Macroeconomics Final
LO6.4 - Explain why shocks and sticky prices are responsible for short-run fluctuations in output and employment
Individuals and firms must sometimes adjust to shocks-situations which the future does not turn out as expected If prices are inflexible, or "sticky," shocks to demand or supply can result in disequilibrium situations quantity demanded does not equal the quantity supplied. So, the only way for the economy to adjust in the short run is through changes in output, employment, and inventories
LO16.4 - Explain how percentage rates of return provide a common framework for comparing assets
They compare different assets, even when those various assets have a wide variety of current prices and a large diversity of future payments. The percentage rate of return generated by an asset is inversely related to its price
LO8.4 - Describe the specific factors accounting for U.S. economic growth
U.S. real GDP growth has been driven by increases in the productivity of labor. Those increases can be attributed to technological progress, increases in the quantity of capital per worker, improvements in the education and training of works, the exploitation of economies of scale, and improvements in the allocation of labor across different industries
LO12.1 - Define aggregate demand (AD) and explain how its downward slope is the result of the real-balances effect, the interest-rate effect, and the foreign purchases effect
AD curve shows the level of real output that the economy demands at each price level real-balances effect indicates that inflation reduces the real value or purchasing power of fixed-value financial assets held by households, causing cutbacks in consumer spending. interest-rate effect means that, with a specific supply of money, a higher price level increases the demand for money, thereby raising the interest rate and reducing investment purchases foreign purchases effect suggests that an increase in one country's price level relative to other countries' price levels reduces the net export component of that nation's aggregate demand
LO12.4 - Explain the factors that shift AS
AS determinants are input prices, productivity, and the legal-institutional environment. All these factors will change per-unit production costs at each output level and shift the AS curve
LO16.3 - Distinguish among the most common financial investments: stocks, bonds, and mutual funds
Stocks - right to share in any future profits that corporations may generate Bonds - right to receive a fixed stream of future payments that serve to repay a loan Mutual funds - own and manage portfolios of bonds and stocks; fund investors get the returns generated by those portfolios
LO14.4 - Discuss the structure of the Federal Reserve
consists of (a) the Board of Governors of the Federal Reserve System, (b) the 12 Federal Reserve Banks, and (c) some 4,600 commercial banks and 7,000 thrift institutions (mainly credit unions) Board of Governors - basic policy-making body for the entire banking system the directives of the board and the Federal Open Market Committee implemented through the 12 Fed. Reserve Banks, which are simultaneously (a) central banks, (b) quasi-public banks, and (c) banker's banks
LO10.2 - List and explain factors other than income that can affect consumption
determined by the amount of wealth owned by households, borrowing, expectations of future prices and incomes, and real interest rates and taxes
LO16.1 - Distinguish between economic investment and financial investment
financial economics focuses on investor preferences and how they affect the trading and pricing of the wide variety of financial assets available in the modern economy, including stocks, bonds, and real estate
LO11.4 - Discuss two alternative ways to characterize the equilibrium level of real GDP in a private closed economy
saving equals planned investment no unplanned changes in inventories
LO1.1 - Define economics and explain the economic perspective
social science that looks at how people behave in an economy and make choices, deal with scarcity, opportunity cost, MB/MC
LO15.6 - Describe how the various components of macroeconomic theory and stabilization policy fit together
the economy's aggregate supply of final goods and services is determined by input prices, productivity, and the legal-institutional environment the economy's aggregate demand for final goods and services is determined by the factors that influence consumption spending, investment expenditures, net export spending, and government expenditures
LO14.3 - Describe what "backs" the money supply
the government's ability to keep the value of money relatively stable, which in turn depends largely on the government's effectiveness in managing the money supply
LO8.2 - Describe the institutional structures necessary for modern economic growth
the institutional structures must encourage savings, investment, and the development of new technologies Institutional structures that promote growth include strong property rights, patents, efficient financial institutions, education, and a competitive market system
LO13.6 - Discuss the size, composition, and consequences of the U.S. public debt
2021 - U.S. public debt was $29.7 trillion or $83,885 per person Public holds 58% of the federal debt; Federal Reserve and Federal agencies hold the other 42% Concern of bankruptcy b/c of large public debt is a false worry b/c (a) the debt needs only to be refinanced rather than retired and (b) the federal government has the power to increase taxes to make interest payments over the debt Problems: (a) payment of interest on the debt may increase income inequality; (b) interest payments or principal on the portion of the debt held by foreign nationals means a transfer of real output abroad; (d) government borrowing to refinance or pay interest on the debt may increase interest rates and crowd out private investment spending, leaving future generations with a smaller stock of capital than they would have otherwise had
LO9.5 - Describe how inflation may affect the economy's level of real output
Cost-push inflation reduces real output and employment. Demand-pull inflation reduces the economy's real output. However mild inflation may be a necessary by-product of high and growing spending that produces high levels of output, full employment, and economic growth.
LO13.1 - Identify the purposes, tools, and limitations of fiscal policy
Fiscal policy - deliberate changes in government spending, taxes, or both to promote full-employment, price-level stability, and economic growth Requires increases in govt. spending, decreases in taxes, or both (budget deficit) to increase AD and get out of recessions. Decreases in govt. spending, increases in taxes, or both (budget surplus) are appropriate fiscal policy for decreasing AD to try to slow or half demand-pull inflation
LO9.1 - Describe the phases of the business cycle
Four phases peak, trough, recession, and expansion, business cycles vary greatly in duration and intensity some of the biggest factors are major innovations and productivity shocks has greater effects on employment in the capital goods and durable consumer goods
LO8.3 - Identify the supply, demand, and efficiency forces that lead to economic growth
Four supply factors are changes in the quantity and quality of natural resources, changes in the quantity and quality of human resources, changes in the stock of capital goods, and improvements in technology One demand factor is changes in total spending One efficiency factor is changes in how well an economy achieves allocative and productive efficiency
LO7.3 - Determine GDP by summing all incomes received for providing resources
GDP is calculated as the sum of compensation to employees, rents, interest, proprietors' income, corporate profits, and taxes on production and imports, minus net foreign factor income, plus consumption of fixed capital and a statistical discrepancy
LO7.1 - Define and measure gross domestic product (GDP)
GDP is the market value of all final goods and services produced within a nation's borders in a year. Final goods are those purchased by end users. Intermediate goods, nonproduction transactions, and secondhand sales are excluded in calculating GDP.
LO7.2 - Determine GDP by summing all expenditures on final goods and services
GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output GDP = C + Ig + G + Xn The U.S. economy is referred to as a service economy because 60 percent of consumer expenditures in the United states are on services
LO1.7 - Explain how economic growth and international trade increase consumption possibilities.
Technological advances and increases in the quantity and quality of resources enable the economy to produce more of all goods and services-that is to experience economic growth. Society determines the future location of the production possibilities curve and the extent of economic growth international trade enables a nation to obtain more goods from its limited resources than its production possibilities curve indicates
LO17.3 - Explain the short-run trade-off between inflation and unemployment (the Phillips Curve)
Trade-off between inflation and unemployment in the long-run the economy will meet its maximum potential even if some years have bumps in potential at one time there was a nice trade-off phillips curve
LO15.5 - Explain the advantages and shortcomings of monetary policy
advantages include its flexibility and political acceptability which has led to stability in the financial sector during 07-09 and swift promotion of financial stability during COVID-19 2 major limitations (1) the recognition and operation lags complicate the timing of monetary policy; and (2) in a severe recession, the reluctance of banks to lend-and of firms and households to borrow-may contribute to a liquidity trap that limits the effectiveness of an expansionary monetary policy
LO2.6 - Explain how the market system deals with risk
by focusing business risks onto owners, the market system encourages the participation of workers and suppliers who dislike risk while at the same time creating a strong incentive for owners to manage business risks prudently.
LO15.3 - Define the Fed's dual mandate and explain how conflicts can arise between meeting the inflation target and the unemployment target
Fed. Reserve must pursue 2 goals: the full-employment rate of unemployment and the target rate of inflation Dual Mandate Bullseye chart illustrates how the Fed may sometimes receive "mixed signals" on whether to pursue expansionary, restrictive, or neutral monetary policy. Leads the Fed to put more emphasis on full employment in the labor force than the inflation target
LO4.4 - Understand why asymmetric information may justify government intervention in some markets
can cause a market to fail if the party with less information decides to withdraw from the market because it fears being exploited by the party with more information. Can end up causing underallocation of resources to the production of the product sold in the market moral hazard problem is the tendency of one party to a contract or agreement to alter their behavior in ways that are costly to the other party adverse selection problem arises when one party to a contract or agreement has less information than the other party and incurs a cost because of that asymmetrical information
LO2.2 - List the main characteristics of the market system
characterized by the private ownership of resources, including capital, and the freedom of individuals to engage in economic activities of their choice to advance their well-being. Self-interest is the driving force of such an economy, and competition functions as a regulatory or control mechanism specialization, the use of advanced technology, and the extensive use of capital goods are common features of market systems. by functioning as a medium of exchange, money eliminates the problems of bartering and permits easy trade and greater specialization, both domestically and internationally
LO12.2 - Explain the factors that shift AD
determinants of AD consist of spending by domestic consumers, by businesses, by government, and by foreign buyers. the extent of the shift is determined by the size of the initial change in spending and the strength of the economy's multiplier
LO6.2 - Discuss why sustained increases in living standards are historically recent
economies grew, but any increase in output was equal to an equal increase in the population so the amount of output per person did not rise. Since the Industrial Revolution began in the late 1700s, many nations have experienced modern economic growth in which output grows faster than population-so standards of living rise over time.
LO1.2 - Describe the role of economic theory in economics
economists employ the scientific method, in which they form and test hypotheses of cause-and-effect relationships to generate theories, laws, and principles. Economists often combine theories into representations called models
LO17.1 - Explain the relationship between short-run aggregate supply and long-run aggregate supply
economy is only capable of the maximum amount able to be produced in the long-run maximum point on the curve and so you can only have that much supply
LO3.4 - Explain how supply and demand interact to determine market equilibrium
equilibrium price and quantity established where supply and demand curves intersect market demand and market supply adjusts the price to the point at which quantities demanded and supplied are equal, so eq price. and the quantity would be eq quantity. the ability of market forces to synchronize selling and buying decisions to eliminate potential surpluses and shortages is known as the rationing function of prices.
LO4.2 - Explain how positive and negative externalities cause under- and overallocations of resources
externalities or spillovers are costs or benefits that accrue to someone other than the immediate buyer or seller negative externalities result in an overallocation of resources to a particular product positive externalities result in an underallocation of resources to a particular product government can correct the underallocation of resources and efficiency losses either by subsidizing consumers or by subsidizing producers. Coarse theorem - under the right circumstances private bargaining can solve externality problems
LO6.5 - Characterize the degree to which various prices are sticky
firms often attempt to maintain stable prices to please consumers, who tend to prefer predictable prices. A firm with just a few competitors may be reluctant to cut its price due to the fear of staring a price war
LO11.3 - Combine consumption and investment to create an aggregate expenditures schedule for a private, closed economy and determine the economy's equilibrium level of output
for a private closed economy, the equilibrium level of GDP occurs when aggregate expenditures and real output are equal, or where the C + Ig line intersects the 45-degree line. When GPD is greater than eq GDP real output exceeds aggregate spending, causing unplanned investment in inventories and eventual declines in GDP When GPD is below-equilibrium aggregate expenditures exceed real output, causing unplanned disinvestment in inventories and eventual increases in GDP
LO14.6 - Explain the fractional reserve system used by U.S. Banks and why the Fed might wish to influence their creation of checkable-deposit money
fractional reserve system - only a portion of checkable deposits are backed by currency. Implies that U.S. banks are vulnerable to bank panics. Employs deposit insurance to mitigate that risk. The Fed also stands ready to make emergency loans to banks experiencing bank runs Banks and thrifts create checkable deposit money at any time they extend a loan. It is destroyed whenever a bank or thrift loan is repaid. Any decision by the Fed that influences bank lending will tend to change: the total amount of checkable deposit money, the overall money supply, the total volume of lending, interest rates, and overall economic activity.
LO9.2 - Measure unemployment and explain the different types of unemployment
full-employment or the natural rate of unemployment frictional unemployment are those unemployed but in the process of finding jobs structural unemployment is those who are unemployed because of skills and not being able to move where more employment is cyclical unemployment is caused by decreases in total-spending
LO15.1 - Explain the tools of monetary policy, including open-market operations, forward guidance, and the administered rates
main tools are (a) open-market operations, (b) the administered interest rates, and (c) forward guidance 3 administered rates: interest rate on reserve balances (depository institutions lend the Fed money), overnight reverse repo rate (non-depository financial firms can lend the Fed money), and the discount rate (depository institutions can borrow money from the Fed) Fed Reserve policy rate - effective federal funds rate Fed adjusts administered rates to control the effective federal funds rate and other money market interest rates
LO14.5 - Identify the functions and responsibilities of the Federal Reserve
major functions are (a) issue Federal Reserve Notes, (b) hold reserves deposited by banks and thrifts (and set reserve req., if any), (c) lend money to financial institutions and serve as the lender of last resort in national financial emergencies, (d) provide for the rapid collection of checks, (e) act as the fiscal agent for the government, (f) supervise the operations of the banks, and (g) regulate the supply of money in the economy's best interests. The Fed is independent from the President, Congress, and political pressure
LO5.2 - Explain the difficulties of conveying economic preferences through majority voting
majority voting creates the possibility of underallocations or overallocations of resources to particular public goods and inconsistent voting outcomes that make it impossible for a democratical system to definitively determine the will of the people.
LO1.3 - Distinguish microeconomics from macroeconomics and positive economics from normative economics.
microeconomics examines the decision making of specific economic units or institutions, while macroeconomics looks at the economy as a whole or its major aggregates positive economics deals with facts normative economics reflects value judgements (opinions)
LO10.5 - Illustrate how changes in investment and the other components of total spending can multiply GDP
multiplier effect causes an increase in investment spending to ripple through the economy and create a magnified increase in real GDP. it equals the ultimate change in GDP divided by the initiating change in investment the multiplier is equal to the reciprocal of the MPS, and the greater the MPS the smaller the multiplier, the greater the MPC the larger the multiplier
LO7.4 - Describe the relationships among GDP, net domestic product, national income, personal income, and disposable income
net domestic product is GDP minus the consumption of fixed capital. National income is found by subtracting a statistical discrepancy from NDP and adding net foreign factor income to NDP. Personal income is the total income paid to households before they pay personal taxes. Disposable income is personal income after households have paid personal taxes. DI measures the amount of income available to households to consume or save
LO11.6 - Integrate the international sector into the aggregate expenditures model
net export schedule in the open economy relates net exports to equilibrium GDP. level of net exports is the same at all levels of real GDP positive net exports increase aggregate expenditures to a higher level, and negative net exports decrease aggregate expenditures, decreasing equilibrium real GDP by a multiple of their amount. increases in exports or decreases in imports have an expansionary effect on real GDP, and decreases in exports and increases in imports have a contractionary effect
LO7.5 - Distinguish between nominal GDP and real GDP
nominal GDP is the current dollar value real GDP is the constant-dollar value and is adjusted for price-level changes, using a GDP price index to convert to real dollars
LO5.3 - Define government failure and explain its causes
politicians and other government officials may sometimes manifest a principal-agent problem, pursuing actions that serve their own interests rather than those that would serve the public causes for inefficiency are citizens as voters face limited bundled choices regarding candidates and public goods, government bureaucracies have less incentive to operate efficiently than do private business, regulated industries may sometimes capture their government regulatory agencies and mold government policies toward their best interest deregulation is one way to prevent industries from capturing their regulators
LO16.2 - Explain the time value of money and calculate the present value of money
present-value formula - tells investors the current number of dollars that they have to invest today to receive Xt dollars in t years. risk-free investment's proper current price is the sum of the present values of each of the investment's expected future payments/
LO1.6 - Apply production possibilities analysis
production possibilities curve shows two products and the combinations with which you can produce both. Leading to opportunity costs where society may want to produce more of one item but it leads to the loss of more of the other item can draw a PPC curve
LO5.1 - Describe free riding and public goods, and illustrate why private firms cannot normally produce public goods.
public goods nonrivaly and nonexcludability public goods are not profitable to private firms because nonpayers, or free riders,can obtain and consume those goods without paying national defense example: those who pay no taxes still receive protection/benefits
LO8.1 - Explain two ways to measure economic growth
real GDP real GDP per capita
LO18.3 - Describe the rules versus discretion debate regarding stabilization policy
set monetary rule just increase the money supply by the same amount every year and it will stabilize the economy increase MS by 4%, people will spend money to pump money into the economy, and 4% will also cool it down leave govt. exp. where they are, short-run leave it how it is
LO10.4 - Identify and explain factors other than real interest rate that can affect investment
shifts in the investment demand curve occur as the result of changes in the acquisition, maintenance, and operating costs of capital goods; business taxes; technology; the stocks of capital goods on hand; planned inventory changes, and expectations instability factors of investment spending include varying expectations, the durability of capital goods, the irregular occurrences of major innovations, and profit volatility
LO11.2 - Derive an economy's investment schedule from the investment demand curve and an interest rate
shows how much investment the firms in an economy are collectively planning to make at each possible level of GDP. Investment is a constant value and is derived from the investment demand curve by determining what quantity of investment will be demanded at the economy's current real interest rate
LO11.1 - Explain the role of sticky prices in the aggregate expenditures model
spending is the primary determinant of GDP Keynes asserted firms do not reduce prices, but instead lay off workers. (Depression does not self-correct)
LO8.5 - Explain how U.S. productivity growth has fluctuated since 1973
the 1995 to 2010 increase in the average rate of productivity growth was based on rapid technological change in the form of microchip and information technology, new firms, increasing returns, and lower per-unit costs, and heightened global competition. Main sources of increasing returns are the use of more specialized inputs as firms grow, the spreading of development costs, simultaneous consumption by consumers, network effects, and learning by doing. after the Great Recession of 2007-2009 slow productivity growth rate explanations include high debt levels, overcapacity, the rise of "free" internet products, and a slowdown in technological innovation
LO12.5 - Explain how AD and AS determine an economy's equilibrium price level and real GDP
the intersection of the AD and AS curves determines an economy's equilibrium price level and real GDP. At the intersection, the quantity of real GDP demanded equals the quantity of real GDP supplied
LO14.7 - Explain how the equilibrium interest rate is determined and why interest rates and bond prices vary inversely
the total demand for money consists of the transaction demand for money plus the asset demand for money the amount of money demanded for transactions varies directly with nominal GDP the amount of money demanded as an asset varies inversely with the interest rate the market for money combines the total demand for money with the money supply to determine equilibrium interest rates the Fed can alter the interest rate by increasing or decreasing the money supply. this can affect some interest rates more than others. those that are more (less) strongly affected are those paid on loans of low (high) risk and short (long) duration. Interest rates and bond prices are inversely related
LO2.5 - Describe the mechanics of the circular flow model.
illustrates the flow of resources and products from households to businesses and businesses to households, along w/ corresponding monetary flows. businesses are on the buying side of the resource market and the selling side of the product market. Households are on the selling side of the resource market and the buying side of the product market.
LO10.3 - Explain how changes in real interest rates affect investment
immediate determinants of investment are the expected rate of return and the real interest rate economy's investment demand curve found by cumulating investment projects, arraying them in descending order according to their expected rates of return firms should undertake investment up to the point at which the real interest rate equals the expected rate of return, and inverse relationship between the real interest rate and the level of aggregate investment
LO12.6 - Use the AD-AS model to explain demand-pull inflation, cost-push inflation, and recessions
increases in AD to the right of the full-employment output cause inflation and positive GDP gaps. An upward-sloping AS curve weakens the multiplier effect of an increase in AD shifts of the AD curve to the left of full-employment output cause recession, negative GDP gaps, and cyclical unemployment. When the price level is fixed, changes in AD produces full-strength multiplier effects leftward shifts of the AS curve reflect increases in per-unit production costs and cause cost-push inflation, with negative GDP gaps, rightward shifts of the AS curve are caused by large improvements in productivity, and help achieve full employment, economic growth, and price stability
LO3.5 - Explain how changes in supply and demand affect equilibrium prices and quantities
increases in demand raise both equilibrium price and equilibrium quantity; decreases in demand lower both equilibrium price and equilibrium quantity increases in supply lower equilibrium price and raise equilibrium quantity; lowers in supply increase equilibrium price and lower equilibrium quantity simultaneous changes in demand and supply affect equilibrium price and quantity in many ways but it depends on their direction and the relative magnitudes of the changes
LO1.4 - Explain the individual's economizing problem and illustrate trade-offs, opportunity costs, and attainable combinations with budget lines.
individuals wants exceed their incomes, so they must decide on what to purchase and what to forgo, society societal wants exceed the available resources necessary to fulfill them, society therefore must decide what to produce and what to forgo opportunity costs that is to obtain more of one thing society sacrifices the opportunity of getting the next best thing that could have been created with those resources budget line shows the various combinations of two products that a consumer can purchase with a specific money income, given the prices of the two products.
LO9.3 - Measure inflation and distinguish between cost-push inflation and demand-pull inflation
inflation is the rise in the general price level and is measured by the Consumer Price Index Demand-pull inflation excess of total spending relative to the economy's capacity to produce Cost-push inflation abrupt and rapid increases in the prices of key resources these supply shocks push up per-unit production costs and ultimately raise prices of consumer goods
LO18.1 - Describe alternative perspectives on the causes of macroeconomic instability
instability caused by shocks/craziness to AD and AS MV=PQ Debate between monetarism and fiscal policy causes of macroeconomic stability, shocks to the economy
LO6.3 - Identify why saving and investment promote higher living standards
investment activities increase the economy's future potential output level, but it must be funded by savings, which accumulate only if people are willing to reduce current consumption below current income. Individuals and society face a trade-off between current consumption and future consumption. Banks and other financial institutions help to convert savings into investment by lending savings generated by households to businesses that wish to make investments
LO2.1 - Define and explain laissez-faire capitalism, the command system, and the market system
is a hypothetical economic system in which government's role would be restricted to protecting private property and enforcing contracts. governments in command systems own nearly all property and resources and make nearly all decisions about what to produce, how to produce it, and who gets the output. most countries have market systems in which the government does play a large role, but in which most property and resources are privately owned and markets are the major force in determining what to produce, how to produce it, and who gets it
LO3.2 - describe demand and explain how it can change
is a schedule or a curve, shows what people are willing to buy at various alternative prices change in demand is a shift on the demand curve change in quantity demanded is from one point to another on point along a fixed demand curve can draw a demand curve, and quantity demanded demand curve
LO3.3 - describe supply and explain how it can change
is a schedule or curve, law of supply states that producers will offer more of a product at a high price than at a low price. Relationship between price and quantity supplied is positive change in supply occurs when there is a change in one or more of the determinants of supply and shifts a product's entire supply curve change in quantity supplied occurs when the price of the product changes, and is shown as a movement from one point to another point along a fixed supply curve
LO7.6 - Explain some limitations of the GPD measure
it fails to account for nonmarket and illegal transactions, changes in leisure and in product quality, the composition and distribution of output, the environmental effects of pollution, noneconomic sources of well-being, and economic activity at earlier stages of production and distribution
LO1.5 - List the categories of scarce resources and explain society's economizing problem.
land, labor, capital, and entrepreneurial ability/PPC analysis society has wants that exceed its available resources, and individuals have wants that exceed its available income, and so both have the issue of needing to decide on what to forgo for the next best thing or opportunity costs
LO2.4 - Explain the operation of the "invisible hand."
let people pursue their own passion and good outcomes will occur
LO15.2 - Relate how the Fed's tools and strategies have evolved over the past several decades
Before 2007-2009 - used open-market operations exclusively for raising and lowering effective federal funds rate 2007-2009 crisis was so severe, had to lower the effective federal funds rate to nearly zero, meaning the Fed needed additional ways to stimulate the economy Solutions: quantitative easing - pre-announced purchase of a specific dollar amount of longer-term government bonds to lower (ease) interest rates on longer-term government debt. This all led to increased usage of administered rates and forward guidance, and the constituting of the "new normal" of monetary policy in the US
LO13.2 - Explain how built in stabilizers moderate business cycles
Built-in stability arises from net tax revenues, which vary directly w/ the level of GDP. Built-in stability lessens, but does not fully correct, undesired changes in GDP During recession - federal budget automatically moves toward a stabilizing deficit During expansion - the budget automatically moves toward an anti-inflationary surplus
LO13.5 - Discuss the problems that governments may encounter in enacting and applying fiscal policy
(a) timing problems associated w/ recognition, administrative, and operational lags; (b) the potential for misuse of fiscal policy for political rather than economic purposes; (c) the fact that state and local finances tend to be pro-cyclical; (d) potential ineffectiveness if households expect future policy reversals; (e) the possibility of fiscal policy crowing out private investment
LO13.4 - Summarize recent U.S. Fiscal Policy
2010s - significant cyclically adjusted budget deficits of around 4 to 5 percent of GDP eve at full-employment amount of fiscal stimulus then multiplied b/c of the COVID-19 pandemic, w/ cyclically adjusted budget deficit peaking in 2020 at -14.3 percent of potential GDP
LO13.3 - Describe how the cyclically adjusted budget reveals the status of U.S. Fiscal Policy
Actual federal budget deficits go up and down b/c of changes in GDP, changes in fiscal policy, or both Cyclical deficits - deficits caused by changes in GDP The cyclically adjusted budget removes cyclical deficits from the budget and measures the budget deficit or surplus that would occur if economy is at full-employment all year Cyclical budget deficit or surplus provide info on whether US fiscal policy is expansionary, neutral, or contraction any Changes in the actual budget deficit or surplus do not b/c they can include cyclical deficits or surpluses
LO16.6 - Define risk and distinguish between diversifiable and non-diversifiable risk
An asset is risky if its future payments are uncertain. Diversifiable risks - risks that can be canceled out by diversification Non-diversifiable risks - risks that cannot be canceled out by diversification
LO14.1 - Explain the functions of money
Anything that serves simultaneously as (a) a medium of exchange, (b) a unit of monetary account, and (c) a store of value
LO11.8 - Define equilibrium GDP, full-employment GDP, recessionary expenditure gaps, and inflationary expenditure gaps
EQ GDP and full-employment GDP may differ Recessionary expenditure gap is the amount by which aggregate expenditures at full-employment GDP fall short of those needed to achieve the full-employment GDP, producing a negative GDP gap Inflationary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP, causing demand-pull inflation
LO11.5 - Explain how the multiplier affects equilibrium GDP
if G, I, or Xn go up by $1 then real GDP goes up by multiplier (1/MPS) x 1$
LO2.3 - Explain how the market system answers the five fundamental questions of what to produce, how to produce, who obtains the output, how to adjust to change, and how to promote technological progress
the market system produces products whose production and sale yield total revenue sufficient to cover total cost economic profit indicates that an industry is prosperous and promotes its expansion. Losses signify that an industry is not prosperous and hasten its contraction consumer sovereignty means that both businesses and resource suppliers are subject to consumers' wants the income a household receives for resources it supplies to the economy determines the household's claim on the economy's output by communicating changes in consumer tastes to entrepreneurs and resource suppliers, the market system prompts appropriate adjustments in the allocation of the economy's resources. The market system also encourages technological advance and capital accumulation.
LO4.3 - Explain why society is usually unwilling to pay the costs of completely eliminating negative externalities, such as air pollution
the socially optimal amount of externality abatement occurs where society's marginal cost and marginal benefit of reducing an externality are equal. With pollution, the optimal amount of pollution abatement is likely to be less than a 100 percent reduction.
LO11.7 - Integrate the public sector into the aggregate expenditures model
there are no unplanned changes in inventories government purchases shift the aggregate expenditures schedule upward and raise GDP taxation reduce disposable income, lowers consumption and saving, shifts the aggregate expenditures curve downward, and reduces equilibrium GDP eq GPD: Ca + Ig + Xn + G = GDP at eq GDP: Sa + M + T = Ig +Xn + G
LO14.2 - Describe the components of the U.S. money supply
M1 & M2 M1 consists of currency, checkable deposits at banks, and other liquid deposits, such as savings deposits at banks and checkable deposits held at thrifts M2 consists of M1 plus small-denominated (less than $100,000) time deposits and money market mutual fund balances held by individuals.
LO3.1 - Characterize and give examples of markets
Markets bring buyers and sellers together. Some markets are local and others are international. Some have physical locations and others are online. highly competitive markets bring large numbers of buyers and sellers together for buying and selling standardized products markets all involve demand, supply, price, and quantity, price is determined by interactions between buyers and sellers
LO15.4 - Explain how monetary policy affects real GDP and the price level
Monetary policy affects: (a) forward guidance helps to shape the spending, saving, and investment decisions of both individuals and firms; (b) changes to the IORB and ON RRP rates alter short-term interest rates in the money market, including the effective federal funds rate; (c) quantitative easing or tightening the shift on longer-term interest rates; (d) changes in both short-term and longer-term interest rates affect investment; (e) changes in investment affect AD; (f) changes in AD affect real GDP and the price level.
LO6.6 - Explain why economists use different macroeconomic models for different time horizons
Price stickiness moderates over time. Some models reflect the high degree of price inflexibility that occurs in the immediate short run, while other models reflect the high degree of price flexibility that occurs in the long run.
LO6.1 - Explain why economists use GDP, inflation, and unemployment to assess the economy's health
Real GDP = value of all final goods and services unemployment = percentage out of workers who are willing and able inflation = percentage increases in prices
LO16.8 - Explain why arbitrage will tend to move all investments onto the Security Market Line
Security Market Line (SML) - straight upsloping line showing the average expected rates of return on assets and portfolios in the economy vary with their respective levels of non-diversifiable risk as measured by beta. Arbitrage ensures that every asset in the economy should plot onto the SML slope of SML reflects the investors' dislike for non-diversifiable risk, with steeper slopes reflecting greater dislike for that risk. The vertical intercept of the SML equals the risk-free interest rate that compensates for delay (time preference).
LO10.1 - Describe how changes in income affect consumption and saving
a direct relationship between income and consumption and between income and saving exists. Each assume a fixed price level The consumption and saving schedules show the various amounts that households intend to consume and save at various income and output levels APC and APS - show the fractions of any total income that are consumed and saved MPC and MPS - show the fractions of any changes in total income that are consumed and saved
LO3.6 - Define government-set prices and explain how they can cause surpluses and shortages
a price ceiling is a maximum price set by government and is designed to help consumers. effective price ceilings produce persistent product shortages, government must ration product to consumers a price floor is a minimum price set by government and is designed to aid producers. Effective price floors lead to persistent product surpluses; the government must either purchase the product or eliminate the surplus by imposing restrictions on production or increasing private demand legally fixed prices stifle the rationing function of prices and distort the allocation of resources
LO12.3 - Define aggregate supply (AS) and explain how it differs in the immediate short run, the short run, and the long run
aggregate supply curve shows the levels of real output that businesses will produce at various possible price levels. slope of the AS curve depends on the flexibility of input and output prices in the immediate-short-run AS curve both input prices and output prices are fixed, resulting in a horizontal line at the current price level in the short-run AS curve input prices remain fixed while output prices vary, resulting in the AS curve sloping upward b/c per-unit production costs rise as real output expands in the long-run AS curve both input prices and output prices can vary, resulting in a vertical curve at the full-employment output level
LO16.5 - Define arbitrage
arbitrage - the process whereby investors equalize the average expected rates of return generated by identical or nearly identical assets. If two identical assets have different rates of return, investors will sell the asset with the lower rate of return and buy the asset with a higher rate of return. This process will continue until the rates of return on the two assets have been equalized
LO9.4 - Explain how unanticipated inflation can redistribute real income
arbitrarily redistributes real income at the expense of fixed-income receivers, creditors, and savers when anticipated individuals and businesses may be able to take steps to lessen or eliminate adverse effects lenders add inflation premium to interest rate charged on loans and nominal interest rate becomes the real interest rate plus the inflation premium
LO15.7 - State the Taylor Rule and explain how it balances the two parts of the Fed's dual mandate
attempts to model how the Fed Reserve and other central banks set their policy rates if there is a trade-off between meeting their goals with respect to inflation and employment inflation gap (= current actual inflation rate - 2 percent target inflation rate) unemployment gap (= current actual unemployment rate - 3.5 percent target unemployment rate) Fed target interest rate = 2 + current actual inflation rate + 0.5 x (inflation gap) - 1.0 x (unemployment gap)
LO16.7 - Explain the factors that determine investment decisions
average expected rate of return - sum of the return that compensates for delay plus return that compensates for the non-diversifiable risk beta measures the non-diversifiable risk of an investment relative to the amount of non-diversifiable risk facing the market portfolio, which, by definition, has a beta equal to 1.0 delayed use of money or time taken for investment return
LO4.1 - Explain consumer surplus, producer surplus, and how properly functioning markets maximize total surplus and allocate resources optimally
consumer surplus - the difference between the max price that a consumer is willing to pay for a product and the lower price actually pay producer surplus - the difference between the minimum price that a producer is willing to accept for a product and the higher price actually received consumer surplus is the triangle under the demand curve and and above the actual price producer surplus is the triangle above the supply curve and below the actual price at equilibrium price and quantity in a competitive market, marginal benefit equals marginal cost, maximum willingness to pay equals minimum acceptable price, and total surplus is maximized
LO8.6 - Discuss whether economic growth is desirable and sustainable
critics say that it degrades the environment, increases human stress, and depletes the earth's finite supply of natural resources defenders say it is the primary path to the high and rising material standard of living that most people desire, that it need not debase the environment, and that there are no indications that we are running out of resources defenders argue that there are no natural limits to sustainable, environmentally friendly growth because growth is based on the expansion and application of human knowledge