AP Econ 1.1-6.6 (ALL TOPICS--FINAL) (MACRO ECON)

Is it frictional, structural or cyclical? 1) A high school senior looking for her first job 2) A worker becomes unemployed because his factory is automated 3) A restaurant employee is fired for chronic tardiness. 4) A financial crisis leads to widespread lay-offs across the economy. 5) A laid off worker has trouble finding a job because the jobs available require more education.

1) Frictional. 2) structural. 3) frictional. 4) cyclical. 5) structural.

Positive AD shock effect on LRAS

AD shifts right, SRAS shifts left, supply can't keep up with demand in the short run. Price levels rise-reduce real wages, GDP will exceed potential output (LRAS curve), creating an inflationary gap. inflationary gap will self correct & bring rGDP, AD, & SRAS to meet LRAS at a new equilibrium point (Workers want higher nominal wages → rises production costs → SRAS shift left → GDP decreases back to LRAS → rises unemployment back to natural unemployment rate → Long-run equilibrium is restored)

Contractionary Fiscal Policy

Addresses inflationary gaps, goal is to decrease AD (shift left) to close the gap between actual & potential GDP. Include; decrease gov spending on goods/services, decrease gov transfers to homes, increase taxes. If the gov, consumers & firms spend less, it'll decrease AD → decrease aggregate output & gets the economy closer to potential output. Reducing gov spending is the most direct & effective

Negative AD shock effect on LRAS

Aggregate output & prices fall in the short-run, Unemployment rises, recessionary gap, GDP falls short of LRAS (potential output), & will self-correct over time. rGDP, employment, & price levels will adjust back to a new LRAS point to attain equilibrium

Value added approach (production approach)

GDP = value of production - value of intermediate goods (output - intermediate goods)

Given output - opportunity cost of good A = Given input- opportunity cost of good A =

Good B/Good A Good A/Good B

Short-Run

Producers have fixed & variable costs (wages & contracts) that limit their ability & flexibility to respond to market changes to maintain profits. Don't allow for broad capabilities in reaction time

Automatic stabilizer - Response To Overheated Econ—Unemployment Falls → Automatic stabilizer - Response To Overheated Econ—High Income & taxes → Government Transfers Federal Poverty Line More time/study is given to AD shocks than AS shocks because Supply, demand, opportunity, & scarcity are important measures that economists use to Nominal wages & aggregate price levels aren't sticky in the long run. T or f Output gap Inflation is expected to increase Profitability rGDP per capita As people lose confidence in the economy Of all the factors driving economic growth, what is most influential Tax cuts boost a weak economy in In long run, tax cuts can LR-Phillips curve could shift outward. T or f Personal Consumption Expenditures Price Index (PCEPI or PCE) value of the basket of goods/services is same. T or f Value of money is determined by Quantity of money 2x, price levels ___

Socal Payment falls → Gov Spending falls → AD Falls Less disposable income → consumption falls → AD Falls payments to people with no goods/services provided in return those below may get welfare benefits. ($12,490 for 1. $16,910 for 2. $25,750 for +4) supply shocks that affect the entire econ are rare, but are harsh, especially with employment. understand relationships of prices, wages, & rGDP. t difference between full-employment output & rGDP (actual output - natural output). when AD & pricing shift in the short-run, reflected in relation to LRAS (potential output). SRAS shifts left (hold off on selling til later, expect input cost to rise [nominal wages incr]) the degree to which a firm or activity yields profit or financial gain. better indicator of econ growth = Real GDP/population it contracts. technology short run. increase inflation, leads Fed Reserve to raise interest rates → slows econ growth. T monthly report that measures price changes (inflation) in goods/services (broader set of goods/services than CPI). T, a cup of coffee that cost 25 cents in 1950 would cost $2.68 in 2020. The value of the cup of coffee didn't change, but the value of money did. supply & demand. 2x, causes inflation

If the economy is producing at more than max output, what is the actual unemployment compare to the natural unemployment rate

The actual unemployment rate is less than the national unemployment rate when more than max output is made If below max output, then actual unemployment > natural employment If at the max output then, actual unemployment = natural employment

Wealth Effect

The effect aggregate price levels have on consumer spending Aggregate price level increases, AD decreases rise in real wealth, increases consumption & AD increases

Price Elasticity of Demand

The sensitivity of the quantity demanded to a change in price

Non-recorded transactions (underground economy)

Transactions that don't go through traditional market. cooking, cleaning, & childcare. No specific money value associated with them Nonmarket Transactions, Unreported Activities, Illegal Activities

Inflationary Gap

When AD is greater than AS. When production levels are high due to low unemployment & more consumer disposable income, robust trade with countries, or gov purchases causes high rGDP, higher price levels, & decreases unemployment below natural unemployment rate.

Recessionary Gap

When operating below full employment equilibrium, decreased demand, unemployment rises, & prices drop. Producers respond with changes in production costs, wait until they can adjust the sticky nominal wages, & ultimately increase output. Over time, SRAS curve will shift back right until it reaches the equilibrium point where SRAS & LRAS intersect with a new AD point.

Differences between tax multiplier & expenditure multiplier

With tax multiplier, people won't spend the full initial tax decrease, they'll save more of it. With expenditure multiplier, the full initial total is spent by gov/investing firm—is why expenditures have a larger impact on AD & GDP than tax decreases

Full/Natural employment rate/economy

a condition when anyone who wants to work can get work (doesn't mean 0% unemployment rate) When Unemployment rate = nonaccelerating inflation rate of unemployment (NAIRU) when cyclical unemployment = 0 When actual GDP is at its potential.

GDP deflator

a measurement used to determine price inflation or deflation in relation to a specific year = Nominal GDP/Real GDP x 100 Percentage Change new-old/old x 100

Comparative Advantage

a producer can produce a good/service at a lower opportunity cost than another producer. 2 countries should benefit from trade unless both have equal opportunity costs in every good Limits--doesn't account for the value of different countries currency, relative prices, & changes in competitive advantage over time

Demand Pull Inflation

aggregate demand increases → producers try to increase supply When additional supply is unavailable → producers increase prices When aggregate demand increases faster than aggregate supply → Consumers save less & spend more—increase consumption causes prices to raise

Short-run Aggregate Supply (SRAS) (& Curve)

aggregate output of goods/services (rGDP) that exist in time when production costs can be considered fixed (shows how businesses respond to stickiness) Movement along occurs due to changes in the relationship between aggregate price level & AS positive relationship between aggregate price level & rGDP supplied by producers—in short run Decrease in SRAS-shift left. Increase in SRAS—shift right Shifters--Any factor that causes production costs to change; input cost, productivity, gov action, inflationary expectations, Subsidies, Technology

Capital Outflow Positive Effect

aggregate price levels drop, exports to others are cheap & country's currency depreciates on FX. Imported goods are expensive, consumers buy domestic > imported goods. Net exports rise so CA increases

Needs Wants Scarcity Choices Economics Economists Microeconomics Macroeconomics Goods Services Consumers Consumption Producers Natural resources Human resources In the long run, AD & rGDP are sticky wages Autonomous expenditures Disposable income When firms expect the econ to remain strong/improve

air, water, food, clothing, shelter desirable but not necessary things gap between limited resources & unlimited wants (never enough to satisfy wants) decisions about how to use resources for need & wants study how people/societies use limited resources for unlimited wants (study scarcity & choice) professionals that study the ways society allocates its resources to satisfy wants study of the effects of economic forces on individual parts of the economy (business, workers, homes) study of the impact of changes to the economy as a whole, not on an individual part tangible items of value intangible things that have value people who buy goods/services for personal use money people spend on buying goods/services people/institutions that make & offer goods/services raw materials on earth/air that humans use for goods (land) people whose efforts & skills go into the production of goods/services the same. when nominal wages are slow to rise or fall in response to changes in the econ (aren't sticky forever) necessary costs built into operating a home, firm, gov (rent) what's left over after autonomous expenditures are taken care of investment spending increases

LRAS Curve - Assumptions LRAS Curve - Relationship Portrayed LRAS Curve - Value as a Baseline PPC - Assumptions PPC - Relationship PPC - Value as a Baseline

all costs (ex. nominal wages) are completely flexible & efficiently used relationship between aggregate price level & aggregate output (real GDP) based on potential output (YP) Establishes a baseline for measuring an economy's output (falling below, matching, or exceeding the baseline) Assumes goods/services production is as efficient as possible Shows the relationship between 2 possible products based on scarcity & opportunity Establishes a baseline for measuring inefficient, efficient, & unachievable production

Intangible Asset Financial Assets Term deposits representative money gold standard balance sheet Other assets Reserve Ratio Actual amount of money created is actually less than money multiplier predicts. T or f When nominal interest rate is above equilibrium When nominal interest rate is below equilibrium Keynes's theory of liquidity preference Issues of Gold Standard Interest income is taxable crowding out Banks can ignore suggestions from Fed. t or f Fed has a great deal of control over money supply in US, it's limited in its ability to Lack of savings has a direct impact on less incentive to save when investment spending

nonphysical property (intellectual property, patents for inventions, trademarks for logos, & songs' copyrights)(nonliquid) value comes from a contractual claim or ownership claim (currency/investments in stocks & bonds. Cash-paper but value is backed up by federal gov) usually higher interest rate than savings accounts, investor's money is tied up for a time, less liquid, higher ROIs (CDs) has little or no value in itself. Value comes from commodity it represents (metals) guaranteed that govs would redeem paper money for gold A statement that summarizes assets, liabilities, & net worth building, fixtures, equipment, ATMs. percentage of demand deposits thats required to be reserved with Fed Reserve Bank T, since banks may wish to keep excess reserves & borrowers may not deposit all the money they receive. people reduce the amount of money they hold, for bonds people increase the amount of money they hold nominal interest rate adjusts to balance supply & demand for money lack of flexibility—econ instability. increasing population needs more currency in circulation—difficult when tied to gold reduces future payoff & thus reduces incentive to save. If gov borrowing causes a decrease in private borrowing (borrows bonds, less loanable funds supply & increase real interest rates & discourage borrowing) T, didn't used to be like that. Now interest rates are competitive regulate dollars in foreign hands, which lessens its ability to regulate the value of the dollar, price levels, & business cycle. supply of loanable funds, interest rates, investments, & econ growth. interest rates are low--loanable funds shortage Money spent on capital goods, or goods used in capital production, goods/services (machinery, land, production inputs, or infrastructure).

Long-run aggregate supply (LRAS)

when price levels, wages, & contracts can adjust to changes in the econ. if all prices & wages were fully flexible, resources were used efficiently, & at full employment output is a vertical line because it represents full-employment output (Yf ) (potential output) (changes in aggregate price levels have no effect on aggregate output in the long run) tends to shift right because it increases over time due to long-run factors, increases in physical capital, human capital, & technological progress. Provides capacity info about total economy, Supply & demand, opportunity, & scarcity.

Imperfectly Competitive Market

competition for market share, variety of products, prices can be set by supply & demand or producers. can be benefits for consumers & producers like price competition & improvements in products. can have monopolies/oligopolies & undermine the idea of competition. Displays how the pricing process works differently from a perfectly competitive market (is imperfect—markets don't react like ideal/perfect market)

Demand Terms of trade = Substitutes Complementary Federal funds Credit Card Rate A general rise in incomes doesn't ensure a higher savings rate, because of Govs face risk Financial markets face risks Credit risk Liquidity risk Speculative risk Foreign investment risk Negative inflation/Recession - effect on consumers Bank accounts are essentially risk-free. T or f bond's maturity date Liquidity liquid accounts Relationship of interest rates & quantity of money demanded Many loans are secured

consumers desire & ability to purchase goods/services Price of Exports/Price of Import x 100 things that can be purchased in place of a good/service goods purchased along with a particular good/service (cars & gas) balances that banks maintain in their accounts at their Federal Reserve Bank average interest charged on unpaid credit card balances. a rise in consumption when they can't control inflation. changes in market interest rate, defaults by sectors or large firms, or macroeconomic forces. danger with lending money. borrower defaults, investors experience decreased income from loan repayments as well as lost principal & interest. involves securities/assets that can't be sold or bought fast enough to cut losses. Investing in real estate involves more liquidity risk than a mutual fund. Most financial investments (stock), since share values may go down = loss. Investments made by people in one country of assets in another country. Risks in the variations in market operations, higher investment costs, & political volatility, nationalization of industries, changes in currency exchange rates. People hold onto money, put off major purchases because they expect prices to continue to drop T, Most bank accounts (checking, savings, money market, NOW, & CDs) are insured up to $250,000 by FDIC. date at which the issuer of the bond promises to redeem it at its face value ease in which assets can be converted to cash. easily converted, provide holders with low interest rates (low ROI)(checking & savings accounts) If bonds are the alternative to holding money, then nominal interest rates is the price of holding money. borrowers pledge assets as collateral in case they default or fail to repay.

Free trade Tariffs Quotas Gov encourages research/development by High debt-to-GDP ratio Positive Statement Normative Statement Economic systems If a business purchases a good to use for the making of their product (tomatoes for pizza), does it affect GDP? Retailer increases her stock of imported shoes. Would it increase a nation's current GDP GDP isn't measuring actual worth of activities, but only Investment Net exports (Xn) Rent In the circular flow model, businesses & household supply & demand. T or f Companies capital stock 2 sector model recession Households own factors of production. T or f It's possible for 2 currencies to appreciate against each other at the same time. T or f

countries can concentrate on producing goods they have a comparative advantage, makes mutually beneficial trade duties gov imposes on imported or exported goods. Burden of tariffs usually falls on consumers. limits on the amounts of goods that can be imported. protecting intellectual property thru copyrights, patents, trademarks, & trade secrets. increases risk of holding gov securities, & makes them less attractive to investors. a factual claim about how the world actually works statement which describes how the world should be ways of allocating resources to production and the distribution of production created with those resources No, because it's an intermediate good No, its imported. exchange in money money firms pay for equipment/supplies to operate (building of machines, houses, etc) Export - Imports purchasing major things that you'd need a loan for (house) t , gov demands resources & supplies goods, households supply resources & demand goods equipment, plant, and other assets used in production (includes inventory-extra goods) only 2 segments (firm & households) (no imports or exports) GDP has decreased for +6 months (negative GDP growth). Firms produce less output because demand decreases. Firms need fewer workers so unemployment rate increases. t F, one currency has to depreciate as the other currency appreciates, because currencies are exchanged on a one-to-one basis,

When govs spend money on goods/services (GOV SPENDING)

creates a chain reaction in the economy. Depending on MPC & MPS, every dollar of stimulus leads to a certain amount of additional spending (if the multiplier is 2, for every $1 of federal spending, an additional $2 will be spent—increases demand & GDP) More federal spending on big projects means more goods/services demand.

GDP Limits

doesn't include intermediate goods, payment transfers (tax refunds, stock), market transactions, non-recorded/unreported/illegal activities, & used/second-hand goods (goods produced from a different year). Doesn't account for income inequality (not all people benefit from GDP inc), ignores the cost of economic activity that's damaging & unsustainable (pollution, quality of life)

Limitations of Unemployment Rate

don't count for discouraged workers (want a job but not looking), Underemployed workers (mismatched—nurse working as a waitress), Part-time workers (want full time but can't), Chronically unemployed workers (removed from unemployment rate calcs after 27 weeks w/o work)

Pricing Power

effect of a change in a firm's product price on quantity demanded (linked to the price elasticity of demand). Companies can increase price & output → increase profit per unit. Companies can cut prices & slow production to offset lost demand & profits.

Gross national product (GNP)

estimate of total value of goods/services produced by countries' residence, at home & abroad (foreign)

Nominal GDP

quantifies total value in money (not units produced) of goods produced in a year. how much is spent on output, not how much is produced. If nominal GDP increases it could mean that prices increase, not production = C + I + G + (X - M). consumption, gross private domestic investment, gov spending, exports, imports

Multiplier effect

how an increase or decrease in 1 econ activity causes increases or decreases across other related econ activities a change in spending leads to a much larger change in rGDP than initial change If the gov spends $100 which causes rGDP to increase by $400, then the multiplier effect has multiplied the initial impact 4x.

Production Possibilities Curve (PPC)

illustrates trade offs & opportunity costs associated with production of 2 goods/services estimates what commodities are needed, how much should be produced, what resources need to be adjusted Determines how much of 1 good they need to give up to increase production of another good Shape depends on if opportunity costs are constant, increasing, or decreasing. Shifters; factors of production or productivity/technology. point on curve shows max combination of 2 products that can be produced when all resources are being used efficiently Point above (outside)-not possible (need additional resources or expanded trade). Pont below (inside)-underutilizing/inefficiently using resources PPC can be used to determine possible outcomes of additional resources (labor force expansion, better management techniques, improved tech).

Tax Multiplier (TM)

impact GDP but not as much as expenditures, refers to how an increase or decrease in taxes impacts spending & GDP. always 1 less than expenditure multiplier, & always negative. = MPC/MPS or = MPC/(1-MPC)

CPI Limitations

inadequate representation of value (actual cost may be skewed when a new product is introduced to the market before added to market basket) No acknowledgement of changes in product quality (a consumer may benefit from a product's quality improvement even if its price has risen) substitution bias (a price rise causes consumers to purchase less expensive alternative) lack of inclusion of buyer habits (consumers whose preferences differ from goods/services in market basket won't be reported due to location or age)

Law of Demand Law of Supply

inverse relationship between price & quantity demanded. Limits -- doesn't predict how much the quantity demanded will increase or decrease with each change in price. when all other factors are equal, there's a positive correlation between price & quantity supplied. (price incr → quantity supplied incr & quantity that consumers are willing to buy decr)

GDP per capita

is a measure of a country's output per person. Serves as a universal measure of prosperity or standard of living. Adjusts for population growth when measuring GDP, Evenly divided figures. doesn't take into account; quality of life, income inequality = country's GDP/population

Business cycle

is a mix of periods of economic expansion when production output & purchases increase, economic contraction when production & output and purchases decrease, & transitions in between. Occur when there's changes in aggregate output & employment in response to changes in aggregate supply or demand. Don't occur at set intervals. phases; expansion, peak, contraction, trough

Gross national income (GNI)

measure income not production takes into account the income of all of a country's firms/residents account for money earned abroad & foreign investment/aid

Income approach

measures total income earned through factors of production, includes adjustments for taxes & subsidies. GDP = w + r + i + pr (wages, rent, interest on capital, profits)

Factors of economic fluctuations

monetary policies (ineffective expansion or contraction of money supply causes macro instability) natural events political insecurity (firms confidence & investment can decline with political factors (war) make policies unreliable) trade barriers (reduction in trade barriers promotes overall economic growth) gov spending (increase in gov spending may stimulate the economy while a decrease can slow it)

Combat high inflation/inflationary spiral

reduce demand for goods, high income tax, high interest rate, low gov spending, change banking regulations to reduce money available for loans gov can reduce aggregate demand by cutting gov spending or raising taxes on consumers to reduce amount of money they have, decrease amount of money in circulation, raise interest rates.

Fiscal policy

refers to the changes in spending & taxes (Programs, stimulus) govs make to affect overall spending. Intended to moderate downturns (like recessions) & aid in continuing expansion.

Constant opportunity costs Increasing opportunity costs Decreasing opportunity costs

resources are easily adaptable to the production of both products (linear) (both goods use similar resources to be produced) resources aren't easily adaptable to the production of both products (Concave down)(the two goods use different resources to be created) when production declines. When the cost of producing one product reduces, making the next unit also reduces (Concave up)

Difference Between Short-Run and Long-Run

short-run-good is limited because most of their production costs are rigid or fixed. Long-run-good isn't limited by short run & has flexibility for changes that'll reduce their production costs.

Demand Curve Demand Schedule

shows price & quantity demanded (downward slope), shifts left → decrease in demand. Shift right → increase in demand a table showing relationship between price of a good/service & quantity demanded (when all other determinants are equal) Determinants; T-tastes O-other goods N-number of buyers I-income E-expectations

Expenditure multiplier (spending multiplier)

shows the impact a change in autonomous spending will have on aggregate spending & AD. The multiplier effect can be bigger & make a greater impact on GDP when people make a large expenditure. = 1/MPS or = 1/(1-MPC). or = Δreal GDP/Δ autonomous spending.

Frictional unemployment

temporary, results from a transition. When workers are searching for a job (change in occupation) (move from school to work).

Interest Rate Effect

the impact that changes in borrowing power has on AD & Aggregate prices. High interest rates-people hesitate to borrow due to low purchasing power & high total costs. Lower interest rates-people make investments/big purchases due to high purchasing power.

The higher the MPS is Appreciated Depreciated Exchange Rate Effect - a phone in U.S. is $1,000, in Spain it's €1,000. The exchange rate is €1.20 = $1, the Spanish phone is Fixed Nominal wages Nominal price rigidity (price stickiness) stickiness occurs due to Profit per Unit = Long-Run Tax stimulus MPC - higher income households MPC - lower income households Consumption/Income Graph As disposable income increases Potential output (full employment output) If gov makes a change in tax policy it'll impact AD more than gov spending. T or F SRAS shifts in response to LRAS curve & PPC are related because they're 2 different ways of looking at Adjusting income tax rates

the more money is saved for future use. object's value increases (more buying power) object's value decreases (less buying power) 20% cheaper than U.S. phone. when production costs can't be changed for a time period (not easily/quickly changed) dollar amounts paid to employees, are sticky in SR prices for goods/services that are fixed or not flexible economies don't adjust instantly Price per unit sold - Production costs per unit when all production & costs can be changed, flexibility & has the ability to respond to expected or predicted changes. cutting tax rates, offering tax rebates, or incentives for certain kinds of purchases & investments spend tiny percentage of new income because many wants are already met spend large percentage of new income because income will be used for immediate concerns X-axis-income, y-axis-consumption. MPC has positive slope. consumption increases rGDP if all prices & wages were flexible & used efficiently (can only be estimated). at potential output when... actual unemployment = natural unemployment rate. F, not as directly, less impact real GDP & its relation to potential output. potential output primary automatic stabilizers, used to moderate swings in econ

Full /Natural Unemployment Rate

the proportion of labor force that remains unemployed during a period of full employment real output (Accounts for workers being unemployed when econ's growing) Can change over time because of changes in labor force. = Frictional Unemployment Percentage + Structural Unemployment Percentage

inflation

the rate at which the aggregate price levels increase over time rise in the price of goods/services (decline in the value of money) decrease in value of savings, increase in interest rates on loans, decreased in exports. benefits those who borrowed money because they repay loans with money worth less. Benefits gov since sales tax are a percentage not a flat rate.

Gross domestic product (GDP)

the total value of all final goods/services produced within a country in a time period (measure of final output) economic strength can be represented by a circular flow diagram doesn't include income produced abroad adjusted to account for trade Goods/services are part of GDP of the country where its made regardless of headquarters

Companies hesitate to change nominal wages because

they affect employees' attitudes; If economy is poor & sales are down, companies don't want resentment from employees by cut wages. If economy is good & demand for labor is high, companies don't want to create high expectations in employees by raised wages

Aggregate demand (AD) (& Curve)

total amount of demand for all goods/services at various price levels in a time period. how desirable GDP goods are & how much money is spent buying them. = C+I+G+X-M (consumer spending, investment spending, gov spending on goods/services, exports, imports) relationship of aggregate demand & aggregate price levels (Negative Slope) AD increase--shift right.---higher aggregate price levels & aggregate output (GDP), employment & nominal wages rise. This new aggregate output level exceeds LRAS curve, creating inflationary gap. AD decrease-shift left Shifters---Any component of AD not from changes in price level (C+I+G+X-I)

Consumer Price Index (CPI)

tracks change in average price of a group of consumer goods/services. measures cost of a fixed basket of goods/services in a given year relative to the base year. measures the change in income a consumer would need in order to maintain the same standard of living over time under a new set of prices as under the original set of prices. Used to adjust income payments so payments reflect price levels (Social Security, Military & federal civil service retirees, SNAP recipients, workers with collective bargaining agreements). Can calculate the difference between real & nominal variable determines cost-of-living. Helps Fed Reserve determine economic policy modifications (interest rates) What the U.S. inflation rate is based on = cost of market basket in a year a/cost of market basket in base year x 100.

Opportunity cost

trade off of the value of 1 good/service for the value of another. would no longer exist if supply of all resources were unlimited depends on interest rate that could be earned by investing in assets. influenced by technology, depletion of nonrenewable resources

Perfectly Competitive Market

unlimited number of buyers & sellers identical products (or easily substituted) companies have no power to set prices (production costs are fixed—no change output costs)

Expansionary Fiscal Policy

usually during a recession, used when potential output isn't met. Goal is to increase AD (shift right) to close the gap between actual & potential GDP. Includes; increase gov purchasing of goods/services (stimulus spending), increase gov transfers to homes, decrease taxes. If people have more disposable income to spend, they'll buy more goods & increase AD → increases aggregate output & gets econ closer to potential output (full employment output).

Absolute Advantage

when a producer can produce more of a good/service than another producer that has the same quantity of resources

Demand-Pull Inflation Cost-Push Inflation

when aggregate prices rise due to supply shortage. Most common cause of inflation (Ex. New product → consumers go crazy for it, it's hard to get → price increases). Caused by economic growth, export surge, gov spending, inflation expectations, & more money in the system causes higher prices for consumers, occurs when cost for production increases (materials/wages), natural hazards, & changes in gov regulations. AS falls but AD is constant, so the higher production costs get passed on to consumers.

Cost push inflation

when aggregate supply decreases or anything that increases cost of production (increase in cost of raw material for production)

Difference between the CPI & GDP Deflator

CPI tracks average price changes in a market basket of goods/services GDP deflator tracks average price changes in all good/services

legal tender monetary unit monetary standard commodity money Annual Percentage Rate (APR) An increase or decrease in price Supply Supply is elastic if Supply is inelastic if Shortage Prices encourage efficient production The fundamental problem of economics If a certain combination of goods/services lies outside the production possibilities curve of an economy If two nations specialize according to law of comparative advantage & trade with each other What is a concept that makes mutually beneficial trade possible? factors of production (economic resources) Simple Model of Scarcity Private property Public property Collective property

(coins/money) must be accepted in payment for debts form of currency in a country & may be issued in various denominations that are multiples ($1, $5, $10, $20) or fractions (1¢, 5¢, 10¢, 25¢) of basic unit Whatever commodity or definitions a society uses for its money Money that gets its value from the substance it is made of (salt, cacao) percentage return that is advertised for bank deposits, loans, or bonds doesn't shift, moves along the curve. amount of a good/service a producer is willing & able to sell at a given price a change in price leads to a substantial change in quantity supplied a change in price only leads to a slight change in the quantity supplied when demand exceeds supply—leads to prices increasing producers want efficient use, consumers benefit because of lower prices How to fulfill unlimited wants with limited resources Resources aren't available to achieve that combination of goods/services. Each nation would increase its consumption possibilities. Specialization items that go into the making of goods/services (land, labor, capital, entrepreneurship) society produces 2 goods, uses all best tech & resources efficiently property owned & managed by person or a legal group of owners (corporation or partnership) owned by public at large & controlled by gov or community (Schools, highways, parks) controlled/owned by group, few people, or entities that jointly control access & use (Grazing land)

Contraction Trough Recovery Output gap Actual output Positive output gap Negative output gap Real wage = Market Basket Inflationary spiral Inflation will make the deflator __, and deflation will cause the deflator to __ If inflation rose by 1%, GDP deflator for that year is If real GDP < nominal GDP If nominal GDP < real GDP With a stable population, per capita GDP will grow as __ grows depression CPI calc inflation between years Inflation Rate = real variable nominal variable

(recession) increasing unemployment, decreasing economic activity, & declining econ output lowest point in economic activity eventual upward direction of economy after the trough difference between economy actual output & potential output what has been achieved in reality when output is more than full capacity when output is less than full capacity nominal wage/CPI x 100 collection of +200 categories of items that consumers purchase (food, transportation, meds...) inflation leading to more inflation (prices incr → workers want incr wages, prices incr) increase, decrease 101 or (1.01 in hundredths) inflation deflation productivity... usually from tech developments prolonged contraction or recession (at least 3yrs), decrease in real GDP of +10% (New - Old)/Old x 100 (CPI2-CPI1)/CPI1 x 100 variables whose value is adjusted for & determined by their value in terms of goods/service/nominal variables. measured in money & doesn't included inflation (usually increases much more than real variable)

Limitations of PPC

- only 2 goods shown - assumes natural resources, labor pool, capital are constant & available - doesn't tell how much of each good they should produce

Help or Hurt? 1) Anna's retired & lives on a fixed-income annuity & a savings account that pays her 1% interest on the balance. Inflation rate is 1.7% 2) Erica worked without a raise. Inflation has risen 5%. She was given 6% raise 3) Gavin's saving money for a ring. He gave the money to his mother to hold. The price of the ring increased by 10% 4) In a bank, the manager made many fixed-rate loans at low interest rates. Inflation is rising at 3% per year 5) Rylie's union negotiated a new contract with a small annual raises & a cost of living adjustment 6) Katie just read that the national debt owed by gov is at an all-time high. (Explain impact on federal gov) 7) Kristin works at the local tax agency. The county commissioners voted to sell license tags at the same rate for 5yrs (Explain impact on gov) 8) Anthony signed fixed rate lease for the condo he's living in while he attends college

1) Hurt. 2) Helped. 3) Hurt. 4) Hurt.. 5) Helped. 6) Helped. 7) Hurt. 8) Helped

Is it counted towards GDP? (if yes is it C, G, I, or Xₙ. If no, why?) 1) Used pair of shoes 2) Bottle of US wine sold in the UK 3) Income from selling Motorola stock 4) A new car made in US 5) A business purchase of new industrial robots 6) Nails bought by a cabinet maker 7) Cars made in a factor but not yet sold 8) City purchase of new fire engines 9) Income earned by restaurant owner 10) Income paid to a public school teacher 11) Money saved by fixing your own car 12) You buy 200 shares of Amazon stock 13) You spend $87 on a new pair of shoes 14) Your parents buy you a new condo built this year to live in while you're at college, you & your roommate pay rent

1) No, Used items aren't counted in GDP 2) Yes, Xₙ 3) No, Financial transactions aren't counted in GDP 4) yes, C 5) Yes, I 6) No, Intermediate goods aren't counted 7) yes, I 8) Yes, G 9) Yes, C 10) yes, G 11) No, Household production (non-market activities) isn't counted in GDP 12) No, Financial transaction 13) Yes, C 14) Yes, I

Peak, Trough, Expansion, or Contraction 1) This phase marks the end of a recession 2) This phase can be predicted by an unexpected increase in business inventories 3) When the unemployment rate is increasing 4) When GDP output is decreasing 5) When national income is increasing 6) When unemployment is at its highest 7) When inflation is likely to be at its highest 8) When it's hardest for businesses to find workers

1) Trough 2) Contraction 3) Contraction 4) Contraction 5) Expansion 6) Trough 7) Peak 8) Peak

1. Good A & B are substitutes - price of Good B rises; demand for Good A 2. Good A & B are substitutes - price of Good B falls; demand for Good A 3. Good A & B are complements - price of Good B rises; demand for Good A 4. Good A & B are complements - price of Good B falls; demand for Good A 5. Good A is a normal good - income rises; demand for Good A 6. Good A is a normal good income falls; demand for Good A 7. Good A is an inferior good income rises; demand for Good A 8. Good A is an inferior good income falls; demand for Good A 9. Tastes favor Good A, demand for Good A 10. Tastes are against Good A; demand for Good A 11. Price of Good A is expected to rise in future; demand for Good A 12. Price of Good A is expected to fall in future; demand for Good A 13. Number of consumers of Good A rises; demand for Good A 14. Number of consumers of Good A falls; demand for Good A

1) increases. 2) decreases. 3) decreases. 4) increases. 5) increases. 6) decreases. 7) decrease. 8) increases. 9) increases. 10) decreases. 11) increases. 12) decreases. 13) increases. 14) decreases

Human Development Index (HDI)

Based on a long & healthy life (life expectancy), knowledge (expected years of schooling for children & average schooling 25+ yrs), & decent standard of living (by GNI). Those who score higher will have more opportunities

Deregulation Income tax cuts Flexible labor markets Free Trade Agreements Reduce welfare benefits If it took more U.S. dollars to purchase the same number of pesos Lower import prices & stronger dollar can Outflow of funds Inflow of funds Debit Inflow > Outflow, CFA Outflow < Inflow, CFA Investment in > Investment out, CFA Investment out > Investment in, CFA BOP - US to Rest of World - CA BOP - US to Rest of World - CFA BOP - Rest of World to US - CA BOP - Rest of World to US - CFA Expansion Peak

allow new firms to enter market - open monopolies to competition. make it easier to build new factories and housing greater incentive to work longer hours reduce power of trade unions, min wages & regulations reduce tariff barrier and other obstacles to trade increase incentive to get a job U.S. dollars are weak & peso strong. keep inflation in check. capital flowing out of (leaving) an econ/country capital flowing in of (entering) an econ/country Money that leaves a country surplus deficit surplus deficit Payments to world for goods/services, factor income, & transfers Asset payments to world Payments to US for goods/services, factor income, & transfers Asset payments to US (boom) increasing employment, economic growth, & pressure for price increases max growth stage of economy

electronic funds transfer (EFT) Money market accounts & certificates of deposit (CDs) often pay more interest than savings accounts. T or f The value of the dollar is tied to Demand for Treasury Securities decreases Debt Ceiling High interest rates on Treasury bonds Crowding in Physical capital Human capital Technology Capital resources (capital or capital good) Depreciation Entrepreneurship Entrepreneur Trade off Commodities Specialization Division of labor Trade-offs occur as a result of Mutually beneficial trade

allows bills to be paid by moving funds from 1 account to another account at the same bank or a different one. t the value of Treasury securities interest rates increase, decreases dollar's value-discourages foreign investors Controlled by Congress, the max amount of money that U.S. gov can borrow by issuing bonds. rises interest rates elsewhere & discourages private investment/spending. when gov investments stimulate additional private investment. Not all deficit spending causes crowding out amount or quality of capital goods (building, machines, vehicles, tools, improves productivity) As workers become more skilled through education, training, or experience, they become more productive. Higher average education an economy, the higher the human capital & labor productivity. make existing firms more productive & can spawn new industries. machines, tools, & buildings used in the production of goods/services decline in the value of capital goods process of bringing together 3 factors of production (land, labor, capital) person who organizes a business & invests time & money to earn a profit when one thing is given up to obtain something else, results in opportunity costs raw materials used to make products consumers buy focusing production on select goods to increase efficiency, lead to consumption opportunities beyond the PPC. assigning different & specific tasks to workers specialization when 2 countries have a rate of exchange that is profitable for both countries. Determined by Comparative advantage & opportunity costs

Multiplier

an economic factor that changes & causes subsequent changes in other associated areas

Aggregate Demand Shock Positive Demand Shock Negative Demand Shock

an unforeseen event that causes an increase or decrease in demand for goods/services increase in AD. high prices, increased output, & lower unemployment. Some shocks are intentional by gov to respond economic downturn. Producers respond by supplying more, which requires more workers & higher wages. Can create general economic growth & inflation decrease in AD. Consumers purchase less & save more. When events reduce employment. Decreases aggregate output & aggregate prices

Cyclical Unemployment

as a consequence of a downturn in the overall economy economic slowdown → job losses Oversupply of goods or a decline in demand that leads to layoffs. = Actual unemployment rate - Natural unemployment rate

Genuine progress indicator (GPI)

assign values to the indispensable functions of household, communities, & natural environment. Includes unpaid domestic work when calculating production values & subtracts destructive effects of consumer consumption (pollution) (better measure of Economic well-being)

Equal Exchange of Currencies If foreigners buy less US exports, GDP will If foreigners spend more bc USD appreciates & goods are expensive In open economy what determines the value of currency? Trade Balance (Balance of trade) A country's currency is cheaper to buy on FX Countries try to strike a balance of exports & imports. T or f financial capital If USD appreciates & demand for U.S. goods drops Multinational Corporations High inflation can cause 2 types of international transactions FX is predisposed to push exchange rates to equilibrium. T or f Sales/purchases of goods/services Transfers Investors invest money in a country if the central bank is Changes in real interest rates can play an important part in a country's Interest rates must exceed the rate of inflation, or else In the case of deflation, the real interest rate is ___ than the nominal rate Real interest rates is predictive when

balanced exchange that countries want. fall because demand decreases (weak econ) export costs rise. Laws of Supply & Demand value of exports of goods/services - value of imports of goods/services. goods/services from that country are cheap, encourages foreign consumers/investors to buy from that country T, balance suggests healthy & growing economy. If net export number is high, indicates weak domestic market or a surging FX (exception is US, U.S. trade deficit gets worse when econ is strongest. US had trade deficits but due to its size & resources, it's a productive country) always flow to countries with high interest rates & out of countries with lower rates. foreign goods (imports) are cheap & American consumers have more purchasing power with stronger $ firms based in +1 countries instability & difficult to compete in global export markets (investors pull investments) CA & CFA T, if demand for U.S.$ is low in to the euro, the cheaper cost to buy US goods will incentivize Europeans to buy American goods with their stronger euros closest to export/import numbers. funds that people living in one country send to people in another country committed to well-established economic theories & independent of short-term political pressure. capital inflow or outflow on open market returns on investments will lose buying power. higher actual inflation rate is unknown, occurs when a loan is actually being taken out or a bond is being purchased.

Interest rates are based on Functions of Money medium of exchange unit of account store of value loans Depositor When consumers expect econ to remain strong/improve Export surge Inflation expectations (if expected to increase) More money in the system, but Producers can't keep up with AD When short-run demand shocks occur After a AD shock or SRAS shock passes, what happens to wages, prices, & employment levels? In the long run, all elements of production & its costs (materials, labor) are ΔGDP = MPS + MPC MPS - Low income households MPS - high income households MPS & MPC help calculate the The higher the MPC is

estimate of what inflation will be during the time of a loan/bond a medium of exchange, a unit of account, & a store of value. something that buyers give to sellers when they purchase goods/services. provides a convenient standard for expressing the values of different items ($60 buys 1 video game or 10 sub sandwiches, no one would say the video game is 10 subs, or 1 sub is 1/10 of a video game) people can save it for future use, money money lent, assets because they're owned by bank & represent debts payable to the bank (where most bank's profit is made) a person who keeps money in a bank account consumer spending increases If exports' value increases relative to imports' value, more money enters domestic econ Firms decrease output, expecting nominal wages to rise, firms hike up prices, consumers make major purchases before prices rise. SRAS shifts LEFT prices rise long run reflects the outcome of shocks based on how society responded. adjust to their natural rates variable, not sticky multiplier x spending 1 less able to save a large percentage of new income able to save a larger percentage of new income. impact of multiplier effect on econ the higher the multiplier & the greater the increase in total consumption.

Households to Business - Factor Market Business to Households - Factor Market Households to Business - Product Market Business to Households - Product Market

factors of production costs, money income (wages, rents, interest, profits) Consumption expenditures, revenue goods & services

Expenditures approach (demand approach)

focuses on demand for goods/services. GDP = C + I + G + (X - M) (Imports, Consumption, Investment, Gov Spending, Exports)

Stagflation

form of negative supply shock when inflation meets decreasing aggregate output stagnation + inflation Unemployment rises, Aggregate output decreases, aggregate prices rise increasing unemployment & inflation, stagnant economic growth. Any changes in monetary policy to lower unemployment by increasing inflation could only have a temporary effect

Structural unemployment

from shifts in economy (decline in an industry), Technological changes-machines take jobs. Characterized with mismatch in employees skills & employers needs. Most difficult to address.

Circular flow model

graphic representation of how different units of economy interact with each other describes activity in a market economy assumes equilibrium; amount of money spent equals value of goods/services

In the long run, the growth rate of money supply determines When the government is in debt During recessions, a temporary deficit can be a good thing. T or f When gov's forced to borrow if inflation increases U.S. federal budget What determines how much money a gov can borrow Closing a Recessionary Output Gap without actions Closing an Inflationary Gap without actions taken Phillips curve Balanced Budget More savings does what to the economy? Public sector investment in infrastructure Education Vocational training Housing supply Health spending Expected rate of inflation real % = Privatization

growth rate of the price level & inflation rate they must pay interest on the debt t difficult to finance new investments. Harder to upgrade equipment or expand. Reduces supply of funds for private investment AD shifts right, & SRPC is thrown out of equilibrium. product of gov's fiscal policy & represents public spending if investors are willing to lend (trust gov won't default) SRAS shifts right due to fall in nominal wages in long run nominal wages (in long run) rise due to labor shortage, & SRAS shifts left, bringing economy to potential output. inverse relationship of wages/prices/inflation & unemployment. didn't say when unemployment dropped prices would rise. tax revenues can cover gov spending. Rarely balanced → gov borrows by issuing financial securities, taking out loans from private financial institutions/international organizations Encourages econ growth improve transport & reduce costs increase funding to schools & universities-improve labor productivity gov schemes to provide new skills to those who lose jobs increase supply of council housing improves geographical mobility public spending on health cna reduce hours lost to ill health the inflation where SRPC and LRPC meet nominal % - inflation rate % sell state owned assets to private sector, improve incentives

Unsecured personal loans Small business loans may be secured by the business owner's personal property. T or f everything a firm owns is an asset, & everything it owes is a liability. T or F Bank's assets Depository institutions We assume that people have only 2 ways to hold financial assets checking account are There's an expectation that money invested in bonds will be If people think interest rates are low If people view interest rates as high national gov sets __ __, the nation's central bank sets __ ___ Interest rates should be high enough to encourage __, but not so high that they discourage __ Public policy A country can improve its long-term economic growth by fiat money major types of thrift institutions Commercial banks mutual savings banks savings & loan associations (S&Ls) Currency

higher rate of interest than loans that are secured by collateral. t t loans & investments it makes (real estate & equipment) get funds thru deposits by public (savings banks, credit unions, savings/loan associations & commercial banks) hold funds or securities for depositors checking accounts or bonds. highly liquid tied up til matured, bonds can be converted to cash, seller may need to pay a penalty for doing so before maturity. less incentive to invest in bonds, demand for money increases. bonds become more attractive, demand for money decreases fiscal policy, monetary policy saving, borrowing gov's plans/actions that affect that gov's constituents, what gov does or not about an issue (laws) investing in education & health care. value is based on confidence people have in gov mutual savings banks, Savings & loan association, & Credit union. works with public, offering a variety of services, dominate banking sector, offer a range of services to firms, & high profits they make from business loans. serve low-income families, generating profits for their members provide affordable mortgages for middle-class home buyer money used in a particular country as a medium of exchange for goods (paper money/coins)

Seasonal unemployment

occurs during times of the year when demand for a certain type of labor is low.

deflation Improvements in techniques increased supply of goods. But low wages restrained demand Shortage of money caused money to become more valuable, so less dollar = more goods Disinflation real% = Aggregate demand Aggregate Supply Borrowing money with lower inflation than expected... with higher... Inflation can be particularly hard on savings for ___ Product Markets Factor market Subsidy 3 sector model 4 sector More exports than imports (with sector models) 5 sector model Any change in inventory is considered Financial market Economic well-being Intermediate good Final goods

overall drop in price of goods/services, reflects severe economic problems. Combated with an increased demand deflation deflation a slower rate of inflation, or a slowing down of the rate at which the general price level is increasing (if inflation rate was 5% & slows down to 3%) nominal% - inflation rate% total demand for all finished goods/services that consumers want at current prices. total amount of goods/services suppliers want to supply at those prices ones who borrowed suffer. bank suffers retirement, money is held on for many years consumers exchange goods/services with producers (where people purchase) where firms purchase resources they need to produce goods a financial aid supplied by a government for some reason gov, household, firm (doesn't include actions taken by financial & foreign sector) includes all govs, firms, households in foreign countries each sector has more money all govs, firms, households in foreign countries, financial markets a part of investment. give individuals/firms an opportunity to borrow money for goods (car/home). material living conditions that people experience & access to goods/resources good used to produce final good sold to consumer who'll actually use it

Labor force (& Labor Force Participation Rate)

people who are able & willing to work (16+ who's working or unemployed looking for work) (Doesn't include ppl in school working, or in military) Labor Force Participation Rate = Labor Force/(civilian population +16) x 100 (Civilian -- Not in jail, military) iincreasing the LF ncreases econ's overall production.

Marginal Propensity to Save (MPS)

percentage of aggregate new income not used for consumption = ΔS/ΔDI (savings, disposable income)

Marginal propensity to consume (MPC)

percentage of new income a consumer spends on goods/services compared to what they save. determined by income level. = ΔC/ΔDI (change in consumption, change in disposable income).

Unemployment rate

percentage of the labor force who aren't working = unemployment/labor force

Perfect Competition

price is determined only by supply & demand. Assumes there's many consumers & producers, competing products are identical, all consumers & producers have full knowledge of market conditions, consumers are free to buy or not, & producers are free to sell or not

Supply curve Supply Schedule

price vs quantity supplied graph, positive relationship a table showing the relationship between the price of a good/service & the quantity supplied when all other determinants are equal Determinants; T-technology O-other goods N-number of producers E-expectations R-resources S-subsidies and taxes

Mandatory spending/transfers Discretionary spending ½ of Fed Gov's revenue goes to state/local gov. The other ½ goes to the federal gov in 3 forms

programs that must be paid for with no goods/services in return. is the biggest chunk of the total federal spending (social insurance programs/entitlements—taxpayers pay into these programs throughout working life) spending results from legislation/policies that's not mandatory. Congress approves & decides discretionary spending limits on national defense, education, highway funds, aid to countries. personal income taxes, corporate profit taxes, social insurance fees for programs (Social Security, Medicare, Medicaid)

Supply Shock Positive Supply Shock Negative Supply Shock

when something unforeseen quickly & dramatically changes product supply levels. Causes rGDP & aggregate price levels to move in opposite directions—no matter if the shock is positive or negative. Shocks to AS tend to be negative. increased AS, SRAS shifts right, Production costs decrease, Output quantities increase, Aggregate price levels adjust downward, Employment rises. decreased AS, SRAS shifts left, Production costs increase, Output quantities decrease, Aggregate price levels rise, Unemployment rises (but sticky nominal wages & contracts mitigate severe drops)

Rate of Return ROI in a savings account depends on If market interest rates go up, bond's price will __ Time Value Principal If lenders believe inflation is approaching Negative Interest more liquid the asset Individuals face risk Businesses face risk Money held as cash has how much ROI? Equity securities Derivatives Financial risk Mutual funds Stocks Bonds Demand Deposits Asset Real Assets

yield, varies from types of savings or investment bank, type of account, & when opened. fall considers how the value of money changes over time due to factors (inflation & interest earned) amount of original loan protect themselves by charging a higher interest rate than before lender pays borrower to take a loan, increases borrowing & spending the lower the return on investment (ROI). when they make decisions that affect their ability to earn money or pay debts. when their cash flow won't be adequate to meet their obligations. 0 are ownership shares in a corporation (stocks & mutual funds) financial contracts that get value from underlying assets. Like commodities—gold, oil, or gas danger of losing money, applies to people, firms, govs, & financial market. organizations that sell shares to the public & use the money to purchase stocks & bonds equity, investors who buy stocks become part owners of a company & share its profits & losses Govs/firm issue interest-bearing assets, holder is lender, indicates how much is lent, interest rate, & when it'll be redeemed. Long-term. less liquid. financial asset that can be withdrawn as desired (cash) a resource of value that can be converted into cash (real-intangible/tangible, financial-liquid/nonliquid) physical assets (real estate, land, art, antiques, precious metals, commodities—soybeans or oil)(nonliquid)