏𝟏𝟏𝟏− 𝒄𝒄𝟏𝟏

MMoonneeyy mmaarrkkeett::

𝑴𝑴𝑫𝑫 = $𝒀𝒀×𝑳𝑳(𝒊𝒊⊖) and 𝑴𝑴𝑺𝑺 = 𝑴𝑴𝑺𝑺

IISS-‐-‐LLMM mmooddeell::

𝒀𝒀 = 𝑪𝑪 𝒀𝒀− 𝑻𝑻 + 𝑰𝑰 𝒀𝒀, 𝒊𝒊 + 𝑮𝑮 and 𝒀𝒀𝒀𝒀 𝒊𝒊 =𝑴𝑴𝑺𝑺

𝑷𝑷

For given C, T, I, G, L, M and P this solves as a system of two equations with two unknowns, i and Y.

WWaaggee aanndd pprriiccee sseettttiinngg::

𝑾𝑾 = 𝑷𝑷𝒆𝒆𝒇𝒇 𝒖𝒖⊖, 𝒛𝒛⊕ and 𝑷𝑷= 𝟏𝟏+𝝁𝝁 𝑾𝑾

TThhee nnaattuurraall rraatteess::

𝑰𝑰𝑰𝑰 𝑷𝑷 = 𝑷𝑷𝒆𝒆 𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕 𝒖𝒖 = 𝒖𝒖𝑵𝑵

𝒀𝒀𝒏𝒏 = (𝟏𝟏− 𝒖𝒖𝒏𝒏)𝑳𝑳

𝒖𝒖𝒏𝒏 =𝝁𝝁+ 𝒛𝒛𝜶𝜶

Uniseminar – Macroeconomics Glossary

5

AAddaappttiivvee eexxppeeccttaattiioonnss:: a method of tacking this year’s expectation of a

certain variable equal to the value of the variable of last year. Mostly used when

forming the expectations of the price level or inflation

AAggggrreeggaattee ddeemmaanndd rreellaattiioonn ((AADD)):: a relation between output and the price

level being derived from IS-‐LM model (equivalently goods and money market).

In the relation output depends negatively on the price level

AAggggrreeggaattee ssuuppppllyy rreellaattiioonn ((AASS)):: again a relation between output and the

price level but being derived from the price and wage setting equation

(equivalently labour market). Now the price level depends positively on output

AAuuttoonnoommoouuss ssppeennddiinngg:: the part of demand Z which does not depend on the

level of output, namely government spending, taxes, investment and autonomous

consumption c₀. This equals the intercept of the demand line/ overall goods

market relation line of the Keynesian cross

BBaallaanncceedd ggrroowwtthh ppaatthh:: the growth path of output and capital if the Solow

economy is in steady-‐state. Output and capital both grow at the rate of

technological progress plus population growth. Output per capita just grows at

the rate of technological progress

BBoonndd:: a financial assets which central banks can buy to increase the money

supply and can sell to decrease the money supply

BBuuddggeett ddeeffiicciitt:: the sum of interest payments plus government spending minus

tax revenue. The budget deficit is equal to the change in public debt

Glossary Uniseminar -‐ Macroeconomics

6

CCaappiittaall aaccccuummuullaattiioonn:: the increase of capital or capital per (effective)

worker in the Solow model. In a position beneath the steady-‐state capital

accumulation is positive. In a position above the steady-‐state capital is

decreasing. The accumulation of capital is equal to actual investment minus

break-‐even investment

CCaattcchhaallll vvaarriiaabbllee zz:: the variable has a positive impact on the wage and

measures how systematic factures influence the wage. Large unemployment

benefits increase z and thereby the wage workers ask for.

CChheecckkaabbllee ddeeppoossiittss:: deposits which can be checked immediately and which

therefore require banks to hold a certain percentage of their value in cash-‐

reserves

CCeennttrraall bbaannkkss:: Institutions which decide about the money supply within an

economy (monetary policy). In almost all western nations they are independent

from the government. Examples are the ECB and the FED

CCoolllleeccttiivvee bbaarrggaaiinniinngg:: this takes place if different workers bargain their wage

together as a labour union. Stronger unions lead to an increase in the catchall-‐

variable z

CCoonnssuummeerr pprriiccee iinnddeexx ((CCPPII)):: a way to measure the price level by taking a

goods-‐basket consisting of every day products consumers need and then

evaluating the price of the basket through different years. Changes in the

consumer price index give therefore an approximation to inflation

CCoonnssuummppttiioonn ((CC)):: the amount of the total demand which is consumed.

Consumption consists of two parts, one not depending and the other one

depending on output. Income which is not consumed is saved

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