econ final

The crowding-out model implies that restrictive fiscal policy will ________ real interest rates

The crowding-out model implies that restrictive fiscal policy will reduce real interest rates

What affects the price of internationally traded commodities?

The forces of supply and demand in the world market. This world price affects the market price a god is sold for in individual countries.

Elastic goods

When a small change in price leads to a large change in quantity demanded and substitutes are readily available.

Negative Externalities

When actions of an individual/group harm the property of others without consent and when property rights are unclear or poorly enforced.

The benefit of a subsidy will go primarily to buyers when the:

demand for the product is highly inelastic and supply is relatively elastic.

Formula for Labor Participation Rate

# in the Labor Force/Civilian poplation

Formula for Rate of Unemplyment

# unemployed/# in the labor force

Equation for calculating the price of elasticity of demand

% change in quantity demanded/% change in price.

Formula for calculating the rate of inflation for a given year.

(CPI current year - CPI last year)/(CPI last year) x100

Formula for converting the income for an earlier year into current dollars

(CPI current/CPI earlier) x amount $ earlier

Formula for converting nominal GDP into real GDP

(GDP Deflator 1/GDP Deflator 2) x Nominal GDP2

GDP Deflator formula

(Nominal GDP/Real GDP) x 100

Economists classify business cycles into 4 phases:

1) Expansion: the upward slope. 2) Peak: Top of the slope. 3) Contraction: the downward slope. 4) Recessionary Trough: Bottom of the slope.

Money Market Multiplier formula

1/r

A reduction in the price level will: (4)

1: Increase the quantity of goods and services demanded. 2: Increase the purchasing power of a fixed quantity of money. 3: Reduce the demand for money and lower the real interest rate, resulting in additional purchase. 4: Make domestically produced goods less expensive relative to foreign goods.

Absolute Advantage

When a nation can produce more of a good with the same amount of inputs, or for a fixed amount a goods you need less amounts of inputs.

Formula for rule of 70

70/economic growth rate

Inflation

A change int he general levels of prices as measured by a price index

Factors that increase SRAS (3)

A decrease in resource prices, a reduction in expected inflation, and favorable supply stocks including good weather and a reduction in the world price of a key imported resource.

Normal Good

A good where the demand increases following a rise in income.

Inferior Good

A good you buy less of when your income rises.

quota

A government limit on the amount of a good that can be imported.

Money is 3 things:

A medium of exchange, a store of value, and a unit of account.

Subsidy

A payment to either the buyer or seller of a good.

Short-run

A period of time during which some prices are set by prior contracts and agreements. In the short-run, households and businesses are unable to adjust these prices when unexpected changes occur.

Long-Run

A period of time long enough that people have the opportunity to respond to price changes. It indicates that it will be possible to achieve and sustain a larger rate of output.

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian would be most likely to recommend:

A reduction in taxes, without any offsetting reduction in government expenditures

Disequilibrium

Adjustments that occur when output differs from long-run potential. An unexpected change in the price level will alter the rate of output in the short-run.

An decrease in aggregate demand indicates

An decrease in aggregate demand indicates that a smaller quantity of goods and services are purchased at each price level. Curve shifts leftwards.

Whey might excessive spending hurt an economy's long-run growth rather than help it? (3)

An expansion in government debt implies higher future interest payments and tax rates that limit future growth, recessions reflect a coordination problem and increased government spending will worsen this problem, and more politically directed spending will lead to more rend-seeking and less productivity activity.

An increase in aggregate demand indicates:

An increase in aggregate demand indicates that decision makers will purchase a larger quantity of goods/services at each different price level. Represented by a rightward shift of the AD curve

Crowding-out effect

An increase in borrowing to finance a budget deficit will push real interest rates upward. This will decrease private spending, reducing the stimulus effect of expansionary fiscal policy.

Then why don't we for people to spend more?

An increase in government spending requires either higher taxes or additional government borrowing.

An increase in the discount rate would _____ the money supply.

An increase in the discount rate would decrease the money supply.

An increase in the required reserve ratio would _____ the money supply.

An increase in the required reserve ratio would decrease the money supply because that means banks will have to keep more money on reserves, so there will be less circulating.

Factors the increase LRAS (3)

An increase in the supply of resources, improvement in technology and productivity, and institutional changes that increase the efficient of resource use.

An unexpected decline in the price will:

An unexpected decline in the price will reduce profitability, causing firms to cut back on output and employment.

An unexpected increase in the price will:

An unexpected increase in the price level will improve the profit margins of firms and thereby induce them to expand output in the short run.

As demand becomes more inelastic, more of the burden will fall on _____.

As demand becomes more inelastic, more of the burden will fall on buyers.

Law of Demand

As price falls, quantity demanded rises.

As supply becomes more inelastic, more of the burden will fall on ______.

As the supply becomes more inelastic, more of the burden will fall on suppliers.

3 determinants of elasticity

Availability of substitutes, amount of the share of the budget, and time considerations.

What policies might an Austrian Economist advocate?

Avoid the "boom" with fiscal restraint and stable monetary policy and that it's impossible to "spend" out of a recession.

To be employed you must:

Be 16+, Working for pay at least one hour per week, be self employed, or working >15 hours a week without pay in a family-operated business.

Why can't the money supply be perfectly controlled by the Fed?

Because of Leakages and Injections of currency into the money supply, which changes the impact of monetary policy.

Keynesian Economics

Believed that fiscal policy could be used to maintain a high-level of output and employment. They think that we should spend more in a recession and spend less in a boom.

Trade restrictions that limit the sale of low price foreign goods in the U.S. market:

Benefit domestic producers in the protected industries at the expense of consumers and domestic producers in export industries.

When LRE is present:

Potential GDP: The economy's maximum sustainable output is consistent with its resource base, current technology, and institutional structure. and the economy is operating at full employment.

Formula for calculating GDP

C+I+G+Nx

Who controls interest rates and what's the problem?

Central banks control interest rates, and they make mistakes.

Austrian Perspective

Concerned with long-term growth, not business cycles.

7 Factors that shift demand:

Consumer preferences, income, price of a substitute good, price of a complementary good, demographics, number of consumers in the market, and expected future prices.

Keynesian policy to offset fluctuations in AD

Counter-cyclical policy. The government should plan budget deficits when the economy is weak and budget surpluses when strong demand threatens to cause inflation. In a boom, reduce spending and increase taxes in order to pay back the deficit you had in the recession.

Principle of Comparative Advantage

Countries should specialize by producing the goods in which they have a comparative advantage even if they have an absolute advantage in all goods.

Adam Smith and International Trade

Countries should specialize in the goods they can produce more efficiently than other nations.

M1 includes:

Currency, checking deposits, and travelers checks.

Random Walk theory

Current stock prices already reflect information that is known.

Production Possibilites Curve

Describes the maximum amount of one good that can be produced for every level of production of another.

Trade makes it possible for:

Domestic producers to obtain higher prices for the items they export, and domestic consumers to buy imported items at lower prices.

If a small percentage decrease in the price of a good results in a rather large percentage increase in the quantity demanded, demand is said to be:

Elastic

If the absolute vale of elasticity is >1 :

Elastic

Price floor

Establishes a minimum legal price for a good.

True or False: A price floor below the equilibrium would cause a surplus.

False. It would only cause a surplus if it were above equilibrium.

What counts in GDP?

Final products, production transactions, produced within a country, produced during a specific time period.

What does an elastic curve look like?

Flat, more horizontal.

According to Keynesians, what is the major source of economic instability?

Fluctuation in total spending (aggregate demand).

During an extended inflationary period, the money rate of interest will usually be:

Greater than the real rate.

Alternative Theories of Growth

Growth of population, natural resources, and foreign aid.

Reasons for economic growth

Increase in resource base, advances in technology, improvement in legal system, and working harder now and giving leisure time to produce more.

Factors the increase Aggregate demand (6)

Increases in real wealth, A decrease in the real interest rate, increased optimism of business and consumers about future economic conditions, an increase in the expected rate of inflation, higher real incomes abroad, and a reduction in the exchange rate value of the nations currency.

Aggregate Demand Curve

Indicates the various quantities of goods and services that people are willing to buy at different price levels.

Non-rival

Individuals can simultaneously enjoy consumption of the same product/service.

If the absolute vale of elasticity is <1 :

Inelastic

What's wrong with Keynesian policy?

It is difficult to time fiscal policy in a manner that promotes stability. There is a time lag between when a change is instituted and when it exerts significant impact.

Non-excludable

It is not possible to limit consumption of the goods/services to those who pay for it.

What does the supply curve of money look like and why?

It is vertical because it's established by the Fed and determined independently of the interest rate.

The "General Theory" of John Keynes exerted a major impact on macroeconomics primarily because:

It provided a reasonable explanation of what went wrong during the Great Depression and what could be done to prevent it from happening again.

Short-run equilibrium

Present in the goods and services market where the aggregate quantity demanded is equal to the aggregate quantity supplied.

Policies to promote growth (6)

Legal System, competitive markets, access to money of stable value, minimal regulation, avoiding high tax rates, and trade openness.

International Trade and specialization result in:

Lower prices for imported products and higher prices for exported products.

M2 includes:

M1, savings, time deposits, and money market mutual funds.

Injection

Money that was previously not circulated in the economy suddenly comes out.

Public goods

Must be non-rival in consumption and non-excludable. If a public good is made available to one, it is also made available to others.

formula for finding real rate of interest

Nominal rate - inflation rate

To be unemployed you must be:

Not employed, actively seeking a job, or on layoff waiting to return to a previous job.

Not in the Labor Force:

People who are neither employed or unemployed.

When the demand for a good increases, what happens to its market price and quantity?

Price rises, quantity increases.

Structural unemployment

Reflects an imperfect match of employee skills to skill requirements of the available jobs. When the skills don't match anymore.

Long-run equilibrium

Requires that these decision makers correctly anticipated the current price level at the time they arrived at the agreements.

Fed's 4 tools used to control the money supply

Reserve requirements, open market operations, extension of loans, and interest paid on bank reservers.

4 factors the shift the supply curve

Resource prices, changes in technology, natural disasters, changes in taxes.

Business Cycles

Short term variations in economic growth over time.

Short-Run Aggregate Supply Curve

Shows the quantities of goods and services that domestic firms will supply in response to the level of prices in the market.

When central bankers screw up and set lower interest rates than the market would dictate:

Speculative investments seem less risky, projects which would never find funding at the more expensive market rate get funded. This artificially "creates" jobs and initial pay-offs from these projects look large. But it's the collapse of these bad investments that triggers an economic bust.

What does an inelastic curve look like?

Steep, more vertical.

Fiscal Policy

Tax and spending policy controlled by Congress.

Rule of 70

Tells us how many years it takes for a country's income to double

Natural Rate of unemployment

The "normal" unemployment due to frictional and structural conditions in labor markets. Occurs when the economy is operating at a sustainable rate of output.

How does the AD curve slope and why?

The AD curve slopes downwards to the right, indicating an inverse relationship between the amount of goods and services demanded and the price level.

Which curve do positive externalities affect?

The Demand Curve.

How does the LRAS curve slope and why?

The LRAS curve is vertical because a change in price levels does not affect the quantity supplied in the long-run.

How does the SRAS curve slope and why?

The SRAS curve slopes upward and indicates that an increase in the price level will increase the quantity supplied in the short-run. In the short-run, an unanticipated increase in the price level improves the profitability of firms. They respond to this increased price level with an expansion in output.

Which curve do negative externalities affect?

The Supply curve.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others can produce it.

Actual Tax

The actual burden of a tax

What is the difference between the Fed Budget deficit and national debt?

The budget deficit is the amount by which expenditures exceed revenues in a particular year, while the national debt is the cumulative effect of all past budget deficits.

Pork-Barrel legislation

The bundling of unrelated projects benefiting many interests.

The Multiplier Principle

The concept that an independent change in expenditures leads to an even larger change in aggregate output. Keynesians argue that the multiplier concept shows why market economies tend to fluctuate. Excess demand generates an economic boom while deficient demand leads to a recession.

What does the height of the demand curve represent?

The consumers willingness to pay for a good.

A price index measures:

The cost of purchasing a bundle of goods at a point in time relative to earlier costs.

The crowding-out model implies that expansionary fiscal policy will ________ real interest rates

The crowding-out model implies that expansionary fiscal policy will increase real interest rates

The National Defense Argument

The idea that domestic industry is needed for national defense purposes.

"infant industry" argument

The idea that new industry needs protection so it can mature.

Statutory Incidence

The legal assignment of who pays a tax.

Full Employment

The level of employment that results from the efficient use of the labor force. When they are being used in the most economically efficient way.

Deadweight loss

The loss of the gains from a trade as a result of the imposition of a tax; a loss to both buyers and sellers.

When a government subsidy is granted to the buys of a product, sellers can end up capturing some of the benefit because

The market price of the product will rise in response to the subsidy.

GDP

The market value of final goods/services produced within a country during a year.

Who get's the greater benefit of a subsidy?

The more inelastic side of the market.

Arguments to Justify Trade Restrictions:

The national Defense Argument, the "infant industry" argument, and "dumping"

Property Rights

The right to use, control, and obtain benefits from a resource, good, or service. Provides legal protection from "invaders"

"Dumping"

The sale of goods abroad at a price below the cost of production.

Normative Economics

The study of "What ought to be" that can't be tested and it can't be true or false.

Positive Economics

The study of "what is" that can be tested, and it can be true or false.

National Debt

The sum of the debt of the federal government in the form of outstanding interest-earning bonds.

Aggregate supply

The total amount of goods and services in the economy available at all possible price levels

When the inflation rate of a country is high over a lengthy period of time:

The year-to-year variability in the rate of inflation is generally large.

How are interest rates paid on savings signals? (3)

They show the amount of savings the economy can use, high interest rates signal the entrepreneurs need money and low interest rates tell investors there's enough money already available for investment.

Why might other economics argue that Keynesian policy is ineffective? (3)

Time Problems, The crowding-out effect, and politics.

Special Interest Effect

Trade restrictions almost always provide highly visible, concentrated benefits for a small group of people, but impose widely dispersed costs on the majority of citizens.

Logrolling

Trading Votes

Cyclical Unemployment

Unemployment due to recessionary business conditions and inadequate labor demand. Fewer goods are being produced, fewer workers are required to produce them.

If the absolute vale of elasticity is =1 :

Unitary Elastic

Rational Ignorance Effect

Voters realize that their votes will not be decisive, so they have little incentive to obtain information on issues other candidates.

Inelastic goods

When a change in price leads to only a small change in quantity demanded and few substitutes are readily available.

When an economy is operating below its potential output:

When an economy is operating below its potential output, fiscal policy should be more expansionary. There should be an increase in government purchases of goods and services and a reduction in taxes.

When an economy is operative above its long-run potential output and inflation is a potential problem:

When an economy is operative above its long-run potential output and inflation is a potential problem, fiscal policy should be more restrictive: A reduction in government spending and an increase in taxes.

When will the government undertake projects that are productive and reject those that are not?

When benefits or costs are either both widespread of concentrated.

Frictional Unemployment

When employers are not aware of all qualified available workers, or available workers are not aware of all jobs offered.

Budget Deficit

When expenditures exceed revenue.

Leakage

When someone holds money in their house instead of putting it in the bank.

When the Fed shifts to be a more expansionary monetary policy, it _____ additional bonds, ______ the money supply.

When the Fed shifts to be a more expansionary monetary policy, it buys additional bonds, expanding the money supply.

Positive Externalities

When the actions of an individual/group generate benefits for 3rd parties.

When the money supply increases, it provides banks with _________ reserves.

When the money supply increases, it provides banks with additional reserves.

How does the price of a complementary good shift demand?

When the price of a complementary good increases, the demand for the original good decreases.

How does the price of a substitute good shift demand?

When the price of a substitute increases, the demand for the original good increases.

When does a price ceiling create shortages?

a price ceiling is only binding and creates shortages when it is below the equilibrium price.

When does a price floor create surpluses?

a price floor is only binding and creates surpluses when it is above the equilibrium price.

When the fed sells bonds that are:

decreasing the money supply. Taking money from the people who buy them.

Price ceiling

establishes a maximum price sellers are legally permitted to charge.

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the:

level of aggregate demand required to achieve full employment of resources.

CPI

measures the impact of price changes on the cost of a typical bundle of goods purchased by households.