Economics (Demystified)

Macroeconomics

- Decisions made by nations

Quizzes: All right but two -- Investment spending is the most volatile (changes most dramatically/greatest variation) portion of the GDP.

--Counting Changes in Inventory: Grogs purchased by store in 2009 for $200 are counted in 2009 as $200 in investment; same grogs sold for $300 in 2010 would be represented by a reduction in 2010 inventory by the same $200, and $300 would instead appear in consumption. For a total change of +$100 in 2010 GDP. This means that the GDP includes the value added from the service of selling grogs. --Net exporters export more goods than imports; net imports import more goods than exports.

THE MODEL OF AGGREGATE DEMAND AND AGGREGATE SUPPLY

Aggregate Supply and Aggregate Demand tell us how the price level is determined and help us understand the fluctuations that we see in unemployment and GDP. On Macroeconomic graphs: GDP axis = output axis; output=GDP

Liquidity of Money Supply

Fed Reserve: M1=cash (curency) outside of banks + coins + checking deposits + travelers checks; considered by the fed to be MOST LIQUID; directly convertible as a medium of exchange M2=M1+ savings accounts + small time deposits (CD's under $100k) money market deposits + money market mutual funds; not directly convertible, but easily convertble, thus M2 aka "near money"

Midpoint Method of Computing Elasticity of Supply between two points

Just use his formula: Es= (Q1-Q0/P1-P0) X average of P/average of Q

Four Economic Resources

Labor (L) - collective size and effort of a nation's workforce Capital (K) - manufactured productive assets (buildings, tools, and machinery Land/Natural Resources (l)- nation's stock of minerals, timber, fisheries, water, and so on. Entrepreneurship/Technology (A)- nation's ability to creatively combine L,K, and l to produce goods and services *money is not a resource in economics * a resource is sthg used to CREATE OTHER THINGS OF VALUE; money just facilitates the exchange of these things

Product Market

any mechanism through which buyers and sellers meet to exchange good and services

Law of Diminishing Marginal Utility

assumes that buyers receive less and less additional utility from each additional unit they consume.

Utility (measured in utils)

how economists measure happiness that consumers get from consumption by comparing happiness of consuming one thing to another assumes that consumers seek to maximize utility (spending all of their money to do so!)

Price Level

like equilibrium price in microeconomics, price level is the AVERAGE OF ALL THE PRICES OF GOODS AND SERVICES IN AN ECONOMY; the corollary (result) in Macroeconomics Significance of price level not very important unless we know the rate that it changes (e.g. Each citizen in Poland had zloty in the millions, changed to new zloty for transaction purposes)

Summary:

-- msrs of nation's macroeconomic labor market important indicators of strength of economy -- adults classified as employed, unemployed, or not in the labor force --unemployed not the same as not in the labor force because the unemployed are actively seeking (willing and able) work --UR=no. of employed persons as percentage of entire labor force --if economy producing at potential level of output, labor markets are at "natural rate" of unemployment --Economists see unemployment as labor markets not clearing b/c wages can't be adjusted downward to the equilibrium (where supply meets demand for labor) possibly b/c of min wage laws, collective bargaining for fixed wages/ and theory of efficiency wages. --if unemployment too low, then firms have to pay more for workers and will pass costs along to purchasers of goods and services and prices will start to rise (i.e. inflation).

3 Major Goals of Macroeconomic Policy:

1) Price Stability 2) Appropriate amt of unemployment 3) economic growth (ability of economy to produce more goods and services)

Two Factors that Influence Price Elasticity of Supply

1. Availability of Inputs ( the more/ease of employing inputs of Labor, Land, etc., the more elastic) 2. Time (the more time available, the more elastic) 1

Theories of Unemployment: Why the Labor Market Does Not Operate Efficiently

1. Existence of minimum wage laws keeps wages from adjusting downward if they are binding/effective (i.e. example of gov price floor) 2. Labor unions/Groups of Employees are able to negotiate wages above equilibrium 3. "Efficiency Wage Theory": Firms pay more for a worker than they have to in order to disincentivize the worker of finding a new employer, as a way to avoid turn-over and increasing pay even more . . .

How to Solve for Percentages in Economics MUST MEMORIZE METHODS FOR BASIC MATH AND PRACTICE ON LOTS OF PROBLEMS! Percentages are commonly and frequently used in calculating elasticity and changes in economic output, growth and inflation, and unemployment. Economists are more interested in the RELATIVE change in something RATHER THAN than the ACTUAL change. To control relative differences without always knowing actual differences, we compute a percentage.

1. Solve for Part: (Part/whole) x 100 = percentage A box of 50 chocolates has 7 filled with nougats. What's the percentage of nougat-filled chocolates in the box? 7/50 x 100 = .14 x 100= 14% Remember that in long division to divide 50 into 7, add 2 zeros after the decimal point that follows the seven as because 50 has two places, not one. 2. Solve for actual number something was: Part=(percentage/100) x whole A box of 80 chocolates and an ad saying 15% nougat-filled. How many are nougat filled? Part= 15%/100) x 80 = .15 x 80 = 12 3. To find the percentage change in value: [(New value - old value)/old value] x 100 = % change from old to new If Max originally had an allowance of $4, and he gets a $5 raise, so that he now gets a $9 weekly allowance. The new value here is $9 and the old value is $4: [($9 - $4)/$4] x 100 = ($5/$4) x 100 = 125% change from old to new

Indicators of Elasticity of Demand Sellers can look at general tendencies that seem to predict whether products have elastic or inelastic demand:

1. Substitutes for the product: the more substitutes there are, the more elastic the demand b/c consumers will have an elastic response because they can easily find alternative products; the converse also true, the fewer substitutes, the less elastic the demand 2. Whether the product is a luxury or a necessity: the less necessary the item, the more elastic the demand 3. Share of income spent on good: the larger the expenditure relative to one's budget the more elastic the demand b/c buyers will notice the change in price more 4. The amount of time involved: the longer the time period involved after a price increase, the more elastic the demand becomes as consumers discover new substitutes for the product or go without. *Note: when discussing inelastic demand (like gasoline), quantity demanded can still decrease as price rises even though the demand is still quite inelastic

Opportunity Cost

1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. 2. The difference in return between a chosen investment (or other purchase) and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%). Economists believe you can use price to estimate the value of an item. However, opportunity cost is more than just price in many cases. It represents the "true costs" of the sacrifice (i.e. the dollar price of the thing given up, plus the time needed in the transaction, etc.)

Determinants of supply

1. The prices of inputs used to produce the product (lower prices, curve shifts right) 2. Production Technology (improvements shift curve right) 3. Prices of Related Goods and Services (the firm can produce a related good, eg. fish sticks instead of chicken nuggets, etc.) (if price of fish sticks rises, firm earns more money if decreases supply of chicken nuggets, shift left) 4. Taxes and subsidies (taxes behave as a cost, shift left, subsidies reduce costs, shift right) 5. Price Expectations (e.g., farmers withhold crops in expectation of higher prices) 5. Number of Firms/Producers (more firms shift to the right)

Expenditures Approach: GDP=C + I + G + ("X"- "M") Consumption: amt of money individuals and households spend on FINAL GOODS AND SERVICES --sometimes broken down further into durable (last longer than 3 years) and non-durable goods (less than 3 years) --BUT household purchases are counted INVESTMENT SPENDING not consumption Investment: amt of money spent on new business equipment, factories, software, etc; also new houses --broken down into residential (houses, apartments, etc.) vs non-residential investment (office buildings, machinery,etc) and changes in inventories.

Government: amt of money spent by local, state, and federal governments on purchase of goods and services (e.g. paying gov employees or purchasing missiles); does not include gov spending like social security check b/c that is a mere transfer of money and was not necessary for production Exports: value of gods and services produced in the US for sale outside the US is included in the GDP Imports: not included in the GDP b/c goal of GDP is to capture production not consumption *Note: only final goods are counted and they are counted in the year in which they were produced; resold goods not counted this year as they are counted in year produced; goods bought sold illegally are never included (during prohibition alcohol was not counted, even though it was sold a lot on the black market).

Law of Demand: Inverse Relationships Between Prices and Quantity Demanded (i.e. consumption)

Holding all other factors constant (ceteris paribus), a decrease in the price of a good will cause consumers to increase their consumption of that good, and . . . INVERSELY If prices increase, consumers will reduce the quantity demanded (consumption). BUT There is always a limit to the maximum consumed because of diminishing marginal utility - the point where total utility begins to reduce and consumption ends.

Aggregate Supply (SRAS and LRAS) Difference Between SRAS and LRAS: Essentially, the SRAS assumes that the level of capital is fixed. (i.e. in the short run you can't build a new factory). However, in the short run you can increase the utilisation of existing factors of production, e.g. workers doing overtime. In the short run an increase in the price of goods, encourages firms to take on more workers, pay slightly higher wages and produce more. Thus the SRAS suggests an increase in prices leads to a temporary increase in output as firms employ more workers. The short run aggregate supply is affected by costs of production. If there is an increase in raw material prices (e.g. higher oil prices), the SRAS will shift to the left. If there is an increase in wages, the SRAS will also shift to the left.

How to Know which ones to use? If showing a change in wage costs or oil prices, I would use a SRAS. For showing Long run economic growth, and an increase in capital stock and investment I would show a shift in LRAS. Keynesian view of LRAS: A further complication is that there are different views of the LRAS. The Classical view is an inelastic LRAS. The Keynesian view suggests it is elastic at a point up to inelastic. In a sense the Keynesian view is a combination of the short run aggregate supply and long run. The Keynesian LRAS shows that there is a point in the economy of spare capacity where firms can use more. There also comes a point where full capacity is reached. Slope: 1) SRAS is upward sloping, which means higher levels GDP supplied are associated with higher price levels, in the short run, even though it doesn't make sense intuitively, three main theories for this: a) Misperceptions theory b) sticky price theory (don't respond quickly) c) sticky wage theory (contracted for, etc.) 2) LRAS is vertical: In the long run, prices have had a chance to fully adjust and the level of production is independent to the price level Shifts: 1) LRAS shifts when CONDITIONS change for inputs to production (land, labor, capital, and technology); when the stock of these increases - - LRAS shifts to the right; when the stock of these decreases --LRAS shifts to the left 2) SRAS shifts when PRICES of one or more of inputs to production change - - if labor, etc. increases, then SRAS shifts to the left, short run supply decreases; if labor etc decreases, supply increases (shift to the right)

Recessionary (deflationary) and Inflationary Gaps RECESSIONARY GAP: A term routed in macroeconomic theory that summarizes the situation where an economy is operating at below its full-employment equilibrium. Under this condition, the level of real gross domestic product (GDP) is currently lower then it is at full-employment, which puts downward pressure on prices in the long run. A recessionary gap happens when an economy is falling into a recession, which is defined as a lower real level of income (as measured by real GDP) then the full-employment level. An economic recession can happen in a number of ways, including a higher nominal exchange rate, which will reduce net exports and domestic income, and a large reduction in consumer expenditure or investment due to a decrease in take home pay by workers.

INFLATIONARY GAP: A macroeconomic condition that describes the distance between the current level of real gross domestic product (GDP) and full employment (long run equilibrium) real GDP. The inflationary gap is so named because the relative increase in real GDP causes an economy to increase its consumption, which causes prices to rise in the long run. An increase in consumption expenditure, investments, government expenditure or net exports will cause real GDP to rise in the short run.

Savings, Investment and Interest Rate

ANY INVESTMENT IN US MUST COME FROM US SAVINGS , unless we have an influx of savings from another country = SAVINGS-INVESTMENT IDENTITY The savings identity or the savings-investment identity is a concept in national income accounting stating that the amount saved in an economy will be the amount invested in new physical machinery, new inventories, etc. Liquidity Preference Explanation: According to the liquidity preference theory, an increase in savings would decrease the demand for money; since people would need less money on hand to carry out transactions (lowered consumption) and this would lead to and INCREASED INTEREST RATE and an INCREASE IN INVESTMENT IN THE SHORT-RUN. Market for Loanable Funds Take: An increase in the savings rate would lead to an increase in the supply of loanable funds that will lower the interest rate and increase the quantitity of funds borrowed in the economy. Great for businesses UNLESS government "crowds" them out, by borrowing all or many of the funds and driving up interest rates! *Note: Many economists believe liquidity preference theory (i.e. money market model) should use NOMINAL interest rate and REAL interest is best to use in the loanable funds model (abbreviated "r"). --nominal rate: i =real rate + inflation --IN SHORT-TERM, WE ASSUME NO INFLATION AND SO THERE IS NO DIFFERENCE BETWEEN THE NOMINAL AND REAL RATES OF INTEREST (and thus textbook uses only "i" and not "r" to denote interest.

Price Elasticity of Supply Tells us how responsive quantity supplied is to a change in price. STEEPER SUPPLY CURVES WILL EXHIBIT LESS ELASTIC RESPONSES TO A GIVEN PRICE CHANGE.

If supply is elastic, producers can increase output without a rise in cost or a time delay If supply is inelastic, firms find it hard to change production in a given time period. The formula for price elasticity of supply is: Percentage change in quantity supplied divided by the percentage change in price: (Es+%changeQs/%changeP) When Pes > 1, then supply is price elastic (unit normal curve) When Pes < 1, then supply is price inelastic When Pes = 0, supply is perfectly inelastic (vertical supply curve) When Pes = infinity, supply is perfectly elastic following a change in demand (horizontal supply curve) What factors affect the elasticity of supply? 1) Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand. --The supply of goods and services is most elastic during a recession, when there is plenty of spare labour and capital resources. 2) Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand - supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity in the market. 3) The ease and cost of factor substitution: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. A good example might be a printing press which can switch easily between printing magazines and greetings cards. 4) Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. --In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. --In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place.

The Law of Supply

If we hold all other factors constant (ceteris paribus), an increase in the price of a good will cause suppliers to increase their production of that good. Supply curve for this is upward sloping. Many factors (or determinants) might affect supply. They can change the location of the supply curve. Remember: distinction between change in quantity supplied and a change in supply. --When price increases, there is an upward movement along the fixed supply curve --But if one of the determinants changes, the entire supply curve will move to the right or the left.

Excise Taxes

In addition to price controls, the government can affect the price of a product by levying a per-unit tax (i.e. excise tax on it; usually for goods like gas, tobacco and alcohol. --tax affects price paid by consumers and after-tax price received by producers; equilibrium quantity, and total surplus. --But, unlike with price controls, an additional outcome of an excise tax is that the government collects tax revenue. --creates a surplus because fewer people buy at the new higher price and thus, prices must fall to clear this surplus and fewer units will be bought, because price still will likely not fall enough to get to equilibrium, this encourages producers to produce less so that the impact of the tax on consumers and producers is that BOTH CONSUMER AND PRODUCER SURPLUS HAS FALLEN AND DEADWEIGHT OCCURS although Government has gained some revenue. --Although inefficient, economists do not always condemn excise taxes since there are often good social and economic reasons for them. *Note: While sometimes the consumers bear the cost of the tax (aka TAX DIVISION/TAX INCIDENCE), who bears the cost actually DEPENDS UPON THE RELATIVE ELASTICITIES OF DEMAND AND SUPPLY: --If demand is relatively less elastic than the supply, the consumers will bear a larger share of the excise tax --If demand is relatively more elastic than the supply, the suppliers will bear a larger share of the excise tax

Phillips Curve and Stagflation

In macroeconomics, the Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment. GREAT "EXPECTATIONS": Stagflation, a portmanteau of stagnation and inflation, is a term used in economics to describe a situation where the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. In 1960's people began to expect inflation and factor it into their contracts, etc., this bumped up natural inflation additionally by whatever they agreed to in wages, 3%, for example, and resulted in serious stagflation that began to emerge in the 1970's. Then in 70's people began to "expect" worsening inflation/stagflation and factored that into wages . . . and so on . . .

Quantity Theory of Money (Classical Theory)

In monetary economics, the quantity theory of money states that money supply has a direct, proportional relationship with the price level. For example, if the currency in circulation increased, there would be a proportional increase in the price of goods. You can find the amount of money in circulating by multiplying the price level, P, by the real GDP, Y, is equal to the dollar amount of the money supply multiplied by its velocity: MV=PY Since P always adjusts in classical theory, it can change, but Y is fixed in the short term. Also assumes velocity of money is relatively stable and reflects spending habits and existing technology in money supply: IMPLICATION: IF MONEY SUPPLY IS CHANGED, THE ONLY EFFECT WILL BE AN INCREASE IN PRICE LEVEL (that is, inflation) WITH NO EFFECT ON THE VARIABLE WE REALLY CARE ABOUT "Y". In other words, according to classical theory, money is neutral and has no real variables (real GDP or unemployment) and probably, according to the classical theory, there is really no such thing as an SRAS curve, the only supply curve in the macroeconomy is the LRAS.

Labor Force Participation Rate (LFPR) *Note: Number of unemployed persons are counted in Labor Force! (a little counter-intuitive)

Indicates percentage of population participating in labor market by working or trying to find a job LFPR=labor force divided by CIVILIIAN, NON-INSTITUIONALIZED, WORKING AGE POPULATION (Formula attached only says "adult population" and is not technically accurate; CNIWAP is more accurate): 1) indicates how full employment rate is changing over time and the more people participating in labor force, the more potential for jobs over time 1) indicates changes in composition of labor force over time (i.e. LFPR lowers if more people stay in school, are jailed, not willing to look for work/retired, in the military,etc. In 2011 US LFPR was 63.9%; for past 30 years hovered around 64-67%; but in 1940 only 48% - increase due to women particpation esp. as result of single-earner, household has almost become the norm . . . (see Census Bureau stats below)

Tax multiplier and Problem Sets Tax multipliers are based on the population's willingness to consume. The marginal propensity to consume, or MPC, is a measure of that willingness. It is defined as the amount of an additional dollar of income that a consumer will spend on goods and services. The MPC can have a value between 0 and 1. A small MPC represents a large amount of savings and a small amount of consumption. A large MPC represents a small amount of savings and a large amount of consumption. When a tax decrease occurs, consumers will spend part of the money and save part of it. Therefore, the actual change in national income as a result of a change in tax policy is equal to [(+ or -) change in taxes * - MPC] / (1 - MPC). The resulting number is called the tax multiplier.

Let us work through a couple of examples. The first one will deal with tax policy. What is the total change in output from a tax cut of $20 million if the MPC is 0.8? To solve this, simply plug these numbers into the tax multiplier, that is [(change in taxes) * -MPC] / (1 - MPC). This becomes [($-20 million) * -0.8] / (1 - 0.8) = $80 million. This means that a $20 million tax cut will yield an $80 million increase in output. What is the process this equation models? Simply put, when consumers have more disposable income, they spend some and save some. The money that they spend goes back into the economy and is saved and spent by somebody else. This process continues, and eventually the final change in output created by a tax cut is significantly larger than the initial tax cut itself. The second example we will work through deals with government spending policy. What is the total change in output from an increase in government spending equal to $20 million if the MPC is 0.8? To solve this, simply plug these numbers into the government spending multiplier: (change in government purchases) / (1 - MPC). This becomes ($20 million) / (1 - 0.8) = $100 million. A $20 million increase in government spending will cause a $100 million increase in output. When government spending increases, the populace, as the recipient of this spending, has more disposable income. When consumers have more disposable income, they spend some and save some. The money that they spend goes back into the economy and is saved and spent by somebody else. This process continues. Eventually the final change in output created by a tax cut, as in the previous example, is significantly larger than the initial tax cut itself.

Income Approach: NI=Wages + Rents + Interest + Profits

NI=National Income Wages: wages, salaries, and benefits earned by labor (also social security and unemployment) Rents: rental income that households receive from property and capital; also patents and copyrights Interest: interest income that households receive from providing money to corps in stocks or bonds; but interest paid by governments or by households to businesses like for mortgages or car loans Profits: amt of money firms have left over after paying wages, rent, interest, and other expenses. While Expenditures approach is simplest, using either will get you to roughly the same result, which should be no surprise considering income=expenditures in THE CIRCULAR FLOW MODEL.

Real and Nominal GDP The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP.

Nominal GDP is adjusted to real GDP (aka "constant dollar GDP" by calculating the value of current production , but using prices from a fixed point in time the base year. Figure shows calculation (and also another tool called the GDP deflator) using Year 1 as base year. We can get the percentage that the GDP Changes from year to year by: new GDP value - old GDP value/old GDP value X 100

Above and Below the Equilibrium Price: Surplus (i.e. Excess Supply) and Shortage (excess demand)

But if price in the problem above were to change, acording to table in textbook to $400 (i.e. above the equilibrium price) the quantity supplied would exceeds quantity demanded= EXCESS SUPPLY (i.e. SURPLUS) If it dropped to $150 as in the chart (i.e. below the equilibrium price, the quantity demanded would exceed the quantity supplied and there would be an EXCESS DEMAND (i.e. SHORTAGE) So, in sum, there is only one price that would CLEAR a market of either a surplus or a shortage = MARKET CLEARING PRICE (a.k.a equilibrium price). ATTACHED GRAPH IS A DIFFERENT PROBLEM.

Quiz: All right but one 1. When demand curve shifts, it changes both the price and the quantity in the same direction. 2. A price ceiling must be set below the equilibrium price to be effective. If set above, there will be no surplus or charge as the market will continue to operate naturally and the control has no effect. 3. Total surplus is maximized when the competitive market is in equilibrium, thus any sort of price control will necessarily decrease total surplus. 4. If a key input in production changes (such as price of leather goes up for leather ball producers) the supply curve will shift to the left, causing price to rise and quantity to fall. 5. If a lower price of a good and a higher quantity occurs simultaneously in the market, the supply curve shifts right and demand would stay constant.

6. The triangle of consumer surplus for market equilibrium price is the difference between highest point on the demand curve and price actual paid. Then A=(b)(h)/2 7. A price floor creates a surplus in the amount of the difference between the units supplied and the units demanded. The deadweight loss is the area of a triangle below the demand curve and above the supply curve and between the new quantity and the equilibrium quantity. A=(b)(h)/2. 8. If both price and quantity fall, the only shift that produces this outcome is a decrease in demand. 9. A perfectly inelastic demand curve is vertical. When the supply curve shifts upward by $T, the new equilibrium price will be exactly $T higher. 10. all gov interference with market equilibrium quantity cause deadweight loss.

T-Account: How the Banks Create and Show Money

A T account keeps track of a bank's liabilities (obligations to pay out money) and its assets (things it holds of value). For a bank, any deposit an individual makes is a liability, bc that person may withdraw it at anytime. But a loan is something that has value, as it is income that the bank will be taking in or it may be sold to other financial institutions. Called a T-account because of the way it looks! Banks are required to ALWAYS REMAIN SOLVENT, so the T-account must always show liabilities do not exceed assets. Money Multiplier to multiply by the Base (initial amount of money in the economy before it gets to Fed or reserves): Mathematical shortcut to figuring out how much the loan will add to the money supply if the bank only keeps the required reserve on hand and all loans are re-deposited (not stuck under the mattress): MM=1/reserve rqmt reserve rqmt is 20% MM=1/.2=5 X 1000 (initially in money supply, then deposited and 20% kept or reserve) = $5000 for the money supply

Fractional Reserves:

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system. Also known as "fractional deposit lending". Many U.S. banks were forced to shut down during the Great Depression because so many people attempted to withdraw assets at the same time. Today there are many safeguards in place to prevent such an instance from occurring again, but the fractional-reserve banking system remains in place.

Detriments of Demand

Demand Curve is shifted to the right (increase in demand) or the left (decrease in demand) due to a handful of variables economists call DETERMINANTS OF DEMAND: 1) income: --NORMAL GOODS: more income leads to an increase in demand and less income leads to a decrease in demand; --INFERIOR GOODS : more income leads to a decrease in demand and less income leads to an increase 2) tastes: favorable change leads to an increase in demand and unfavorable change leads to a decrease in demand 3) prices of related goods: --SUBSTITUTE GOODS (can be used in place of each other): Ifd the price of one such good rises, the demand for its substitute increases --COMPLIMENTARY GOODS (need one to enjoy the other): when price of one rises, demand for the other shifts to the left (decreases) 4) expectations: if the consumer expects price of nuggets to decrease next week, his demand for nuggets this week will decreases as he waits for prices to fall; if he expects income to increase next week, he might increase his demand for nuggets this week to stock up 5) number of buyers: more buyers means more (increase in) demand and vice versa

Three Basic Determinants Resource Quantity: The first major determinant is the quantity of resources--labor, capital, land, and entrepreneurship--that the economy has available for production. This determinant causes shifts of both the SRAS and LRAS curves. Quite simply, if the economy has more resources, then aggregate supply increases and both aggregate supply curves shift rightward. With fewer resources, aggregate supply decreases and both curves shift leftward. Some of the specific determinants that can cause changes in resource quantity include: Population: The total size of the population, which is affected by births, deaths, and migration, is a key influence on the quantity of labor. A larger population means more potential workers. While population generally increases through both natural growth and immigration, it can decrease as well. Reasons for a declining population including emigration, wars, famines, diseases, and natural disasters. Labor Force Participation Rate: The labor force participation rate is another key influence on the labor quantity. A change in the proportion of a given population that is willing and able to work changes the labor force and shifts the aggregate supply curves. The U.S. economy, for example, has seen an increase in its labor force participation rate over the last 50 years largely through an increase in the proportion of women in the labor force. Capital Stock: Changes in the economy's stock of capital is the most important influence on the quantity of capital. These changes are brought about through a combination of investment and depreciation. Investment adds to the capital stock and depreciation reduces it. Investment has the curious role of affecting both the aggregate demand curve, as one of the four aggregate expenditures, and the aggregate supply curves, by influencing the capital stock. Exploration: Discovering new sources of raw materials or other natural resources influences the quantity of land. While the economy is unlikely to "discover" large masses of land like explorers did a few centuries back, exploration does identify mineral deposits, fossil fuel reserves, and other natural resources that increases the aggregate supply curves. Alternatively, depletion of existing natural resources causes a decrease in the aggregate supply curves. Resource Quality: The second major determinant of the aggregate supply curves is the quality of resources. If the quality of labor, capital, land, and entrepreneurship changes, then the SRAS and LRAS curves shift. An improved quality increases aggregate supply and a decline in quality decreases aggregate supply.

Education: Education includes formal, college-type, get-a-degree education, and informal on-the-job training and learn-by-doing experiences. Education affects the quality of labor. Higher quality labor, brought about by more education, is more productive and causes the aggregate supply curves to increase. Of course, it is also possible for less education to reduce the quality of labor and cause the aggregate supply curves to decrease. Technology: Technology is the information that the economy has concerning production techniques. Technology generally affects the quality of capital, but can also peripherally affect the quality of labor, land, and entrepreneurship. In modern times, technology has invariably advanced, causing increases in the quality of capital and thus increases in aggregate supply. It is, however, possible for a technological backstep that would cause a decrease in the quality of capital and aggregate supply. Resource Price: The third major aggregate supply determinant is resource price. The prices of resource affect the cost of producing output and thus the price level charged for an existing quantity of real production. This determinant ONLY affects the short-run aggregate supply. Because the long-run aggregate supply is independent of the price level it is also unaffected by changes in resource prices and production cost. Two of the more important resource prices that influence production cost and shift the SRAS curve are: Wages: Wage payments to labor are usually at the top of any list of resource prices. Wages account for about 60 percent of production cost of the economy. Economy-wide changes in wages shift the SRAS curve. Higher wages, by increasing production cost, cause a decrease short-run aggregate supply. Lower wages, by decreasing production cost, cause an increase short-run aggregate supply. Energy Prices: Energy prices, especially petroleum prices, are a second key group of resource prices. Because energy, like labor, is critical in the production of virtually every good and service in the economy, changes in energy prices also tend to shift the SRAS curve. Like wages, higher energy prices increase production cost and cause a decrease short-run aggregate supply. Lower energy prices decrease production cost and cause an increase short-run aggregate supply. Two Changes Shifts of the short-run or long-run aggregate supply curve, brought about by such things as education or technology, an increase in the size of the population or the capital stock, or changes in wages or energy prices, can be the source of disequilibrium in the aggregate market. Such disequilibrium then results in changes in the price level. The key is that aggregate supply determinants CAUSE shifts of the aggregate supply curves which CAUSE disequilibrium which then CAUSES changes in the price level. This suggests an important difference between two related changes--a change in aggregate supply and a change in real production. A change in aggregate supply is any shift of either of the aggregate supply curves. With this change, the entire curve shifts to a new location. A change in aggregate supply is caused by a change in the aggregate supply determinants. This is comparable to a change in supply in the analysis of the market. A change in real production is a movement along a given aggregate supply curve. This change involves the movement from one point on the existing curve to another point on the SAME curve. The curve does not move. A change in real production is caused by a change in the price level, and ONLY a change in the price level! This is comparable to a change in quantity supplied in the analysis of the market. While a change in real production, as a movement along the curve, applies in principle to both short-run and long-run aggregate supply curves, because real production does not change in the long run, from a practical standpoint, a change in real production primarily applies to the short-run aggregate supply curve. Shorter table on page 236 with Column Headings: Change . . . Effect (shift) . . . Price Level Result . . . Output Result . . . Unemployment Result

Model of Aggregate Demand and Aggregate Supply: (AD-AS Model) An aggregation of ALL OF THE MARKETS in an economy

Explains short run fluctuations in output around the long-run trend: --Price Level Axis holds the price level per selected year(s); often measured by CPI --Output Axis holds Real GDP in $ --in addition to the AD and AS curves, there's the SRAS (short-run aggregate supply) and LRAS (long-run aggregate supply) curves --equilibrium is PLyear and actual level of output that a country produces each Yyear; ex: Using CPI in 2010, equilibrium was PL2010 =216.87 and Y2010=$13.2 trillion --EQUILIBRIUM IN THIS ECONOMY IS LESS THAN Yf, which is the FULL EMPLOYMENT LEVEL OF OUTPUT (i.e. the ideal amount of production of goods and services), kinda like NAIRU concept for unemployment

Federal Open Market Committee (FOMC)

Fed doesn't set interest rates. Rather the FOMC uses the money market to achieve a target rate of interest. The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the board of governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate their service of one-year terms. The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does by buying and selling government securities. For example, to tighten the money supply, or decrease the amount of money available in the banking system, the Fed sells government securities. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.

Marginal Propensity to Save

The proportion of an aggregate raise in pay that a consumer spends on saving rather than on the consumption of goods and services. Marginal propensity to save is a component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income. Marginal propensity to save = change in saving/ change in income MPS is depicted by a savings line: a sloped line created by plotting change in savings on the vertical y axis and change in income on the horizontal x axis. Suppose you receive a $500 bonus with your paycheck. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase on a new business suit and save the remaining $100, your marginal propensity to save is 0.2 ($100 change in saving divided by $500 change in income). The other side of marginal propensity to save is marginal propensity to consume, which shows how much a change in income affects purchasing levels. Marginal propensity to consume + marginal propensity to save = 1. In this example where you spent $400 of your $500 bonus, marginal propensity to consume is 0.8 ($400 divided by $500). Adding MPS (0.2) to MPC (0.8) equals 1. Given data on household income and household saving, economists can calculate households' MPS by income level. This calculation is important because MPS is not constant; it varies by income level. Typically, the higher the income, the higher the MPS, because as wealth increases, so does the ability to satisfy needs and wants, and so each additional dollar is less likely to go toward additional spending. If economists know what consumers' MPS is, they can determine how increases in production will influence saving. MPS is also used to calculate the expenditures multiplier using the formula 1/MPS. The expenditures multiplier tells us how changes in consumers' marginal propensity to save influence production. The smaller the MPS, the larger the multiplier.

Full Employment Level of Output (Yf)

The quantity of real production or real aggregate output (or better yet, real gross domestic product) produced by the macroeconomy when resources are at full employment. For all practical purposes, full-employment real production is real GDP produced when unemployment is at it's natural level, the combination of frictional and structural unemployment that can be maintained without inflation (or deflation either). For the aggregate market analysis, this is the level of real production achieved and maintained in the long run. The long-run aggregate supply curve is vertical at full-employment real production.

Increasing Marginal Cost

the additional cost of producing the next unit of output: MC=Change in TC/change in Q AND =Change in TVC/Change in Q THE DIMINISHING MARGINAL COST CURVE IS A DIRECT RESULT OF THE DIMINISHING MARGINAL RETURNS EXPERIENCED IN SHORT-RUN PRODUCTION FUNCTION. We can infer (about supply) that because the marginal cost of each unit is rising, the only reason a firm will produce additional units is if he can sell them at higher and higher prices.

Marginal Propensity to Consume

To determine how much to increase spending or decrease taxes: The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line- a sloped line created by plotting change in consumption on the vertical y axis and change in income on the horizontal x axis. The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8. Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500). This also means that your marginal propensity to save will be 0.2 ($100 divided by $500). If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500). The other side of marginal propensity to consume is marginal propensity to save, which shows how much a change in income affects levels of saving. Marginal propensity to consume + marginal propensity to save = 1. Given data on household income and household spending, economists can calculate households' MPC by income level. This calculation is important because MPC is not constant; it varies by income level. Typically, the higher the income, the lower the MPC, because as wealth increases, so does the ability to satisfy needs and wants, so each additional dollar is less likely to go toward additional spending. According to Keynesian theory, an increase in production increases consumers' income, and they will then spend more. If we know what their marginal propensity to consume is, then we can calculate how much an increase in production will affect spending. This additional spending will generate additional production, creating a continuous cycle. The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment.

Total Revenue Rule:Price Elasticity's Impact on Total Revenue Price Elasticity of Demand is very useful to sellers of goods. Total Revenue = number of units sold multiplied by price at which they are sold. Price effect: after a price decrease, each unit sold sells at a lower price which tends to decrease revenue Quantity effect: After a price decrease, more unites are sold, which tends to increase revenue

Total Revenue Rule: All else equal, in order to raise total revenue LOWER the price of a good if the demand for the good is price-elastic and RAISE the price of a good if the demand for the good is price-inelastic.

Total Utility

Total utility is the total satisfaction received from consuming a given total quantity of a good or service, while marginal utility is the satisfaction gained from consuming another quantity of a good or service. Sometimes, economists like to subdivide utility into individual units that they call utils.

Economic Models: Understanding How Choices are Made to Pursue Goals of Utility

We simplify the real world into models to understand fundamental decision-making of consumers, firms, and nations and then deduce and infer from there. An important feature of economic models is the need to make assumptions about behavior: e.g. consumers maximize their utility within constraints of budget; firms seek to maximize profits. It is however very difficult to isolate the impact of a change in decisions in just one key variable. Therefore, a second important feature of economic models is the use of the CETERIS PARIBUS Or "all other factors held constant," condition.

INFLATION

When the price of everything goes up; INCREASE IN THE PRICE LEVEL; prices going up - value of money going down

Multiplier Effect of Government Spending The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by eighty cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8. The expenditure multiplier is the ratio of the change in total output induced by an autonomous expenditure change. Look Out! In the Keynesian model, government and private investment spending are considered to be autonomous while consumption is not because it is a function of income. Some consumption is considered to be autonomous. Even with no income, some consumption will occur (savings will need to be used). So the consumption function could be expressed as C = α + (β × Y), where α represents consumption that occurs regardless of income, β is the marginal propensity to consume and Y is income.

Why is there a multiplier effect? Suppose a large corporation decides to build a factory in a small town and that spending on the factory for the first year is $5 million. That $5 million will go to electricians, engineers and other various people building the factory. If MPC is equal to 0.8, those people will spend $4 million on various goods and services. The various business and individual receiving that $4 million will in turn spend $3.2 million and so on. If the marginal propensity to consume is equal to 0.8 (4 / 5), then the multiplier can be calculated as: Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5 As a result of the multiplier effect, small changes in investment or government spending can create much larger changes in total output. A positive aspect of the multiplier effect is that macroeconomic policy can effect substantial improvements with relatively small amounts of autonomous expenditures. A negative aspect is that a small decline in business investment can trigger a larger decline in business activity and, thereby, create instability. The previously mentioned formula for calculating the multiplier is a simplified one. Leakages (money spent, but not on domestic goods or domestic services) reduce the size of the multiplier. Examples of leakages include taxes and imports. Another important point is that the multiplier effect takes time to work; months must pass before even half of the total multiplier effect is felt. Also, keep in mind that the multiplier effect can cause idle resources to be moved into production. If unemployment is widespread, then there should be little impact on resource prices.

Marginal Utility

additional utility received from the consumption of the next unit of a good

Equilibrium in the Macroeconomy Macro-economic fluctuations are simply fluctuations in the level of the national income of a country representing growth or contraction (i.e. the business cycle). A market economy is not static. It is dynamic. A rise in national income means an economy is growing, while a decline in national income means that an economy is contracting. The current economic model describing economic fluctuations in a market economy is the business cycle. Macro-economic fluctuations can also be the result of fluctuations in SRAS, eg. if the price of energy increases, SRAS decreases (shifts to the left), which results in higher price level and a lower output=STAGNATION OF OUTPUT AND INFLATION IS CALLED STAGFLATION. (this is rising unemployment and falling incomes and higher prices)

Occurs when the quantity of aggregate output supplied is equal to the quantity of aggregate output demanded: Both Short-run macroeconomic equilibrium and Long-run macroeconomic equilibrium can be changed by a NEGATIVE AGGREGATED DEMAND SHOCK that could occur if consumers become pessimistic about the future; would shift the AD to the left; aggregate output in the economy would decline as well as the price level, and soon unemployment would rise. Similarly there could be a POSITIVE ECONOMIC SHOCK (like a positive demand shock) where demand would increase and cause output to increase, unemployment to decrease. OUTPUT AND EMPLOYMENT MOVE IN THE SAME DIRECTION. OUTPUT AND UN-EMPLOYMENT MOVE IN OPPOSITE DIRECTION.

Taylor Rule

Often Central Banks set explicit INFLATION TARGETS (2% annual, etc.) and engage in monetary policy in order to achieve the goal regardless of the output level. Unfortunately, there are situations where both inflation and a recessionary output gap, and inflation targeting restricts the central bank to only one objective. Alternative method is the Taylor Rule: A guideline for interest rate manipulation. Taylor's rule was introduced by Stanford economist John Taylor in order to set and adjust prudent rates that will stabilize the economy in the short-term and still maintain long-term growth. This rule is based on three factors: 1) Actual versus targeted inflation levels 2) Actual employment versus full employment levels 3) The appropriate short-term interest rate consistent with full employment. Taylor's rule suggests that the Fed increases interest rates in times of high inflation, or when employment is above the full employment levels, and decreases interest rates in the opposite situations. This method of controlling interest rates has been fairly consistent with interest policy decisions, even though the Fed does not explicitly subscribe to the rule. It takes BOTH output and inflation into account: Federal Funds rate = 1 + (1.5 X inflation rate) + 0.5 X output gap)

Using Y=C + I + G to Get Savings Investment Identity

Recall that the INCOME APPROACH is an equivalent way of calculating GDP. Since we are interest in investment, isolate it: Y - C - G = I We know that in a closed economy any government sending (G) will have to be paid for somehow, usually taxes . In order to change this equation to reflect taxes without fundamentally altering it, both add and substract T (same as adding o): Y - C - G + T -T =I Then we rearrange to make sense: (Y - C - T) + (T - G) = I The term (Y - C - T) is the income (Y) that housheolds and firms earn less taxes paid and less what they consume: IN OTHER WORDS IF YOU HAVE INCOME LEFT OVER AFTER YOU PAY YOUR TAXES AND SPEND, THE ONLY THING LEFT TO DO WITH IT IS TO SAVE IT. Therefore, Y - C - T represents private savings. The other term is hwat the government has left over from the tax revenue it collects after subtracting government spending (recent history a negative number b/c spent more than collected in revenue - aka budget deficit. Thus, T-G represents public savings. And the entire left side of the equation REPRESENTS ALL THE SAVINGS IN AN ECONOMY equaling I, or the savings-investment identity.

MACROECONOMICS

Roots in Great Depression of the 1930's ; failure of "invisible hand" to correct economic Argmageddon led to schism that divided economics into 2 distinct fields. Goal to understand how economy as a whole works so that policy makers can try to keep major swings in business activity and economic catastrophes from occurring again.

Short-Run and Long-Run

Short-run= too brief to change the fixed input (relative to the seller) e.g. If it would take Eli three months to expand the size of his kitchen to install new ovens, and acquire more mixers, then any period of time briefer than that is Eli's PRODUCTION SHORT-RUN. Long-run=time enough to change a fixed input; e.g. for Eli - any time longer than three months. Distinction is important because there are limits to what can be produced and how efficiently it can be produced in the short run while capital is fixed!

Example Marginal Benefits and Marginal Costs of Small Pox Vaccine

So long as the marginal benefit of the next unit of something is AT LEAST AS GREAT as the cost of that unit, the consumer should ALWAYS PURCHASE THE NEXT UNIT. Total Benefit is the SUM OF ALL THE NET BENEFITS. Thus by making decisions "at the margin", the consumer has picked the ideal quantity of X that maximizes her total net benefit. A common mistake made is to think about costs and benefits "on average". This leads to irrational behavior. Given this calculation, one might be tempted to say that each additional unit was "worth" the price of the costs. NO!! There is a point in the marginal cost where the additional unit ACTUALLY MAKES ONE WORSE OFF than if they had began to consume X in the first place.

Census Bureaus Stats that impact LFPR The proportion of Americans who live alone has grown steadily since the 1920s, increasing from roughly 5 percent then to 27 percent in 2013, according to the latest Current Population Survey from the Census Bureau. The growth in the number of men living alone is especially dramatic, rising from less than 6 percent in 1970 to more than 12 percent in 2012, according to a Census Bureau report released last year. Fifteen percent of households are women living alone.

Some highlights of the report are: • Sixty-six percent of households in 2012 were family households, down from 81 percent in 1970. • Between 1970 and 2012, the share of households that were married couples with children under 18 halved from 40 percent to 20 percent. • The proportion of one-person households increased by 10 percentage points between 1970 and 2012, from 17 percent to 27 percent. • Between 1970 and 2012, the average number of people per household declined from 3.1 to 2.6. Nearly three-quarters (72 percent)of men aged 65 and over lived with their spouse compared with less than half (45 percent) of women. • Married couples made up most (63 percent) of the family groups with children under the age of 18. • Partners in married oppositesex couples were less likely (4 percent) to be different races than partners in either unmarried opposite-sex couples (9 percent) or same-sex couples (12 percent).5 • Black children (55 percent) and Hispanic children (31 percent) were more likely to live with one parent than non-Hispanic White children (21 percent) or Asian children (13 percent).6 • During the latest recession, the percentage of stay-at-home mothers declined and did not return to its prerecession level until 2012. • During the latest recession, home ownership among households with their own children under the age of 18 fell by 15 percent. These households saw a 33 percent increase in parental unemployment.

DEMAND

Supply and Demand model is the most widely used model in all of economics. Principles of consumer behavior: 1) motivated by utility maximization and 2) consumer choices are a function of income and prices . .. lay the foundation for 1/2 of supply and demand model.

Short-Run Production/Output: Combining variable inputs with the fixed inputs Typical pattern is to use labor as the variable and capital as he fixed to show short-run production function on a Total Production of Labor (a.k.a TOTAL OUTPUT; here "jackets")-Units of Labor Graph

TPl = total product of labor; output being produced when labor used as only variable input with a fixed amt of capital MPl=Marginal Product of Labor; change in total product when additional unit of labor employed (e.g. how much more each additional worker produces or how much the last worker produced: formula: MPl=(changeTPl/changeL) APl=Average Product of Labor; total product divided by units of labor employed formula: APl=TPl/L

The Money Supply

The entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country's government or central bank. Public and private sector analysis is performed because of the money supply's possible impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve policy is the most important deciding factor in the money supply. Also called money stock.

Equilibrium Market Price An equilibrium market price is: 1) the price at which there is no tendency for it to change (i.e. rise or fall); 2) an outcome in which the quantity of units demanded is exactly the quantity of units supplied. Qd(P*)=Qs(P*) When price is lower than the equilibrium price, quantity demanded will be greater than quantity supplied. There will be a tendency for the price to increase. When price is higher than the equilibrium price, quantity supplied will be greater than quantity demanded. There will be a tendency for the price to decrease. Equilibrium market price is attained when the quantity demanded equals quantity supplied. It is sometimes called market clearing price.

The equilibrium price can also be found by solving the two equations above for two unknowns P and Q: If Qd(P*)=Qs(P*), and the equilibrium market price of bicycles is $300, with 600 demanded and 600 supplied then: DEMAND EQUATION: Pd=600 - 1/2Qd SUPPLY EQUATION: Ps=1/2Qs Assume P*=Ps=Pd and Q*=Qd(P*)=Qs(P*) Then set the two equations together 600-1/2Q*=1/2Q* 600=Q* and Then solve for P*: P*600-1/2 (600)=600-300=$300 P*=$300

Simultaneous Shifts in Demand and Supply Confuse Even Economists

The fact is that without more information, it's hard to tell whether the ultimate impact on price is that it goes up, down or stays the same.

Long-run Macro-Economic Equilibrium

occurs when the actual amount of production is at the ideal level (i.e. prices have fully adjusted, the economy is operating at its full potential and unemployment is at its natural rate - NAIRU)

Quizzes Notes: Total vs Marginal utility: Law of diminishing marginal utility says that as one consumes more, one gets less utility from each additional unit. While total utility increases (and you are better off with each additional unit of consumption, YOU ARE NOT BETTER OFF FROM THE LAST UNIT OF CONSUMPTION AS YOU WERE FROM THE PREVIOUS ONE (i.e. marginal utility decreases.) Utility is only measured in fiction utils, not dollars. Doesn't measure actual happiness, just relative happiness to something else. Utility maximization rule says the consumer should CONTINUE TO CONSUME until he gets to the point all marginal utilities per dollar are equal. If the marginal utility of the next unit is negative, that unit actually reduces total utility and SHOULD NOT BE CONSUMED!

The hard one: No 6. page 42: To maximize utility across two goods, the marginal utility per dollar must be the same for both goods. We are told that the marginal utility per dollar for soda is six. The table informs us tat the marginal utility of the the 3rd chicken liver is 6 utils. The only way that Sissy can maximize utility is if the price of the fried chicken liver is $1 because: MUx/MUy=Px/Py A total utility that rises by 5 utils for each unit and never diminishes results in a marginal utility that is constant (drawn horizontal) a 5 utils.

Utility Maximization Rule (UMR)

says that a consumer has maximized her utility when she has spent her income in such a way that the marginal utility per dollar is equal for all goods (usually just two in a comparison, could be more). Motivation behind UMR is when the price of sthg goes down, we get an increased "bang for the buck" compared to that from our consumption of all other things AND If we want to make ourselves as happy as possible (maximization of utility), we must rearrange our consumption by consuming more of this item. IF we consume more of this item, there will be a movement along a downward-sloping marginal on the Price-Quantity graph. THE DOWNWARD SLOPE IS THE DEMAND CURVE AND THE FOUNDATION FOR THE LAW OF DEMAND.

Economic Growth

The only way an economy can grow is to improve the ability to produce (i.e. its capacity) and produce more; reflected in AD-AS model as a shift to the right of the LRAS curve as the result of an increase in the stock of inputs or an improvement in technology, occurring in the following ways: An increase in labor (i.e human capital), either increase in quality or quantity will expand potential labor force An increase in natural resources through discovery or more efficiency in use, etc. An increase in the capital stock through investment An improvement in technology (i.e. better ways of combining resources to produce more goods and services using same technology. Relative importance of these has changed over time: --Industrial Revoution: economy grew due to increases in stock of capital --today economy grows due to improvements in human capital and technology

Monetary Policy

The other stabilization policy that can be used by a central bank (discussed above) with Federal Reserve outline and liquidity preference model. Federal Open Market Comittee (FOMC): exclusively makes changes to the money supply, when it increases money supply, interest rate goes down; when it decreases money supply, interest rate goes up. To achieve the target of changing money supply, FOMC (NY) most often buys or sells T-bonds (Treasury securities) in the open market; FOMC rarely changes the reserve reqmts/ reserve ratios or lending through the discount window (i.e. overnight lending to banks) as these options do not allow the same kind of control over the money supply that open market operations allow. Fed is charged not just with 1) fighting recessions, but also with 2) ensuring price stability. Two do this, it moderate amount of investment in economy by changing the interest rate: --If engaging in EXPANSIONARY MONETARY POLICY: its goal is to increase aggregate demand by lowering interest rates, it achieves this by BUYING BONDS --if CONTRACTUARY MONETARY POLCY: SELL BONDS to decreases money supply by decreasing aggregate demand via increased interest rates. Goal of price stability: generally, a low and positive rate of inflation.

Microeconomics

- Decisions made by individuals, households, firms, or industries

Summary

--in the short-run, if labor is the only variable input and labor is being hired to work with a fixed amount of capital, the marginal product of labor will eventually diminish. --There are some costs that are fixed and some that are variable b/c when inputs are hired they must be paid. --As more output is produced, the TVC of production rises more quickly, thus the marginal cost of producing the next unit also rises. --the rising marginal cost of producing the next unit is a direct result of the diminishing returns from hiring the next unit of labor --when the marginal product of labor is falling, the marginal cost of production is rising.

Econ mystifies because of the: 1) language barriers (jargon) - Economists unintentionally make the science difficult using complicated language to communicate simple ideas 2) Economists don't always agree and come to polar opposite conclusions about how a policy or decision will work because of the different ASSUMPTIONS (about how the world works) used in their THEORETICAL MODELS (aka economic models or simplified version of the complex world used to predict how changes in one thing will affect other things. 3) Math & Graphs - but most (not all) economics can be demystified with just a few simple math techniques and graphical analysis; When govs/ individuals, etc. do sthg- economists try to use

-In order to understand econ, can't just read - must do econ -every econ concept can be broken down into: 1) math formula representing the concept; 2) graph - picture illustrating the formula and concept and 3) story representing explanation and verbal analysis of the concept --end of book contains a 100 Q final exam

Price and Quantity Controls and Efficiency in Competitive Markets (Market Equilibrium Price and Quantity Context) An outcome is efficient if it MAXIMIZES TOTAL SURPLUS/WELFARE (sum of consumer surplus/welfare and producer surplus/welfare) *Note "surplus" used interchangeably with "welfare" Consumer surplus ("CS" i.e. like savings) is the DIFFERENCE BETWEEN THE HIGHEST PRICE SHE WOULD HAVE PAID AND PRICE SHE ACTUALLY PAID. The highest price she would have paid is found on the demand curve for a particular good and the price actually paid is at the intersection of market demand and market supply curves (equilibrium?). Producer surplus ("PS"i.e. like gains) is the difference between price that a seller actually received and lowest price he would have accepted for a unit. (found on intersection of demand and supply curve and lowest price found along the supply curve for that good.) *Note: interfering with the market's natural inclination to move toward an equilibrium price and quantity (say 1000 bikes) by controlling how much QUANTITY can be bought and sold on a market, say 900 bikes only, is called a QUOTA. ; DEADWEIGHT loss (DWL) is lost combined consumer and producer surplus that goes unearned because there are 100 bike transactions unmade. THUS WE HAVE LOST OUR EFFICIENT OUTCOME.

A PRICE CEILING occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium. When a price ceiling is set, A SHORTAGE OCCURS shortage occurs. For the price that the ceiling is set at, there is more demand than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied. An inefficiency occurs since at the price ceiling quantity supplied the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss. A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage--the minimum price that can be payed for labor. Price floors are also used often in agriculture to try to protect farmers. For a price floor to be effective, it must be set above the equilibrium price. If it's not above equilibrium, then the market won't sell below equilibrium and the price floor will be irrelevant. IN SUM: 1. gov control of quantity= quota; 2. gov control of price = price ceiling 3. any quantity below or above equilibrium price = deadweight loss and a reduction in total surplus; NOT EFFICIENT; NOT COMPETITIVE 4. Deadweight loss is simply the dollar value of all the mutually beneficial transactions (consumers/producers) that are lost because of something that prevents the market equilibrium from being reached.

Budget Constraint

A budget constraint shows how a consumer's income and the prices of two good, X and Y, limits the combinations of X and Y that the consume can afford.

Real GDP Per Capita (per head!)

A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another because it shows the relative performance of the countries by indicating the wealth of their citizens. India/ Canada example: India's GDP was $1.7 trillion in 2010 and Canada's $1.5 trillion, but India has MANY more people and GDP per capita shows $1, 477 compared to Canada's $46,060.

Gresham's Law If a mint issues two distinct types of silver dollars, one containing, say, half as much silver as the other, will both coins be used as a medium of exchange? According to the popular version of Gresham's law—perhaps the most generally accepted and frequently cited proposition in economics—the answer is no; only one of the coins will circulate because bad money drives out good. In this case that means the lighter-weight silver dollar (bad because overvalued at the mint) will circulate while the heavierweight coin {good because undervalued at the mint) will be hoarded.

A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new coin ("bad money") is assigned the same face value as an older coin containing a higher amount of precious metal ("good money"), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation. INVESTOPEDIA EXPLAINS 'Gresham's Law' Coins were first made with gold, silver and other precious metals, which gave them their value. Over time, the amount of precious metals used to make the coin decreased because the metals were worth more on their own than when minted into the coin itself. If the value of the metal in the old coins was higher than the coin's face value, people would melt the coins down and sell the metal. Similarly, if a low quality good is passed off as a high quality good, then the market will drive down prices because consumers won't be able to determine the good's real value.

Shape of Supply Curve Comes from Shape of Marginal Cost Curve

A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. As such, the firm moves along its positively-sloped marginal cost curve in response to changing prices.

Simple Geometry in Economics Only area of a rectangle and area of a triangle used in introductory econ courses. Areas of a rectangle are used in Price-Quantity Graphs to find Revenue. Areas of Triangles used to describe consumer and producer surplus.

Area of a rectangle = base x height (and then put a 2 above to square it?) Wide = Height Long = Base Area of triangle=1/2 x (base x height)

Midpoint Method: Preferred formula that should be used to calculate the elasticity of demand

Average price and average quantity between 2 pts on the demand curve; Used in order to account for numerical result changes when the new and old prices (or quantities) are reversed. ex: if a price rises from a value of 10 to 11= 10% increase BUT if prices falls from a value of 11 to a value of 10=9.1 increase SO VALUE OF PRICE ELASTICITY (PERCENTAGE) CHANGES depending on whether price is rising or falling

Fixed and Variable: Inputs Used in Production Factors of production: An economic term to describe the inputs that are used in the production of goods or services in the attempt to make an economic profit. The factors of production include land/natural resources, labor, capital and entrepreneurship.

Because quantities of labor and natural resources are easy to increase if production must increase, they are called VARIABLE INPUTS. Because capital is difficult to increase (i.e. if you already have a business, then finding space to add more *tools of capital, it is called a FIXED INPUT. The only way to increase capital is to make SHORT-RUN and LONG-RUN decision. *Earlier illustrations often described capital as physical items, such as tools, buildings, and vehicles that are used in the production process. Since at least the 1960s economists have increasingly focused on broader forms of capital. For example, investment in skills and education can be viewed as building up human capital or knowledge capital, and investments in intellectual property can be viewed as building up intellectual capital. These terms lead to certain questions and controversies discussed in those articles.

Rate of Inflation

CPI Price level in new period - CPI price level in old period/CPI price level in old period (*percentage change formula: new-old/old)

Consumer Price Index: (CPI) --most common measure of price level, also used by BLS --includes goods and services typical consumer purchases; actual prices they pay for them; compared to some base period to make them easier to understand

CPIx=cost of basket of goods in year X/cost of basket of goods in base year X 100 (BLS') Method for calculating CPI: 1. Fix a basket of goods 2. Find the pices 3. Compute the cost of the basket in each period 4. Choose a base year Currently BLS uses average prices over a three-year period, 1982-1984, to compute the cost of the basket in the base year. *Remember the CPI for the base year is always 100.

Competitive Markets: Buyers and Sellers Behavior of Buyers grounded in utility maximization (downward-sloping demand curve) Behavior of Sellers grounded in profit maximization (upward-sloping supply curve) Perfectly competitive market: market with certain characteristics that predict how buyers and sellers interact to produce an outcome that economists believe is most efficient.

Competitive Markets based on TWO ASSUMPTIONS: 1) many buyers and many sellers 2) because many buyers and many sellers, no single individual can affect the price through her individual actions Note: monopoly (one seller); monopsony (one buyer) Under these assumptions, the EQUILIBRIUM MARKET PRICE is determined by the competitive interaction of buyers and sellers.

Utility Maximization Rule

Consumers are believed to maximize their utility given the limits of the budget constraint. The utility maximization rule states that the best (utility-maximizing combination of goods to consume will be the one where the marginal utility per dollar spent on each good will be the same for all goods. Memorize Algebraic Expression in Chart: MUx/MUy=Px/Py . Try some more practice problems, keep getting this one wrong.

Demand Curves

Downward sloping line on price-quantity demanded graph (Demand versus Quantity Demanded: Demand is the entire demand curve or all of the POSSIBLE quantities that a consumer would buy at each possible price; QD is THE QUANTITY of a good a consumer will purchase ate ONE specific prices. )

Math and Graph Review: Cartesian Coordinate System Not complicated - a tiny bit of algebra, even tinier bit of geometry and a lot of graphical analysis. Most common math: graphing, simple calculations, calculating area, and solving a system of two equations. To practice you should be drawing and writing down every graph and equation you see. A graph is a pictorial representation of the RELATIONSHIP BETWEEN TWO THINGS. In algebra students learn the Cartesian Coordinate System graph where there are four quadrants, where two things "x" and "y" are represented on two axes and any lines or points on the graph show the particular value of y that goes with a particular value of x. In the case of a line, there is usually an equation that describes the relationship between x and y mathematically and the rah simply translates the equation into a picture. Each of the axis represents a number line and they intersect at zero.

Each point on the Cartesian plan is a representation of a combination of a particular value of x and a value of y associated with x. The horizontal axis is for x, with the left (quadrant II) being negative and the right (quadrant I) being positive in value. The vertical axis is for y with the top being positive and the bottom being negative. A (0,4) means Point A describes the combination where x=0 (right on the axis line) and y=4 (up four marks, because its positive. Practice understanding relationships between x and y with the picture. But Economists only use equations based on quadrant 1.

Marginal Cost Curve

Economists assume that consumers make choices at the margin: Consumers: if the marginal benefit of consuming the next unit is greater than or equal to the marginal cost, the person will consume it to increase his utility. Producers/Sellers: if the marginal benefit (price received) of producing that unit is greater than or equal to the marginal cost of producing it, the firm will produce that unit and the profits earned by the firm will rise. Figure shows and upward-sloping marginal cost curve. Firm will increase output upward along the marginal cost curve in order to find the optimal price for the optimal quantity. The firm wants the price to equal the marginal cost at the right output.

Rational Decision Making (*Assumption alert) Rational economic actors (consumers, nations, etc.) seek economic benefit (things that make them most happy) and attempt to avoid economic costs (things that make them most unhappy). Rationality assumption does not mean that actors always make the best decisions. Sometimes available information is incomplete or flawed. Rationality principle simple assumes that a decision-maker does not knowingly make himself worse off.

Economists believe that consumers and nations, etc. EXAMINE choices, and within the LIMITS OF THEIR BUDGET/RESOURCES, make RATIONAL DECISIONS to purchase forgo shoes for gasoline, for example, because doing so makes them BETTER OFF. Specifically economists assume that the RATIONAL CONSUMER/NATION, etc. goes through life making decisions that will maximize their UTILITY (eg. happiness, usefulness, or economic benefit) Rational consumers/nations, etc. seek out things that make them the most happy - PROVIDE THE MOST BENEFITS and avoid the things that make them unhappy INCUR LOTS OF COSTS.

Price Elasticity of Demand: Measuring responsiveness of a consumer's demand behavior to some sort of change.

Ed=%changeQd/%changeP (IGNORE THE NEGATIVES) Where percentage decrease in Qd is the RESPONSE and percentage increase in P is the TRIGGER. AND Elasticity > 1 (1= sensitive, 2=twice as large, 3= VERY sensitive to price changes) Inelasticity < 1 Unitary Elastic =1 Perfectly Inelasticity =0

Stabilization Policy

Efforts to return output to the full-employment level. Two Types of intervention: 1) fiscal policy (use of goernment spending and/or taxes to change output) and 2) monetary policy (use of money supply to change output)

4 Stages of the Business Cycle

Even though output has increased over time, there are periods when output is expanding and when it is falling: 1) contraction 2) trough (or bottom) 3) expansion or recovery 4) peak

Classical vs. Keynesian Theory Two economic schools of thought are classical and Keynesian. Each school takes a different approach to the economic study of monetary policy, consumer behavior and government spending. A few basic distinctions separate these two schools. Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire--also known as free--market requires little to no government intervention. It also allows individuals to act according to their own self interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item&amp;rsquo;s value is determined based on production output, technology and wages paid to produce the item. Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is often influenced by public and private decisions. Public decisions represent government agencies and municipalities. Private decisions include individuals and businesses in the economic marketplace. Keynesian economic theory relies heavily on the fact that a nation&amp;rsquo;s monetary policy can affect a company&amp;rsquo;s economy.

Government Spending Government spending is not a major force in a classical economic theory. Classical economists believe that consumer spending and business investment represents the more important parts of a nation&amp;rsquo;s economic growth. Too much government spending takes away valuable economic resources needed by individuals and businesses. To classical economists, government spending and involvement can retard a nation&amp;rsquo;s economic growth by increasing the public sector and decreasing the private sector. Keynesian economics relies on government spending to jumpstart a nation&amp;rsquo;s economic growth during sluggish economic downturns. Similar to classical economists, Keynesians believe the nation&amp;rsquo;s economy is made up of consumer spending, business investment and government spending. However, Keynesian theory dictates that government spending can improve or take the place of economic growth in the absence of consumer spending or business investment. Short Vs. Long-term Affects Classical economics focuses on creating long-term solutions for economic problems. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories. Classical economists also take into account the effects of other current policies and how new economic theory will improve or distort the free market environment. Keynesian economics often focuses on immediate results in economic theories. Policies focus on the short-term needs and how economic policies can make instant corrections to a nation&amp;rsquo;s economy. This is why government spending is such a key cog of Keynesian economics. During economic recessions and depressions, individuals and businesses do not usually have the resources for creating immediate results through consumer spending or business investment. The government is seen as the only force to end these downturns through monetary or fiscal policies providing instant economic results.

GNP Vs GDP

Gross National Product= measure of all final goods and services produced by the productive assets of a country Gross national product (GNP) is the market value of all the products and services produced in one year by labor and property supplied by the citizens of a country. GNP is a better picture of how well off the nationals of a country are doing economically and sub-fields, like development economics, use it to assess the well-being of individuals within a country. Ex: Toyota Motor Manufacturing of Kentucky would be included in GDP b/c inside US borders; but not inside GNP because wholly owned by Japanese.

MONEY AND THE MONEY MARKET

How much is in a bank account is wealth. Money is a way of getting the nation off a bartering system or avoiding having to carry around heavy metals. To an economist, Money is defined by what it does - 3 FUNCTIONS OF MONEY: anything that can perform all three can be money --unit of account (asset considered money must be able to serve as a standard unit of msrmt of the value of prices or goods; --a store of value (asset must be able to reasonably maintain unit of valuable, ice wouldn't work!) --unit of exchange, (must be accepted in exchange for goods or services) Commodity money (intrinsic value like gold, silver, salt, corn, coral in some societies (tibet), cigarettes in prison, etc. ): but beware of Gresham's law! fiat money: paper currency (no intrinsic value of its own) US Treasury Department DOES NOT CREATE MONEY, it just prints it. --only half of the money supply is made of currency; --the rest is MADE BY BANKS WHEN THEY ISSUE LOANS US Money= 50% currency and 50% debt

Diminishing Marginal Product/Returns Up to a point total product rises, then it will max out and begin to fall b/c the fixed quantity of capital will constrain the output if there is too many of units of labor applied; thus productivity declines. Each point on the marginal product of labor curve is simply the slope of the total product of labor function.

IF THE TOTAL PRODUCT CURVE IS GETTING STEEPER, THE SLOPE IS RISING, and thus marginal product of labor curve is rising. IF TPl IS RISING BUT GETTING FLATTER, THE SLOPE IS FALLING and so the MPl curve is falling. And IF THE TPl BEGINS TO FALL, THE SLOPE IS NEGATIVE and therefore MPl has fallen below zero. There is a close connection between marginal product and average product: IF THE MARGINAL PRODUCT OF TE NEXT WORKER IS GREATER THAN THE CURRENT AVERAGE PRODUCT, THE NEXT WORKER WILL PULL THE AVERAGE UP, thus if the mp is greater, than the ap - the ap will always be rising. The converse is also true (if mp falls, then next worker will pull ap down. In the graph this means that if mp is below ap, the ap curve will be declining.

Difficulties with Fiscal Policy

In order to increase spending, gov must acquire the funds needed in one of three ways: --taxes: results smaller output since GDP reduced when taxes taken from households and firms (aka balanced-budget multiplier), no net multiplier effect here --creating money: causes inflation to increase and power of multiplier to go down; rising prices does not mean increased consumption --borrow money: deficit spending impacts loanable funds market by CROWDING OUT investors and households with increasing interest rates from increased demand; Some economists take the view that deficits reduce the amounts of savings supplied, rather than increasing the amount of loanable funds demanded, leading to decrease in the supply of loanable funds. In either case, however, interest rates increase. SO THE MULTIPLIER AND CROWDING-OUT EFFECT CAN HAVE COMPETING IMPACTS ON GDP. The final impact depends on which is stronger. --if multiplier effect stronger: the shift outward in aggregate demand will be farther than the shift inward of aggregate demand caused by the crowding-out effect and final impact is an increase in GDP. --if crowding-out effect stronger, an increase in government spending can actually wipe out any gains from the government spending.

FISCAL POLICY AND MONETARY POLICY Traditionally economic theory held best course of action was to do nothing when large or prolonged swings in unemployment, output, and inflation occurred. (Classical Theory) Then the Great Depression exposed this as a bad idea; and fiscal or monetary policy, or both, was used to affect macroeconomic variables. According to Classical Theory, the Great Depression should never have been possible, but: --individual actions of private producers DID NOT AGGREGATE into an efficient macroeconomic outcome. --Say's law had fallen apart: supply did not create its own demand. --Allowing the macroeconomy time to self-adjust had led to a downward spiral that started with something spooking aggregate demand and output going down, but wages and other prices were not flexible, and SRAS didn't adjust. SRAS curve stated completely horizontal up the the full-employment output. Implications: 1) any decrease in aggregate demand can potentially lead to a permanent reduction in output. ONCE AN ECONOMY HAS STARTED A DOWNWARD SPIRAL, IT CANNOT CORRECT ITSELF AND SOME SORT OF INTERVENTION IS NECESSARY. 2) impacts of any actions to correct aggregate demand will have no effect on the price level UNLESS AGGREGATE DEMAND EXPANDS BEYOND FULL EMPLOYMENT. In other words, any shift in aggregate demand will not cause inflation as long as output is below full-employment (Keynesian Model). On the left we see the Keynesian model, which shows output (real GDP) falling with a fall in AD. The fall in output corresponds with a fall in employment, and therefore a recession (or Depression). To return to full employment, aggregate demand must move back to the right (or increase). To facilitate this, Keynes and his contemporaries believed that government should increase its spending, decrease taxes (to encourage households and firms to spend) and lower interest rates (to make saving less appealing). All that is needed, say the Keynesians, is a dose of stimulus to get back to full employment (Yfe).

In the Hayekian model (very similiar to old classical theory - supply creates its own demand and therefore horizontal), no government intervention is needed at all when aggregate demand falls. In fact, in an economy with very limited government, a fall in AD will have little or no effect on output and employment. Without minimum wages or laws making it difficult or expensive for firms to reduce wages or fire and hire workers, firms faced with falling demand will simply lower their employees' wages and reduce the prices of their products to maintain their output. If there is no more demand for some products, those firms will shut down and their workers will go to work for firms whose products are still in demand, at whatever wage rate the market is offering. Wages and prices are perfectly flexible in the Hayekian view, because there is no government interfering, demanding workers for big government projects, competing wages up, enforcing a minimum wage, or paying unemployment benefits to those out of work: all policies that make it difficult for wages to adjust downwards during a recession. Without government intervention, wages and prices rise and fall with the level of demand in the economy, but output remains constant at its full employment level. The two models could not be more different. In one (Keynes') recessions will occur anytime demand falls below the level needed to maintain full employment. In the other (Hayek's), recessions are impossible as long as government gets out (and stays out) of the way. - Which models is the right model? For most of the last 100 years, most Western economies have demonstrated more of the characteristics of the Keynesian model. As the last several years show, recessions certainly are possible. Wages and prices have NOT fallen as much as Hayek's model suggest they should, and economic output has declined in many Western nations and remains below the levels achieved in 2007 in many places. Most economists would argue that this prolonged recession is likely due to a weak level of aggregate demand. And the economic policies of many Western nations have reflected the Keynesian belief that government can "fix the problem" through stimulus plans involving tax cuts, spending increases, and low interest rates. - But two years of Keynesian policies are now being reversed. US President Obama's latest attempt at a Keynesian-style stimulus (his $447 billion "American Jobs Act") has been rejected by the US Congress. Across Europe, government spending is being slashed and taxes are being raised, both policies that threaten to further reduce aggregate demand. Deregulation is the battle cry of the Republican Party in the United States one year before the next presidential election. Presidential candidates are promising to "cut taxes, cut spending and cut government", which sounds like a Hayekian battle cry. Less government will lead to more competition, greater efficiency, more employment and a stronger economy, goes the thinking. Government cannot solve our problems, government is our problem. - This debate is not a new one. It has been going on since the 1930s when two scholars, one an Englishman from Cambridge, the other an Austrian at the London School of Economics, went toe to toe on the role of government in a nation's economy. The two models of aggregate supply above survive to this day, and 80 years later, in the midst of what may be the second Great Depression, economists and politicians still haven't figured out which theory is correct. Part of our problem is that in our Western democracies in which economic policies are determined by politicians who are often only in office for two to four years, we have not had the opportunity to truly put either economic theory to the test. Less than three years ago Barack Obama, freshly elected, embarked on the greatest experiment in Keynesianism since Franklin Roosevelt's "New Deal", which was widely credited with getting the US out of the Depression. Now, with another election looming, we have politicians promising to bring America back to economic prosperity in a truly Hayekian fashion, by "cutting, cutting and cutting".

Price Quantity Charts and Demand Curve For example if we want to know the relationship between the PRICE (y) of a good and how much QUANTITY (x) of that good people are willing to buy, we can make a Price-Quantity Demanded chart. Demand Curve (Chapter 3 Demystified) The Demand curve answers this question: What quantity of a good would consumers buy at each possible price? (Data is typically gathered through surveys in economics.) Suppose we have an economy of only ten consumers, and we ask them the following question: How much cake would you purchase, per day, at prices ranging from nothing to 10? Suppose are consumers are named A through J (ten names). Survey responses can be plotted in a Price Quantity Chart. A likes cake a lot and will pay as much as $9 for a cake. Nobody else likes cake that much. J does not like cake at all and will accept one only if it is free. Note that A happily continues to buy a cake even if it costs less than $9. (To keep our numbers simple, we assume nobody ever buys more than one cake per day.) By adding up the quantities demanded by each consumer at each price, we can draw a "demand curve." This is just a line which shows the quantity demanded at each possible price. Remember that we always reason from price to quantity: this shows us the quantity demanded (on the horizontal axis) for every possible price (on the vertical axis).

In y=a+b times x equation form: If price is greater than $8 no one buys and because price is variable, we don't use =: So y > 8, x=0 where y is price and x is quantity. So relationship between price of cakes and quantity of cakes people in our economy buy can be represented by: P=9 (the point where no one buys) - 1Q, where 9 is the price axis intercept of y and x (a=9) and the slope of the line is -1 (b= -1). ex. P=9 - 1Q Ch. 3: When any of the determinants of demand change, the demand curve shifts: a shift of a curve is a change of the INTERCEPT (a) not the slope. See Chapter 3 and also see great tutorial: http://faculty.washington.edu/danby/bls324/surplus.html

Inverse Relationship Shared by Marginal Product of Labor and Marginal Cost of Production

MC=changeTVC/Change in Quantity=Change in wages x labor/change in quantity Because the wage is constant and because Change in L/Change in Quantity is the inverse of the marginal product of labor, we can substitute: MC=w X (changeinL/ChangeinQ=w X (1/MPl) So marginal cost is simply the inverse of marginal product of labor multiplied by the constant wage, which clearly shows us that if MPl is falling then MC must be rising.

Marginal Analysis, Benefit, Costs Assumes people try to maximize the difference or NET BENEFIT between economic benefits they enjoy and economic costs they incur in their decisions to do/buy something. An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables. 'Marginal Analysis' For example, if you already exercise five times a week and are thinking about adding a sixth day, you would use marginal analysis to determine whether the benefits of the sixth day, such as additional calories burned, endurance gained and muscle built, would be worth the costs of the sixth day, such as giving up sleeping in on Saturdays, having less energy to do your other weekend activities, and increasing your risk of injury.

Marginal Analysis is applied incrementally in the decision-making process and at each step BENEFITS RECEIVED are RE-EVALUATED against COSTS INCURRED. Marginal Benefit= additional benefit (happiness) received from the next unit of a good Marginal Cost = additional costs (unhappiness) incurred from the same next unit of good

Scarcity

Most fundamental economic concept that enjoys universal support among economists: 1) imbalance between our limitless wants and our limited resources (L, K, l, A) available to satisfy those wants and needs 2) drives all decision making and behavior and forces us to choose some goods at the expense of others 3) field of economics based on this concept; studies how society whether single consumer or a nation can best make decisions between wants and resources when confronted with scarcity

Recession

No strict rule, but when OUTPUT AND EMPLOYMENT have fallen for 6months or more (i.e. in a contraction) = RECESSION. A severe, prolonged recession = DEPRESSION. National Bureau of Economic Research is the group that officially declares recessions: --11 recessions in the US since WWII --average length of business cycle (from one peak to the next) is about 5 yrs 7 mos --despite these recessions, US economy is growing on average about 2.8% every year (i.e. economy is able to produce 2.8% MORE goods and svcs every year on average (some years negative growth

3 Eternal Truths of Classical Theory of economics

Prices fully adjust. Production will generate enough income to support the same level of demand. Savings and investment will equal each other.

Deflation (decrease in inflation) vs Disinflation (rate of change in inflation/slowdown in rate of inflation) Deflation and disinflation refer to two very different conditions with respect to the direction and change of general price levels. Deflation refers to falling prices; or in other words, the opposite of inflation (rising prices). Disinflation doesn't refer to the direction of prices (as inflation and deflation do), but rather the rate of change: it's a slowdown in the rate of inflation.

Put in the form of an example, deflation would be an inflation rate of -1%, while disinflation would be a change in the inflation rate from 3% one year to 2% in the next. Disinflation 101: Disinflation is a much more common condition than deflation. While at first glance a lower rate of inflation would seem to be a positive - and indeed it usually is for those who own bonds, since it increases their real (after inflation) returns - that may not always be true. In many cases, a falling rate of inflation signifies slowing growth and higher unemployment. A certain degree of inflation is a positive development that indicates an economy in reasonably good health.

Binomial Relationships

Relationships between y and x can be non-linear (not straight lines). A common nonlinear function (equation that represents a curve) seen in economics is binomial: y = a + bx + cx (squared)2 (the squared is what makes it quadratic) These functions are called quadratic functions and will have a "U" shape or a "hill" shape.

Nominal vs Real Interest Rate and Effective Rate Nominal Interest Rate: --the stated interest rate of a given bond or loan. --referred to as the coupon rate for fixed income investments, as it is the interest rate guaranteed by the issuer that was traditionally stamped on the coupons that were redeemed by the bondholders. T --in essence is the actual monetary price that borrowers pay to lenders to use their money. If the nominal rate on a loan is 5%, then borrowers can expect to pay $5 of interest for every $100 loaned to them. Real Interest Rate: --The nominal interest rate doesn't tell the whole story due to inflation's impact on purchasing power of lender or investor --real interest rate is so named because it states the "real" rate that the lender or investor receives after inflation is factored in; that is, the interest rate that exceeds the inflation rate. --If a bond that compounds annually has a 6% nominal yield and the inflation rate is 4%, then the real rate of interest is only 2%. --it's the actual mathematical rate at which investors and lenders are increasing their purchasing power with their bonds and loans. --possible for real interest rates to be negative if the inflation rate exceeds the nominal rate of an investment. For example, a bond with a 3% nominal rate will have a real interest rate of -1% if the inflation rate is 4%. A comparison of real and nominal interest rates can therefore be summed up in this equation: Nominal interest rate - Inflation = Real interest rate

Several economic stipulations can be derived from this formula that lenders, borrowers and investors can use to make more informed financial decisions. Real interest rates can not only be positive or negative, but can also be higher or lower than nominal rates. Nominal interest rates will exceed real rates when the inflation rate is a positive number (as it usually is). But real rates can also exceed nominal rates during deflation periods. A hypothesis maintains that the inflation rate moves in tandem with nominal interest rates over time, which means that real interest rates become stable over longer time periods. Investors with longer time horizons may, therefore, be able to more accurately assess their investment returns on an inflation-adjusted basis. Effective Interest Rate One other type of interest rate that investors and borrowers should know is called the effective rate, which takes the power of compounding into account. For example, if a bond pays 6% on an annual basis and compounds semiannually, then an investor who invests $1,000 in this bond will receive $30 of interest after the first 6 months ($1,000 x .03), and $30.90 of interest after the next 6 months ($1,030 x .03). The investor received a total of $60.90 for the year, which means that while the nominal rate was 6%, the effective rate was 6.09%. Mathematically speaking, the difference between the nominal and effective rates increases with the number of compounding periods within a specific time period. Note that the rules pertaining to how the AER on a financial product is calculated and advertised are less stringent than for the annual percentage rate (APR).

Frictional and Structural Unemployment: Frictional Unemployment: Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information. For example, a first-time job seeker may lack the resources or efficiency for finding the company that has the job that is available and suitable for him or her. As a result this person does not take other work, temporarily holding out for the better-paying job. Another example of when frictional employment occurs is when a company abstains from hiring because it believes there are not enough qualified individuals available for the job, when in actuality there is.

Structural Unemployment: A longer-lasting form of unemployment caused by fundamental shifts in an economy. Structural unemployment occurs for a number of reasons - workers may lack the requisite job skills, or they may live far from regions where jobs are available but are unable to move there. Or they may simply be unwilling to work because existing wage levels are too low. So while jobs are available, there is a serious mismatch between what companies need and what workers can offer. Structural unemployment is exacerbated by extraneous factors such as technology, competition and government policy. ex: blacksmith whose skills no longer relevant

Federal Reserve

The central bank of the United States and the most powerful financial institution in the world. The Federal Reserve Bank was founded by the U.S. Congress in 1913 to provide the nation with a safe, flexible and stable monetary and financial system. It is based on a federal system that comprises a central governmental agency (the Board of Governors) in Washington, DC and 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S. The Federal Reserve Bank is considered to be independent because its decisions do not have to be ratified by the President or any other government official. However, it is still subject to Congressional oversight and must work within the framework of the government's economic and financial policy objectives. Often known simply as "the Fed". Outside separations of powers system of checks and balances. 2 main objectives: 1) maintaining a healthy banking system and serving as a lender of last resort for banks and 2) carry out monetary policy - manage macroeconomic performance through the control of the money supply

Cross-Price Elasticity of Demand

The effect of a change in one product's price on the quantity demanded for another product: Exy=%changeQxd/%changePy If cross-price elasticity is positive, then X and Y are substitutes. If cross-price elasticity is negative, then X and Y are complementary goods. If cross-price elasticity is 0, then X and Y are unrelated, independent products.

Income Elasticity of Demand

The percentage change in quantity demanded that results from some percentage change in consumer incomes: Ei=%changeQxd/%changeI A positive income elasticity indicates that this is a normal good b/c for the normal goods, higher incomes shift the demand curve to the right. Negative income elasticities indicate inferior goods, higher incomes shift the demand for inferior goods to the left. *Note the role of the sign: --price elasticity of demand always negative (because of the law of demand) but the sign is not useful or used. --cross-price and income elasticities of demand, the sign conveys important and useful information about the type of good you are talking about

Reserve Ratio

The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out).

PRODUCTION AND COST: Processes That Go Into Supplying Goods

This is the supply half of the model of demand and supply. If demand is the result of the buyer's objective maximizing utility, then supply is the SELLER'S objective of MAXIMIZING PROFIT. Profit maximization: if a seller knows what price a good will sell at, there is some quantity that will give the seller the highest amount of profit at that price.

Price Indices: Useful tools A price index can also be used to adjust nominal GDP (or any other dollar value like your salary) to real GDP (salary, etc.): Real Value= nominal value/price index X (100)

Though many prominent economic series such as gross domestic product (GDP) and exports are adjusted for inflation, some less prominent indicators are not. A simple methodology can be used to deflate any nominal data series to real values. Changing Nominal to Real To transform a series into real terms, two things are needed: the nominal data and an appropriate price index. The nominal data series is simply the data measured in current dollars and gathered by a government or private survey. The appropriate price index can come from any number of sources. Among the more prominent price indexes are the Consumer Price Index (CPI), the Producer Price Index (PPI), the Personal Consumption Expenditure index (PCE) and the GDP deflator. Common price indexes measure the value of a basket of goods in a certain time period, relative to the value of the same basket in a base period. They are calculated by dividing the value of the basket of goods in the year of interest by the value in the base year. By convention, this ratio is then multiplied by 100. Generally speaking, statisticians set price indexes equal to 100 in a given base year for convenience and reference. To use a price index to deflate a nominal series, the index must be divided by 100 (decimal form). The formula for obtaining a real series is given by dividing nominal values by the price index (decimal form) for that same time period: Nominal Value divided by Price Index (decimal form) equals Real Value

Costs in the Short-Run: ShortRun Costs-Output/Product Graph Production costs of employing variable and fixed inputs explain how and why firms can supply units of output to the market.

Total Fixed Costs (TFC): costs that DO NOT CHANGE when the firm wishes to increase or decrease output in the short-run; payments necessary to employ the fixed inputs in the production function Total Variable costs (TVC) costs that RISE AND FALL with short-run output; i.e. payments necessary to employ the variable inputs in the short-run production function. Total Cost (TC) is the sum of total fixed and total variable costs at each level of output: TC= TFC + TVC

Diminishing Marginal Product's Influence on the Supply Curve

True or False: The law of supply is really the result of diminishing marginal returns to production. TRUE! Diminishing Marginal Product's Influence leads to a marginal cost curve with a positive slope. This upward-sloping marginal cost curve is behind (i.e. the same as) the upward-sloping supply curve.

Model of Economy as a Whole: Circular Flow Diagram

Two Main Entities: Households and Firms --Households are buyers of goods but sellers of the factors of production --Firms are sellers of goods, but buyers of factors of production --Households take money in exchange for providing labor services, savings, and other resources; they then spend that money for the purchase of goods and services from firms (i.e. consumer spending) --In this model, income equals expenditures and if we are interested in counting production, we can count either all the income or all the expenditures and get the same result.

Exponential Expansion: Rule of 70

Whenever you have exponential expansion, the rule of 70 gives you the amount of time it takes for a number in that series to double: Doubling time=70/rate of growth So if the growth rate of US GDP is 2.8% - - - 70/2.8=25yrs for the US economy to double!

Factor Market

where buyers and sellers exchange factors of production 'Factors Of Production' An economic term to describe the inputs that are used in the production of goods or services in the attempt to make an economic profit. The factors of production include land, labor, capital and entrepreneurship.

Aggregate Demand Aggregate Demand represents ALL SPENDING ON GOODS and services and the relationship of that spending to the aggregate price level: --the quantity of output that would be demanded at any possible price level by households, businesses, the government and the rest of the world AD= C + I + G + (X-M) Difference between GDP is that it represents a particular point on the AD curve (i.e. a particular level of GDP given the price level), and the AD curve represents the hypothetical GDP that would be purchased at varying price levels.

--DOWNWARD SLOPING due to the principle that people will consume different amounts at different price levels; whereas the demand curve sloped downward in Micro-economics due to the law of demand Slopes downward (movement down ALONG the curve) for three reasons: 1) wealth effect (aka Pigou wealth effect) WHEN THERE IS AN INCREASE IN THE PRICE LEVEL, THE PURCHASING POWER OF MONEY GOES DOWN and people are less able to purchase at increased price levels; 2) interest-rate effect - When price level goes up, people need to hold onto more money to make purchases as opposed to putting into bank assets, then the bank has less money to lend out and that drives interest rates up; WHEN INTEREST RATES INCREASE, INVESTMENTS DECREASE (the i part of the AD), thus as price level increases, amount of AD decreases 3) Exhange-rate effect: When price level in one country increases, people naturally try to substitute with goods and services from other countries and IMPORTS INCREASE which increase the supply and lowers demand and imports are NOT a part of our output (GDP) so not helpful to the economy. Shifts: When AD increases it shifts outward (to the right); when AD decreases it shifts inward (to the left); several factors cause this: --changes in expectations: if consumers and firms pessimistic about the future will save more and spend less; if optimistic --changes in wealth --government fiscal (increases/decreases spending or taxes) and monetary policies (Fed controls money supply to influence interest rates, which influences C and I of AD. REMEMBER IF SOMETHING AFFECTS C, I, G, X OR M through something besides the price level, it WILL change the AD.

Unemployment Rate: Inability of those willing and able to work to find work UR=Number of unemployed divided by Number of employed + Number of unemployed

--released by BLS every month on first Friday of the Month; percentage of people that were unemployed during the previous month --purpose is to capture true unemployment rate: Are the people willing and able to work able to find it? Employed: counted as employed by BLS/macroeconomics if worked a single hour during the previous week Unemployed: counted as unemployed if did not work a single hour AND had actively looked for work during the LAST FOUR WEEKS. Ex: In 2011, 139.3million people employed in US; 13.9 unemployed. --Labor Force =153.2 million --Unemployment rate=9.1% Third category used by BLS: Discouraged Workers

UNEMPLOYMENT

--situation in which people are not working, EVEN THOUGH THEY ARE WILLING AND ABLE TO WORK --not merely everyone who is not working, must be WILLING AND ABLE; (i.e. a person who wants to work but cannot find work) --like GDP, another important indicator of the economy --all else equal, we expect more people to e working when an economy is making more goods and services; fewer people working when economy making fewer goods and services --thus, number of people working=good indicator of HOW CLOSE AN ECONOMY IS TO PRODUCING ITS FULL POTENTIAL --certain amount of unemployment is GOOD for an economy to grow at a healthy pace without large increases in the prices of goods and services

Underemployment and Discouraged Workers Unemployment rate not a perfect measure and is sometimes misleading and can UNDERSTATE true employment situation:

--underemployed - when people take jobs for which they are overqualified and/or jobs with reduced hours when they cannot find appropriate jobs; --discouraged worker effect: exit the labor force and are not counted in the willing and able to find work labor force numbers --marginally attached: technically left the workforce, but would still like to work and have demonstrated some degree of attachment to the labor force (i.e. might not have worked during previous week or looked for work, but plan to, etc.); INCLUDES DISCOURAGED WORKERS and those who haven't worked for family constraints, transportation problems, school commitments, ill health or other reasons ALSO INCLUDED. --these are taken into account in BLS's 6 different measures of unemploymnet (U-1 to U-6) and lead to substantial differences between reported umployment rae and true UR during recessions and other economic downturns.

Quiz Mistakes: 3. The producer of a good who is thinking rationally will focus on the average cost of producing a good. - - FALSE: Rational agents think MARGINALLY - on the marginal cost of the good, rather than its average cost. 4. Decision making by household is in the realm of microeconomics while decision-making by large firms is in the realm of macro-economics. --FALSE: Both of these are in the real of micro-economics. Macro-economics focus on ENTIRE ECONOMIES. (nations, states, etc.) 5. The price of a purplett is $9, the additional benefit from purchasing another purplett is$10, and the average benefit from purchasing another purplett is only $8. Given this, a buyer should not buy another purplett. --FALSE: Marginal Analysis of Cost and Benefit of the next unit: If the price of the next purplett is $9 (the marginal cost to the consumer) and he or she will receive $10 in marginal benefit from purchasing it, there is a NET GAIN of $1. So long as the marginal benefit of the next unit of something is AT LEAST AS GREAT as the cost of that unit, the consumer should/will ALWAYS PURCHASE THE NEXT UNIT.

7. Scharf sells T-shirts. When she sells 35 T-shirts, it costs her a total of $40, and when she sells 36 T-shirts, it costs her total of $45 Based on this information, which is definitely true. A. It would be irrational for Scarf to sell any T-shirts for less than $40. B. It would be irrational for Scharf to sell the 36th T-shirt unless she received at least $45 for it. C. Scharf shouldn't sale T-Shirts as it will never be possible for her to make a profit. D. It would be irrational for for Scharf to sell the 36th T-shirt unless she received at least $5 for it. --ANSWER IS D. MY ORIGINAL CALCULATIONS 1. 35/40=$.8705 per shirt 2. Marginal cost of $1 (rounded) - Marginal cost of extra unit of t-shirt at $5= NET LOSS OF -4$ 3. So long as the marginal benefit of the next unit of something is AT LEAST AS GREAT as the cost of that unit, the consumer should/will ALWAYS PURCHASE THE NEXT UNIT. 4. She would have to receive at least $5 which is the cost of selling it. CORRECT MATH EXPLANATION: The total cost of producing 36 units is $45 and the total costs of producing 35 units is $40, so the MARGINAL COST OF PRODUCING THE 36TH UNIT IS $45-$40=$5.00. Thus, a rational decisionmaker will sell the 36th unit if she can get at least as great as the cost of that unit or $5.00 for it. 8. Which of the following would be considered capital? A. The money raised to start a business. B. A factory. C. A worker. D. Electricity. --ANSWER IS B. Capital is sth made (built or produced) and that is used to produce other things. Electricity and other forms of energy are natural resources.

Missed Quiz Q's 1. Diminishing marginal utility is the foundation of the law of demand and the downward sloping demand curve. TRUE: This is the same as saying Utility Maximization is the foundation of the law of demand and demand curve. Because the theory of Utility Maximization presumes it. 2. A lower price of oranges will cause the demand for oranges to increase, shifting the demand curve to the right. FALSE: Lower price of oranges will increase QUANTITY DEMANDED ALONG THE DEMAND CURVE, but DOES NOT SHIFT THE CURVE. Only determinants, not price, shifts the curve.

7. Should have just used his midpoint method formula: Ed=(Q1-Qo/P1-P0)X (Average of P/Average of Q) instead of the one in the picture. I didn't know/forgot to flip the Average of Q/Average of P and multiply it to the first part of the equation!!

Quiz: (got most right, but wanted to remember them) 1. When the marginal product of labor is falling, the total product of labor is falling. FALSE: so long as the next unit of labor is positive it adds to the total product. 2. In the long run, all inputs are variable. TRUE: only in the short-run are their fixed inputs (usually assumed to be capital) 3. Diminishing marginal product is a short-run phenomenon. TRUE. Because there are fixed costs only in the short-run, diminishing marginal product can occur. 5. Diminishing returns to variable inputs implies rising marginal production costs. TRUE. They are inversely related.

8. The average product of labor is equal to _____ units when 8 units of labor are hired. APl=TPl/L 5 units 6. Which of the following is false about short-run production functions: a) As more labor is employed, he marginal product of labor eventually decreases. b) If the marginal product of labor exceeds the average product of labor, the average product is rising. c) If the total product of labor is rising, the marginal product of labor must be postitive. d) if the marginal product of labor is rising, the total product of labor is falling. D. If the marginal product is rising, it must be positive and therefore total product must also be rising. In fact, total product would be rising at an increasing rate.

Money Market

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper. The money market is different from the capital market. Graph: SINCE THE FED DECIDES WHAT THE AMOUNT OF MONEY IN THE ECONOMY SHOULD BE, . . . AT ANY GIVEN TIME, THE AMOUNT OF MONEY IN THE MONEY SUPPLY IS A FIXED AMOUNT . . .THUS, THE MONEY SUPPLY (Sm) IS VERTICAL AT A SINGLE POINT. Money demand curve: how much money people are willing to hold at various interest rates due to the opportunity cost of holding money - the interest rate. Changes in factors can shift the demand curve for money in (decrease) or out (increase): --changes in the aggregate price level will increase the demand for money --if GDP changes, so does the demand for money - if it grows they need more money for purchasing --technology and habits: christmas time sees an increased demand, ATM's have decreased demand since folks need to keep smaller amounts on person nowadays

Liquidity preference theory (aka MONEY MARKET MODEL) Used to explain determination of the interest rate by the supply and demand for money: The demand for money as an asset theorized to depend on the interest foregone by not holding bonds (here, the term "bonds" can be understood to also represent stocks and other less liquid assets in general, as well as government bonds). Interest rates cannot be a reward for saving as such because, if a person hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although he has nevertheless refrained from consuming all his current income. Instead of a reward for saving, interest, in the Keynesian analysis, is a reward for parting with liquidity.

According to Keynes, money is the most liquid asset. Liquidity is an attribute to an asset. The more quickly an asset is converted into money the more liquid it is said to be. According to Keynes, demand for liquidity is determined by three motives:[2] --the transactions motive: people prefer to have liquidity to assure basic transactions, for their income is not constantly available. The amount of liquidity demanded is determined by the level of income: the higher the income, the more money demanded for carrying out increased spending. --the precautionary motive: people prefer to have liquidity in the case of social unexpected problems that need unusual costs. The amount of money demanded for this purpose increases as income increases. --speculative motive: people retain liquidity to speculate that bond prices will fall. When the interest rate decreases people demand more money to hold until the interest rate increases, which would drive down the price of an existing bond to keep its yield in line with the interest rate. Thus, the lower the interest rate, the more money demanded (and vice versa). Economist John Maynard Keynes describes liquidity preference theory in Chapter 13, "The General Theory of the Rate of Interest," of his famous book, "The General Theory of Employment, Interest and Money." Keynes said that people value money for both "the transaction of current business and its use as a store of wealth." Thus, they will sacrifice the ability to earn interest on money that they want to spend in the present, and that they want to have it on hand as a precaution. On the other hand, when interest rates increase, they become willing to hold less money for these purposes in order to secure a profit. EFFECT: IN OTHER WORDS INTEREST RATE WILL ADJUST TO BRING THE AMOUNT OF MONEY THAT PEOPLE WANT IN LINE WITH THE AMOUNT OF MONEY THAT ACTUALLY EXISTS.

Say's Law (Classical Theory)

An economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services. INVESTOPEDIA EXPLAINS 'Say's Law Of Markets' Say's Law is named after the 18th-century French classical liberal economist Jean-Baptiste Say, who popularized the notion. Say was an advocate of laissez-faire economics and was heavily influenced by Adam Smith. Say's Law is frequently misinterpreted as "supply creates its own demand," which is evidently false. If it were true, anyone could do whatever they wanted for a living and be successful at it.

Consequences of Inflation Shoe leather and Menu transaction costs: very inefficient for folks who could be producing more with their time. Money loses its value and therefore people lose confidence in money as the value of savings is reduced. This is particularly the case with rapid inflation Inflation can get out of control - price increases lead to higher wage demands as people try to maintain their living standards. Businesses then increase prices to maintain profits. Higher prices then put upward pressure on wages. This is known as a wage-price spiral. Problems for people on fixed incomes - consumers and businesses on fixed incomes lose out because the their real incomes falls

Employees in poor bargaining positions lose out - for example people in low paid jobs with little or no trade union protection and my see the real value of their pay fall when inflation is high. In this sense, inflation can cause an arbitrary redistribution of income. Inflation can favour borrowers at the expense of savers because inflation erodes the real value of existing debts. And the rate of interest on loans may not cover the rate of inflation. When the real rate of interest is negative, savers lose out at the expense of borrowers. Inflation can disrupt business planning - although businesses are aware of what has happened to prices in the past, they cannot be certain what will happen in the next few months and years. Budgeting becomes difficult and this may reduce planned investment spending. Lower investment has a detrimental effect on the economys long run growth potential. Inflation is a possible cause of higher unemployment - particularly if one country experiences a much higher rate of inflation than another, leading to a loss of international competitiveness and a subsequent worsening of their international trade performance. If inflation in the UK economy is significantly above that of our major trading partners, British exporters may struggle to maintain their share in international markets and import penetration into our domestic economy would be expected to grow. Both factors could lead to worsening balance of payments problems. Rising inflation is associated with higher interest rates because the independent Bank of England seeks to control inflationary pressure by raising the level of base interest rates this reduces economic growth and can lead either to a slowdown or (worse) a recession.

EXTRA HELP: http://beta.tutor2u.net/economics/blog/unit-1-micro-price-elasticity-of-demand Price elasticity of demand (Ped) measures the responsiveness of demand following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is: Percentage change in quantity demanded divided by the percentage change in price Since changes in price and quantity usually move in opposite directions, usually we do not bother to put in the minus sign. We are more concerned with the co-efficient (use absolute number) of elasticity of demand. Values for price elasticity of demand 1. If Ped = 0 demand is perfectly inelastic - demand does not change at all when the price changes - the demand curve will be drawn as vertical. 2. If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. 3. If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level. 4. If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. For example a 10% increase in the price of a good might lead to a 30% drop in demand. The price elasticity of demand for this price change is -3

Factors affecting price elasticity of demand 1. The number of close substitutes - the more close substitutes there are in the market, the more elastic is demand because consumers find it easy to switch. 2. The cost of switching between products - there may be significant costs involved in switching. In this case, demand tends to be relatively inelastic. For example, mobile phone service providers may insist on a12 month contract. 3. The degree of necessity or whether the good is a luxury - necessities tend to have an inelastic demand whereas luxuries tend to have a more elastic demand. 4. The proportion of a consumer's income allocated to spending on the good - products that take up a high % of income will tend to have a more elastic demand 5. The time period allowed following a price change - demand tends to be more price elastic, the longer that consumers have to respond to a price change. They may search for cheaper substitutes and switch their spending. 6. Whether the good is subject to habitual consumption - consumers become less sensitive to the price of the good of they buy something out of habit (it has become the default choice). 7. Peak and off-peak demand - demand tends to be price inelastic at peak times and more elastic at off-peak times - this is particularly the case for transport services. 8. The breadth of definition of a good or service - if a good is broadly defined, i.e. the demand for petrol or meat, demand is often inelastic. But specific brands of petrol or beef are likely to be more elastic following a price change.

Idea of Full Employment: Wikipedia: Full employment, in macroeconomics, is the level of employment rates where there is no cyclical or deficient-demand unemployment.[1] It is defined by the majority of mainstream economists as being an acceptable level of unemployment somewhere above 0%. The discrepancy from 0% arises due to non-cyclical types of unemployment. Unemployment above 0% is seen as necessary to control inflation in capitalist economies, to keep inflation from accelerating, i.e., from rising from year to year. This view is based on a theory centering on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU); in the current era, the majority of mainstream economists mean NAIRU when speaking of "full" employment. The NAIRU has also been described by Milton Friedman, among others, as the "natural" rate of unemployment. Having many names, it has also been called the structural unemployment rate.

Investopedia: A situation in which all available labor resources are being used in the most economically efficient way. Full employment embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time. The remaining unemployment is frictional. Frictional unemployment is the amount of unemployment that results from workers who are in between jobs, but are still in the labor force. Full employment is attainable within any economy, but may result in an inflationary period. The inflation would result from workers, as a whole, having more disposable income, which would drive prices upward. Many economists have estimated the amount of frictional unemployment, with the number ranging from 2-7% of the labor force. IF UNEMPLOYMENT IN USA RISES ABOVE 6.25% ECONOMY COULD BE WEAKENING; IF FALLS BELOW 6.25% ECONOMY ACTUALLY PRODUCING MORE THAN ITS CAPACITY, WHICH COULD LEAD TO A SPIKE IN PRICES AND AN INFLATIONARY PERIOD.

Problems with Fiscal and Monetary Policy

Liquidity Trap: Monetary policy has been rendered ineffective because the interest rate is already so low that it's up against the lower bound of zero. Lags: --Inside Lag Inside lag is the decision-making time that it takes governing bodies to assess a problem, determine a solution and agree on a final solution. On a federal level, this often entails an agreement between the two congressional houses and the president of the United States. On a state level, this includes the agreement between the two state congressional houses and the governor of the state. Inside lag can delay an economic solution due to a disagreement about the implementation of an economic solution, disagreement about the extent of the problem or confusing the situation with other political issues: ----Examples: Recognition lag and Decision lag (esp severe with fiscal policy that is submitted to Congressional DISCRETIONARY FISCAL POLICY procedures; one solution is AUTOMATIC STABILIZERS, provisions in the tax code and transfer payment systems that change w/o need for additional legislative action) --Outside Lag (aka Impact Lag) Outside lag is the delay between the time that a solution is approved and the date that the solution is implemented and/or works it way through the economy. Outside lag exists to give people in the public and private sector time to make the necessary changes in order to prepare for the economic solution. This may include scheduling development teams if the solution involves construction, upgrading the public or private sector to meet new specifications or time to save money to fund a solution. NEITHER MONETARY NOR FISCAL POLICY IS VERY GOOD AT STIMULATING GROWTH: Stabilization policies can only return an economy to the full-employment rate of output, NOT STIMULATE ECONOMIC GROWTH.

Measuring State of the Economy Gross Domestic Product (GDP) --most important measure of macroeconomy --measure of the MARKET VALUE of (new) final goods and services produced within an economy --gives info as to how much economic activity is occurring within the economy --also reflects the standard of living within the economy b/c our collective income depends on how many goods and services are being produced in the economy.

MARKET VALUE is used as a common denominator to add up everything. FINAL GOODS AND SERVICES is used to avoid overcounting (counting tires twice, once in manufacture and then on cars) or undercounting. PRODUCED WITHIN AN ECONOMY means within the geographical borders of the nation, no matter the nationality of the producer. IN US ECONOMY: -- Consumption is largest part of GDP; mostly in the form of services --US is a net importer (typically import more goods than export) -- Greatest variation is in INVESTMENT into future production capabilities by firms; 2008 Consumption didn't fall too much surprisingly given the financial crisis, but business investment took a big 25% dip! Seemed to be more interested in getting rid of inventor than in adding it.

Discouraged Worker as Marginally Attached and Frictionally Unemployed In the United States, a discouraged worker is defined as a person not in the labor force who wants and is available for a job and who has looked for work sometime in the past 12 months (or since the end of his or her last job if a job was held within the past 12 months), but who is not currently looking because of real or perceived poor employment prospects.[2][3][4]

The Bureau of Labor Statistics does not count discouraged workers as unemployed but rather refers to them as only "marginally attached to the labor force". This means that the officially measured unemployment captures so-called "frictional unemployment" and not much else.[8] This has led some economists to believe that the actual unemployment rate in the United States is higher than what is officially reported while others suggest that discouraged workers voluntarily choose not to work.[9] Nonetheless, the U.S. Bureau of Labor Statistics has published the discouraged worker rate in alternative measures of labor underutilization under U-4 since 1994 when the most recent redesign of the CPS was implemented.[10][11] The United States Department of Labor first began tracking discouraged workers in 1967 and found 500,000 at the time.[12] Today, In the United States, according to the U.S. Bureau of Labor Statistics as of April 2009, there are 740,000 discouraged workers.[13][14] There is an ongoing debate as to whether discouraged workers should be included in the official unemployment rate.[12] Over time, it has been shown that a disproportionate number of young people, blacks, Hispanics and men, make up discouraged workers.[15][16] Nonetheless, it is generally believed that the discouraged worker is underestimated because it does not include homeless people or those who have not looked for or held a job during the past twelve months and is often poorly tracked.[12][17] According to the U.S. Bureau of Labor Statistics, the top five reasons for discouragement are the following:[18] The worker thinks no work is available. The worker could not find work. The worker lacks schooling or training. The worker is viewed as too young or too old by the prospective employer. The worker is the target of various types of discrimination.

GDP Deflator The GDP DEFLATOR is another tool that gives a number that modifies nominal GDP to get real GDP. GDP deflator is sometimes used instead of CPI to get the real GDP in a given year because the CPI does not capture changes in the rices of all goods, only consumer goods. The technique is the same.

The GDP deflator is an economic metric that converts output measured at current prices into constant-dollar GDP. This includes prices for business and government goods and services, as well as those purchased by consumers. This calculation shows how much a change in the base year's GDP relies upon changes in the price level. If we wish to analyze the impact of price changes throughout an economy, then the GDP deflator is the preferred price index. This is because it does not focus on a fixed basket of goods and services and automatically reflects changes in consumption patterns and/or the introduction of new goods and services. Real GDP for a given year, in relation to a "base" year, is computed by multiplying the nominal GDP for a given year by the ratio of the GDP price deflator in the base year to the GDP price deflator for the given year. Example: Suppose we wish to calculate the real GDP for the year 2001 in terms of 1996 dollars. The value for (note that these values are for illustration purposes only) 1996 price deflator is 100 and the 2001 price deflator is 115. The 2001 GDP in nominal terms is $10 trillion dollars.

Aggregate Supply Determinants (Shifting) An assortment of ceteris paribus factors that affect short-run and long-run aggregate supply, but which are assumed constant when the short-run and long-run aggregate supply curves are constructed. Changes in any of the aggregate supply determinants cause the short-run and/or long-run aggregate supply curves to shift. While a wide variety of specific ceteris paribus factors can cause the aggregate supply curves to shift, they are commonly grouped into three broad categories--resource quantity, resource quality, and resource price. Aggregate supply determinants are held constant when the aggregate supply curves are constructed. A change in any of these determinants causes a shift of either the short-run aggregate supply curve, the long-run aggregate supply curve, or both. The assortment of aggregate supply determinants fall into three categories (1) resource quantity--the amounts of labor, capital, land, and entrepreneurship available, (2) resource quality--the productivity of the four factors of production, and (3) resource price--the prices of the inputs used in production. While a complete list is lengthy, four specific determinants that tend to stand out in the study of macroeconomics and aggregate market (AS-AD) analysis are: Wages: This is the price of labor, which works through the resource price determinant. It is the key determinant underlying the self-correction mechanism of the aggregate market. Wages affect the short-run aggregate supply curve, but not the long-run aggregate supply curve. Technology: Improvements in production techniques, often embodied in product inventions and innovations, is a prime example of a resource quality determinant. Technology causes shifts in both the short-run and long-run aggregate supply curves. Energy Prices: These are the prices of key energy inputs, especially petroleum, that are essential to any modern industrialized economy. Like wages, energy prices also work through the resource price determinant. Also like labor, energy prices affect the short-run aggregate supply curve, but not the long-run aggregate supply curve. Capital Stock: This is the total quantity of capital used by the economy for production. It is a prime example of a resource quantity determinant and affects both the short-run and long-run aggregate supply curves. Other determinants of aggregate supply, each important in its own right, include education',500,400)">education, population growth, labor-force participation, resource exploration, and assorted material input prices.

The aggregate supply determinants shift both the short-run aggregate supply curve, abbreviated SRAS, and the long-run aggregate supply curve, abbreviated LRAS. The exhibit to the right presents a standard short-run aggregate supply curve in the top panel and a typical long-run aggregate supply curve in the bottom panel. The short-run aggregate supply curve is positively sloped and captures the specific one-to-one relationship between the price level and real production. The long-run aggregate supply curve is vertical at the full-employment level of production, indicating that real production is independent of the price level. The ceteris paribus factors, that is, the aggregate supply determinants, are assumed to remain constant when these curves are constructed. Similar to other determinants, the aggregate supply determinants shift these two aggregate supply curves. A change in any of the determinants can increase or decrease one or both of the aggregate supply curves. Short-Run Aggregate Supply: Consider first the short-run aggregate supply curve. An increase in short-run aggregate supply is illustrated by a rightward shift in the SRAS curve in the top panel. A decrease in short-run aggregate supply is illustrated by a leftward shift. Click the [Increase in SRAS] or [Decrease in SRAS] buttons for a demonstration. Long-Run Aggregate Supply: Now consider the long-run aggregate supply curve. An increase in long-run aggregate supply is illustrated by a rightward shift in the LRAS curve in the bottom panel. A decrease in long-run aggregate supply is illustrated by a leftward shift. Click the [Increase in LRAS] or [Decrease in LRAS] buttons for a demonstration. What does it mean to have an increase in supply? It means that for every price level, the business sector is willing and able to supply more real production. A decrease in supply is obviously the exact opposite. For every price level, the business sector is willing and able to supply less real production.

Changes in Equilibrium: When demand curve, supply curve or both curves shift due to determinants of supply and/or demand, the market will adjust to a new equilibrium price and quantity. For example: 1. If bikes are normal goods and consumer income rises, the demand for bikes will increase (shift to the right OR shift out) from Do (original demand curve) and could cause a shortage in bikes, but only temporarily as THERE WILL BE PRESSURE ON THE PRICE TO INCREASE TO CLEAR THE SHORTAGE. Thus, there will be a new higher equilibrium price with a new equilibrium quantity after the market adjusts. 2. If price of riding the bus falls, then the low-cost substitute of riding a bike will become less popular and demand for bikes will decrease (shift to the left) from Do. Falling Demand causes a temporary surplus as THERE WILL BE PRESSURE ON THE PRICE TO DECREASE TO CLEAR THE SHORTAGE and soon the equilibrium price will decrease until a new equilibrium quantity is established. *Note: Both price and quantity change IN THE SAME DIRECTION AS THE DEMAND SHIFT itself. WHEN DEMAND INCREASES, PRICE AND QUANTITY BOTH INCREASE; WHEN DEMAND DECREASES PRICE AND QUANTITY DECREASE.

The same shifting and changes in equilibrium occur in the supply curve when determinants change (i.e. vast improvements in technology, etc. *Note: When supply shifts, the EQUILIBRIUM QUANTITY goes in the same direction: WHEN SUPPLY INCREASES, QUANTITY INCREASES AND PRICE DECREASES; WHEN SUPPLY DECREASES, QUANTITY DECREASES AND PRICE INCREASES. (REVIEW)The following determinants cause shifts in the entire demand curve: change in consumer tastes change in the number of buyers change in consumer incomes change in the prices of complementary and substitute goods change in consumer expectations The following determinants cause shifts in the entire supply curve: change in input prices change in technology change in taxes and subsidies change in the prices of other goods change in producer expectations change in the number of suppliers Any factor that increases the cost of production decreases supply. Any factor that decreases the cost of production increases supply.

Effects of Attempting to Lower Unemployment Below Nairu: Short-run Phillips Curve (SRPC) and Long-run Phillips Curve (LRPC) If an attempt is made by governments or private individuals collectively to maintain a level of unemployment below the NAIRU (i.e. natural rate of unemployment), the result will be ever-escalating levels of inflation due to folks expectations and wage bargaining.

The short-run Phillips curve depicts the inverse trade-off between inflation and unemployment. The long-run Phillips curve is a vertical line at the natural rate of unemployment (NAIRU), but the short-run Phillips curve is roughly L-shaped. The inverse relationship shown by the short-run Phillips curve only exists in the short-run; there is no trade-off between inflation and unemployment in the long run. Economic events of the 1970's disproved the idea of a permanently stable trade-off between unemployment and inflation. Graph attached is SRPC and LRPC BEFORE AND AFTER EXPANSIONARY POLICY (i.e. fed interference in interest rates, etc.)

Monetary Base (i.e. circulation + federal reserve's stash [latter of which not counted in the money supply])

The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies. Also known as the "money base". For example, suppose country Z has 600 million currency units circulating in the public and its central bank has 10 billion currency units in reserve as part of deposits from many commercial banks. In this case, the monetary base for country Z is 10.6 billion currency units. For many countries, the government can maintain a measure of control over the monetary base by buying and selling government bonds in the open market.

Velocity of Money (Part of Formula for Quantity Theory of Money)

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. Classical economists believe that when more money is in circulation and chasing after the same goods, prices will be bid up.

Contractionary Fiscal Policy

Times when the economy is operating above full employment and inflation is the more serious problem, then the government can REDUCE GOV SPENDING OR INCREASE TAXES to SHIFT AGGREGATE DEMAND TO THE LEFT AND REDUCE THE PRICE LEVEL. Consequence is output will decrease and unemployment may increase.

The Role of Interest Rate and Investment Even though consumption much larger part of GDP, investment critical as an engine of economic growth and macroeconomic stability. It is much more VOLATILE than consumption. The amount of investment in economy depends on several things, but foremost among them is INTEREST RATE.

Two models for how interest rate is determined in short run: 1) liquidity preference: investors demand a larger return for securities with longer maturities (greater risk) b/c they prefer cash (less risk i.e. the more liquid an investment, the easier it is to sell quickly for its full value). BUT Because interest rates are more volatile in the short term, the premium (a sum added to an ordinary price or charge) on short- versus medium-term securities will be greater than the premium on medium- versus long-term securities. For example, a three-year Treasury note might pay 1% interest, a 10-year treasury note might pay 3% interest and a 30-year treasury bond might pay 4% interest. 2) market for loanable funds model: Supply is UPWARD-SLOPING and it originates from the savings that exist in an economy: --households and businesses supply their savings thru financial intermediaries and price they receive is the interest rate --as the interest rate increases, the amt of savings they are willing to supply increases (b/c opportunity cost of consuming increases) --Demand is DOWN-WARD SLOPING b/c loanable funds are used for INVESTMENT and the interest rate is the PRICE OF INVESTING --the more expensive it is to borrow money, the lower the rate of return on investments and therefore the less investment takes place --SHIFTS in the supply curve for loanable funds occur when there are CHANGES IN SAVINGS FROM OTHER COUNTRIES --Demand for loanable funds is a DERIVED DEMAND (i.e. demand of an item derived from the demand of another) of - FOR FIRMS - the demand for factors of production (land, labor, capital, entrepreneurship), and - FOR GOVERNMENT - demand for funds to spend above the tax revenue it collects. --THUS changes in the demand for loanable funds occur when their are changes in the investment climate that would not allow for profitable pursuit of these factors OR changes in the government's budget balance.

Cartesian Coordinate System with Lines: Lines are drawn to represent equations. Remember algabraic equations start with y: y=-4 + 1 times x OR y=-4 +1x. Use the labeled points (i.e. A,B,C, D, etc.) on the graph to solve the equation For example if point D corresponds to the point (4,0), where x always placed first in the parenthetical (x,y), then solve for y in the equation above by plugging in x=4. y=-4 + 1(4) or y=0 The line is merely the description of ALL THE POSSIBLE VALUES OF Y THAT WILL CORRESPOND TO ANY GIVEN VALUE OF X.

Two things to note about the relationship between equations and graphs: 1) -4 in the equation is the point at which the line crosses the y axis 2) the slope of this line is equal to + 1, meaning that every time x increases by 1 unit (graph square) the corresponding value of y will also increase by 1 unit. In general, the equation of any line in the Cartesian plane can be expressed as y=a+b times x, where a is the intercept (intersection) and b is the slope (increasing of units). Anytime b is positive, line slopes upward. If negative, then downward-sloping (by one unit in our example) ex. y=-4 + (-1)x

Labor Force (i.e. potential workers) US Bureau of Labor Statistics (BLS): agency responsible for collecting and analyzing employment data since 1940; conducts monthly (first friday of the month!) & annual Current Population Survey (CPS) to track employment and labor force

US Labor Force: (other countries vary) 1) be of working age (over 16 yrs) and not part of the "institutionalized population" (i.e. prison, jail, mental institution, or the military); and have either 2) worked at least one hour in the previous week OR not worked at all in the previous week and been actively looking for work 2011 roughly half US population not counted as potential workers

Expansionary fiscal policy

Undertaking by goverments to increase gov spending or decrease taxes to SHIFT AGGREGATE DEMAND TO THE RIGHT b/c increasing aggregate demand INCREASES OUTPUT, WHICH IN TURN INCREASES EMPLOYMENT. One consequence is risk of heightened inflation.