macro

• Labor force


  employed + unemployed
• Labor force participation rate

  labor force / population
• U-3 unemployment rate


  unemployed / labor force
• U-6 unemployment rate

  (unemployed + PTER + MAW) / (labor force + MAW)
• Nominal GDP


  (P x Q) + (P x Q) + ...
• Real GDP


  (Pbase x Q) + (Pbase x Q) + ...
• Consumer Price Index (CPI)


  ((P x Qbase) + (P x Qbase) + ...) / ((Pbase x Qbase) + (Pbase x Qbase) + ...)
• GDP Deflator


  nominal GDP / real GDP x 100
• GDP is a measure of the overall flow of final goods and services over a period of time
• Inflation is a rise in the general level of prices
• U-3 unemployment rate is the number of working aged individuals seeking employment divided by the number of working aged individuals seeking employment and the number of working aged individuals working
• First Classical Postulate


  w/p = MPN(N) (labor demand function, real wage = marginal product of labor)
• Second Classical Postulate


  MUw/p = MUleisure (labor supply function, happiness from money earned is equal to happiness from leisure)
• Classical Labor Market


  • Clears to determine w/P and Ys (real wage and level of output)
• Substitution Effect


  As real wage increases, workers become more attracted to labor, so labor supply increases
• Income Effect


  As real wage increases, workers can work less and still maintain same standard of living as before, so labor supply decreases
• Classical Model Supply Equations

  1. Ys = F(K, N) (output is a function of capital and labor)

  2. Nd = f(w/P) (labor demanded is a function of the real wage)

  3. Ns = g(w/P) (labor supplied is a function of the real wage)

  4. Ns = Nd (market clearing)
• Classical Theory


  • Stressed self-adjusting economy
  • Nominal variables like money supply, C, I, G, etc. do not affect real variables like price level and output and real wage
  • M is exogenous; determined by monetary policy
• Say's Law


  Supply creates its own demand, r adjusts so to bring E = Ys, E = C + I + G
• Classical Market Demand Equations


  1. LFs = S(r) (loanable funds supply = savings which is a function of interest rate)

  2. LFd = I(r) + G - T (loanable funds demand = I from firms, which is a function of interest rate, and also government borrowing, from their budget deficit)
• Quantity Theory of Money


  MV = PY (changes in money supply (M) affect nominal variables (w, P, PY) but not real (w/P, Y, N))
• First Classical Postulate


  w/p = MPN(N) (labor demand function, real wage = marginal product of labor, in the long run firms will adjust w relative to P so that it equals the marginal product of the labor they are receiving)
• Second Classical Postulate


  MUw/p = MUleisure (labor supply function, happiness from money you earn is equal to the happiness from leisure, people make decisions about how much labor to supply based on utility of consuming goods relative to utility of not working)
• The Classical Labor Market clears to determine w/P and Ys (real wage and level of output)
• Substitution Effect


  As real wage increases, workers become more attracted to labor, so labor supply increases
• Income Effect


  As real wage increases, workers can work less and still maintain same standard of living as before, so labor supply decreases
• Classical Model Supply Equations

  1. Ys = F(K, N) (output is a function of capital and labor, production function)

  2. Nd = f(w/P) (labor demanded is a function of the real wage, labor demand function, profit max)

  3. Ns = g(w/P) (labor supplied is a function of the real wage, labor supply function)

  4. Ns = Nd (market clearing)
• Classical Theory stressed self-adjusting economy, nominal variables do not affect real variables, M is exogenous, AS is vertical at FE, markets are self-regulating, no government intervention
• Say's Law: supply creates its own demand, r adjusts so to bring E = Ys, E = C + I + G
• Classical Market Demand Equations


  1. LFS = S(r) (loanable funds supply = savings which is a function of interest rate)

  2. LFD = I(r) + G - T (loanable funds demand = I from firms, which is a function of interest rate, and also government borrowing, from their budget deficit)
• Quantity Theory of Money: MV = PY, changes in money supply affect nominal variables but not real
• Keynes Theory: wages are sticky, changes in money supply affect nominal variables not real, labor demand is dependent on investment, r, and business confidence, labor supply depends on nominal wage, AD determines output and employment, fiscal policy to stimulate demand during downturns
• During downturns AD goes down, so employment goes down, but because of sticky wages, labor supply is the same, so there's unemployment, government spending increases AD
• Active money balances


  cash or checking, readily available for transactions
• Inactive money balances


  savings accounts, etc., held as store of value