ECONFINAL - - primary deficit: govt purchases+transfer...

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Unformatted text preview: - primary deficit: govt purchases+transfer payments-taxes; govt purchases, less net tax excluding interest payments on the govt debt-primary budget is balanced, but govnt borrowed. Debt-to-GDP ratio rises if real interest rate exceeds rate of GDP.- Seigniorage: the value of new monetary base.-If central bank is independent of central govnt, central bank increases MB through permanent open market op.-The government finances its budget deficit with money creation. In this situation, the inflation rate falls over time.- If the debt-to-GDP ratio is rising, then bond-financing the budget deficit may make eventual inflation worse.-QE 2 is increasing both the size of the Fed balance sheet and its holdings of government bonds.-The aggregate short-run production function gives real GDP as a function of labor , holding all else constant.-The average product of labor is defined as Y/L , and the marginal product of labor is defined as ∆ Y/ ∆ L.-The marginal product of labor is positive, and diminishing as the quantity of labor increases.-Suppose real wage ⇑ . Firms respond by reducing employment to increase marginal product of “marginal” worker.-Effect of increased real wage on # of hours worked by ppl: income effect is negative, substitution effect is positive-Increase in capital stock, technology, size of the labor force will increase full employment and potential real GDP- technological progress and increase in the capital stock will increase per capita income-The productivity function gives output per worker-hour as a function of physical capital per worker-hour-“ one-third rule”: 3% increase in physical capital per worker-hour leads to 1% increase in output per worker-hour.- increase in the quantity of real GDP demanded can result from either movement down the AD, movement from an equilibrium on one AD to a new equi on another AD curve- increase in taxes, drop in stock/house prices, increase in the exchange rate decreases AD Increase AD: expansionary monetary- an increase in wages shifts SRAS up -----A “permanent” increase in the real price of oil causes LRAS and SRAS to shift left, and SRAS to shift up.-Improvements in technology tend to shift LRAS, SRAS, and AD to the right.- A change in factor prices and input prices shifts: SRAS but not LRAS.-As move down the AD curve households spend more because the purchasing power of their assets increases.- intertemporal substitute effect of decrease in price makes future goods less attractive compared to current goods As the GDP deflator falls: current goods become cheaper compared to future goods.-An increase in the foreign exchange value of the dollar decreases US AD.-An increase in expected future price levels increases AD and decreases SRAS....
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This note was uploaded on 10/20/2011 for the course ECO 304L taught by Professor Bencivenga during the Spring '10 term at University of Texas.

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ECONFINAL - - primary deficit: govt purchases+transfer...

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