gross domestic product (GDP): the total income of a country, which is considered as the best indicator to measure social and economic welfare

gross? Domestic product: the market value of all final goods and services produced in a country in a given period (the geographical scope of a country)

GDP? Y=C+I+G+NX?

consumption consumption: expenditure of goods and services used by families except for buying new houses

investment investment: purchase of goods used for producing other goods (capital equipment, savings and loans and buildings, including the purchase of new houses by families)

government? Purchase government purchase: expenditure of local state federal government on goods and services (excluding transfer payment of social security, etc.)

net export: expenditure of foreigners on domestically produced goods-expenditure of domestic residents on foreign goods (import-export)

inflation: average price increase ratio

nominal GDP (current price) real GDP (constant price)

GDP deflator. : nominal/true

consumer price index CPI

inflation rate? Inflation rate

= (second year GDP deflation-first year GDP deflation)/first year GDP deflation

= (second year CPI deflation-first year CPI deflation)/ CPI deflator in the first year < P > Real interest rate = nominal interest rate-inflation rate < P > Catch-up effect: poor countries tend to increase faster than rich countries at the beginning < P > Externality: the influence of one's behavior on bystander welfare < P > Encouraging savings and investment is a way for the government to promote growth. And in the long run, it is also a way to improve the living standard of an economy.

Savings and investment and financial system

Financial system: a group of institutions in the economy that make one person's savings match another person's investment.

Financial market (bond market, stock market): financial institutions used by savers to directly provide funds to borrowers.

Bond: a debt certificate (term, credit risk, Tax treatment)

Stock: the right to claim part of the ownership of an enterprise

Financial intermediaries (banks, mutual funds): financial institutions through which savers can indirectly provide funds to borrowers

loanable funds market; The market where people who want to save can provide funds and those who want to borrow money for investment can borrow funds

(There is an interest rate, the real interest rate, which is both savings income and borrowing cost)

Savings is the source of supply in loanable funds. Investment is the source of loanable funds's demand

Basic financial tools

Finance: the study of how people allocate resources and deal with risks in a certain period of time

Effectiveness: a person's subjective measurement of welfare or satisfaction

Discounting: the process of finding a certain amount of present value of future money

Annuity: a regular income (paid by insurance companies) every year before death

Diversification of risks: Insurance replaces a kind of risk to reduce risk

Efficient market hypothesis (even if it is not an accurate description of the world, it contains a lot of truth)

Unemployment

Unemployed: people who can work and try to find a job in the previous 4 weeks but have not found a job. It also includes people who have been fired and are waiting to be recruited back to work

Labor force = number of employed people+number of unemployed people

Periodic unemployment: deviation of unemployment rate from natural unemployment rate

Natural unemployment rate: normal unemployment rate around which unemployment rate fluctuates

Most unemployment is short-term, Most of the unemployment observed at any given time is long-term (usually the result of changes in labor demand between different enterprises)

Friction unemployment: it takes time for workers to find jobs that best suit their hobbies and skills

Structural unemployment: unemployment caused by the shortage of jobs available in some labor markets to provide jobs for everyone who wants to work.

unemployment insurance, government policies, trade unions, efficiency wages, minimum wage law → more than balanced wages lead to unemployment

efficiency wages: wages paid by enterprises to improve workers' productivity

money &; Price

functions of money: medium of exchange, unit of valuation, means of value storage

Liquidity: the ease with which an asset can be converted into a medium of exchange in the economy (money is the most liquid asset)

Commodity currency: money in the form of goods with intrinsic value (even if it is not used as money, things themselves have value, such as gold)

Legal tender: no intrinsic value, The currency used as currency is determined by government decrees)

Money stock: the amount of money circulating in the economy (currency, deposits, funds, etc., excluding credit cards)

Reserve: deposits obtained by banks but not lent out (when banks only use some deposits as reserves, Created money)

Money multiplier: the amount of money generated by the banking system with a dollar reserve (the reciprocal of the reserve ratio)

Discount rate: the interest rate at which the Federal Reserve lends to banks

Federal funds rate: the interest rate at which banks lend to another bank overnight

The Fed's tools for controlling money are: open market operation (buying and selling government bonds), statutory reserve ratio (increasing the reserve ratio and reducing the money supply), and Inflation

In the long run, the overall price level will be adjusted to make the demand for money equal to the supply of money

Money quantity theory: a theory that the available amount of money determines the price level, The theory that the growth rate of available money determines inflation

Nominal variables: variables measured in monetary units

Real variables: variables measured in physical units

Classical dichotomy: theoretical distinction between nominal variables and real variables

Monetary neutrality: changes in money supply do not affect the view of real variables (money is the unit of valuation, But in the short term, it will have an impact on real variables.)

money circulation speed: the speed at which money changes hands

V=(P*Y)/M= (price level is GDP deflator * output is real GDP)/ money quantity

M*V=P*Y? Quantity equation The increase in the amount of money must be reflected in one of the other three variables. The price level must rise, the output must rise or the circulation speed must fall? Under normal circumstances, the speed of money circulation is relatively stable

Inflation tax: the income raised by the government by creating money

Fisher effect: when the Federal Reserve increases the money growth rate, the long-term result is higher inflation rate and higher nominal interest rate, that is, the one-to-one adjustment of nominal interest rate to inflation rate

The cost of inflation:

The decline in purchasing power is wrong. Inflation itself does not reduce people's actual purchasing power

the cost of leather shoes: the resources wasted when inflation encourages people to reduce their money holdings

the menu cost: the cost of changing prices

the tax distortion caused by relative price changes and improper resource allocation

the confusion and inconvenience of pricing

the unexpected price changes redistribute wealth between debtors and creditors

trade

. Yu: the part where exports are greater than imports

Net capital outflow NCO: foreign assets purchased by domestic residents minus domestic assets purchased by foreigners

Net exports = Net capital outflow

Savings = Domestic investment+Net capital outflow

Nominal exchange rate: the rate at which a person can exchange one country's currency for another

Real exchange rate: the rate at which a person can exchange goods and services from one country for goods and services from another country. Rate * domestic price/foreign price

The first exchange rate determination theory: average purchasing power (any unit currency should be able to buy the same amount of goods in all countries, and if it is different, arbitrage will make the final average price)

According to this theory, the nominal interest rate between the two currencies will inevitably reflect the price level of these two countries

Limitations of purchasing power parity:

1. Many goods are not easy to trade. Arbitrage has limitations

2. Even tradeable goods, when produced in different countries, can not completely replace

In an open economy, the government budget deficit raises the real interest rate, squeezes out domestic investment, causes the appreciation of the US dollar, and makes the trade balance tend to deficit

Trade policy: tariffs, import quotas

Capital flight: a country's asset demand is greatly and suddenly reduced

. Total supply

recession: the period of real income decline and unemployment increase

depression: serious recession

economic fluctuation:

1. Irregular and unpredictable

2. Most macroeconomic variables fluctuate at the same time

3. With the decrease of output, unemployment increases

Most economists believe that classical theory describes the long-term world. However, it is not described that the short-term

price drop in the world has increased the demand for goods and services:

1. Consumers are richer, which has stimulated the demand for consumer goods

2. Interest rates have fallen, which has stimulated the demand for investment goods

3. Currency depreciation has stimulated the demand for imports and exports

1. Wealth effect: the decline in price level has increased real wealth. 2. Interest rate effect: the falling price level lowers interest rates and encourages investment expenditure < P >? 3. Exchange rate effect: the decline in the price level causes the real exchange rate to decline, encouraging the net export expenditure

In the long term, the total supply curve is vertical, and in the short term, it is inclined to the upper right (sticky wages, sticky prices, illusion of relative prices)

When the actual price level deviates from the expected price level, Short-term output deviates from its long-term level

product supply = natural growth rate +a (actual price level-expected price level)

stagflation: the period when output decreases and prices rise

the influence of monetary policy and fiscal policy on total demand

liquidity preference theory: Keynes's theory holds that the adjustment of interest rate makes money supply and money demand balance

Interest rate rises. Declining demand for money

multiplier effect: when expansionary fiscal policy increases income and thus increases consumption expenditure, it causes additional changes in total demand

marginal propensity to consume MPC: the proportion of extra household income that is used for consumption but not for saving

multiplier =1/(1-MPC)

crowding-out effect: when expansionary fiscal policy causes interest rates to rise, it reduces total demand caused by investment expenditure. Unemployment

Phillips curve: a curve representing the short-term trade-off between inflation and unemployment (negative correlation)

In the long run, unemployment does not depend on monetary growth and inflation

Unemployment rate = natural unemployment rate -a (actual inflation-expected inflation)

Natural unemployment rate hypothesis: It is believed that regardless of inflation, The view that unemployment will eventually return to its normal rate or natural rate

supply shock: an event that directly changes the cost and price of enterprises to move the total supply curve in the economy, thus moving the Phillips curve

sacrifice rate: the percentage of annual output loss in the process of reducing inflation by a percentage

rational expectation: when people predict the future, they can make full use of all the information they have. Theory including information about government policies

In the most extreme case, the sacrifice rate can be zero: if the government makes a credible commitment to a low inflation policy, people's rationality is enough to make them immediately reduce their inflation expectations. Short-term Phillips curve will move downward, and the economy will soon reach low inflation without paying the price of temporary high unemployment and low output

macro-policy debate

zero inflation

support: inflation has many costs, even if it has few benefits. In addition, the price of inflation in Xiaohu-depressing output and employment-is only temporary. Even this cost can be reduced if the central bank announces a feasible plan to reduce inflation, thus directly reducing inflation expectations.

Objection: Moderate inflation brings only a small cost to society. The recession needed to reduce inflation is expensive

Balance the government budget

Support: the budget deficit puts the burden of not working on future generations by increasing their taxes and reducing their income

Objection: the deficit is only a small part of fiscal policy

Tax incentives for savings

Objection: many changes to stimulate savings mainly benefit the rich, and have only a slight impact on private savings, so as to increase public welfare by reducing the government budget deficit.