ECONFINAL - -primary deficit govt purchases transfer...

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- 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. -shortrun equilib, actual GDP is less than full-employ output. SRAS shifts down will move economy back to fullemployment equilib - Which would result in a below full-employment equilibriu : LRAS increases more than expected.
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