ECN 222 Test 1 Hadsell Uncw, ECN 222, ECN 222, ECN 222 Final Exam, Economics 222, Macro Economics, Macro Economics
Suppose the CPI=100 in year 1 and CPI=150 in year 10. What is the equivalent price in year 10 of something that cost $500 in year 1?
$750 (500*(150/100)=750
if MPC = 0.8 and income rises $100, how much would C rise?
$80
One reason for unemployment is ___________.
'sticky wages'
An economy growing at about 3 percent per year will double in size in approximately ______.
24 years (use rule of 72, this this rule is an approximation)
If the price level increased from 120 to 150, then what was is the inflation rate?
25%
Green house gas emissions have fallen by over .... since .....
25% since 1990
Productive capacity or LRAS is determined by
2Qs of the FOPS
The record number of people in employment at the moment is
30 million
If the index of GDP was 96 then it means it was
4% lower than in base year
Specialization
A focus on a particular activity or area of study that one person may be more skilled at. Makes trading better and can focus on one certain thing and make more of it.
Competitive Market Equilibrium
A market equilibrium with many buyers and sellers.
Perfectly Competitive Market
A market with many buyers and sellers and where all products sold are identical with no barriers to new firms entering the market.
Consumer price index
A measure of the average price level of goods and services in the UK
Personal expenditures price index (PCE)
A measure of the price level that is similar to the GDP deflator except it includes only the prices of goods from the consumption category of GDP.
A change in quantity demanded means
A movement along the demand curve as a result of a change in the products price.
Monetary Growth Rule
A plan for increasing the money supply at a constant rate that does not change in response to economic conditions. (Milton Friedman)
Balance of Payments
A record of a countries trade with other countries.
Taylor Rule
A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables. states that the Fed should set the target for the FFR equal to the the sum of the inflation rate, equilibrium real FFR, inflation gap, and output gap. Includes inflation and output gap because Fed is concerned about both inflation and fluctuations in real GDP. DOESN'T account for changes in the target inflation rate or the equilibrium interest rate.
A change in demand means...
A shift of the demand curve if there's a change in one of the variables other than price (income, taste, expectations...)
Autarky
A situation in which a country does not trade with other countries
Coordination Problem
A situation in which two or more people are all better off if they coordinate on a common course of action, but there is more than one possible course of action to take. (Jack and Jill, Stag Hunting). Look at graphs.
Supply Schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied.
Tariff
A tax on imported goods or services
Factors that cause shift in AS The 2 Qs and the price of the FOPs
Commodity prices (important as we import most raw materials), costs of imports, Employment costs, changes in production costs, Government impact (taxes on inputs)
What happens if General Motors builds $500 million worth of cars, but consumers only buy $470 million of them
Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million
Expectations- House holds expectations of future incomes
Consumption spending increases by consumers with hopes of more money coming to them in the future, shifts graph to the right and visa versa.
Real Exchange Rate
Corrects the nominal exchange rate for inflation. AKA changes in prices of goods and services.
People consider the opportunity cost of every choice-
Cost of not doing the next best thing and what is the value of that. Includes time and money.
Concerns of economic growth
Environment problems, and unethical work place environments in poor countries
Public Saving
Equals the amount of tax revenue the gov retains after paying for gov. purchases and making transfer payments to households.
Index of GDP in year x =
GDP in year x/GDP in base year * 100
LRAS shifts right each year because...
GDP increases each year as the number of workers increases, and the economy accumulates more machines and equipment and as tech. innovation occurs.
Nominal GDP
GDP measured in current prices. No price set at a base year. Out put valued at current prices.
Guild System
Government would give an organization or producers the authority to control the production of a good.
Two main reasons for why other high income countries haven't caught up to the U.S?
Greater flexibility of U.S markets Greater efficiency of the U.S financial system
measures total income of everyone in the economy
Gross Domestic Product (GDP)
what is the single best measure of a society's economic well-being?
Gross Domestic Product (GDP)
GNP
Gross National Product - the sum of all goods and services produced in a nation in a year. (ex: Toyota having a plant in VA is part of Japan's GNP but not GDP)
Market
Group of buyers and sellers of a market to which they can buy and sell and have an arrangement by which they come to trade.
Division of labor
Pin Factory example. 10 divided workers=48,000 pins, 10 workers working individually 10 pins each. Limited to how big the market is. 1. Increase skill in every worker at specific task. 2. Save time from moving from one task to the other. 3. Man can create machines to help make job easier.
Comparing open/closed growth rates
Poor countries that are open to trade grow faster than rich countries. Poor countries that are closed to trade grow slower than rich countries.
Catch up
Poor countries will catch up to rich ones. Not accurate. Other factors matter.
The economic growth model predicts that...
Poor countries will grow faster than rich countries
Technological Change
Positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
GDP and employment
Potential GDP=working at full potential Full potential GDP always has natural unemployment because people in between jobs. Full Potential=Full employment= Natural Employment
The level of output that absorbs all spare capacity is called (all resources fully employed)
Potential output (Max output without inflation, factors of production in equilibrium - demand for labor meats supply, machines working at design capacity and all those who are willing to work are in employment)
Innovation
Practical application of an invention.
Demand side deflation
Pressure from low demand causes firms to cut prices and output
Entrepreneur
Someones who operates a business.
Economic Variable
Something measurable that can have different values such as incomes of doctors.
Two ways to reduce a budget deficit
Reduce domestic demand from contractionary fiscal or monetary policy, or persuading consumers to switch expenditure to domestic goods
Transport costs (force propelling globalization)
Reduced transport costs have been one of the driving forces of globalization
Balanced Budget
Refers to a situation where the government's tax revenues equals the government expenditures.
Shadow Banking System
Refers to investment banks, money market mutual funds, hedge funds engaged in similar activities. By raising money from investors and lending it directly or indirectly to firms and households these firms were carrying out a function that at one time was exclusively the domain of commercial banks.
Income Effect
Refers to the change in the quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power.
National Income Accounting
Refers to the methods of the Bureau of Economic Analysis used to keep track of total production and income in the economy.
Per worker production function
Relationship between real GDP per hour worked and capital per hour worked, holding constant the level of technology.
Adjustment assistance
Relocating workers to sectors with competitive advantage
national income is the combination of
Rent, wages, profit (it does not include transfer payments - pension, benefits because they do not reflect economic activity )
Excess Reserves
Reserves that banks hold over the legal requirement.
Trade Policies (Barrier to globalization)
Restrictions from Gov's restricting trade.
Who is considered to be not in the labor force?
Retirees, the disabled, etc.
Yet capital doesn't guarantee economic growth because...
Rich countries could have capital because they are rich and visa versa
Property Rights
Rights individuals and firms have to exclusive use of their own land.
Property Rights
Rights individuals or firms have to the exclusive use of their property including the right to buy or sell it.
Three things that inflation directly causes
Rise in the price of G&S, fall in a the value of money, rise in the cost of living
Law of supply
Rule that holding everything else constant increases in price cause increases in the quantity supplied and decreases in price cause decreases in the quantity supplied.
Friedman's Monetary Rule
Rule that would keep central banks from expanding the money supply beyond a small amount like 3%.
Equation for Private Saving
S*private=Y+TR-C-T TR=Transfer payments
Public Saving Equation
S*public=T-G-TR
Any supply side policy the increases the quanity or quality of labour will increase both
SRAS and LRAS
Adam Smith
Said Nation depends on stuff it has. Man has propensity to trade, barter, exchange because it is mutually effective. Coined specialization/division of labor. Wrote Wealth of Nations, Theory of Moral Sentiments. Said man desires to beloved and lovely, meaning selfish passions and social passions conflict, man wants respect and adoration in which we have to be lovely as well as selfish. 1. Productive powers of labor and order and who it is distributed. The Who? 2. How capital is accumulated and the different quantities in labor which put it into motion. The How? 3. How each nation treats certain industry in the country. 4. How individuals make gov/economic choices out of self interest and how it affects the country. 5. Treats the revenue of sovereign states, what are necessary expenses, what should be paid for by the whole society, who should pay for it, what methods should be used when society has to pay, and what are the pros and cons of the methods.
Example of what Government current expenditure is spent on
Salaries of public sector workers
What is the source of supply for loanable funds?
Saving
Total saving formula is...
Saving=S*private+S*public Saving= (Y+TR-C-T) + (T-G-TR) Saving=Y-C-G
Openness index
Scale from 1-100, depends on if Gov. controls openness and markets, tariffs.
Mutual Funds
Sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages and other financial securities.
Dumping
Selling good/service below cost to penetrate a country's market and weaken and destroy that country's competitors. Yet after seller penetrates market and drives out domestic competition they have to jack their prices way up to make up for the losses of dumping, which allows domestic producers to re enter the market with goods at the right price. Or use another foreign firm that has better prices than the one that dumped.
Short Run effect of a decline in aggregate demand, what happens and how is it fixed naturally.
Shift L Increased interest rates = a decrease in investment = an increase in layoffs = a decline in Agg. Demand Shift back R to Equil. Firms will lower their prices because of the lack of demand and in response workers will accept lower wages because the low prices are affordable.
Short Run effect of an increase in aggregate demand
Shift R Firms become optimistic about investment profits = increase in investment = shift of the AD Curve Right. Firms operate beyond normal rate of capacity and economy is beyond potential GDP. Shift L back to Equil. With operating past capacity = increased price level = increased wages demanded by workers because dollar buys less. Since high employment workers have higher bargaining power and get higher wages and firms get higher prices due to demand = shift back to Equil.
An increase in corp. taxes will...
Shift the demand for loanable funds curve to the left causing the real interest rate and the level of investment to decrease.
An increase in expected future profits will...
Shift the demand for loanable funds curve to the right causing the real interest rate and the level of investment to increase.
An increase in the Gov.s budget deficit will.
Shift the supply of loanable funds curve to the left causing the real interest rate to increase and investment to decrease.
An increase in the desire of households to consume today will...
Shift the supply of loanable funds curve to the left causing the real interest rate to increase and investment to decrease.
An increase in tax benefits for saving which increase the incentive to save will...
Shift the supply of loanable funds curve to the right causing the real interest rate to decrease and investment to increase.
How do shifts in demand and supply affect the exchange rate?
Shifts in demand and supply curves cause the equilibrium exchange rate to change. 1. Changes in the demand for US produced goods and services and changes in demand for foreign produced goods and services. 2. Changes in the desire to invest in the US and changes in the desire to invest in foreign countries. 3. Changes in the expectations of currency traders about the likely future value of the dollar and the likely future value of foreign currencies.
Monetary Policy is more concerned with what interest rate?
Short term nominal interest rate because it is mostly affected by increases and decreases in the money supply
Demand Curve
Shows the relationship between the price of a product and the quantity of the product demanded.
LRAS
Shows total planned output but prices and factors can change (affected by all the factors of production - the 2 Qs of the FOP)
SRAS
Shows total planned output but prices can change but factors of production cant (affected by the cost of production - wage prices)
Forward Guidance
Signal to public by Fed. that they will do something in future.
Economic Model
Simplified version of reality used to analyze real world economic situations.
Liquidity
The ease with which a financial security can be exchanged for money, Financial System provides this by offering savers markets where they can sell their holdings of financial securities. Ex: Sellers can easily sell their stocks and bonds on major stock and bond markets.
Trade restrictions are managed because...
The elimination of the restriction has a bigger impact on the firm than the overall economy. One firm would go out of business with removal of restriction and the price of the goods may only decrease by a dollar for consumers.
Factor mobility
The extent to which resources can move to alternative uses
Marginal tax rate
The fraction of each additional dollar of income that must be paid in taxes.
Store of Value
The function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. Money as a store of value allows people to easily store and retrieve it (liquid). The ease at which people can convert an asset into a medium of exchange.
Opportunity cost
The highest valued alternative that is given up to engage in an activity.
What is the classical dichotomy?
The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables
Market for Loanable Funds
The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.
Federal Funds Rate
The interest Rate banks charge each other for overnight loans. Rate is determined by the demand and supply for reserves. Only banks can borrow and lend. FFR has a greater effect on short term interest rates than on long term rates.
What is the federal funds rate?
The interest rate at which banks lend reserves to each other overnight, or for short-term loans of reserved
Discount Rate
The interest the Fed charges on the loans to the banks.
GDP is
The market value of all final goods/services produced with a country's border in a year.
Required Reserve Ratio
The minimum fraction of deposits banks are required by law to keep as reserves.
Equilibrium in the money market occurs where..
The money demand curve crosses the money supply curve
To know how much to spend or cut the gov uses...
The money multiplier
The greater the sensitivity of consumption, investment, and net exports to changes in interest rates...
The more crowding out will occur.
Law of diminishing returns
The more of one input added the output increases by a smaller additional amount.
Total value of Treasury bonds outstanding is called...
The national debt or Fed Gov Debt
Multiplier definition
The number by which a initial change in injections has to be multiplied by to find the final change in income
Trade restrictions also managed by...
The part of owners of factors of production that will become relatively less scarce if tariff protection is removed.
Capital Account
The part of the balance of payments that records relatively minor transactions, such as migrants' transfers and sales and purchases of non-produced non-financial assets.
Expansion Phase
The phase in the business cycle when production, employment, and income all increase. Ends with a peak.
Exposure to domesticated animals and disease
With the domestication of these animals comes the diseases with them. Eventually the population of Eurasia would become more immune to them, yet when they traveled to the Americas, Africa, or Australia the people there were not immune so they died faster making it easier to colonize.
Recession
Two consecutive QUARTERS of negative ECONOMIC GROWTH
Trade enhances technology
With trade comes more direct foreign investment with technology, also organizational ways, and more money to invest in tech.
Consumer expenditure depends on
Yd (depending on Marginal propensity to consume, dependent on savings ratio, interest rates, availability of credit, asset prices, consumer confidence, population size)
Reserve Requirements
When the Fed reduces the required reserve ratio it converts required reserves into excess reserves. If fed changed reserve requirement for banks from 10% to 8% they would have 2% more excess reserves that they could lend out and visa versa with raising it.
Reserve Requirements (Tool
When the Fed reduces the required reserve ratio it converts required reserves into excess reserves. If fed changed reserve requirement for banks from 10% to 8% they would have 2% more excess reserves that they could lend out and visa versa with raising it.
What does monetary neutrality tell us?
an increase in the money supply will increase the price level, but not real GDP
An increase or decrease in real GDP means
an increase or decrease in the amount of buying/selling of goods means people would want to hold more money on hand to buy things
Consumer Price Index
an index of the cost of all goods and services to a typical consumer
Foreign Portfolio Investment
an investment that is financed with foreign money but operated by domestic residents
What is a "medium of exchange"?
an item buyers give to sellers when they want to purchase goods and services
What is a "store of value"?
an item people can use to transfer purchasing power from the present to the future
JMK compared business confidence to
animal spirits
Inflation is measured by the
annual % change in the consumer prices index
Implicit Costs
any other sacrifices made
Who is considered unemployed?
anyone who is not employed, is available for work, has looked for work in the past 4 weeks, and anyone who is waiting to be recalled from a job from which they have been laid off
Who is considered employed?
anyone with a current job
"Gains From Trade"
arise from specialization
Cyclical Unemployment
associated with business cycles (recessions/expansions)
CPI Overstates Inflation When It:
assumes the quality of a good doesn't change from year to year doesn't account for the benefits of new goods uses a fixed basket of goods
long yield
average of short term rates today and expected future short term rates.
Keynes View on Agg. Demand
High demand is key to the success of a whole economy. In Keynes's view, economic recessions are caused by too little aggregate demand. The cure for recessions is higher aggregate demand. The best way to increase aggregate demand is for government to ramp up its spending until economic health is restored
The interest rate effect
How a change in price level affects investment. When prices rise households and firms remove investments to have cash. which drive up interest rates which costs more money for firms and people to get loans which means less consumption and expansion.
The international trade effect
How a change in the price level affects net exports. If the price level in the US rises exports will become expensive so less foreign people will buy US goods and US consumers will shift to buy foreign goods. exports will rise and imports will fall.
Diamond Example
How an increase in the supply of money (inflation) is bad because the more money printed the less goods money can buy, making it worth less. If a meteor brought thousands of diamonds to the earth and everyone had diamonds they wouldn't be valuable anymore.
Three sources of technological change...
Human Capital, Efficiency/organizational techniques, physical capital
Trade restrictions also managed by...
Human Capital, High education workers in U.S are abundant, low education workers are there too, with opening to trade low education workers get offset by high abundance of low education workers elsewhere. which increases the wage gap.
HDI
Human Development Index- based on income, education, health
Extremely high rates of inflation are called _____________.
Hyper inflation
Government spending on social capital is counted in .. and not part of government current expenditure
I
Investment will increase capital stock if
I> rate of consumption
Labour force survey measure of unemployment is also known as the
ILO (international labour office)
Transfer Payment
INCOME received for which no productive activity has been made
Expected Future Prices
If a firm expects its good to have a higher demand in the future then it has an incentive to decrease supply now and increase it in the future, shift to the left.
Problem in recession is that there is too little spending so expansionary fiscal policy intends to...
Increase aggregate demand either by having the Gov. directly increase its own purchases or by cutting taxes to increase household disposable income and spending.
Economic growth
Increase in real GDP (one of government objectives- measured in annual % change of GDP) over time
Unexpected changes in price of natural resources AKA supply shock
Increase in the price level for a natural resource will increase the cost of many different inputs for firms, the rising costs will make it harder for firms to supply the same level of output than before the shock.
How do countries grow and become rich?
Increase in the quantity of capital per hour worked Use the best available technology
A movement along a demand curve is a?
Increase or a decrease in the quantity
What will investment incentives do to the supply and demand model for loanable funds?
Increase the demand for loanable funds, raising the equilibrium interest rate, and raising the equilibrium quantity of loanable funds
Quantitative Easing
Increase the size of the Fed's balance sheet and buy more assets. Fed bought mortgage backed securities and long term bonds which increased price and decreased interest rates. Banks bailed out firms and the Fed bailed out banks who started the whole recession in the first place.
What will tax incentives for saving do to the supply and demand model for loanable funds?
Increase the supply of loanable funds, reducing the equilibrium interest rate, and raising the equilibrium quantity of loanable funds
Capital Deepening
Increased amount of capital per worker, productivity per worker increases.
Technological Change
Increases in tech innovation, increase the amount of productivity. Workers can produce more goods and services with the same amount of machinery.
The two key factors in raising living standards in low income countries are...
Increases in technology and knowledge
How does a lower interest rate effect the aggregate demand curve?
Increases quantity demanded (shifts aggregate demand curve to the right)
How does an increase in consumption (or wealth) effect the aggregate demand curve?
Increases quantity demanded (shifts aggregate demand curve to the right)
Expansionary Fiscal Policy
Increasing Gov. purchases or decreasing taxes, increasing Gov. Spending is a component of Agg. Demand, decrease in taxes means consumers will have more money.
At the level of the entire economy knowledge capital is subject to...
Increasing returns because knowledge is accessible to everyone.
CPI
Index that measures average price level of goods and services in the UK
Malaria Ecology Index
Index that measures the susceptibility of a country's climate to mosquito breeding as well as the amount of mosquitoes in the region that feed on humans.
Fed's response to fear of one piece failing so they all fail
Lending and credit programs to corporations, cutting the FFR to zero, used quantitiative easing vs credit easing.
Fed. Reserves initial response to the 2007 recession
Lending and credit programs to corporations. To cut the FFR to zero. Helped JP Morgan acquire Bear Steirns but let Lehman Bros. to fail.
Potential GDP
Level of real GDP/production in a country when all their firms are producing at full capacity. Potential Increases as labor force grows.
Financial System provides three key services for savers and borrowers
Liquidity Risk Information
What happens when production grows rapidly?
Living standards grow rapidly
Because both borrowers and lenders are concerned with the real interest rate they will receive or pay the...
Loanable funds market determines the real interest rate.
Sub-prime loans
Loans given to people who have a higher chance of defaulting.
Discount loans
Loans the Fed makes to banks, when a bank receives a loan from the Fed its reserves increase by the amount of loan.
Discount Loans
Loans the Federal Reserve makes to banks.
Backward linkage
Locally produced goods are used as inputs by the resource extraction industry
What contributes to developing countries lack of growth?
Low income
Poor education and health
Low income countries have weak school systems and many people can't read or write or work new technology. Sick workers work less and not productively.
How interest rates affect consumption
Lower interest rates increase household spending on and reduce the return to saving. Higher interest rates reduce household spending and increase the return to saving.
Fed's traditional response to inflation is..?
Lower the target for the FFR.
Fiscal Multiplier
M = 1 / R money multiplier = 1 / reserve ratio
What is the quantity equation?
M x V = P x Y
What is the Quantity Equation?
M x V = P x Y quantity of money x velocity = price level x quantity of output or real GDP
Quantity Theory of Money
M+V=P+Y M= Growth rate of money supply V= Velocity of zero P= Inflation rate Y= Real output growth rate
Money Multiplier Formula
M=MBx1/rr M= Change in checking account deposits MB= Change in bank reserves rr= reserve requirements
Mortgage Backed Securities
MBS; created by pooling a group of similar mortgages. The owner then uses the mortgage pool as collateral to issue a new security the MBS.
Price only equals a
MOVEMENT ALONG DEMAND CURVE
To decrease inflation by reducing AD (contractionary monetary policy) there has to be a trade off between
Macro economic objectives - economic growth and inflation (you could also do it by increasing AS)
Most important effect of trade on productivity is...
Makes a country more productive by allowing it to produce the things it is good at producing and then to sell them to other countries in return for things it is not as good at producing. (specialization)
What disease has had the largest affect on economic growth?
Malaria
Four Functions of money (MUSS)
Must act as a Medium of exchange Must serve as a unit of account Must serve as a store of value Must offer a standard of deferred payment
Taylor believes inflation is worse than unemployment because...
NEED ANSWER
M1 Money
Narrow definition of money supply consisting of the sum of currency in circulation, value of checking account deposits, value of travelers checks.
Deficit is financed by borrowing so increases
National debt
Politics
Natural Resources can have a negative affect on gov. policies. 1. Natural Resources lead to an over-expansion of the gov. sector of the economy 2. With increased revenue from resources gov. can distribute to favored groups, and encourage more people to seize power.
Forward linkage
Natural resource is processed or used to produce other goods
Industrialization
Natural resources can distort the structure of an economy leading to short run benefits but long term costs
Wealthy Countries tend to be...
Near one another
Dissaving
Negative saving
What does the "NX" include in the equation for GDP, and how do you calculate it?
Net exports (exports - imports)
1. Better machinery and equipment
New tech. allows for faster and more productive ways of doing things.
Any change in capital with new tech is because the new tech made the capital productive because...
New technology is more innovative and allows for better production from workers and is not subject to diminishing returns.
Closed Economy
No interactions in trade or finance with other countries.
Bank Panic
Situation in which many banks experience runs at the same time.
Voluntary Exchange
Situation when both the buyer and seller benefit from the transaction.
Shortage
Situation where the quantity demanded is greater than the quantity supplied. Firms respond by raising prices to move market back to equilibrium.
Surplus
Situation where the quantity supplied is greater than the quantity demanded. Firms respond by cutting their prices to move market back to equilibrium.
Scarcity
Situation where wants exceed the limited resources available.
Enclaves
Small pockets of economic development that have almost no contact with the rest of the country's economy.
If geography determines trade and if trade helps a country get rich then...
Some countries have a fundamental advantage over others
What is one reason that the aggregate demand curve is downward sloping (as defined by the wealth effect) ?
consumers are wealthier, which stimulates the demand for consumptin goods
One time tax rebates increase...
consumers' current income but not their permanent income. Tax rebates are likely to increase consumption spending less than a permanent tax cut.
total spending by households on goods and services
consumption
What does the "c" include in the equation for GDP?
consumption (spending on goods and services by households)
What happens to consumption, interest rates, and net exports when the price level increases?
consumption decreases, interest rates rise, and there is a reduction in US net exports
Also producing more capital goods means producing less..
consumption goods.
What happens to consumption, interest rates, and net exports when the price level decreases?
consumption increases, interest rates fall, and there is an increase in US net exports
Gov Policy- Personal income tax or business taxes
consumption spending by consumers falls when personal taxes rise and investment falls when business taxes rise because of the higher cost to both of them shifting the graph to the left and visa versa.
what does c, i, g, and nx stand for the in the equation for GDP?
consumption, investment, government, net exports.
A rise in the GPL will lead to a ..... in AD
contraction (and vice versa; fall = expansion)
Menu Costs
costs associated with changing price tags, price lists, website content, catalogs, and menus
Spare capacity is useful to
counter unexpected demand
Trade effects Domestic firm efficiency by... (effect on efficiency)
creating more competition from abroad.
In recovery there are high levels of debt a low supply of
credit (low confidence, slow export growth, QE + low interest rates)
Government expenditure in AD is called
current government expenditure (state services (schools and wages) as well as spending on capital)
negative output gap
current ouput or GDP is lower than the UK's potential output
What will a government budget deficit do to the supply and demand model for loanable funds?
decrease the supply of loanable funds, raising the equilibrium interest rate, and reducing the equilibrium quantity of loanable funds
Two groups of world economies
developed countries Developing countries
Budget balance
difference between tax revenues and public spending (does not have to balance in the short term)
Access to the sea and proximity to major centers of economic activity help account for...
differences in the cost of transporting goods.
The accumulation of physical capital is subject to
diminishing returns
The accumulation of knowledge capital at the firm level is subject to...
diminishing returns.
what income you have left over once fixed cost (Schools fee, energy bills) has been met
discretionary income (if you have floating rate interest from before the recession then your discretionary income has increased as morguage rates have decreased)
what does GDP not value?
environmental quality, leisure time, non-market activity, such as at home child care, an equitable distribution of income
The total value of saving in economy must...
equal the total value of investment.
when prosperity is distributed equally among society's members
equality
for the economy as a whole, income ................ because every dollar a buyer spends is a dollar of income for the seller
equals expenditure
when the price has reached the level where quantity supplied equals quantity demanded
equilibrium price
productivity depends on the _________, ____, ______ available to workers
equipment, skills, and technology
Positive output gap sucks in imports because of
excess demand
If price level is above equilibrium there will be a
excess supply (if below = excess demand)
in the long run, inflation is almost always caused by __________, which causes the value of money to fall
excessive growth in the quantity of money
Natural Capital represents the resources that...
exist irrespective of human activity
If the expected rate of inflation is 4% and the nominal interest rate is 6% then ____________.
expected real interest rate is 2% (Nominal = expected real + expected inflation).
The effect of resources on a country's economic growth will depend crucially on the degree to which the...
exploitation of a natural resource stimulates or impedes production in other sectors backward or forward linkages
_____ represents foreign spending on the economy's goods and services
exports
How do you find NX?
exports- imports
Lack of unification had advantages for economic growth such as...
external competition served as a check on governments power, if another country gained an advantage then they would be able to dominate the other country so rulers did not want to stifle growth, people can leave one country easier and go to another.
when the production or consumption of a good affects bystanders
externalities
two causes of the price system not working right
externalities and market power
Recession;
fall in GDP over 2 consecutive quarters
Supply side deflation is caused by
falling costs of inputs and as result in fall in commodity prices and technological advances (good inflation - higher standards of living and increase firms productive capacity)
depreciation of pound
falls in value against other major currencies (current account is imports and exports)
Investment in new technology in production line should allow resources to be made (3 things)
faster, with fewer defects, out of less resources
Multipier (k) = (words)
final change in expenditure / initial injection
intended for the end user
final goods
Stocks
financial securities that represent partial ownership of a firm, if you buy a stock you become a partial owner of the firm.
Countries open to trade more able to import tech. by... (effect on efficiency)
firm building a factory in another country will bring tech.
Demand side policies are
fiscal and monetary
What Kinds of Policy Suffer From Lags?
fiscal and monetary policies
polocies designed to reduce the budget deficit is called
fiscal austerity (increased taxes, decreased government spending - can backfire if it pushes economy into recession - negative multiplier effect)
A change in gov spending it likely to have magnified affect as result of
fiscal multiplier
Change in government budget deficit that leads to a more than proportional change in increase in AD is called the
fiscal multiplier
Inflation squeezes real income and in especially hurts those on
fixed incomes (pension annuity, bond holders - they want deflation)
what is the Circular flow of income
flow of goods and service between households and firms and their corresponding payments in money terms
Income is a
flow of money arising from current economic activity measured over a particular time period
Three reasons why GDP is hard to predict
fluctuations in confidence cant be measured, external factors, cant predict exchange rates
What can shifts in aggregate demand contribute to?
fluctuations in output
the obstacles which prevent labour from moving from one area to another to find work represents
geographical immobility
Mobility of labour refers to the ability of workers to change jobs both
geographically and occupationally (2.5 million unemployed suggest that the labour market does not always operate efficiently)
Institutions and culture can change but...
geography can't
Progressive tax
gets larger as income rises
So if T=tax MM and G=Gov. spend MM and Y=recessionary gap then if G goes up by 1, Y goes up by 4, the tax MM goes up by one, Y has to...
go down by 3 so together the G MM and T MM=1
Fiscal policy in concerned with changes in
government expenditure, borrowing and taxation (used counter cyclically smooth out volatility)
Evaluation of fiscal policy - crowding out
government has to cover higher interest rates on bonds has they are borrowing more to persuade people to buy bonds - requires firms to do the same - less pass rate of return test = less investment - reducing Ad and depressing LRAS
fiscal policy
government manipulation of its spending and taxation in order to affect aggregate demand
all spending on the goods and services purchased by the government at the federal, state, and local levels.
government purchases (G)
What does the "G" stand for in the equation for GDP?
government spending
What is public saving?
government tax revenue minus government spending (T - G)
a non binding price ceiling....
has no effect
a non binding price floor....
has no effect
Intrinsic Value
has value outside of its use as money (anything with intrinsic value is a commodity)
Separate countries...
have higher chances of war between neighboring states which wastes resources
why is gross domestic product important?
having a large GDP enables a country to afford better schools, a cleaner environment, health care; many indicators of the quality of life are positively correlated with GDP
G will be greater than T in expansionary fiscal policy or when the economy is
heading into recession (increase G on welfare benefits and decrease in T)
Automatic budget surpluses and deficits can...
help stabilize the economy. when the economy moves into recession, wages and profits fall, reducing taxes that households and firms owe to the gov. Basically the households and firms have received an automatic tax cut that keeps spending higher than it would've been.
Natural Resources are...
helpful to economic growth but are neither necessary nor sufficient to achieve growth.
what is equality?
how evenly the benefits from using resources are distributed
what is efficiency?
how much a society can produce with its resources
Fisher Rule Formula
i = r+n i= nominal interest rate r= real interest rate n= inflation rate
Bonds Formula
i=(fv-p)/p=interest/yield for bond
How do you find productivity?
ide the quantity of output by the number of hours worked (number of units produced per hour)
Evaluation for change in AD put the component into perspective
ie not as big a effect as same % change in C
What would cause would cause prices and real GDP to rise in the short run?
if aggregate demand shifts right
What could cause you to be frictionally unemployed?
if job seekers and employers need time to find one another (this kind of unemployement is usually brief)
what would cause would cause prices to fall and output to rise in the short run?
if short run aggregate supply shifts right
what causes a surplus?
if the current price is above the equilibrium price
what causes a shortage?
if the current price is below the equilibrium price
What could cause you to be structurally unemployed?
if the number of jobs available in the labor market is insufficient to provide a job for everyone
What does the misperceptions theory tell us?
if the price level is higher than people expected, then some firms believe that the relative price of what they produce has increased, so they increase production
Increased demand for labour will not cause unemployment if there is
immigration
Commodity prices and tariffs are particularly important for Britain as we
import most of our raw materials
a High value pound is good for inflation because
imported goods reduce prices (30% of CPI are imports) and vice verso when the exchange rate is low imports raise inflation
the portions of C, I , & G that are spent on goods and services produced abroad
imports
governments may intervene in markets to...
improve efficiency (or tradeoff) and promote equality
How are real variables measured?
in goods
How are nominal variables measured?
in monetary units
What are the two ways in which monetary policy can be described?
in terms of the money supply or in terms of the interest rate
When does nominal GDP equal real GDP?
in the base year
When is monetary neutrality most relevant?
in the long run
When are Real and Nominal Variables Independent?
in the long-run aggregate supply and demand
When are Real and Nominal Variables Intertwined?
in the short-run aggregate supply and demand
something that induces a person
incentive
SRAS slopes upwards as higher prices give firms more
incentive to supply more
.... is a flow of money - how much you earn over a period of time
income
Direct taxes are on
income and wealth, profit (capital gains tax least important tax)
If interests rate fall then investment will
increase (more passes the rate of returns test)
If minimum wage rises then consumer spending will
increase (the poorest spend the most)
three ways to close recessionary gap
increase Gov. spending and lower taxes, decrease gov. spending and raise taxes or increase both taxes and Gov. spending by the same amount, doing both will close gap and balance budget.
Expansionary fiscal policy =
increase in G and lower T (if negative output gap, increase in government sector employees / increased disposible income as tax declines = increases AD)
A rise in the FTSE 100 may will cause wealth effect but it may also
increase in Yd because of increase in dividends (rise in consumer confidence
Debt can...
increase interest rates and which would lower investment spending and create crowding out.
A shift of a demand curve is a?
increase or a decrease in demand
Expansionary fiscal policy may also reduce budget deficit in long term if it leads to longer term economic growth as this will
increase tax revenues
Evaluation of fiscal policy - leakages
increased savings, imports and taxation could could mean affect on AD is smaller than expected
If tax reduction and simplification are effective the economy will experience...
increases in labor supply, saving, investment, and the formation of new firms, Increasing Real GDP at all levels!
Increases in price cause
increases in the quantity supplied
Investment has a duel role on the economy of
increasing AD and AS
Supply side policies are aimed at
increasing AS and increasing firms willingness and ability to supply at any given price level
What does an increase in government spending do to aggregate demand?
increasing government spending increases aggregate demand
Discretionary Fiscal Policy can increase the Fed. Budget during recessions by...
increasing spending or cutting taxes to increase Agg. Demand.
market demand is the sum of ____
individual demand
The presence of monopolies is a source of...
inefficiency and leads to misallocation of factors of production.
If positive output gap (higher the GDP potential GDP - overtime from workers) - lots of pressure on
inflation
If the money supply grows faster than the real GDP
inflation
rise in the general level of prices
inflation
negative output gap (lots of spare capacity) - less pressure on
inflation (used to counter unexpected increase demand, this may not be a good thing if already below 2% target, BOP improve)
society faces a short-run tradeoff between what two things?
inflation and unemployment
Compute the inflation rate using CPI using the...
inflation rate formula
If QE is embarked upon when there is no slack in the economy then
inflation will result
Change in national output =
initial change in investment * multiplier
There is a inverse relationship between investment demand and
interest rates
QE is only embarked upon when
interest rates can no longer be lowered (way of increasing supply of money in economy without printing money)
What is one reason that the aggregate demand curve is downward sloping (as defined by the interest rate effect) ?
interest rates fall, which stiumulates the demand for investment goods
The transmission mechanism refers to the effects of ........ on ....
interest rates on AD
used as components or ingredients in the production of other goods
intermediate goods (not included in GDP)
Increased profits will cause firms to expand production which in turn will increase business
investment
What is the Source of the Demand For Loanable Funds?
investment
What is the source of demand for loanable funds?
investment
total spending on goods that will be used in the future to produce more goods, includes capital equipment, structures, and inventories
investment
15% of AD is (1 million jobs)
investment (but is most volatile so has big effects)
What does the "I" include in the equation for GDP?
investment (new housing, equipment, inventories, structures, etc.)
Firms capital stock will only increase if
investments > capital consumption
Credit easing
involves purchase of debt securities in order to inject liquidity into the banking system and increase lending as a way to stimulate the economy. Consists of mortgage-backed securities, corporate bonds are added to the federal governments balance sheet as a credit.
unemployment is not caused by too little aggregate demand but...
is caused by the widespread failure of individual prices to convey accurate information to entrepreneurs and investors about what specific products they should produce and about how best to produce these products. Therefore, such unemployment cannot be cured by more government spending or other efforts to raise aggregate demand. Instead, such unemployment
Someone working 10 hours per week__________
is counted as employed
SRAS is drawn on assumption that quantity and quality of resources is constant, as these can only be changed in
long run
Expansionary monetary policy is called a
loose or easy policy
If inflation is below 2% then the BoE will
loosen monetary policy
Cycle of poverty
low incomes mean no saving which means few funds go to firms which means no investment which means no growth which means low income
Exploitation of workers
low wages, bad conditions, child workers. Still better than alternatives
QE leads to increased price of government and commerial bonds which is beneficial as it
lowers coupon payments reducing government spending and lowers borrowing costs that encourages C and investment as more projects will pass the rate of returns test
Land rich countries were...
magnets for immigration
what are the 2 characteristics of rational people?
make decisions by evaluating costs and benefits of marginal changes, and ignore sunk costs
incremental adjustments to an existing plan
marginal changes
Proportional tax
marginal rate of tax remains constant
The slope of the T curve is dependent on the
marginal rate of taxation
a group of buyers and sellers (need not be in a single location)
market
group of buyers and sellers of a particular product
market
Macroeconomic equilibrium occurs at .... .... ... intersection of supply (SRAS) and Aggregate demand
market clearing price
shows how the total quantity demanded of a good varies as the price of the good varies, while all the other factors that affect how much consumers want to buy are held constant.
market demand curve
allocates resources through the decentralized decision of many households and firms as they interact in markets
market economy
governments can improve efficiency when there is...
market failure
when the market fails to allocate society's resources efficiently
market failure
a single buyer or seller has substantial influence on market price (example: monopolies)
market power
Market Exchange Rate
market where people ( and firms/governments/banks) can buy and sell currencies. Rate is determined by the interaction of supply and demand just as other prices are.
To problems of a current account surplus
may cause exchange rate to appreciate, become increasingly reliant on exports
To measure the effectiveness of a stimulus package we must...
measure its affects on real GDP and employment. Must separate from the effects of other factors such as Fed. Reserve monetary policy and other typical changes in real GDP and employment.
Investment ___________________.
measures purchases of things like trucks, factories, and machines to be used in the production process
standard of living
measures welfare of people living in the economy
We can measure the degree of integration between two economies by...
measuring the differences in prices.
Why is the Federal Reserve an Independent Policymaking Body
members of the board of governors are appointed for 14-year terms
Government spending needs to provide ..... ..... that the public sector would not supply
merit goods
Explicit Costs
monetary amounts paid (wage)
What is considered commodity money?
money that takes the form of a commodity with intrinsic value
Fiat Money
money whose value derives from government decree
What is considered fiat money?
money without intrinsic value, used as money because of government decree
Lowering inflation will make us more or less internationally competitive
more
The closer the prices of the same goods or factors of production in two countries the...
more integrated are their markets for goods.
The smaller the tax wedge the...
more of that economic activity will occur, it's an incentive
The fact that wealthy countries are geographically clustered may represent an additional obstacle for the development of many poor countries because...
most developing countries are isolated and not close to wealthy countries and don't get the benefits of spillover.
Investment may be the smallest component of AD (15%) but it can have a large effect as it is the
most volatile
a change in price causes a _______ the demand curve
movement along
Change in price level equals
movement along curve
a ______ occurs when price changes
movement along the demand curve
If only the price of a product changes there is a...
movement along the supply curve
The limited nature of FOP means constraint on
national output
level of unemployment at Yp =
natural level of unemployment
Output additionally with labor needs...
natural resources
Expansionary fiscal policy may be appropriate if there is a
negative output gap (spare capacity as to the left of Yp as the government is injecting into the economy to increase AD)
Converting Money Formula
new = original (current year's CPI / original year's CPI)
what is the formula for percent change?
new- old/old x 100
What is the "P x Y" portion of the quantity equation also equal to?
nominal GDP
includes change in price and change in output
nominal GDP
values output using current prices
nominal GDP
If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?
nominal GDP but not real GDP
what is the definition of GDP deflator?
nominal GDP/ real GDP x 100
Real change in variable =
nominal change - inflation rate
Real rate of interest is
nominal interest rate - inflation rate
Current problem with expansionary monetary policy
nominal interest rates cant fall below zero so run out of road
maximum price of gasoline is $7 per gallon, example of...
non binding price ceiling
government says cant sell gas for less than 35 cents is an example of
non binding price floor
what causes a market to fail?
not allocating resources efficiently
Johnny has been without a job for 2 years since his employer shut down. But seeing no prospects he last looked for a job 2 months month (and has not even applied for one in three months). Johnny is _____________.
not counted as unemployed (One must be actively looking for a job to be counted as in the labor force and unemployed. One must be in the labor force to be either unemployed or employed. Johnny is not in the labor force and therefore is not unemployed.)
Ring fenced spending means that it will
not fall in real terms (Health, schools, international development)
A unsecured loan is
not tied to the value of another asset (Student overdraft, bank loan, credit card)
Unemployment rate =
number of people unemployed as a percentage of the labour force
How do you find the unemployement rate?
number of unemployed / (number of employed + number of unemployed) x 100
Frictional Unemployment
occurs because job seekers and employers need time to find one another
Structural Unemployment
occurs because the number of jobs available is insufficient to provide jobs to everyone
Frictional unemployment:
occurs when workers are temporarily between jobs.
Structural unemployment:
occurs when workers do not have the necessary skills to fill job openings in the economy. (also known as a skills mismatch).
A budget surplus Increase the total amount...
of saving in the economy, shifting the supply curve for loanable funds to the right, decreasing the interest rate and increasing investment and saving.
Savings ratio is 0.06 it means
on average households in UK saved 6% of any income it earned. (therefore it consumed 94% of its disposable income) It is not the amount saved on a increase of Yd but the amount saved of all Yd
what is the relevant cost for decision making?
opportunity cost
whatever must be given up to obtain an item
opportunity cost
Markets are usually a good way to do what?
organize economic activity?
The only way to increase a nations wealth is to increase its real output
out put=stuff.
Difference between output level and potential level =
output gap
GDP = no. of workers *
output per worker (productivity)
SRAS curve is upward sloping because price...
over the short run as the price level increases, the quantity of goods and services firms are willing to supply increases.
Increase in minimum wage would increase the
participation rate
Who is considered to be in the labor force?
people employed and people unemployed
What happens when the stock market crashes?
people feel poorer, consumption decreases, aggregate demand shifts to the left
What happens when there is a boom in th stock market?
people feel wealthier, consumption increases, aggregate demand shifts to the right
An increase in the price level means
people will have to hold more money on hand b/c the dollar buys less
inflation is measured in
percent change
Consumers base their spending on their...
permanent income which reflects the consumers expected future income. Ex: doctor spending money or taking loans based on future salary.
inflation target
permitted range for the increase in price levels measured by the CPI
The first 10,000 of your income is called your
personal allowance
Inflation conflicts with unemployment as the ...... curve shows
phillips (there is a rade off)
Environmental exploitation
pollution of poorer countries, deforestation, destroying habitats
Countries with little capital are...
pooor
GDP growth many not lead to increased standard of living if there is
population growth (Per capita GDP is still the same)
if Ad increases then it is called a
positive demand shock
Fiscal policy on increases investment in capital to help work force (reduction /health) will have ... .... when supplied
positive externality
a legal maximum on the price of a good or service
price ceiling
rent control is an example of a....
price ceiling
legal minimum on the price of a good or service
price floor
What is On the Vertical Axis of a Short-Run Model of Aggregate Demand and Supply?
price level
Level of real GDP determined by the number of workers, capital stock ( machines, factories, equipment), and available tech which means changes in the...
price level do not affect the level of real GDP in the LONG RUN.
Interest rates are the
price people pay to borrow and the income they receive when they save
to calculate GDP, sum up _____
price x quantity
Compounding Interest Rate
principal(1+interest rate)^time period = amount investment is worth
Productivity is defined as ______________.
production of hour per work
Related to YP, recession can have permanent effect on
productive capacity
the amount of goods and services produced per unit of labor
productivity
the most important determinant of living standards is ?
productivity
Compliment Goods
products that are usually jointly consumed (associate), such that a decrease in the price of one product will cause increase in demand for the other product.
A negative output gap decreases cost of FOP which then causes .... ..... to increase
profit margin (increases incentive to supply)
The extent to which economic growth increases the tax rate depends on the
progressivity of the tax (average tax and number of tax bands)
the ability of an individual to own and exercise control over scarce resources
property rights
what must we have for markets to work right?
property rights
Marginal propensity to save =
proportion of any increase in income that is saved
Unit of Account
provides buyers and sellers a common reference point for valuing goods and services (units/dollars)
how does the government enforce property rights?
providing police and courts
Cutting interest rates and ..... lowers the price of a £
quantitative easing
amount of a good that buyers are willing and able to purchase
quantity demanded
What is On the Horizontal Axis of a Short-Run Model of Aggregate Demand and Supply?
quantity of output
amount that sellers are willing and able to sell
quantity supplied
refers to the amount suppliers wish to sell
quantity supplied
When the price of a good falls selling the good is less profitable and the...
quantity supplied will decrease.
When the price of a good rises, producing the good is more profitable and the...
quantity supplied will increase
If debt becomes too high the Gov. must...
raise taxes to high levels or cut back on other types of spending to make interest payments on the debt.
BoE increases interest rates by
raising bank rate (raised commercial banks costs - higher rates of interest)
Demand for imports reflects
rate of economic growht
Economic slowdown is when
rate of growth drops below trend
A company will only invest if
rate of return is greater than rate of interest on loan use to finance investment (or if out of retained profits must be greater then bank interest rate)
Regressive tax
rate of tax falls as income rises
during a shortage, sellers must....
ration goods
systematically and purposefully do the best they can to achieve their objectives (self interest)
rational people
includes only change in output
real GDP
indicates total economic activity...
real GDP
values output using a baseyear
real GDP
which form of calculating GDP is corrected for inflation?
real GDP
two most improtant factors that cause Shifts in the money demand curve
real GDP and Price level
High productivity means what for real GDP and income?
real GDP is large and incomes are high
_____ main indicator of the average person's standard of living
real GDP per capita
Classical Dichotomy
real and nominal variables are separate
Boom:
real national output greater than trend (more business investment, less unemployment, higher real wages, + imports, increased government tax revenues)
Workers don't want to accept nominal wage cuts so inflation is a good way of reducing
real wages and costs for firms
Profits affect business investment, profits may decline as a result of
red tape, taxes, factors of production cost
Immobility in long term can
reduce quality of human capital and lead to lower productivity and competitiveness
Supply side policy to scrap red tape may
reduce quality of life (cost benefit analysis)
Contractionary fiscal policy may be used to
reduce size of budget deficit (called Fiscal Austerity)
Why does an increase in the price level decrease the quantity demanded?
reduces the real value of money and makes consumers poorer, discourages investment spending, and reduces net exports
Why interest rates should not be zero (4)
reduces wage flexibility, make monetary policy less effective, need to be able to have negative interest rates to stimulate economy, Deflation is potentially worse
A simplified tax code would increase economic efficiency by...
reducing the number of decisions households and firms make solely to reduce their tax payments and force workers for H&R block to work at something else.
"Business Cycle"
refers to the fluctuation in the amount of goods and services produced
Critism of Indirect taxes (Excise duties) - they have a
regressive impact (effect lower incomes more)
A normative statement ___________________________.
relies on personal values (A normative statement is opinion-based (a value-based statement) as opposed to a 'positive' statement, which is fact based.)
how do we calculate excess reserves?
reserves - required reserves
Growth of many countries in the western hemisphere was...
resource driven
what does scarcity mean?
resources are limited
With higher economic rents come higher benefits of rent seeking so...
resources are wasted on such activities
Policy to tackle positive output gap
restrictive fiscal policy
In the long run, small differences in economic growth...
result in big differences in living standards Compounding interest contributes to this.
Contractionary Policy
results in a decrease in aggregate demand
A permanent increase in Gov. Purchases in the long run
results in complete crowding out and the decline in consumption, investment, and net exports offsets the increase in Gov. purchases.
An increase in Gov. purchases in the short run
results in partial crowding out.
the farther a country is from the equator the...
richer the country is
as buyers increase, demand curve shifts....
right
for a normal good, increase in income shifts demand curve...
right
why could recession have permanent effect on prodution capacity? (2)
rise in business failure + CV gaps make the unemployed unemployable
If consumers come to demand more oranges and fewer grapefruits the price of oranges must...
rise relative to the price of grapefruit so citrus growers know to produce more oranges and fewer grapefruit.
Why there is such a difference between claimant count and LFS (ILO)
rules don't allow a lot of people to claim benefits (too much is savings, other half earns too much)
Reduced interest rates punishes
savers
Why can nominal rates of interest not fall below zero
savers would convert deposits into cash
Net savings =
saving - borrowing
A budget deficit has reduced the level of total...?
saving in economy and increases the interest rate which reduces the level of investment by firms which means that gov. will have crowded out firms.
What can fiscal policy influence in the long run?
saving, investment, and growth
What is the Source of the Supply For Loanable Funds?
savings
Withdrawals form circular flow of income =
savings, taxation, imports
the limited nature of society's resources
scarcity
what concept does economics primarily deal with?
scarcity
Firms can tell that housholds are saving money instead of spending by...
seeing the interest rate go down and loanable funds rate go up.
Consumer confidence is often
self fore filling prophecy
predictions can often become
self fore-filling prophecies (they are particularly important before someone makes a big purchase)
what guides decisions in a market economy?
self-interest and prices
If countries are open to trade in goods then the same good will...
sell for the same price in both countries
Problems of expansionary fiscal policy - (£51billion to....)
service debt (total stock of bonds * average interest rate on bonds)
Differences between fiscal and monetary policy (2)
set every month by MPC vs set annually by government (chancellor of the exchequer)
a_____occurs when a non-price determinant of demand changes (like income or # of buyers)
shift in the demand curve
A change in supply means a...
shift in the supply curve if a change occurs in one of the other variables not including price.
If any other variable changes there is a...
shift of the supply curve
an increase in the number of sellers will cause the supply curve to....
shift out
changes in determinants other than price _______ supply curve
shift the
an event that changes tastes or preferences in favor of a good or service_____
shifts demand out
Fluctuations in the real GDP and the price level are caused by...
shifts in the aggregate demand curve or in the aggregate supply curve.
as income increases, demand curve for inferior goods
shifts left
when quantity demanded exceeds quantity supplied
shortage
a binding price ceiling leads to....
shortages
rapid growth then there is not spare capacity will cause inflation because of the
shortages in the factor market (increased prices)
Aggregate demand curve shows
shows quantity of domestically produced g&s that would be bought a different values of the general price level
SRAS curve shows
shows total quanitity of g&s that would be bought a different values of the general price level each year(factors of production cannot change but price can)
Nominal value of something measured in 'Current prices'
simple unadjusted numerical value (distorted by inflation)
The more urbanized a country comes the
smaller the average family (rural urban migration)
The higher the tax rate the...
smaller the multiplier effect
Government expenditure in AD (24% of AD) does not include
social capital (this is counted for in I) and transfer of payments (nothing in return i.e benefits)
How does 0% inflation decrease wage flexibility and possibly lead to unemployment
some firms need real wages to fall to maintain employment but workers are very reluctant to accept nominal pay cuts
The ouput gap measures how much
spare capacity / productive potential there is in the economy
Indirect taxes are on
spending (VAT)
Consumption =
spending by households on goods and services
If money supply grows at the same rate as real GDP
stable
3 measures of GDP not the same because of (average is taken
statistical errors, tax evasion
What are the three explanations for the upward slope of the short-run aggregate supply curve?
sticky wages, sticky prices, and misperceptions
Industrial development resulting from backward or forward linkages can...
stimulate growth in other economic sectors
Wealth is a
stock of assets (wealth can generate income - dividend on shares)
Competitiveness of UK goods =
strength of pound, elasticity of demand for exports (non price factors - reliability, marketing, after sales service) protectionism
General price level rises - infalation - higher interest rates from banks =
stronger currecny
Occupational immobility can lead to ...... unemployment
structural
the mismatch of skills and location between job seekers and job providers gives rise of immobility of labour and is called
structural unemployment
what should the government do for producers of positive externalities?
subsidize the producers
two goods for which an increase in the price of one leads to an increase in the demand for the other
substitutes
costs that have already been incurred
sunk costs
refers to the position of the supply curve,
supply
Negative output gap encourages increases ..... as the price of the FOPs decrease
supply (When a country deviates from Yp it will be self correcting)
what happens to current supply when expected prices rise?
supply decreases (shifts left)
what happens to supply when the price of an input increases?
supply decreases (shifts left)
what happens to supply when there is an increase in the price of a substitute in production?
supply decreases (shifts left)
what happens to supply when there is an increase in the price of a compliment in production?
supply increases (shifts right)
an increase in input prices will result in.....
supply shifting in
What causes a shift in the short run aggregate supply curve?
supply shock
when quantity supplied exceeds quantity demanded
surplus
a binding price floor leads to....
surpluses
Business rates
tax on business property based on value of property paid to local council
Capital gains tax
tax on increase of price of asset when it is re-sold
Tax revenue =
tax rate * tax base
Negative economic growth effect on distribution of income depends on
tax rates
Equity of incomes if often dependent on
tax rates both direct and indirect and their progressivity
what should the government do for producers of negative externality?
tax the cost of the externality
The tax base for income is
taxable income (
how much of an input is required for a unit of output
technology
The substitution bias _________________.
tends to overestimate the true rate of inflation (Substitution bias: when the switch to lower price alternatives is not captured in the market basket (and hence the CPI)
WE WILL BURY YOU- Kruchev meant...
that communism would become world dominating economic power..
interest rate
the cost of borrowing and the income on savings (the rate in usually determined by BOE)
The RPI includes .... when the CPI does not (rest of Europe uses the CPI)
the cost of home ownership (mortgage interest payments, council tax, property insurance)
What is one reason that the aggregate demand curve is downward sloping (as defined by the exchange rate effect) ?
the currency depreciates, which stimulates the demand for net exports
Fluctuations in actual output reflect the operation of
the economic cycle
budget deficit (fiscal deficit) may occur if there is a expansionary fiscal policy or
the economy enters recession (increase on welfare benefits and decrease in tax revenues - causing tax base to shrink)
Policies that increase the incentives to save and invest will increase ...
the equilibrium level of loanable funds and the level of real GDP per capita
What has the most important effect on a small economy in terms of aggregate deamnd?
the exchange-rate
What happens to the federal funds rate then the Federal Reserve uses open market operations to buy government bonds?
the federal funds rate decreases
Who controls the money supply in the US?
the federal reserve (FED)
What is the Marginal propensity to consume (MPC)
the fraction of extra income that households consume rather than save
In QE the second hand government and commercial bonds are bought with digitally created BoE money and then place in the ownership of
the government
What is the quantity theory of money?
the hypothesis that changes in prices correspond to changes in the monetary supply
What has the most important effect on the US economy in terms of aggregate demand?
the interest rate
What is the discount rate?
the interest rate on loans that the federal reserve makes to banks
What is human capital?
the knowledge workers gain through training, education, and experience
Relative prices are...
the main source of both this knowledge and these incentives. Relative prices are the prices of some goods and services relative to the prices of other goods and services.
GDP
the market value of all final goods and services produced by resources with the U.S. in a given year = C + I + G + (X - M)
what is GDP?
the market value of all final goods and services produced within a country in a given period of time
gross domestic product is....
the market value of all goods and services produced within a country in a given period of time
What do we use to study fluctuations?
the model of aggregate demand and aggregate supply
Trade weakens... (Effect on efficiency)
the monopoly power of domestic firms
injection of new demand into the circular flow of income is likely to lead to
the multiplier effect (K) (fades overtime because of withdrawals)
What are the two effects that fiscal policy can have on aggregate demand?
the multiplier effect and the crowding out effect
The Claimant count measure of unemployment measures
the number of people seeking unemployment benefits (Out of work in last 4 weeks, age 16-65 and internationally recognised)
The LFS measures
the number who are jobless but would like work, are available for work and have looked for work in the last month
What does CPI measure?
the overall cost of the goods and services bought by a typical consumer
what is considered currency?
the paper bills and coins in the hands of the (non-bank) public
What is the reserve ratio?
the percentage of deposits that the bank keeps as reserves (it then loans out the rest)
What does "P" stand for in the quantity equation?
the price level
Why is the Long-Run Aggregate Supply Curve Vertical at the Natural Rate of Output?
the price level has no bearing on the economy's long-run level of real output
What is the interest rate?
the price of a loan (the amount that borrowers pay for loans and the amount that lenders receive on their saving)
Exchange rate =
the price of one currency expressed in terms of another
Exchange rate;
the price of one currency expressed in terms of another, the amount of one currency that can be bought with a unit of another (then probably reference data so a pound would have bought .... Euro)
What Does CPI reflect?
the prices of all goods and services bought by consumers
Marginal propensity to import
the proportion of any increase in incomes that is spend on imports
What does the aggregate demand curve show us?
the quantity of all goods and services demanded at any given price level
what is productivity?
the quantity of goods and services produced from each unit of labor input
What does "M" stand for in the quantity equation?
the quantity of money
What does "Y" stand for in the quantity equation?
the quantity of output
What is the classical theory of inflation also known as?
the quantity theory of money
What is inflation tax?
the revenus a government creates by printing money
If countries are open to movements of factors of production then...
the same factor should earn the same income in both markets.
increase in technology means fewer inputs per unit output, similar to a decrease in input prices, resulting in
the supply curve shifting out
What determines production?
the total amount of goods and services produced
What is productivity?
the total amount of goods and services produced per worker
What is national saving?
the total income in the economy that is left after paying for consumption and government purchases (Private + Public Saving)
What does "V" stand for in the quantity equation?
the velocity of money
Increasing the distance between two countries by 1% lowers...
the volume of trade between them by .85%
What has the least important effect on the USeconomy in terms of aggregate demand?
the wealth effect
What is a "unit of account"?
the yardstick people use to post prices and record debts
What is nominal GDP?
the yearly production of final goods and services valued at current prices (price from the current year)
What happens if the gov't increases spending holding taxes constant or decreases taxes holding spending constant?
there is a crowding out effect
goods that the typical houseshold doesn't buy are only included in the GDP deflator if....
they are made in the United States
what happens to prices when the government prints too much money?
they rise (inflation)
What do positive supply shocks include (these shirt the short run aggregate supply curve)?
things like decreases in oil prices or an unexpected great crop season
What do adverse supply shocks include (these shirt the short run aggregate supply curve)?
things like increases in oil prices, a drought that destroys crops, and aggressive union actions
Unemployment is
those who are seeking work but are unable to find a job
High and unexpected inflation have a greater cost for whom?
those who save than for those who borrow
Contractionary monetary policy called a
tight policy
If inflation is above 2% then the BoE will
tighten monetary policy
availability of credit decreases when banks (not just lending to consumers but to other banks as well)
tighten their lending criteria (credit crunch and decrease in C home owners have to pay a higher rate on their mortgage repayments and lay down a larger deposit)
Evaluation for change in AD long run effects different to short run effects because of
time lag (adjustment of C and laying off workers)
The way to cure this unemployment is...
to allow prices to adjust so that they better reflect consumer desires and the realities of resource availabilities.
Why would the federal reserve sell bonds?
to decrease the money supply
Why would the federal reserve buy bonds?
to increase the money supply
Why is GDP revised
to reflect new and improved data
What is physical capital?
tools, machinery, equipment, and structures used to produce goods and services
Employment rate calc
total employed / working age *100
In closed economy investment spending is equal to
total income-consumption spending-Gov. purchases. I=Y-C-G
Aggregate demand is the =
total planned spending on domestically produced g&s
Two reasons why GDP may increase
total quantity of G&S in improving or that the price of G&S is increasing
savings ratio (the AVERAGE propensity to save)
total savings as a percentage of deposable income (s/Yd)
GDP (measure of economic activity) = The government publishes all three measures and takes a average
total value of domestically produced g&s during a year (total national expenditure of domestic g&s / national income arising from production of g&s per year) measure of national income
Differences in transport costs correlate well with differences in...
trade volume and income per capita
government purchases does not include _______ such as social security or unemployment insurance benefits
transfer payments
here are several ways in which changes in interest rates influence aggregate demand, output and prices. These are collectively known as the
transmission mechanism of monetary policy
Business investment makes up more than ..... the amount of social investment by government so has a far larger effect.
twice
GDP per capita in areas within 60 miles of the sea is...
twice as high as GDP per capita of places in land
Which way does the aggregate supply curve slope in the short run?
upward
A fall in house prices apart from negative wealth effect will mean people have less equity available to
use as collateral for borrowing
Nominal Variables
variables that are measured in monetary units nominal wage is $ per hour
Real Variables
variables that are measured in physical units real wage is 1/2 pizza per hour
The LRAS on a graph is...
vertical
when there is a fierce competition for jobs people are more likely to accept
wage cuts
income to households from firms comes in the form of
wages, dividends and bonus (conversely consumer spending provides firms with income)
..... is a stock of assets, it is what you own (property, savings, bonds)
wealth
Higher income workers often have a income from
wealth
How is wealth redistributed when infation is expected to be low, but turns out to be high?
wealth is redistributed from creditors to debtors
How is wealth redistributed when infation is expected to be high, but turns out to be low?
wealth is redistributed from debtors to creditors
"organizing economic activity" means determining which 4 things?
what goods to produce, how to produce them, how much of each to produce, and who gets them
In economics, what is the cost of something?
what you give up to get it (opportunity cost)
Demand pull inflation (expectations can be self fore-filling; consumers will bring forward their spending to beat the price rise and cause demand pull inflation)
when AD rises above Yp and firms encounter shortages of factors of production (inputs)- increase in units cost as firms seek to protect their profit margins
Wealth effect
when asset value changes causes a change in spending (multiplier + confidence)
A secured loan is
when borrower uses another asset as collateral
When is the government running a budget surplus?
when it spends less than it collects in tax revenues
When can the government improve market outcomes?
when markets fail to produce efficient or fair outcomes
'Convergence' is_____________
when poor countries grow (in terms of GDP) faster than rich countries
Inflation Tax
when the government pays its debts by printing money
What does the sticky-price theory of the short-run aggregate supply curve suggest?
when the price level is higher than expected, some firms will have lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied
The Natural Rate of Unemployment Occurs When?
when there is 0% cyclical unemployment
When is an economy at its natural rate of unemployment?
when there is no cyclical unemployment
GDP measures the value of production that occurs ________ whether done by its own citizens or foreigners there
within a country's borders
malinvested
workers and resources will be invested in production processes that do not best meet the demands of consumers
Economically inactive
working age neither in or seeking work
what is the equation for GDP
y= c + I + G +nx
Rule of 70
years it takes a variable to double = (70) / (the growth rate) the annual growth rate of the variable.
if multiplier is 2 then 10 pounds of new spending will lead to
£20 of extra income (2 times greater increase in national income compared to initial injection)
How much did it cost to service debt last year
£51bn
Current account deficit in 2014
£71 billion (X(injections)-M(leakages))
Balance of payment deficit 2014
£72 Bn (bottom of the G7)
3 groups
Institutions culture Geography
Discount Rates
Interest Rate the Fed charges on its loans.
Targets of Fed (IR, MS)
Interest Rates in long term........ money supply in the short term
Interest on Reserves (Tool)
Interest on reserves (IOR) is the rate at which the Federal Reserve Banks pay interest on reserve balances, which are balances held by DIs at their local Reserve Banks. One component of IOR is interest on required reserves, which is the rate at which the Federal Reserve Banks pay interest on required reserve balances. Which would give banks an incentive to keep more Reserves.
Nominal Interest Rate
Interest rate as usually reported without a correction for effects of inflation.
Real Interest Rate
Interest rate corrected for effects of inflation. Real Interest rate= (nominal interest rate)-(inflation rate)
Determinants of business investment
Interest rates, availability of credit, business confidence, profits (70% of investment out of retained profits + increased profits encourages firms to expand production)
Law of Demand
Inverse relationship between the price of a product and the quantity of the product demanded. Ex: Increase in Price, Decrease in quantity demanded Visa Versa
What happens if Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China
Investment rises by $1800, net exports fall by $1800, GDP is unchanged
Contractionary Fiscal Policy
Involves decreasing Gov. purchases or increasing taxes to reduce increases in aggregate demand that seem likely to lead to inflation.
Private saving
Is Equal to what households retain of their income after purchasing goods and services and paying taxes.
the government is trying to get around how much inflation?
2%
Average rate of economic growth since WW2
2.24%
Economic growth in 2014
2.6% (provided government with increased revenue)
fiscal austerity increase in vat from 17.5% to .... in 2010
20%
Openness refers to...
Flow of resource factors, people, ideas from country to country.
Budget surplus
When the Fed Gov.'s expenditures are lower than its tax revenues.
Store of Value
a means of transferring purchasing power from the present to the future
a change in the price causes ___________ supply curve
a movement along the
Economic Rents
a payment to a factor of production that is in excess of what is required to elicit the supply of that factor.
What could cause you to be cyclically unemployed?
a recession
What is it called when Inflation induces people to spend more resources maintaining lower money holdings?
a shoeleather cost
Macroeconomic objectives
aims of the government to improve economic welfare
X-M measures the extent that international trade
boosts or holds back the economy
Dis-savings
borrowing
Reduced AD may cause unemployment as labour is a form of
derived demand
Unemployment Rate Formula
# of unemployed/employed+unemployed
Natural Resources are...
A determinant of economic growth
Technological change
Change in the quantity of output a firm can produce using a given quantity of inputs.
How interest rates affect Aggregate Demand (CIN)
Consumption Investment Net eXports
What happens if Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston?
Consumption and GDP rise by $200
CPI Formula
(Basket cost Current year)/ Basket Cost Base Year) X 100
How do you calculate inflation from the CPI?
(CPI in Current Year - CPI in Base Year)/(CPI in Base Year) x 100
Inflation Rate Formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100
How do you find the labor force participation rate?
(Labor Force / Adult Population) x 100
TANSTAAFL
(There ain't no such thing as a free lunch)- because of scarcity everything has a opportunity cost.
How can you convert the quantity equation to account for percentages?
(percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output)
Unemployment rate formula
(unemployed)/(employed+unemployed)
With aggregate supply and demand curve; ... is on x axis
Real National Output (RNO) or GDP
The ways Europeans benefited from Geography...
1. size of Eurasia with similar climates and water ways 2. domestication of agricultural plants and animals that formed the agricultural economies. 3. Exposure to animals that gave them disease that they over time became immune to.
Economic Model Steps
1. Decide on assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test a hypothesis. 4. Revise the model if it fails to explain economic data well. 5. Retain the revised model to help answer questions in the future.
What are the four steps to analyzing economic fluctuations?
1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD-AS diagram to see how the shift changes Y and P in the short run. 4. Use AD-AS diagram to see how economy moves from new SR eq'm to new LR eq'm
What five criteria make a good suitable for use as a medium of exchange? (Acc, Stand, Dur, ValRW, Divis)
-Acceptable/usable to most people -Of standardized quality so that any two units are identical. -Durable so that value is not lost by spoilage -Valuable relative to its weight so that large amounts are transportable and easy to trade. -Divisible so that it can be used in purchases of both low priced and high priced goods.
Categories of Gov. Expenditures (Gr, Nat. D Int, Trans. Pay)
-Grants to state and local Gov's- Payments by Federal Gov. to support state/local. -national debt interest- Payments to holders of the bonds the Federal Gov. has issued to borrow money. -Transfer Payments- Social security, Medicare, unemployment insurance, fastest growing Gov. Expenditure.
Budget deficit / Budget surplus
...
Current rate of inflation
0%
The number of people unemployed by the Claimant count measure is
0.82 million
The sum of Gov spending and tax multiplier has to equal...
1
How do you find the multiplier?
1 - (1/MPC)
How many people employed in the investment sector
1 million
600 miles of distance from one of the most developed regions of the world raises transport costs by...
1 percent.
to determine the effects of equilibrium....
1) decide whether event shifts s curve, d curve, or both 2) decide in which direction the curve shifts 3) use supply demand diagram to see how the shift changes equilibrium of price and quantity
A cut in the tax rate affects equil. RGDP through two channels (Inc. Dis. Inc., Inc. ME)
1. A cut in the tax rate increases the disposable income of households increasing consumer spending. 2. A cut in the tax rate increases the size of the multiplier effect.
PCE pros (CBP)
1. Allows the mix of products or basket goods to CHANGE each year. 2. Includes the prices of more goods and services than the CPI, a BROADER form of inflation. 3. PAST values of PCE can be revised.
pros of inflation targeting (ana)
1. Announcing explicit targets for inflation draws public attention to what the Fed can ACHIEVE. 2. Announcing inflation target provides an anchor for inflationary expectations (People believe inflation will always go back down to NORMAL). 3. Inflation targets promote ACCOUNTABILITY for the Fed by providing a yardstick against which its performance can be measured.
Technology has three affects
1. Any increase in tech means an increase in Capital 2. Any change in capital with new tech is because the technology made the capital productive. 3. New tech does not suffer from diminishing returns
3 ways labor productivity can increase
1. Capital Mobility 2. Trade as technology 3.Trade enhancing tech advancement.
Three approaches to determine whether being open to the world economy will cause a country to be rich
1. Compare Growth Rates of income in closed/open 2. Examine how growth rates change when countries become open/closed. 3. Consider the impact of geographic factors that affect a country's openness.
Why the change in the price of inputs is slower than the change in the price of price level 3 reasons (movement along SRAS curve)
1. Contracts make wages sticky 2. Firms are often slow to adjust wages 3. Menu costs make some prices sticky.
Why timing is harder with fiscal policy than monetary policy
1. Control over monetary policy is concentrated in the hands of the FOMC, and can change the policy at any of the meetings. 2. The president and congress all have to agree on fiscal policy and fiscal policy takes much longer.
Two ways economic openness contributes to a higher level of tech...
1. Countries open to trade more able to import existing tech. abroad. 2. Interactions among countries allow for the transfer of softer tech. such as innovative organizational techniques.
Reasons for a Resource Curse
1. Countries with rich resources do not develop the cultural attributes for economic success. 2. Over-consumption 3. Industrialization 4. Politics
5 Problems with GDP (Dep, Obsc GI, G&B, ESoN, MOO)
1. Doesn't take depreciation of capital into effect. 2. Obscures Growing inequality and encourages depletion of resources. 3. Can't differentiate between the good (education) and the bad (cigarettes) of things that people spend on. 4. Doesn't measure economic services of nature. 5. Measures only output and makes no claims on the quality of that output or social progress or happiness.
Three ways climate affects economic growth
1. Effects on production, importantly agriculture 2. Influences human input into production because the prevalence of disease and climate and how Temp. affects ability to work. 3. Affects the economy by making a location more or less pleasant to live.
Reasons for the recession
1. Excessive desire to expand home ownership. 2. Fed. too loose with Monetary Policy, deflation fears create too low of interest rates. 3. Breakdown of the financial system, bubble bursts and liquidity crisis, intrabank lending dried up.
Four key factors for why some low income countries grow slowly... (FWPL)
1. Failure to enforce the rule of law 2. Wars and revolutions 3. Poor public education and health 4. Low rates of saving and investment
How does the BLS calculate CPI (Fix, Find, Compute, Choose, Compute)
1. Fix the basket 2. Find the prices of goods/services in the basket at one point in time. 3. Compute baskets cost 4. Choose a base year and compare it to other years.(Use CPI formula) 5. Compute the inflation rate using CPI in (Inflation rate formula.)
Merton's Examples of Unintended Consequences (Ig, Er, iii, BV, SDP)
1. Ignorance 2. Error 3. Imperious Immediacy of Interest 4. Basic Values 5. Self Defeating Prediction
Variables that can SHIFT market demand (In, Pr of RG, T, P&D, Ex FP)
1. Income 2. Prices of related goods 3. Tastes 4. Pop. and Demographics 5. Expected future prices.
5 Variables that shift the SRAS Curve (Incr LF&CS, TC, HH/F Exp, Adj. W4Err, SS)
1. Increases in labor force and capital stock 2. Technological change 3. Expectations of future price level 4. Adjustments of workers/firms to errors in past expectations about price level 5. Unexpected changes in price of Nat. Resource (supply shock)
Why people buy bubble assets?
1. Investor is caught up in the enthusiasm of the moment and fails to gather sufficient info about the true value of the asset. 2. Investor may expect to profit from buying the asset at inflated prices if the investor can sell that at higher price before bubble pops.
How to measure openness?
1. Law of one price 2. Openness index
3 main Monetary Policy Targets of the Fed
1. Money Supply 2. Interest Rate 3. Federal Funds Rate
3 Monetary Policy Tools of the Fed.
1. Open Market Operations 2. Discount Policy 3. Reserve Requirements
Fed's policy tools
1. Open Market Operations 2. Discount Policy 3. Reserve Requirements 4. Monetary Policy Goals of Fed can be conflicting.
Fed's 4 main monetary policy goals to promote well being for the whole economy
1. Price Stability 2. High Employment 3. Stability of financial markets and institutions 4. Economic Growth
Variables that shift market supply (Pr I, TechC, PrSP, N#F, ExFP)
1. Prices of inputs 2. Technological Change 3. Prices of substitutes in production 4. Number of firms in the market 5. Expected Future Prices
cons of inflation targeting (ufid)
1. Rigid numerical targets for inflation diminish the FLEXIBILITY of monetary policy to address other policy goals. 2. Monetary policy affects inflation with a lag, inflation targeting requires that the Fed uses forecasts of future inflation which may be INACCURATE. 3. Holding the Fed accountable only for a goal of low inflation may make it more DIFFICULT for elected officials to monitor the Fed's support for good economic policy overall. 4. Inflation targets may increase UNCERTAINTY over whether the Fed will take prompt action to return the economy to full employment following a recession.
3 Problems with CPI (Sub B, IntroN, U QC)
1. Substitution Bias- Not all prices rise proportionately, so consumers buy substitute goods when one good becomes too expensive. 2. Introduction of new goods- With new goods comes more variety to choose from, which reduces the cost of maintaining the same level of economic well being. 3. Unmeasured Quality Change- Quality of good decreases from one year to the next while its price remains the same. The value of the dollar falls because you're getting a lesser good for the same money.
The 8 Basic Principles of Economics (T, RD, OC, DM, IW=IO, CW=LV-HV, I, ME=R)
1. TANSTAAFL 2. People make rational decisions 3. People consider the opportunity cost of every choice 4. People make decisions at the margin 5. The only way to increase a nations wealth is to increase its real output 6. The only way to create wealth is to move resources from a low value to a high value 7. Information is valuable and costly 8. A market economy leads to a better allocation of resources
Which households not effected by inflation;
Welfare benefits are index linked
Deficits occur automatically in recessions because...
1. Wages and profits fall, causing Gov. tax revenues to fall. 2. The Gov. automatically increases its spending on transfer payments when the economy moves into recession.
Three sources of foreign currency demand for U.S Dollar... (FG, FI, FEx)
1. Want to buy american goods 2. Want to invest in US (factories or stocks/bonds) 3. People who believe that the value of the dollar will be higher in the future than it is today.
of 30 million workers how many are on the minimum wage
2 million
UK debt
1.5 trillion
The LFS measure of unemployment says that .... are unemployed
1.91m
reasons for why Wealthy countries are near each other is because...
1.Countries have influence on each other (spillovers) 2. Nearby countries share similar characteristics that are important for growth.
Government Spending Multiplier Formula
1/(1-MPC) or 1/MPS
How do you find the change in aggregate demand by using the multiplier effect?
1/(1-MPC) x change in government expenditures
Multiplier =
1/(sum of propensity to withdraw = save + tax + import on any extra income)
average income in rich countries is _____ more than the average income in poor countries
10
If the CPI rises from 200 in year 1 to 220 in year 2, the rate of inflation is ____________.
10% (220-200)/200 = 10%
Deposit on new house is typically
10% (this is why wealth effect is bad for first time buyers)
How many Federal Reserve regional banks are there?
12
The rate of inflation is the measure of the average increase in prices over the last
12 months (measured on the CPI)
as of Q2 of 2015, what was the GDP of the United States?
17.9 trillion
How many public sector workers in the UK
5.4 million
Current rate of unemployment
5.5% (it has been gradually falling)
How much does it cost to service debt per year
51 billion more the MoD
What % of I is funded out of profits
70%
Rule of 70 formula
70/Growth rate
the U.S standard of living is about _____ times larger than 100 years ago
8
The Tax cut multiplier
A decrease in taxes raises disposable income, consumption, and Real GDP and visa versa. Always negative number. Tax Multi.= Change in equil. RGDP/Change in taxes
Inflation Rate
= (GDP deflator in current year - GDP deflator in previous year) / GDP deflator in previous year = ((new money supply - old money supply) / old money supply) x 100
Labor Force Participation Rate
= (labor force / adult population) x 100
GDP Deflator
= (nominal GDP / real GDP) reflects the prices of domestically produced goods and services
Unemployment Rate
= (number of unemployed / labor force) x 100
What is the Velocity Formula?
= (price level x quantity of output or real GDP) / quantity of money V = (P x Y) / M
CPI
= (total basket cost of current year / total basket cost of the base year) x 100
Spending Multiplier
= 1 / (1 - marginal propensity to consume)
GDP in Closed Economy
= C + I + G
National Savings
= GDP - consumption - government spending = Y - C - G = private savings + public savings = investment
Private Savings
= GDP - consumption - taxes = Y - C - T
Real GDP
= SUM(quantity x base year's price) IS corrected for inflation
Nominal GDP
= SUM(quantity x current price) NOT corrected for inflation
Reserves
= demand deposits - loans
Required Reserves
= demand deposits x required reserve ratio
Opportunity Cost
= explicit costs + implicit costs
Total Change in Demand
= initial change in spending x spending multiplier
Real Interest Rate
= nominal interest rate - inflation rate = ((new quantity - original quantity) / original quantity) x 100
Public Savings
= taxes - government spending = T - G
Labor Force
= unemployed + employed
A lower price level means...
A decrease in the quantity of money demanded at each interest rate, need less money at hand to buy same goods.
Bank Run
When many depositors decide to withdraw money from a bank
Quarter
A 3-month period
Fractional Reserve banking system
A banking system in which banks keep less than 100 percent of deposits as reserves.
Jigsaw Puzzle
A billion pieces of a jigsaw puzzle would be impossible for one person to pick up and put together, but with enough people the puzzle could be picked up and put together. Yet for the jigsaw puzzle to be a picture that everyone likes even decreases the chances of the puzzle being successful. The jigsaw puzzle is a metaphor for knowledge of how things work with the economy. It would be impossible for one planner to solve the or predict what the puzzle would be and how to make it pretty. That is why its best to let make a picture by itself. People are the individual puzzle pieces and they will arrange themselves where they want to be over time without even meaning to make a pretty picture. Each person wants a loud beep when connecting a piece of the puzzle or in the real world more money or better trade.
Aggregate Demand Curve shows
A curve that shows the relationship between the price level and the quantity of real GDP demanded by households firms and the Gov
Supply Curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
When the Gov. runs an expansionary fiscal policy the result is...
A cyclically adjusted budget deficit.
When the Gov. runs a contractionary fiscal policy the result is ...
A cyclically adjusted budget surplus.
Crowding out
A decline in private expenditures as a result of an increase in gov purchases.
Instruments of Fed
Banking reserves, Federal funds rate
Budget deficit
a situation in which the government spends more than it takes in in taxes.
Pop. and Demographics
As demographics of a community change so does the demand for certain goods.
3 main ways Aggregate Demand Curve shifts ANY VARIABLE OTHER THAN PRICE LEVEL CHANGE THE CURVE SHIFTS (G, HH Exp, FV
Changes in Gov policies Changes in expectations of households/firms changes in foreign variables
What is the equation for aggregate demand?
AD = C + I + G + NX
Absolute Advantage
Ability of an individual firm or country to produce more of a good or service than competitors using the same resources.
Comparative Advantage
Ability of an individual or a firm or country to produce a good or service at a lower opportunity cost than competitors.
Economic Growth
Ability of economy to increase production of goods and services.
Entrepreneurial Ability
Ability to bring together the other factors of production to successfully produce and sell goods and services.
Faster flow of info (force propelling globalization)
Access to current information aids both trade and capital investment.
Openness gets a country...
Access to resources, integration, and increased labor productivity.
Fiscal Policy
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
Human Capital
Accumulated knowledge and skills that workers acquire from education and training or from their life experiences.
A key determinant of economic growth is...
Accumulation of knowledge capital
Example
Accused Poland of dumping golf carts into the US Market. Since Poland was communist at the time there was no "fair price" to compare it to in Poland. So the Dept. of Commerce uses Canada and how much their golf carts are sold for in Canada as collateral which is unfair. Later the DoC used constructed value.
When retained earnings are not enough to finance growth firms...
Acquire funds from households either directly through financial markets (stocks/bonds) or indirectly through intermediaries (banks).
Monetary Policy
Actions the FED takes to manage the money supply and interest rates to achieve macroeconomic policy objectives.
What are the two kinds of supply shocks?
Adverse supply shocks and positive supply shocks
Aggregate Supply
Aggregate supply (AS) is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time.
Climate effects on production
Agricultural output per worker differs greatly between tropical and temperate regions. Temperate countries produce 300X more output than workers in tropical countries.
Labor
All forms of work.
Short run growth
Changes in real GDP caused by alterations in AD
Investment Tax Credits
Allow firms to deduct from their taxes some fraction of the funds they have spent on investment. which increases incentives and after tax returns.
How do you calculate todays prices from prices in an earlier era by using CPI?
Amount in today's dollars = amount in year T dollars x (CPI today) / (CPI in year T)
GDP Deflator Formula
Amount in year 1 x (Price level today)/(price level year 1)
Growth rates matter because...
An economy that grows too slowly fails to raise living standards.
Monetary policy
Changes in the supply of money and the availability of credit initiated by a nation's central bank to promote price stability, full employment and reasonable rates of economic growth.
Trade Deficit
An imbalance in international trade in which the value of imports exceeds the value of exports.
Technological change is more important than..
An increase in capital in explaining long run growth
Adjustments of workers and firms to errors in past expectations about the price level
An increase in price level one year while the workers wages were sticky will make the workers want to increase their wage contracts for the following years, which will make it harder for firms to produce the same level of output b/c increased wages (inputs)
Medium of Exchange
An intermediary (mutual) instrument used to facilitate the sale, purchase or trade of goods between parties. In modern economies the medium of exchange is currency. Money is a medium of exchange when sellers are willing to accept it in exchange for goods or services. Sell a good for money then buy what they want with that money.
Supply-side shock
An unexpected event affecting AS
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs.
Keynes: what guides Business cycle?
Animal Spirits and expectations.
Asset
Anything of value owned by a person or firm
Industrial Revolution
Application of mechanical power to the production of goods.
Money
Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.
Velocity of Money
Average number of times each dollar turns over, AKA is used in the money supply is used to purchase goods and services included in GDP.
GDP = (in terms of price a good)
Average price * volume of goods
Financial system works by...
Channeling funds from savers (consumers) to borrowers (banks, firms) and channels returns on the borrowed funds back to savers.
Fannie Mae and Freddie Mac and the secondary market for mortgages continued...
Banks made more money buying MBS's because they knew F and F were going to buy them from them. Banks started buying high risk mortgages and also started giving out adjustable rate mortgages to increase borrowing. This created a collateral debt obligation.
Demographics
Characteristics of a population like age, race, and gender. Also the amount of people.
Individual income tax
Cutting ii tax raises entrepreneurship and the encouraging of new businesses, also increases return to saving.
Business/Trade Cycle
Fluctuations of economic growth around trend (our deficit is consistent so not a result of this - more fundamental problem)
MPC of the BoE meet every month and set it own interest rate known as the
Bank rate (Base rate)
Why the aggregate demand curve is sloping down
Because a fall in the price level increases the quantity of real GDP demanded.
Why does trade allow people to specialize?
Because of comparative advantage and the ability for countries to produce what they're best at and make more of it to trade for what they're not good at.
how can prices can differ in two markets
Because of short run currency fluctuations (one country's currency depreciates) or differing market conditions.
Why can't the Fed target both the interest rate and the money supply?
Because the Fed controls the money supply but not the money demand, which is determined by decisions of households and firms as they weigh the trade-offs of the convenience of money and low interest rate V.S high interest rate and low convenience of other deposits.
Reasons why USSR's communism did not become economic dominating world power...
Because with communism in USSR there was no investment or incentive to innovate technology, only investment in capital.
Why is transportation important?
Because workers go where demand is, brings goods from all over the world and information, access to more resources.
Positive Externality
Beneficial side effect that affects an uninvolved third party. Where a person can benefit to society by benefiting themselves.
Free Riding
Benefiting by research and development of other firms.
Three main sources of technological change
Better machinery and equipment Increases in human capital Better means of organizing and managing production
Government debt is bought off in the form of
Bonds (interest rate on these can create a debt trap)
Intellectual Property Rights
Books, films, software, and ideas people have their rights too.
Over-Consumption
Booms in income from natural resources are temporary. Early large amounts of income lead countries to raise their price which cannot be sustained long term and investing countries find cheaper places to trade resulting in a lower level of income for the resource country.
Every time the Fed. Gov. runs a budget deficit the Treasury must...
Borrow funds from investors by selling treasury securities to pay off Gov. debt.
M2 Money
Broader definition of money, includes all of M1, plus savings account deposits, small denomination time deposits, balances in money market deposit accounts in banks, and non-institutional money market fund shares.
Three main types of investment
Business investment (55%), New dwellings (25%), Social Capital (20% - things like schools)
Fall in consumer confidence will lead to less ..... ....
Business investment (less incentive to supply)
Quantitative Easing (Tool)
Buying securities beyond the short term Treasury Securities that are in open market operations.
How Fiscal Policy increases aggregate demand in a recession...
By decreasing taxes or increasing Gov. spending consumers have more money increasing aggregate demand and visa versa.
Discount Policy
By lowering the discount rate the Fed can encourage banks to take additional loans and thereby increase their reserves. With more reserves, banks will make more loans to households and firms. which will increase checking account deposits and the money supply.
We sometimes consider alternatives to GDP such as the HDI because _____________.
GDP does not measure some important aspects of well-being (such as health)
If savings ratio increases, courtiers paribus, the ... will decrease
C
Defict currently in UK (£108bn) financed by
borrowing (increase in national debt of £1.37 trillion)
Component of AD =
C + I + G (current government expenditure) + (X-M = net exports)
National expenditure =
C + I + G + E
aggregate demand =
C + I + G+ NX
Example of economic growth in unified/not unified
Chinese sailors killed if they traveled to far or built a ship, Christopher Columbus who couldn't get financed by Portuguese went to the neighboring country and got a ship there.
Downside of economic growth
environmental damage, sucks in imports, increased inflation, distribution of wealth
Nearby countries share similar characteristics that are important for growth
Close countries share similar climates, have common characteristics that are difficult to measure
4 main reasons Aggregate Demand Slopes
C+I+G+NX Consumption spending Investment spending Government spending Net Exports
rank AD components in terms of what proportion they make up
C,G,I,X-M
Something that could cause demand side deflation
Collapse in housing market, Collapse in consumer confidence, Restrictive fiscal policy
The wealth effect
Change in the price level affects consumption. Household with 10,000 likely to spend but if price level increases 10% they'll spend less therefore reducing the demand for goods.
Choose a base year and compare it to other years using the...
CPI Formula
Inflation Rate for CPI
CPIt - CPIt-1 /CPIt-1 x 100 CPIt= later year CPIt-1= earlier year
Positive money characteristics
Can use it to buy goods, services, or financial assets.
Law of Unintended Consequences
Can't see the reaction to what laws will do. The general observation that the actions of people and governments always have effects that are not expected or intended.
The largest US trading partner (in terms of total value tradedm exports plus imports) is ____________.
Canada
Summary of Capital and technology on economic growth sustainability
Capital deepening improves labor productivity but is subject to diminishing return which the return will eventually=0. Sustained growth from technological change is possible because technology and knowledge are public goods ex: assembly line
Two main factors of labor production
Capital per worker and technological change
How to look at data and find a causation from a correlation?
Compare data from time period before variable and data from time period after ex: education, Increased Education after 1980, compare GDP before 1980 to see what rate was before education increase and then compare GDP after 1980 to see if there was an increase.
Money market model
Concerned with short-term nominal rate of interest- the interest rate most affected by increases and decreases in the money supply
Positive analysis
Concerned with the "What is?"
Normative analysis
Concerned with the "What ought to be?"
Constructed Value
Constructing an estimated cost then adding on 8 percent for profit to get what the price should be in the U.S. However communist countries like Poland have no profit and very low wages so the 8% profit cost wouldn't work there so they used Spanish wage rates which were much higher meaning Poland had to pay a much higher "fine or tariff" then they should have.
Around 60% of AD is
Consumer Expenditure
CPI
Consumer Price Index- Measure of overall costs of the goods/services bought by a typical customer.
Tastes
Consumers can be influenced by advertisements.
Expected future prices
Consumers chose not only which products to buy but when to buy them.
Direct finance
Consumers give money directly to firms (financial markets) through stocks and bonds, high risk high reward.
Indirect finance
Consumers give money to banks (financial intermediaries) who lend it to firms through loans, low risk low reward.
Sharing Economy
Consumers share bikes, cars, clothes, tools, apts, and skills and extracting more value from what they already own. (Uber, UHaul, Hotels.)
The largest single component of GDP is _____________
Consumption
To bring Real GDP back to potential GDP congress and president use...
Contractionary fiscal policy to decrease gov. purchases or increase taxes, which will shift aggregate demand curve to the left. Pres. and Cong. can stabilize economy by using fiscal policy to affect the price level and level of real GDP.
With rising inflation
Contractionary to decrease gov. purchases or raise taxes. Real GDP and price level fall.
Sticky Wages
Contracts and failure to predict future price level increases lead workers to have lower wages, allowing for firms to pay them less and sell their product at the higher price level. Earning more profit.
cost pull inflation
Costs rise independently of AD (firms save profits so pass on to consumer in form of higher prices (if you have stagnation and inflation = stagflation)
Convergence
Countries that start out rich will get richer but at a slower rate compared to countries that started off slow.
Loss of national sovereignty
Countries that want firms to come to them will change policies and laws to be more appealing to firms, includes removing restrictions on environmental pollution and workers rights. Also Gov. must keep taxes low cause corp. can just leave.
Climate and Disease
Countries with a poor health environment will in equilibrium be both poorer and less healthy than countries with a good health environment.
Hidden price of foreign capital...
Country becomes subject to whims of international investors because of control.
NI contribution tax
Cover the costs of a state pension and the health service
Patents and copyrights affect technology and capital and growth by...
Creating incentives for innovation by guarentteing the profits from their product for a period of time.
Copyrights
Creator of a book or film have the rights to it till they die.
Spillover
Cross border effects that countries have on each other
Problems of expansionary fiscal policy, rate of return test harder to pass)
Crowding out (if needs money or more risky then higher interest rates on bonds - force firms to increase rate on corporate bonds)
What are the two components of the money supply?
Currency and demand deposits
What happens if Jane spends $1200 on a computer to use in her editing business. She got last year's model on sale for a great price from a local manufacturer
Current GDP and investment do not change, because the computer was built last year
Long Run Aggregate Supply Curve
Curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.
The long run aggregate supply curve (LRAS)
Curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.
Short Run Aggregate supply curve shows
Curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
Corporate income tax
Cutting Corp. i tax would encourage investment spending by increasing the return on new investments in equipment, factories, buildings and increase tech. change.
How does a higher interest rate effect the aggregate demand curve?
Decreases quantity demanded (shifts aggregate demand curve to the left)
A decrease in real GDP means...
Decreases the quantity of money demanded as a medium of exchange to buy goods and services at each interest rate. SHIFT L
People make rational decisions
Decisions in our best interest if not then not predictable.
Crowding Out
Decline in private expenditures as a result of an increase in Gov. Purchases.
How does a decrease in consumption (or wealth) effect the aggreate demand curve?
Decreases quantity demanded (shifts aggregate demand curve to the left)
Two factors that determine labor productivity?
level of Technology and quantity of capital per hour worked
Supply side policies may cause ...... unless there is a simultaneous rise in AD
Deflation
Natural Capital is not created by...
Deliberate Investment
Gov Policy -Interest rates increase
Demand curve shifts to the left because higher interest rates rise the cost of borrowing to firms and consumers which means they will consume and invest less and visa versa.
Bank Reserves
Deposits that banks keep in cash in its vault or on deposit with the Fed. Required to keep 10% of their checking account deposits.
Catching up
Developing countries will eventually catch up to the standards in developed countries.
Over Consumption cont...
Developing countries with early income boom from resources will expect the levels of income to be constant and will borrow money to fund investment projects leading to debt.
Inflation Gap
Difference between current inflation and a target rate.
Profit
Difference between revenue and costs.
Tax Wedge
Difference between the pretax and post tax return to an economic activity determined by the marginal tax rate.
Balance of Trade
Difference between value of exports and imports.
Capital Deepening is subject to...
Diminishing Returns. ex: 1 machine=+15, 2 machine=+10, 3 machine=+5
Financial Security
Document that states the terms under which funds pass from the buyer (consumer, household) of the security who provides the funds to the seller (firms).
When Backward and forward linkages are present the exploitation of a natural resource can...
Drive the development of the economy as a whole
Trade-Offs
Due to scarcity, producing more of one good or service means producing less of another.
In the long run, a country will experience an increasing standard of living only if..
It experiences continuing technological change
Information is valuable and costly
Most valuable info is decentralized. All info is out there and no one person knows it all.
Financial intermediaries
Firms such as banks, mutual funds, pension funds, and insurance companies that borrow funds from savers and lend them to borrowers.
A change in quantity supplied means...
Movement along the supply curve because of a change in price.
Increases in labor force and capital stock
Firms will supply more output at every price if it has more workers and physical capital. Increase in workers/capital=increase in output supplied
Employment rate formula
ER= (# of unemployed)/(labor force)
Negative money characteristics
Earns very low or no interest.
Capital Mobility
Easier to move capital around, buy, sell, transport.
Technology sustains...
Economic Growth and is a key factor
Supply side policies such as cuts in benefits have trade off between
Economic growth and equality
what are the 6 macro economic goals
Economic growth, low inflation, low unemployment, Satisfactory Balance of Payments, Equitable (fair) distribution of income, Protection of environment
Income
Effects the willingness and ability of a consumer to buy a good.
Upwards increase on prices when increase in AD depends on the
Elasticity of SRAS
Cyclical Unemployment
Employment when economy has slowed so fewer workers are needed for these goods.
Size of Eurasia with similar climates and water ways
Eurasia is large so there are a wide array of species that could be domesticated and help benefit the people, also the geographical orientation along the east-west axis contains a similar climate which allows for agriculture techniques to be widely used and spread. Also with size comes access to water ways.
Household
Everyone in a home
Banking Reserves
Excess Reserves, required reserves
The cause of inflation is?
Excessive growth in the supply of money. To fix inflation simply stop printing more money and putting it into circulation.
Patent
Exclusive right to produce a product for a period of 20 years from the date the patent is applied for.
Process of economic growth depends on... ETAB
Expand operations Train workers Adopt new technology Buy additional equiptment
SR (actual growth) economic growth is a result of
Expansionary FP or MP
In recession
Expansionary policy to increase gov. purchases or cut taxes. Real GDP and price level rise.
GDP can be measured in
Expenditures- Final sum of purchases by consumers. Income Approach- Measured in sum of incomes and costs. Value Added- Sum of value added at each stage.
Reasons for anti globalization (5) (HEEIL)
Exploitation of workers Inability of poor countries to compete Environment problems loss of national sovereignty Hidden price of foreign capital
Supply side economics
Fiscal policies expanding the productivity capacity of the economy and increasing the rate of economic growth
Marginal
Extra or additional
Formula for the Taylor Rule
FFR Target rate= Current inflation rate+ Equilibrium real FFR+ (1/2)x Inflation Gap) + (1/2)x output gap).
Find the prices of goods/services in the basket at one point in time.
FIND IT
Income per capita is dependent on...
Factor endowments (resources) and labor productivity
There is still risk of investing in poor countries because..
Failure to enforce law, corruption, war. Why invest in factory and tech if a dictator could just take it?
Equity
Fair distribution of Economic Benefits.
Because their wages are typically lower, young people in the U.S. (ages 20-24) usually have had a lower unemployment rate compared to older workers (25-54, for example).
False (The young typically have higher unemployment rates than older people. The text has details. A large part of this is related to lack of experience and the fact that younger workers tend to be more recently hired (and so are the first ones to be laid off during a recession, for example))
Self Defeating Prediction
Fear of consequence driving people to find solution before the problem occurs.
Stability of markets
Fed promotes the stability of markets so that an efficient flow of funds from savers to borrowers will occur.
Contractionary monetary policy
Fed's policy of increasing interest rates to reduce inflation. Fed decreases the money supply and increases interest rates.
Greenspan Doctrine
Fed. Reserve should not pop bubbles before they would naturally pop. Problem is how do you know it's a true bubble.
Fed. expansion is better In open market because...
Fed. can use Consumption, investment, and Net Exports to expand money supply, whereas in a closed economy there is are no exports or imports, can only us C+I
When the Fed decreases the money supply the interest rate...
Fed. will sell T. Bonds and withdraw funds from interest paying bank accounts. Banks will have to offer higher interest rates to retain consumers to deposit money. Higher short term interest rates increase the opportunity cost of holding money with no interest, so more people deposit money causing a MOVEMENT UP MONEY DEMAND CURVE
What kind of money is the US dollar bill considered to be?
Fiat money
Security
Financial Asset, stock or bond, that can be bought and sold in a financial market.
Bonds
Financial Securities that represent promises to repay a fixed amount of funds. Firms pay back price of bond with interest.
Fix the basket
Find which goods are more important to consumers.
Firms are slow to adjust wages
Firms re-adjust wages slower than the price level changes, firms benefit from this because lower input of wages, yet higher output with increased price level= more profit.
QE increases .... begins with L
liquidity
Inability of poor countries to compete
Forces small farmers and firms to compete at international level with large corps. Not bad, resources adjusted to other markets aka adjustment assistance
When GDP increases then what will also increase (payed for by the government)
Foreign aid (0.7%) and fee for UN
Inflation Targeting
Framework for conducting monetary policy that involves the central bank announcing its target level of inflation.
A lack of Frost in Tropical Countries is bad because...
Frost kills disease Frost kills exposed organisms and insects that eat crops humans need. Frost kills microorganisms in the soil that could cause sickness. Frost slows the decay of organic materials, decreasing the loss of fertility
Two ways of measuring income
GDP GNP
Net investment income is the difference between
GDP and GNP
measures inflation of goods produced in the US
GDP deflator
GDP=
GDP= C+I+G+ (X-M) C- Consumption spending by households on durable/non durable/services. I- Investment spending by firms on building factories, software (Non-Residential) or building a house for others, inventories or inputs (Residential) G- Government spending by government at all levels (local, state, federal) X- EXports M- IMports
What determines Growth?
Geography (landlocked), Climate, culture, Government/Institutions.
Determinants that are immune of the problem of income affecting government or gov. affecting income
Geography, climate, natural resources
Patents
Give an inventor intellectual rights.
Inferior Good
Good for which the demand increases as income falls and decreases as income rises.
Normal Good
Good for which the demand increases as income rises and decreases as income falls.
Commodity Money
Good used as money that also has a value independent of its use as money. (Deer skins, Tobacco warehouse) Main problem is that its value depends on its purity. Ex: gold can be mixed with other metals and now isn't valuable.
Complements
Goods or services that are used together. The more consumers buy of one the more they'll buy of the other. (PB&J)
Prices of related goods
Goods that can be used for the same purpose or (substitutes).
Non Durables
Goods that last less than 3 years.
Durables
Goods that last longer than 3 years. Affected more by business cycle than non durable goods.
Subsidizing Research and Development
Gov can use subsidies to increase the quantity of research and development that takes place.
Using Patents and Copyrights
Gov's increase incentive to engage in R&D by giving firms the exclusive rights to their discoveries for a period of time.
Automatic Stabilizers
Gov. spending and taxes that automatically increase or decrease along with the business cycle. Ex: when the economy is expanding and employment is increasing, gov spending on unemployment insurance will automatically decrease cause less people have lost jobs.
How Aggregate Demand graphs shift
Government Policies 1. Interest rates increase or decrease 2. Personal income tax or Business taxes increase or decrease. Expectations 3. Future expectations are good or bad. Foreign Variables 4. Growth rate of domestic GDP relative to Foreign GDP increases or decreases. 5. Exchange rate of the dollar relative to other currencies increase or decreases
Two most important variables that cause the money demand curve to shift
Real GDP Price level
Unit of account
Has a unit of measure or currency used to value goods at a cost. Unit of account gives buyers and sellers a way of measuring value in the economy in terms of money.
Patents prevent Creative Destruction by...
Having a company patent everything, like apple did with rounded corners in a phone, so other companies cant make better phones for cheaper.
Hayek and Friedman's views of money
Hayek favored denationalization of money, getting government completely out of the business of issuing money and controlling the money supply. Competitive market forces would instead be responsible for supplying sound money. Friedman became so skeptical of central banks that he argued that government be stripped of any power and responsibility to regulate the supply of money.
Current Account
Records current short term flows of funds in and out of a country.
Financial account
Records purchases of assets a country has made abroad. Usually Long Term Investments
How interest rates affect investment
Higher interest rates on corporate bonds or on bank loans make it more expensive for firms to borrow, so they will undertake fewer investment projects, higher interest rates also rises the cost of buying a new home for consumers lowering the demand. Lower interest rates make it less expensive for firms to borrow so they will borrow more and increase investment, and also lower mortgage loans making housing cheaper to buy.
Loanable Funds market slopes upwards with...
Higher interest rates, because people save their money in banks and banks loan the money out to firms.
How does population growth affect productivity?
Higher population growth can depress economic prosperity by reducing the amount of physical capital per worker (but It also raises the pace of the technological process)
Consolidated Alchemy
Hoax about transmutation process that many people invested in until it was found out to be fake.
What key groups participate in markets?
Households and Firms.
Why the demand curve for money is downward sloping
Households and firms have a CHOICE between holding money (which earns no interest) and holding other financial assets such as US Treasury Bills (which earn interest but have to be sold to buy stuff).
Households vs Banks in investing
Households don't have the knowledge or tools to be able to truly asses the true risk of lending to firms, Banks asses risk better that is why it is safer to lend money to them to give to firms.
How does inflation push savers and benefit borrowers
If inflation raises above the nominal interest rate then real interest rates will be negative
Number of firms in the market
If more firms enter the market for a good the graph shifts to the right and visa versa.
Prices of substitutes in production
If the price of a substitute good increases more people will want the other good and the graph will shift to the right.
Expectations of future price level
If workers believe there will be an increase in price level they will demand an equal amount of increase in their wages. this increases the amount of costs in the economy.
Example of Keynesian economic problem
If you have all of the parts of, say, an automobile scattered randomly about a large room, the main reason you do not have a functioning car is not that you do not want, or that you fail to "demand," such a car. Instead, the chief reason you have no functioning car is that those parts aren't fitted together in ways that allow them all to operate smoothly together so that a drivable and reliable car exists. It's true that no one will exert the energy and initiative required to assemble all of the parts into a working vehicle if there is no (or too little) demand for such a vehicle. But your desire to have a drivable car is not really the main obstacle standing between you and a working vehicle. The main obstacle is the challenge of mobilizing all the knowledge involved in assembling these pieces into a car and motivating people to put forth the effort to perform that assembly. The desire of nearly everyone to possess and consume automobiles, along with lots of other goods and services, can be depended upon always to exist. The challenge is to ensure that producers have the knowledge and the incentives actually to produce the goods and services that people want. The challenge, in other words, is to get the economic details right so that producers have both the knowledge and the incentive to produce the "right" mix of outputs
Imperious Immediacy of Interest
Immediate interest overriding long term interests.
Economic Growth
Important to raising living standards, stable economic growth met by high employment price stability and stable financial markets and institutions.
Describe depreciation of pound effect on imports
Imports more expensive so less are demanded at higher price so fall in expenditure on imports (export led growth)
Foreign Variable- Growth rate of domestic GDP relative to the growth rate of foreign GDP
Imports will increase faster than exports, reducing net exports
Foreign Variable- The exchange rate of the dollar relative to foreign currencies
Imports will rise and exports will fall if foreign currency is at a lower value than dollar because you can buy more foreign goods for less money which will shift the graph to the left because exports will fall and visa versa.
Ignorance
Impossible to anticipate everything.
Error
In analyzing the problem with whats worked in the past.
Why do humans trade?
In human nature because of mutual benefit.
Aggregate Demand
In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels.
what makes people likely to respond to a policy change?
Incentives: if it changes either the costs or benefits of their behavior
Natural Resources
Include land, water, oil, iron, and other materials used to produce goods.
Federal Gov. Expenditures
Include purchases plus federal government spending such as social security payments that do not involve purchases.
Civilian Employment
Includes all individuals who worked at least one hour for a wage or salary, self employed, or working 15 hours a week, Also includes vacation, leave, labor dispute.
Transfer Payments
Income from Gov. that households receive which includes social security and unemployment insurance payments.
Civilian Unemployment
Individuals who are not working but are able and looking for a job. 30 days without a job=unemployed.
Economic Growth started when...?
Industrial Revolution in England in 1750.
Too much bank reserves can cause...
Inflation
The BoE primary goal is to control
Inflation (secondary role is to support governmental macro economic targets)
Hayek Tiger Analogy
Inflation is like grabbing a "tiger by the tail." Once someone grabs a tiger's tail, that person is at risk of being bitten when he lets go. Holding on to the tiger's tail, delays facing the risk of being bitten. But holding on makes the tiger angrier, so that when it finally does break free and it eventually will, the beast will be more likely to attack with greater fury. Each moment the person holding the tiger's tail is tempted to hold on a bit longer to delay the risk of being mauled, only making the tiger more mad. At some point the tiger will become so furious that it will manage to break free on its own. The danger to the person who held on to the tiger's tail for that long will be enormous. The difficulty of stopping inflation is like the difficulty of letting go of a tiger's tail. The mechanics of doing either task are incredibly easy: just stop printing money (to stop inflation) or relax the muscles in your hand (if you're holding the tail). Yet in light of the anticipated consequences of stopping inflation or of releasing a tiger's tail, the task is challenging.
Firms are willing to increase the quantity of goods supplied because inputs...
Inputs like wages and resources rise slower than the price level is. Price good sold for - price of inputs for good = profit
Factors of production
Inputs used to make goods or services.
A unified country is good for economic growth because...
It has a larger market with higher gains for specialization, Productive ideas should also spread more easily in a unified country.
Inflation is bad for current account price competitiveness as
It raises prices and makes them less competitive
Fed. can't directly tell firms how many people to hire so
It sets up targets that it can directly affect, which in turn affect variables such as real GDP, employment, and price level.
If Countries differ in their health environment than...
It will affect income and actual health
Real GDP cannot continue to remain over potential GDP because..
It would cause inflation
Another way geography affects economic growth is through...
Its effects on the size of states as well as the conduct of the government.
The symbol for withdrawals
J
A economy is in equilibrium when
J = W
Productive capacity = (supply)
LRAS
Better means of organizing and managing production
Labor productivity increases if managers can do a better job of organizing production. With organized production firms require less people and keep track of things better.
Low Hanging Fruit
Larger gains from investing in poor countries because the technology is not as advanced which means you would have higher gains due to less diminishing return, as country becomes more advanced you get more diminishing return.
MPC means
Marginal Propensity to Consume (by consumers when they get additional money.)
MPS means
Marginal Propensity to Save (by consumers when they get additional money.)
Increase in Yd will increase C depending on
Marginal propensity to consume
What does the size of the multiplier effect depend on?
Marginal propensity to consume (MPC)
Factor Markets
Market for factors of production like labor, capital, natural resources.
Product Markets
Markets for goods like computers, or for services like medical treatment.
Producer Price Index
Measures the cost of a basket of goods/services bought by firms rather than consumers.
What are the three functions of money?
Medium of exchange, unit of account, store of value
Focus Groups
Meetings with consumers to see what new products they'd like to see produced.
Prices of input
Most likely cause of shift in supply, If a piece of a good goes up in price smartphones will become less profitable and shift to the left.
Menu Costs make prices sticky
Menu Costs are prices that firms set and advertise their products at. It costs money to change those advertisements, so some firms decide to keep the prices the same as the menu costs even when the price level increases. Which means that those firms are selling their goods cheaper than their competition and have a higher demand.
What are 3 costs of inflation?
Menu costs, infation tax, shoeleather costs
Non Tariff Barriers
Methods to prevent the sale of imports apart from tariffs or quotas (anti dumping duties, VER's, Excessive Standards)
Keynesian economics ignores the...
Micro-economic details of an economy. How well or poorly each of the economy's many individual parts "fit" together and work together to generate goods and services for consumers, and to create job opportunities for workers.
New Growth Theory by Paul Romer
Model of long run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.
Economic Growth Model
Model that explains growth rates in real GDP per capita over the long term.
Aggregate Demand and supply model
Model that explains short run fluctuations in real GDP and the price level.
Circular Flow Diagram
Model that illustrates how participants in markets are linked
How do you find the money multiplier from the reserve ratio?
Money Multiplier = 1 / R (where R = reserve ratio)
Injection
Money entering the CIRCULAR FLOW OF INCOME
Fannie Mae and Freddie Mac and the secondary market for mortgages...
Money flowed in through buyers of bonds to Fannie/Freddie, F and F used the money to buy mortgages from banks, banks made money then buying and selling mortgages.
Hayek Fiat Money Problems
Money is only good because of faith in the Gov. Fiat money is printed and used by the Gov. to finance its expenditures that people don't want to fund because people hate when their taxes are raised.
Two main Fed Targets are
Money supply and interest rates.
If the federal reserve buys bonds with new dollars, how much does the money supply increase by?
Money supply increases = (amount of bonds) x (money multiplier)
Fiat Money
Money that is authorized by a central bank or Gov body that does not have to be exchanged by the central bank for gold or some other commodity money. Is risky because you have to trust the Gov because it is not backed by anything and could become non redeemable. Fiat money
A trade deficit means
More Foreign investment and visa versa
Surplus
More exports than imports.
2. Increases in human capital
More human capital equals more productivity in labor because of more education.
Deficit
More imports than exports.
Countries have influence on each other in ways like...
More likely to trade with each other, spread jobs with each other to take advantage of low wages (Maquiladora Plants), wealthy countries are good examples for their neighbors. Unstable countries send refugees and military aggression.
If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her nominal GDP for 2001?
Nominal GDP = (1 x 15) = 15
Real GDP
Nominal GDP plus the price level. Price set at a base year. Current output valued at base year prices.
What is the difference between nominal variables and real variables?
Nominal variables are measured in monetary units ($), whereas real variables are measured in physical units
Not accounted for in the Real GDP
Non Market production- illegal production like drug trade or babysitting or stay at home moms not accounted for.
Unemployment rate
Number of unemployed as a percentage of the labor force.
If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her real GDP for 2001?
Real GDP = (2 x 15) = 30
Systematic Risk
One thing fails everything fails.
Creative Destruction
Only way to get ahead in a market is to come up with a new, better idea.
Tools of the Fed
Open Market Operations, Reserve Requirements, Discount Policies, Quantitative Easing, Interest on Reserves
Which tool to control the money supply is used most often?
Open-market operations
What tools are available to control the money supply?
Open-market operations, term auction, changes in reserve requirements
Opposition to trade openness from...
Org. that benefit from having monopolies in one country or have a comparative disadvantage to foreign companies.
Firm
Organization that produces a good or service.
Trade as technology
Organizational techniques and efficiency like specialization and comparative advantage for a country to trade.
What is the catch-up effect?
Other things equal, relatively poor countries tend to grow faster than relatively rich countries
GDP as value of domestically produced G&S is calculated by
P*Q (average price*volume of goods
How the Fed measures interest
PCE scale
The strength of the pound will affect exports depending on their...
PED
Over Patenting can decrease innovation because...
Patenting everything which can decrease innovation because new competitors can't make new products ex: apple with phones and round corners and blue light
When GDP increases above potential level households and firms have to... and the government has to....
Pay higher taxes and the Gov. makes fewer transfer payments
In surplus the Treasury...
Pays off some existing bonds.
The phrase "no such thing as a free lunch" explains which accounting principle?
People face trade-offs
Climate effect on humans
People in warm climates cannot work hard because they will overheat. Technology lessens this effect. Warming technology is far cheaper and simpler than cooling tech.
Frictional Unemployment
People unemployed because it takes time for skilled workers to find a job that uses their skills. Ex: college kids after graduation. Usually a short time
Discouraged Workers
People who have stopped looking for a job/gave up.
Subsidizing Education
People with technical training carry out research and development, so by providing free education or loans the Gov. provides incentive to get more educated.
Inflation Rate
Percent increase in price level each year from previous year.
Output Gap
Percentage difference between real GDP and potential GDP.
Mercantilist
Person who believes a nations economic health depends on having a trade surplus and that imports are bad and destroy jobs while exports are good and create jobs. They fail to understand you can't control exports independently of imports. They don't understand that a trade deficit is the flip side of a capital surplus.
Capital
Physical goods like computers and machines or tools to produce other goods.
With aggregate supply and demand curve; ... is on y axis
Price level
How do you calculate CPI?
Price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100
A bubble occurs when...
Prices of the asset rise above the levels that can be justified by the profitability of the firms issuing it.
Technology
Process a firm uses to produce goods.
The Dutch Disease
Process by which the presence of a natural resource is ultimately detrimental to the domestic manufacturing sector
Globalization
Process of countries becoming more open to foreign trade and investment.
Scientific Model
Process of developing models, testing hypothesis, and revising models.
Securitization
Process of transforming loans or other financial assets into securities.
Productive Efficiency
Produce goods for cheapest price, the most we can.
Labor productivity
Production/no of workers (output per unit of input)
Technological Change
Productivity of producing a good increases more of the good will be produced and it will shift to the right.
Retained Earnings
Profits that are reinvested in the firm rather than paid to the firm's owners. Sometimes not enough money however.
Capital Deepening implies that capital does not...
Purely affect economic growth because diminishing return will eventually=0
Investment improves to the two ... of the FOPs
Qs
development is a measure of
Quality of life
Economic growth model says increases in real GDP per capita over time result from two main factors
Quantity of capital available to workers and technological change.
Fees paid to companies (included in G) who are providing a service to the government - example
RAF maintenance
Two key technologies have reduced the cost of transportation and propelled economic integration.
Railroad and steamship
Tropical Countries have poor agriculture because...
Rain fall patterns are heavy and inconsistent and erodes the soil. Seasonal pattern of sunlight in the temperate zones is inconsistent for growing some crops. Lack of Frost.
GDP Deflator
Ratio of nominal GDP to real GDP. Reflects prices of all goods and services produced domestically v.s CPI which reflects all prices bought by consumers.
The government purchases multiplier
Ratio of the change in equilibrium Real GDP to the initial change in government purchases. Gov. Purchase Multi.=Change in equil. RGDP/Change in Gov. purchases
What does investment include?
Spending on new capital, such as machines, equipment, tools, or buildings
The three negatives of inflation
Squeezes real incomes, Loss of international competitiveness, Savers are punished and borrowers are rewarded
Low Rates of saving and investment
Stock and bond markets do not exist in low income countries and households have no savings because wages are so low. This means no investment for firms and contributes to cycle of poverty
The uk has traditionally used the RPI and as a results things such as..... are linked to it
Student loans, rail fare increases, and index linked government bonds
Macroeconomics
Study of economics as a whole. (inflation, economic growth).
What two things explain the law of demand?
Substitution Effect Income Effect
What are the 3 problems with the CPI?
Substitution bias, introduction of new goods, and unmeasured quality change
Civilian Labor Force
Sum of people employed and unemployed ages 16 and older.
LR (trend growth) economic growth relies on 2Qs of the FOPs which will result from (2)
Supply side policies and actions taken by firms
a change in the cost of resources (wage rates, rents, raw materials) that causes the SRAS to shift is called a
Supply side shock
Taylor Rule Formula
TFFR= II + EFFR + (1/2 x inflation gap) + (1/2 x Output Gap) TFFR= Target FFR EFFR= Current FFR II= Current inflation rate Inflation gap= II - target inflation gap Output gap= rGDP - Potential GDP
Currency Appreciation
When market value of a country's currency increases relative to the value of another country's currency.
Demand Schedules
Tables that show the relationship between the price of a product and the quantity of the product demanded.
Corporation tax
Tax on companies profits
Taxes on dividends and capital gains.
Taxes on stocks, taxed twice cause corp. income tax, cutting taxes on stocks would increase the supply of loanable funds from households to firms, increasing saving and investment and lowering the equilibrium real interest rate.
Two major causes have driven globalization
Technological advances have eased the movement of goods and info. Changes in economic policy have lowered barriers to trade.
What are some things that could cause a shift in the long-run aggregate supply curve?
Technological progress, price of imported natural resources, and an increase in the capital stock
Trade is a form of...
Technology
Two Components of Productivity
Technology and Efficiency
Common Mistakes people make about the larger economy...
That economic recessions are caused by too little overall demand. That the cure for recessions is a set of government policies that increase demand.
Law of one Price
That good should cost the same in each market if transportation costs are low.
Standard of deferred payment
That money is accepted to settle a debt. Money can serve as a standard of deferred payment in borrowing and lending.
Resource Curse
That over the long run, the presence of natural resources can actually impede economic growth.
An increase in real GDP means...
That the amount of buying and selling of goods and services has increased which increases the amount of quantity of money that people want to hold so they can buy and sell goods easier with money as the medium of exchange at each interest rate. SHIFT R
Why is CPI the most commonly used measure of prices and inflation?
The CPI better reflects the goods and services bought by consumers
Expansionary Monetary Policy
The Fed's policy of decreasing interest rates to increase real GDP. Fed increases the money supply and decreases interest rates.
Lender of last resort
The Fed, makes loans to banks who cannot get the funds from elsewhere.
The Gov. spending multiplier has higher absolute value than the Tax cut multiplier because...
The Gov. spending multiplier does not have the initial cut of taxes from the beginning large amount like the tax cut multiplier.
Deficits can be bad if...
The Gov. spends money on bad things.
Criticism of the CPI
The basket will be very unrepresentative for some people such as students and they will experience different inflation rates (there is a different tracker for pensioners as they have a different pattern of spending)
Failure to enforce the rule of law
The ability of a Gov to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.
People make decisions at the margin
The additional benefit when benefit=cost it is equilibrium. Scattering- Farmers have land on both sides of the river in case of flooding to one side.
Budget deficit =
The amount by which government expenditure exceeds government revenue
Quantity Supplied
The amount of a good or a service that a firm is willing and able to supply at a given price.
Quantity Demanded
The amount of a good or service a consumer is willing and able to purchase at a given price.
Equilibrium in the market of loanable funds determines...
The amount of loanable funds that flow from lender to borrower the real interest rate that lenders will receive and that borrowers must pay.
Open Market Operations (Tool)
The buying and selling of Treasury Securities by the Fed in order to control the money supply. Buy more TS, banks have more money, Buy less TS, banks have less money.
Risk
The chance that the value of a financial security will change relative to what you expect. Ex: buy a stock at $125 sell it at $225
What is the crowding out effect?
The change in aggregate demand that results from fiscal expansion changing the interest rate
Substitution Effect
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.
Information
The collection and communication of information, or facts about borrowers and expectations about returns on financial securities. Ex: Can gather info on what the stock or bond will go to and the likelihood of getting paid back or earning more or less.
Stopping inflation can be difficult because
The control of the money supply is in the hands of the government so stopping inflation is made difficult by politics.
Monetary policy is concerned with
The cost of money (interest rates) and the supply (QE)
Cyclically adjusted budget deficit or surplus
The deficit or surplus in the federal government's budget if the economy were at potential GDP.
Market Demand
The demand by all the consumers of a given good or service.
Savings =
The difference between INCOME & CONSUMPTION
Net Foreign Investment
The difference between capital outflow from a country and capital inflows.
Bank Profit comes from...
The difference of interest they charge people loans and what they have to pay depositors back.
Recession Phase
The phase in the business cycle when production, employment, income decrease. Phase ends in a trough. Lasts usually a few months, usually begins with a decline in spending by firms on capital goods (machinery, factories, buildings) or by households on durable goods. (cars) As spending declines firms lay off workers which lowers income which lowers spending again.
Catch up
The prediction that the level of GDP per capita in poor countries will grow faster than in rich countries
Another important determinant of openness to trade is...
The proximity to major centers of economic activity.
Adam Smith said the most important geographical determinant
The proximity to the ocean or other water ways.
Foreign Portfolio Investment
The purchase by an individual or a firm of stocks or bonds issued in another country
Foreign Direct Investment
The purchase or building by a corporation of a facility in a foreign country.
Purchasing Power
The quantity of goods a consumer can buy with a fixed amount of income.
Labor Productivity
The quantity of goods and services that can be produced by one worker or by one hour of work.
A higher price level means...
The quantity of money required for a given amount of buying and selling has gone up, this increases the quantity demanded/needed at each interest rate. Need more money at hand to buy same goods. Ex: Cars in 1970 cost 3,000 in 2015 cost 30,000. SHIFT R
Simple Deposit Multiplier
The ratio of the amount of deposits created by banks to the amount of new reserves.
Ceteris paribus condition
The requirement that when analyzing the relationship between two variables such as price and quantity demanded other variables must be held constant.
Required Reserves
The reserves that a bank is required to hold based on its checking deposits.
Whether exploiting a given natural resource will result in backward or forward linkages that promote economic growth depends on...
The resource, transport cost, state of economy.
Inputs
The resources (land, labour, capital, enterprise) that go into producing goods and services
Firms determine whether to borrow funds based on...
The return they expect to make on an investment with the interest rate they must pay to borrow the necessary funds.
Law of price
The same good will sell for the same price in both markets.
Multiplier Effect
The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.
BOP defintion
The set of accounts where all transactions between the uk and other countries are recorded
When the Fed increases the money supply the interest rate...
The short term interest rate must fall until it reaches a level at which households and firms are willing to hold the additional money. Ex: Fed puts 50 billion into circulation by buying T. Bond, banks lend out money and lower interest rates, consumers buy short term assets with additional money. MOVEMENT DOWN MONEY DEMAND CURVE.
Spontaneous Order
The spontaneous and unintended emergence of order out of the self-interested actions of individuals; an unintended consequence of human action, with emphasis placed on the word unintended.
Microeconomics
The study of how households and firms make choices and affect markets.
Economics
The study of scarcity and resources as a social science. Study of choices consumers, businesses, and governments make to reach goals with scarce resources.
Public Choice
The study of the economic motives and attitudes of voters and public officials in collective decision making.
Total saving in the economy (S) is equal to...
The sum of private saving and public saving.
Gross Domestic Product
The sum total of the value of all the goods and services produced in a nation
Financial System
The system of financial markets and financial intermediaries through which firms acquire funds from households.
The tropics have a concentration of disease because...
The temperature never reaches freezing allowing for more diseases to survive. Because humans evolved in tropical regions and spent millions of years there, so parasites had time to evolve.
Price stability
When prices rise the value of money decreases cause it buys less. steady inflation rates keep price stable
Natural Capital
The value of a country's agricultural lands, pasture lands, forests, and subsoil resources like metals coal oil
Which one of the following is counted in GDP?
The value of the wood purchased at Home Depot by someone making a homemade table. (Must be market produced (transaction with a buyer and seller) of a newly produced good or service. Use autos are not newly produced. Homecooked meals are not market transactions. Neither is child care.)
Why the aggregate demand curve is sloping down 3 reasons for increase/decrease price levels (Wii=Price)
The wealth effect The interest rate effect The international trade effect
The hope is that buy buying In QE these bonds three things will happen
The wealth effect will be caused as a result of the back of rising bond prices. Also the increased money bank now have could be lent out. Lower bond yields because higher prices and less supply = allows the government/firms to borrow at a lower rate = +I +C +G
Supply for loanable funds depends on...
The willingness of households to save and by the extent of Gov. saving or dissaving
base year
The year which is chosen as the point of reference for comparison with other years
Europe remained politically fragmented because...
Their geography, which is fertile land in certain cores and has numerous natural barriers like mountains and bodies of water.
Quantity theory of money
Theory about the connection between money and prices that assumes that the velocity of money is constant.
What happens when the money supply increases?
There is an excess supply of money that will result in an increase in spending and later inflation
Entrepreneurs can do what to the economic growth...
They come up with new inventions that revolutionize the world and then create new inventions from the money they made off the first invention.
When banks gain reserves...
They make new loans and the money supply expands
Evaluation point wages and negative output gap
They may not fall as of trade unions and minimum wage (rents will have period of denial then drop)
When banks lose reserves...
They reduce their loans and the money supply contracts.
Easiest way for developing countries to gain access to technology is...
Through foreign direct investment where foreign firms can buy domestic firms or build factories.
Open Market Operations
To control the size of the money supply the Fed buys and sells treasury securities (bonds/bills). The more securities the Fed buys from the banks the money supply increases and visa versa. Open Market Operations are easily reversible, easy to implement and can be either large or small open market operations.
Why do we need money?
To make exchange easier and money allows people to specialize and become more productive.
Problems with Transfer Payments (social security)
Too many old people so taxes would have to be unrealistically high to support them with the same benefits as before or now. Most people who will benefit from it did not pay for it. Takes up far too much of budget for other programs.
Savings ratio
Total SAVINGS as a percentage of DISPOSABLE INCOME
Revenue
Total amount received for selling a good or service.
Two primary forms of economic integration among countries
Trade Flow of factors of production
Effect of Geographical barriers to trade
Trade is affected by how far the countries are, if the countries are landlocked, and how big the countries are. Experiments: Closing of Suez Canal, Increased cost in air freight shipping
The only way to create wealth is to move resources from a low value to a high value
Trade is good.
other factors of income per capita
Trade, institutions, culture, geography
Free Trade
Trading between nations without PROTECTIONISM
Barter Economies
Trading goods for goods directly, must be mutual and must both want each others goods.
Human Capital
Training and skills humans possess.
Lighter weighing objects make...
Transportation easier
Substitute Goods
Two or more goods that satisfy a similar need, so that one good can be used instead of the other. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.
Top to importers of British G&s
US or Germany
High employment
Unemployed workers decrease GDP below its potential level. Keeping employment steady keeps economy well off.
Structural Unemployment
Unemployment because they don't possess the skills employers want. Ex: phone operators because of better phone tech. Usually a long time
Natural Rate of unemployment
Unemployment cause of certain levels of structural/frictional unemployment.
Underemployment
Unemployment cause scarce resources are not put to their best uses.
Nominal Exchange Rate
Value of one country's currency in terms of another country's currency. Determines how many units of foreign currency you can buy with $1.
Basic Values
Values that would prohibit certain actions if long term outcome is unfavorable.
Allocative Efficiency
When production is in accordance with consumer preference. Benefit=Cost.
Market Equilibrium
When quantity demanded equals quantity supplied.
Compute baskets cost
Use data to calculate the cost of basket goods at a set time.
Allocative Efficiency
Use resources to make goods we want most.
Gov. Policy can help increase the accumulation of knowledge capital in 3 ways.. (PSS)
Using Patents and copyrights Subsidizing research and development Subsidizing Education
Discount Policies (Tool)
Using discount loans and rates to banks.
Velocity Formula
V=PxY/M
Budget Deficit
When the Fed Gov.'s expenditures are higher than its tax revenues.
A market economy leads to a better allocation of resources
Voluntary trade results in benefit for both or else they wouldn't trade. Will lead to more efficient economy.
Wars and Revolutions
Wars make it impossible for countries to accumulate capital or adopt new technology.
Aggregate Demand slopes for three main reasons
Wealth Effect Interest Level Effect International Trade Effect
Countries with high capital are...
Wealthy
Open Economies
What almost all economies are today, have interactions in trade and finance with other countries.
Federal Gov. purchases
When Gov. purchases a good or service they receive the good or service in return. Ex: Aircraft carrier or secret service agent. Purchases have been falling since 1950.
Capital Outflow
When an investor in the U.S buys a bond in another country or government builds a factory in another country.
Capital Inflow
When another country builds a factory in the U.S or when an investor invests in a U.S bond.
How changes in openness affect growth
When countries open up more to growth they grow more. When countries restrict opening up trade their growth lowers.
Product efficiency
When goods and services are produced at the lowest possible cost.
Demand Curve for money slopes downward cause...
When interest rates on Treasury Bills and other financial assets are low, the opportunity cost of holding money is low, so people hold a higher quantity of money because they don't make as much money with Treasury Bills with low interest. Visa Versa
Inflation
When the economy's overall price level is rising.
Discretionary Fiscal Policy
When the government takes action to change spending or taxes.
Currency Depreciation
When the market value of a country's currency decreases relative to the value of another country's currency.
How interest rates affect Net Exports
When the value of the dollar rises, households and firms in other countries will pay more for goods produced in the U.S, and U.S households and firms will pay less for goods produced in other countries, this makes imports increase and exports decrease, causing a decrease in net exports. and VISA VERSA
Behavioral response
When workers change their actions as a result of a tax change.
Centrally Planned Economy
Where Government decides how economic resources will be allocated.
Market Economy
Where decisions of households and firms allocate economic resources.
Poverty/Unemployment Trap
Where individuals receive more money from benefits than from working
Mixed Economy
Where most economic decisions are by buyers and sellers but government plays a significant role.
Current account deficit
Where the VALUE of imports exceeds that of exports
Regressive Tax
Where the marginal tax rate falls as income rises
Demand for loanable funds depends on...
Willingness of firms to borrow money to engage in new investment projects such as building factories or R&D
Domestication of agricultural plants and animals that formed agricultural economies
With large size of Eurasia comes more plants and animals that can be used for agriculture which leads to more efficient food production, denser populations, and advanced civilizations.
Any increase in tech means an increase in capital because...
With new technology, more people want to use it and is not subjected to diminishing returns.
Participation rate
Workforce/ Working population *100
what is the equation for GDP?
Y = C + I + G + NX
Calculating growth rate formula
Y1/Y0-1=G Y0= value of base year Y1= value after 1 year
Aggregate Demand Curve components Y=
Y= C + I + G + NX
Tax Money Multiplier Formula
Y= Tx - MPC(1-MPC) Tx= change in tax or tax income
GDP Formula
Y=C+G+I+(X-M)
Gov. Purchases multiplier formula
Y=G/(1-MPC)
Per worker production function formula
Y=f(K,T) f=function k=capital per worker t=tech.
The Tax Cut multiplier formula
Y=tax cut x MPS
LRAS is assumed to be vertical at
Yp
The maximum capacity of the economy without inflation is
Yp
Foreign Direct Investment
a capital investment that is owned and operated by a foreign entity
The availability of...
abundant land drove most economic growth in the Americas
supply side policy
action by gov designed to promote market force in order to increase economic growth of shift LRAS/PPF outwards or increase productive capacity
What is the multiplier effect?
additional shifts in aggregate demand that result when fiscal policy increases income and thereby increases consumer spending
if something is measured in constant prices (measure in terms of the prices prevailing in one year) then it has been
adjusted for inflation (more relevent)
what is the production function
af( L, K, H, N)
aggregate supply
af( L, K, H, N) (labor, capital, human capital (skills), natural resources.
What happens whe the FED sells bonds?
aggregate demand decreases
What happens when the FED buys bonds?
aggregate demand increases
What would cause price levels to rise in the short run?
aggregate demand shifts right or aggregate supply shifts left
in a perfectly competitive market
all goods are exactly the same, buyers & sellers so numerous that no one can affect market price each is a "price taker"
Fiscal policy is concerned what type of government expenditure
all government expenditure (current government spending (wages), social capital, transfer payments)
What are loanable funds?
all income that is not used for consumption or government expenditures
Medium of Exchange
an accepted method of payment for goods and services
Double Coincidence of wants
an economy that relies on barter requires the unlikely occurrence that two people each have a good or service that the other wants
Budget surplus
an excess of tax revenue over government spending
what is an externality?
an external impact on the environment where economic efficiency may be enhanced by government intervention
current account
balance of payments between imports and exports (trade in goods and services)
when tax revenues intersect with government spending the government is said to have a
balanced budget
What are demand deposits?
balances in bank accounts that depositors can access on demand by writing a check
QE is ineffective if
bank then do not lend the money out in fear of creditors defaulting
How do banks create money in a fractional reserve banking system?
banks create money when they make loans
Jared Diamond in Guns, Germs, Steel says that Europeans were able to develop and take control of the Americas, Australia, and Africa because they...
benefited from geography in many ways.
Government borrow through selling
bonds
Treasury Securities are AKA
bonds
rapid growth will cause .... to develop which will put pressure on .... and cause .... to halt
bottlenecks and inflations and cause expansion to halt (as limited workers = rise in wage, limited land = increased rents)
fluctuations in economic activity, such as employment and production
business cycle
What are short run economic fluctuations called?
business cycles
The created money from QE increase the quantity of money in the economy by
buying second hand government bonds from financial institutions
how do rational people make decisions at the margin?
by comparing the marginal costs and benefits of each decision
how does money act as a store of value?
by providing a means of transferring purchasing power from the present to the future
How does money act as a medium of exchange?
by providing an accepted method of payment for goods and services
how does money act as a unit of account?
by providing buyers and sellers a common reference point for valuing goods and services
Loanable funds model of the interest rate is concerned with...
concerned with long term real rate of interest, determined by the demand and supply for loanable funds
Monetary policy EV. Effects of change of interest rates
can take up to two years
Injections into circular flow of income =
capital investment + government spending + exports
A index number is useful it you want to show
change in a relative value at a particular point in time
what causes a change in quantity demanded?
change in price
what causes a change in quantity supplied?
change in price
what causes a movement along the demand curve?
change in quantity demanded
a movement along a fixed S curve
change in quantity supplied
what causes a movement along the supply curve?
change in quantity supplied
a shift in the supply curve, occurs when a non price determinant of supply changes
change in supply
Fiscal policy can affect AD (provide demand stimulus) and can be used to (it is one of the two instruments that can do this, this other is monetary policy)
change pattern of spending and redistribute wealth (through different rates of tax)
Money Neutrality
changes in the quantity of money only impact nominal prices, not production
Wealth affect, housing as example allow more credit to be taken out as house can be used as
collateral (it also increases consumer confidence)
Bank rate is the rate at which
comercial bank borrow overnight from the BOE
What kind of money is a gold coin considered to be?
commodity money
The size of the city of London's financial services gives if a
comparative advantage (Surplus of services in BOP)
Investment allows economy to be more
competitive
If inflation in the Uk is higher than in other countries the Uk will become gradually less
competitive (Exports fall - AD and GDP fall - unemployment)
a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price
competitive market
two goods for which an increase in the price of one leads to a decrease in the demand for the other
compliments
one way to measure the economy's inflation rate is to....
compute the percentage increase in the GDP deflator from one year to the next
Another word for capital consumption is
depreciation
If you are very leveraged (Uk government) then you have a high
debt to income ratio
increase of goods price =
decrease in purchasing power = real consumption falls (also less international competitiveness)
demand for steel is ...... from the demand for cars
derived
In credit crunch loan to value or loan to income ratios will be
decreased
Decreases in price cause
decreases in the quantity supplied
If the money supply grows slower than the real GDP
deflation
a graph of the relationship between the price of a good and the quantity demanded
demand curve
what happens to demand when income increases for an inferior good?
demand decreases (shifts left)
what happens to the demand curve if the price of a compliment rises?
demand decreases (shifts left)
How do we calculate reserves?
demand deposits - loans
how do we calculate required reserves?
demand deposits x required reserve ratio
what happens to current demand if expected future prices increase?
demand increases (shifts right)
what happens to demand when income increases for a normal good?
demand increases (shifts right)
what happens to demand when population increases?
demand increases (shifts right)
what happens to the demand curve if the price of a substitute rises?
demand increases (shifts right)
inferior good
demand is negatively related to income
for a normal good....
demand is positively related to income
Supply side growth conflicts with other objectives less than
demand side growth
Goals of Fed (monetary policy) (EG, SoM, PS, HE
economic growth stability of Markets Price stability high employment
Evaluation: any change in AD could be offset by another change
economic growth overseas counteracts decrease in business investment
the study of how society manages its scarce resources
economics
Trade is to allow the firms in a country to take advantage of... (Effect on Efficiency)
economies of scale by giving them access to a larger market for their output.
Robert Fogel
economy historian best known for work suggesting that a significant factor in long-run economic growth is improvements in worker health from better nutrition
If withdrawals exceed injections then
economy will shrink (GDP decline = national income decline)
when society gets the most from its scarce resources
efficiency
what is efficiency vs equality?
efficiency is how much a society can produce, equality is how evenly the benefits are distributed
what important tradeoff does society make in regards to the first principle of economics?
efficiency vs. equality
What is real GDP?
is the yearly production of final goods and services valued at constant prices (price from the base year)
Car parts analogy means...
is to get the economic details right so that producers have both the knowledge and the incentive to produce the "right" mix of outputs.
Disposable income _______________.
is total income minus taxes.
What do we assume about government spending in regards to aggregate demand?
it is fixed by government policy
What is the slope of the aggregate supply curve in the long run?
it is vertical
Why does a decrease in the price level increase the quantity demanded?
it raises the real value of money and makes customers wealthier, encourages greater spending on investment goods, and stiumulates net exports
What does the crowding out effect do to aggregate demand?
it reduces the increase in aggregate demand
in the short run, when inflation falls, what happens to unemployment?
it rises
What happens to the aggregate supply curve if the price level is higher than expected?
it shifts right
How will velocity be effected if money changes hands more frequently?
it will rise
If the money supply increases by 5%, then what would happen to nominal GDP?
it would also rise by 5%
What would an increase in the money supply do to prices and GDP in the short run?
it would cause them to rise
what does a country's standard of living depend on?
its ability to produce goods and services
Ways the fiscal policy affects supply side
labor incentives, capital spending to create best environment for business, funding of R&D and investment in human capital.
House price decrease is particularly important as it makes up a
large proportion of income
the claim that the quantity demanded of a good falls when the price of a good rises, other things equal
law of demand
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
law of supply
Increase in AD many not be as much as expected because
leakages from the circular flow in form of savings, imports, taxation
Why is Substitution Bias a problem for the CPI?
the CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive (overestimates inflation)
Why is introduction of new goods a problem for the CPI?
the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced (overestimates cost of living)
what gives a person market power?
the ability to influence market prices
Usually, the short run aggregate supply curve only shifts in response to what?
the aggregate demand curve
What does fiscal policy influence in the short run?
the aggregate demand for goods and services
Weighting in the CPI index reflects
the amount of income spent on it
What is private saving?
the amount of income that households have left after paying for their taxes and consumption (Y-T-C)
What is the money multiplier?
the amount of money the banking system generates with each dollar of reserves
fluctuations in economic activity, such as employment and production
the business cycle
Hayek argued that distortions in the prices of capital goods in relation to consumer goods are...
the chief source of booms and busts. The reason has to do with the central role of one particular set of prices: interest rates.
What tells us that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation?
the classical dichotomy
What does the slope of the aggregate supply curve in the long run represent/indicate?
the classical dichotomy (it indicates monetary neutrality)
