Macro Economics Hw4

Homewk #4

1.

1. Hot capital – short-term capital flow into an economy to take advantage of high interest rate
2. Structural unemployment – unemployment from geographical labor demand change or any shifts/changes in the industry; difficult to separate from frictional unemployment
3. Cyclical unemployment – unemployment due to recessions or depressions
4. Full employment – Except for people who are categorized under frictional unemployment, all workers are employed
5. Frictional unemployment – Unemployment due to searching for a new job or just entering the work force.
6. Endogenous – Determined by and “within” the model; cannot be directly influenced or changed by degree but are a product of interaction of other variables

2. The definition of unemployment is that a person is actively looking for work. So if this person stops looking for a job for whatever reason, unemployment rate drops. However, if an economy improves and this same person starts looking for a job again, then it increases the unemployment rate despite an improving economy.

3. Four biases generated by CPI:

1. Substitution bias – When the price of a particular good increase, consumers substitute it with a good whose price may not have increased by as much.
2. New product bias – When new goods and services are introduced into an economy but not yet incorporated into the fixed weights of the market basket; there is a lag between when goods/services introduced and when they are incorporated into the market basket. And the price of these goods/services drop dramatically within the first few years, which is also not captured.
3. Quality bias – Price increase due to increase in quality vs pure price increase
4. Outlet substitution – Sophisticated supply chain management resulted in significant decrease in actual purchase price vs MSRP.

4. National Savings Identity: G – T = (S – I) + (Imp – Exp)

1. G is government expenditure; T is tax revenue; S is savings; I is investment spending; Imp is imports and Exp is exports

1. Link between the current account deficit (more Imp) and the budget deficit: 3.1.2

1. [pic 1]

Draw the market for loanable funds

Higher government deficits increases demand for loanable funds (draw this) which drives up interest rates. Higher interest rates bring in foreign capital, which must buy the local currency to invest. Buying the local currency makes the currency more expensive, which makes imports cheaper and exports pricier. This causes the current account deficit to rise as more is imported and less exported. The goods the government needs are thus provided by the inflow of goods from foreign countries.