ECN 222 Test 1 Hadsell Uncw, ECN 222, ECN 222, ECN 222 Final Exam, Economics 222, Macro Economics, Macro Economics

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Suppose the CPI=100 in year 1 and CPI=150 in year 10. What is the equivalent price in year 10 of something that cost $500 in year 1?

$750 (500*(150/100)=750

if MPC = 0.8 and income rises $100, how much would C rise?

$80

One reason for unemployment is ___________.

'sticky wages'

An economy growing at about 3 percent per year will double in size in approximately ______.

24 years (use rule of 72, this this rule is an approximation)

If the price level increased from 120 to 150, then what was is the inflation rate?

25%

Green house gas emissions have fallen by over .... since .....

25% since 1990

Productive capacity or LRAS is determined by

2Qs of the FOPS

The record number of people in employment at the moment is

30 million

If the index of GDP was 96 then it means it was

4% lower than in base year

Specialization

A focus on a particular activity or area of study that one person may be more skilled at. Makes trading better and can focus on one certain thing and make more of it.

Competitive Market Equilibrium

A market equilibrium with many buyers and sellers.

Perfectly Competitive Market

A market with many buyers and sellers and where all products sold are identical with no barriers to new firms entering the market.

Consumer price index

A measure of the average price level of goods and services in the UK

Personal expenditures price index (PCE)

A measure of the price level that is similar to the GDP deflator except it includes only the prices of goods from the consumption category of GDP.

A change in quantity demanded means

A movement along the demand curve as a result of a change in the products price.

Monetary Growth Rule

A plan for increasing the money supply at a constant rate that does not change in response to economic conditions. (Milton Friedman)

Balance of Payments

A record of a countries trade with other countries.

Taylor Rule

A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables. states that the Fed should set the target for the FFR equal to the the sum of the inflation rate, equilibrium real FFR, inflation gap, and output gap. Includes inflation and output gap because Fed is concerned about both inflation and fluctuations in real GDP. DOESN'T account for changes in the target inflation rate or the equilibrium interest rate.

A change in demand means...

A shift of the demand curve if there's a change in one of the variables other than price (income, taste, expectations...)

Autarky

A situation in which a country does not trade with other countries

Coordination Problem

A situation in which two or more people are all better off if they coordinate on a common course of action, but there is more than one possible course of action to take. (Jack and Jill, Stag Hunting). Look at graphs.

Supply Schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Tariff

A tax on imported goods or services

Factors that cause shift in AS The 2 Qs and the price of the FOPs

Commodity prices (important as we import most raw materials), costs of imports, Employment costs, changes in production costs, Government impact (taxes on inputs)

What happens if General Motors builds $500 million worth of cars, but consumers only buy $470 million of them

Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million

Expectations- House holds expectations of future incomes

Consumption spending increases by consumers with hopes of more money coming to them in the future, shifts graph to the right and visa versa.

Real Exchange Rate

Corrects the nominal exchange rate for inflation. AKA changes in prices of goods and services.

People consider the opportunity cost of every choice-

Cost of not doing the next best thing and what is the value of that. Includes time and money.

Concerns of economic growth

Environment problems, and unethical work place environments in poor countries

Public Saving

Equals the amount of tax revenue the gov retains after paying for gov. purchases and making transfer payments to households.

Index of GDP in year x =

GDP in year x/GDP in base year * 100

LRAS shifts right each year because...

GDP increases each year as the number of workers increases, and the economy accumulates more machines and equipment and as tech. innovation occurs.

Nominal GDP

GDP measured in current prices. No price set at a base year. Out put valued at current prices.

Guild System

Government would give an organization or producers the authority to control the production of a good.

Two main reasons for why other high income countries haven't caught up to the U.S?

Greater flexibility of U.S markets Greater efficiency of the U.S financial system

measures total income of everyone in the economy

Gross Domestic Product (GDP)

what is the single best measure of a society's economic well-being?

Gross Domestic Product (GDP)

GNP

Gross National Product - the sum of all goods and services produced in a nation in a year. (ex: Toyota having a plant in VA is part of Japan's GNP but not GDP)

Market

Group of buyers and sellers of a market to which they can buy and sell and have an arrangement by which they come to trade.

Division of labor

Pin Factory example. 10 divided workers=48,000 pins, 10 workers working individually 10 pins each. Limited to how big the market is. 1. Increase skill in every worker at specific task. 2. Save time from moving from one task to the other. 3. Man can create machines to help make job easier.

Comparing open/closed growth rates

Poor countries that are open to trade grow faster than rich countries. Poor countries that are closed to trade grow slower than rich countries.

Catch up

Poor countries will catch up to rich ones. Not accurate. Other factors matter.

The economic growth model predicts that...

Poor countries will grow faster than rich countries

Technological Change

Positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.

GDP and employment

Potential GDP=working at full potential Full potential GDP always has natural unemployment because people in between jobs. Full Potential=Full employment= Natural Employment

The level of output that absorbs all spare capacity is called (all resources fully employed)

Potential output (Max output without inflation, factors of production in equilibrium - demand for labor meats supply, machines working at design capacity and all those who are willing to work are in employment)

Innovation

Practical application of an invention.

Demand side deflation

Pressure from low demand causes firms to cut prices and output

Entrepreneur

Someones who operates a business.

Economic Variable

Something measurable that can have different values such as incomes of doctors.

Two ways to reduce a budget deficit

Reduce domestic demand from contractionary fiscal or monetary policy, or persuading consumers to switch expenditure to domestic goods

Transport costs (force propelling globalization)

Reduced transport costs have been one of the driving forces of globalization

Balanced Budget

Refers to a situation where the government's tax revenues equals the government expenditures.

Shadow Banking System

Refers to investment banks, money market mutual funds, hedge funds engaged in similar activities. By raising money from investors and lending it directly or indirectly to firms and households these firms were carrying out a function that at one time was exclusively the domain of commercial banks.

Income Effect

Refers to the change in the quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power.

National Income Accounting

Refers to the methods of the Bureau of Economic Analysis used to keep track of total production and income in the economy.

Per worker production function

Relationship between real GDP per hour worked and capital per hour worked, holding constant the level of technology.

Adjustment assistance

Relocating workers to sectors with competitive advantage

national income is the combination of

Rent, wages, profit (it does not include transfer payments - pension, benefits because they do not reflect economic activity )

Excess Reserves

Reserves that banks hold over the legal requirement.

Trade Policies (Barrier to globalization)

Restrictions from Gov's restricting trade.

Who is considered to be not in the labor force?

Retirees, the disabled, etc.

Yet capital doesn't guarantee economic growth because...

Rich countries could have capital because they are rich and visa versa

Property Rights

Rights individuals and firms have to exclusive use of their own land.

Property Rights

Rights individuals or firms have to the exclusive use of their property including the right to buy or sell it.

Three things that inflation directly causes

Rise in the price of G&S, fall in a the value of money, rise in the cost of living

Law of supply

Rule that holding everything else constant increases in price cause increases in the quantity supplied and decreases in price cause decreases in the quantity supplied.

Friedman's Monetary Rule

Rule that would keep central banks from expanding the money supply beyond a small amount like 3%.

Equation for Private Saving

S*private=Y+TR-C-T TR=Transfer payments

Public Saving Equation

S*public=T-G-TR

Any supply side policy the increases the quanity or quality of labour will increase both

SRAS and LRAS

Adam Smith

Said Nation depends on stuff it has. Man has propensity to trade, barter, exchange because it is mutually effective. Coined specialization/division of labor. Wrote Wealth of Nations, Theory of Moral Sentiments. Said man desires to beloved and lovely, meaning selfish passions and social passions conflict, man wants respect and adoration in which we have to be lovely as well as selfish. 1. Productive powers of labor and order and who it is distributed. The Who? 2. How capital is accumulated and the different quantities in labor which put it into motion. The How? 3. How each nation treats certain industry in the country. 4. How individuals make gov/economic choices out of self interest and how it affects the country. 5. Treats the revenue of sovereign states, what are necessary expenses, what should be paid for by the whole society, who should pay for it, what methods should be used when society has to pay, and what are the pros and cons of the methods.

Example of what Government current expenditure is spent on

Salaries of public sector workers

What is the source of supply for loanable funds?

Saving

Total saving formula is...

Saving=S*private+S*public Saving= (Y+TR-C-T) + (T-G-TR) Saving=Y-C-G

Openness index

Scale from 1-100, depends on if Gov. controls openness and markets, tariffs.

Mutual Funds

Sell shares to savers and then use the funds to buy a portfolio of stocks, bonds, mortgages and other financial securities.

Dumping

Selling good/service below cost to penetrate a country's market and weaken and destroy that country's competitors. Yet after seller penetrates market and drives out domestic competition they have to jack their prices way up to make up for the losses of dumping, which allows domestic producers to re enter the market with goods at the right price. Or use another foreign firm that has better prices than the one that dumped.

Short Run effect of a decline in aggregate demand, what happens and how is it fixed naturally.

Shift L Increased interest rates = a decrease in investment = an increase in layoffs = a decline in Agg. Demand Shift back R to Equil. Firms will lower their prices because of the lack of demand and in response workers will accept lower wages because the low prices are affordable.

Short Run effect of an increase in aggregate demand

Shift R Firms become optimistic about investment profits = increase in investment = shift of the AD Curve Right. Firms operate beyond normal rate of capacity and economy is beyond potential GDP. Shift L back to Equil. With operating past capacity = increased price level = increased wages demanded by workers because dollar buys less. Since high employment workers have higher bargaining power and get higher wages and firms get higher prices due to demand = shift back to Equil.

An increase in corp. taxes will...

Shift the demand for loanable funds curve to the left causing the real interest rate and the level of investment to decrease.

An increase in expected future profits will...

Shift the demand for loanable funds curve to the right causing the real interest rate and the level of investment to increase.

An increase in the Gov.s budget deficit will.

Shift the supply of loanable funds curve to the left causing the real interest rate to increase and investment to decrease.

An increase in the desire of households to consume today will...

Shift the supply of loanable funds curve to the left causing the real interest rate to increase and investment to decrease.

An increase in tax benefits for saving which increase the incentive to save will...

Shift the supply of loanable funds curve to the right causing the real interest rate to decrease and investment to increase.

How do shifts in demand and supply affect the exchange rate?

Shifts in demand and supply curves cause the equilibrium exchange rate to change. 1. Changes in the demand for US produced goods and services and changes in demand for foreign produced goods and services. 2. Changes in the desire to invest in the US and changes in the desire to invest in foreign countries. 3. Changes in the expectations of currency traders about the likely future value of the dollar and the likely future value of foreign currencies.

Monetary Policy is more concerned with what interest rate?

Short term nominal interest rate because it is mostly affected by increases and decreases in the money supply

Demand Curve

Shows the relationship between the price of a product and the quantity of the product demanded.

LRAS

Shows total planned output but prices and factors can change (affected by all the factors of production - the 2 Qs of the FOP)

SRAS

Shows total planned output but prices can change but factors of production cant (affected by the cost of production - wage prices)

Forward Guidance

Signal to public by Fed. that they will do something in future.

Economic Model

Simplified version of reality used to analyze real world economic situations.

Liquidity

The ease with which a financial security can be exchanged for money, Financial System provides this by offering savers markets where they can sell their holdings of financial securities. Ex: Sellers can easily sell their stocks and bonds on major stock and bond markets.

Trade restrictions are managed because...

The elimination of the restriction has a bigger impact on the firm than the overall economy. One firm would go out of business with removal of restriction and the price of the goods may only decrease by a dollar for consumers.

Factor mobility

The extent to which resources can move to alternative uses

Marginal tax rate

The fraction of each additional dollar of income that must be paid in taxes.

Store of Value

The function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. Money as a store of value allows people to easily store and retrieve it (liquid). The ease at which people can convert an asset into a medium of exchange.

Opportunity cost

The highest valued alternative that is given up to engage in an activity.

What is the classical dichotomy?

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables

Market for Loanable Funds

The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

Federal Funds Rate

The interest Rate banks charge each other for overnight loans. Rate is determined by the demand and supply for reserves. Only banks can borrow and lend. FFR has a greater effect on short term interest rates than on long term rates.

What is the federal funds rate?

The interest rate at which banks lend reserves to each other overnight, or for short-term loans of reserved

Discount Rate

The interest the Fed charges on the loans to the banks.

GDP is

The market value of all final goods/services produced with a country's border in a year.

Required Reserve Ratio

The minimum fraction of deposits banks are required by law to keep as reserves.

Equilibrium in the money market occurs where..

The money demand curve crosses the money supply curve

To know how much to spend or cut the gov uses...

The money multiplier

The greater the sensitivity of consumption, investment, and net exports to changes in interest rates...

The more crowding out will occur.

Law of diminishing returns

The more of one input added the output increases by a smaller additional amount.

Total value of Treasury bonds outstanding is called...

The national debt or Fed Gov Debt

Multiplier definition

The number by which a initial change in injections has to be multiplied by to find the final change in income

Trade restrictions also managed by...

The part of owners of factors of production that will become relatively less scarce if tariff protection is removed.

Capital Account

The part of the balance of payments that records relatively minor transactions, such as migrants' transfers and sales and purchases of non-produced non-financial assets.

Expansion Phase

The phase in the business cycle when production, employment, and income all increase. Ends with a peak.

Exposure to domesticated animals and disease

With the domestication of these animals comes the diseases with them. Eventually the population of Eurasia would become more immune to them, yet when they traveled to the Americas, Africa, or Australia the people there were not immune so they died faster making it easier to colonize.

Recession

Two consecutive QUARTERS of negative ECONOMIC GROWTH

Trade enhances technology

With trade comes more direct foreign investment with technology, also organizational ways, and more money to invest in tech.

Consumer expenditure depends on

Yd (depending on Marginal propensity to consume, dependent on savings ratio, interest rates, availability of credit, asset prices, consumer confidence, population size)

Reserve Requirements

When the Fed reduces the required reserve ratio it converts required reserves into excess reserves. If fed changed reserve requirement for banks from 10% to 8% they would have 2% more excess reserves that they could lend out and visa versa with raising it.

Reserve Requirements (Tool

When the Fed reduces the required reserve ratio it converts required reserves into excess reserves. If fed changed reserve requirement for banks from 10% to 8% they would have 2% more excess reserves that they could lend out and visa versa with raising it.

What does monetary neutrality tell us?

an increase in the money supply will increase the price level, but not real GDP

An increase or decrease in real GDP means

an increase or decrease in the amount of buying/selling of goods means people would want to hold more money on hand to buy things

Consumer Price Index

an index of the cost of all goods and services to a typical consumer

Foreign Portfolio Investment

an investment that is financed with foreign money but operated by domestic residents

What is a "medium of exchange"?

an item buyers give to sellers when they want to purchase goods and services

What is a "store of value"?

an item people can use to transfer purchasing power from the present to the future

JMK compared business confidence to

animal spirits

Inflation is measured by the

annual % change in the consumer prices index

Implicit Costs

any other sacrifices made

Who is considered unemployed?

anyone who is not employed, is available for work, has looked for work in the past 4 weeks, and anyone who is waiting to be recalled from a job from which they have been laid off

Who is considered employed?

anyone with a current job

"Gains From Trade"

arise from specialization

Cyclical Unemployment

associated with business cycles (recessions/expansions)

CPI Overstates Inflation When It:

assumes the quality of a good doesn't change from year to year doesn't account for the benefits of new goods uses a fixed basket of goods

long yield

average of short term rates today and expected future short term rates.

Keynes View on Agg. Demand

High demand is key to the success of a whole economy. In Keynes's view, economic recessions are caused by too little aggregate demand. The cure for recessions is higher aggregate demand. The best way to increase aggregate demand is for government to ramp up its spending until economic health is restored

The interest rate effect

How a change in price level affects investment. When prices rise households and firms remove investments to have cash. which drive up interest rates which costs more money for firms and people to get loans which means less consumption and expansion.

The international trade effect

How a change in the price level affects net exports. If the price level in the US rises exports will become expensive so less foreign people will buy US goods and US consumers will shift to buy foreign goods. exports will rise and imports will fall.

Diamond Example

How an increase in the supply of money (inflation) is bad because the more money printed the less goods money can buy, making it worth less. If a meteor brought thousands of diamonds to the earth and everyone had diamonds they wouldn't be valuable anymore.

Three sources of technological change...

Human Capital, Efficiency/organizational techniques, physical capital

Trade restrictions also managed by...

Human Capital, High education workers in U.S are abundant, low education workers are there too, with opening to trade low education workers get offset by high abundance of low education workers elsewhere. which increases the wage gap.

HDI

Human Development Index- based on income, education, health

Extremely high rates of inflation are called _____________.

Hyper inflation

Government spending on social capital is counted in .. and not part of government current expenditure

I

Investment will increase capital stock if

I> rate of consumption

Labour force survey measure of unemployment is also known as the

ILO (international labour office)

Transfer Payment

INCOME received for which no productive activity has been made

Expected Future Prices

If a firm expects its good to have a higher demand in the future then it has an incentive to decrease supply now and increase it in the future, shift to the left.

Problem in recession is that there is too little spending so expansionary fiscal policy intends to...

Increase aggregate demand either by having the Gov. directly increase its own purchases or by cutting taxes to increase household disposable income and spending.

Economic growth

Increase in real GDP (one of government objectives- measured in annual % change of GDP) over time

Unexpected changes in price of natural resources AKA supply shock

Increase in the price level for a natural resource will increase the cost of many different inputs for firms, the rising costs will make it harder for firms to supply the same level of output than before the shock.

How do countries grow and become rich?

Increase in the quantity of capital per hour worked Use the best available technology

A movement along a demand curve is a?

Increase or a decrease in the quantity

What will investment incentives do to the supply and demand model for loanable funds?

Increase the demand for loanable funds, raising the equilibrium interest rate, and raising the equilibrium quantity of loanable funds

Quantitative Easing

Increase the size of the Fed's balance sheet and buy more assets. Fed bought mortgage backed securities and long term bonds which increased price and decreased interest rates. Banks bailed out firms and the Fed bailed out banks who started the whole recession in the first place.

What will tax incentives for saving do to the supply and demand model for loanable funds?

Increase the supply of loanable funds, reducing the equilibrium interest rate, and raising the equilibrium quantity of loanable funds

Capital Deepening

Increased amount of capital per worker, productivity per worker increases.

Technological Change

Increases in tech innovation, increase the amount of productivity. Workers can produce more goods and services with the same amount of machinery.

The two key factors in raising living standards in low income countries are...

Increases in technology and knowledge

How does a lower interest rate effect the aggregate demand curve?

Increases quantity demanded (shifts aggregate demand curve to the right)

How does an increase in consumption (or wealth) effect the aggregate demand curve?

Increases quantity demanded (shifts aggregate demand curve to the right)

Expansionary Fiscal Policy

Increasing Gov. purchases or decreasing taxes, increasing Gov. Spending is a component of Agg. Demand, decrease in taxes means consumers will have more money.

At the level of the entire economy knowledge capital is subject to...

Increasing returns because knowledge is accessible to everyone.

CPI

Index that measures average price level of goods and services in the UK

Malaria Ecology Index

Index that measures the susceptibility of a country's climate to mosquito breeding as well as the amount of mosquitoes in the region that feed on humans.

Fed's response to fear of one piece failing so they all fail

Lending and credit programs to corporations, cutting the FFR to zero, used quantitiative easing vs credit easing.

Fed. Reserves initial response to the 2007 recession

Lending and credit programs to corporations. To cut the FFR to zero. Helped JP Morgan acquire Bear Steirns but let Lehman Bros. to fail.

Potential GDP

Level of real GDP/production in a country when all their firms are producing at full capacity. Potential Increases as labor force grows.

Financial System provides three key services for savers and borrowers

Liquidity Risk Information

What happens when production grows rapidly?

Living standards grow rapidly

Because both borrowers and lenders are concerned with the real interest rate they will receive or pay the...

Loanable funds market determines the real interest rate.

Sub-prime loans

Loans given to people who have a higher chance of defaulting.

Discount loans

Loans the Fed makes to banks, when a bank receives a loan from the Fed its reserves increase by the amount of loan.

Discount Loans

Loans the Federal Reserve makes to banks.

Backward linkage

Locally produced goods are used as inputs by the resource extraction industry

What contributes to developing countries lack of growth?

Low income

Poor education and health

Low income countries have weak school systems and many people can't read or write or work new technology. Sick workers work less and not productively.

How interest rates affect consumption

Lower interest rates increase household spending on and reduce the return to saving. Higher interest rates reduce household spending and increase the return to saving.

Fed's traditional response to inflation is..?

Lower the target for the FFR.

Fiscal Multiplier

M = 1 / R money multiplier = 1 / reserve ratio

What is the quantity equation?

M x V = P x Y

What is the Quantity Equation?

M x V = P x Y quantity of money x velocity = price level x quantity of output or real GDP

Quantity Theory of Money

M+V=P+Y M= Growth rate of money supply V= Velocity of zero P= Inflation rate Y= Real output growth rate

Money Multiplier Formula

M=MBx1/rr M= Change in checking account deposits MB= Change in bank reserves rr= reserve requirements

Mortgage Backed Securities

MBS; created by pooling a group of similar mortgages. The owner then uses the mortgage pool as collateral to issue a new security the MBS.

Price only equals a

MOVEMENT ALONG DEMAND CURVE

To decrease inflation by reducing AD (contractionary monetary policy) there has to be a trade off between

Macro economic objectives - economic growth and inflation (you could also do it by increasing AS)

Most important effect of trade on productivity is...

Makes a country more productive by allowing it to produce the things it is good at producing and then to sell them to other countries in return for things it is not as good at producing. (specialization)

What disease has had the largest affect on economic growth?

Malaria

Four Functions of money (MUSS)

Must act as a Medium of exchange Must serve as a unit of account Must serve as a store of value Must offer a standard of deferred payment

Taylor believes inflation is worse than unemployment because...

NEED ANSWER

M1 Money

Narrow definition of money supply consisting of the sum of currency in circulation, value of checking account deposits, value of travelers checks.

Deficit is financed by borrowing so increases

National debt

Politics

Natural Resources can have a negative affect on gov. policies. 1. Natural Resources lead to an over-expansion of the gov. sector of the economy 2. With increased revenue from resources gov. can distribute to favored groups, and encourage more people to seize power.

Forward linkage

Natural resource is processed or used to produce other goods

Industrialization

Natural resources can distort the structure of an economy leading to short run benefits but long term costs

Wealthy Countries tend to be...

Near one another

Dissaving

Negative saving

What does the "NX" include in the equation for GDP, and how do you calculate it?

Net exports (exports - imports)

1. Better machinery and equipment

New tech. allows for faster and more productive ways of doing things.

Any change in capital with new tech is because the new tech made the capital productive because...

New technology is more innovative and allows for better production from workers and is not subject to diminishing returns.

Closed Economy

No interactions in trade or finance with other countries.

Bank Panic

Situation in which many banks experience runs at the same time.

Voluntary Exchange

Situation when both the buyer and seller benefit from the transaction.

Shortage

Situation where the quantity demanded is greater than the quantity supplied. Firms respond by raising prices to move market back to equilibrium.

Surplus

Situation where the quantity supplied is greater than the quantity demanded. Firms respond by cutting their prices to move market back to equilibrium.

Scarcity

Situation where wants exceed the limited resources available.

Enclaves

Small pockets of economic development that have almost no contact with the rest of the country's economy.

If geography determines trade and if trade helps a country get rich then...

Some countries have a fundamental advantage over others

What is one reason that the aggregate demand curve is downward sloping (as defined by the wealth effect) ?

consumers are wealthier, which stimulates the demand for consumptin goods

One time tax rebates increase...

consumers' current income but not their permanent income. Tax rebates are likely to increase consumption spending less than a permanent tax cut.

total spending by households on goods and services

consumption

What does the "c" include in the equation for GDP?

consumption (spending on goods and services by households)

What happens to consumption, interest rates, and net exports when the price level increases?

consumption decreases, interest rates rise, and there is a reduction in US net exports

Also producing more capital goods means producing less..

consumption goods.

What happens to consumption, interest rates, and net exports when the price level decreases?

consumption increases, interest rates fall, and there is an increase in US net exports

Gov Policy- Personal income tax or business taxes

consumption spending by consumers falls when personal taxes rise and investment falls when business taxes rise because of the higher cost to both of them shifting the graph to the left and visa versa.

what does c, i, g, and nx stand for the in the equation for GDP?

consumption, investment, government, net exports.

A rise in the GPL will lead to a ..... in AD

contraction (and vice versa; fall = expansion)

Menu Costs

costs associated with changing price tags, price lists, website content, catalogs, and menus

Spare capacity is useful to

counter unexpected demand

Trade effects Domestic firm efficiency by... (effect on efficiency)

creating more competition from abroad.

In recovery there are high levels of debt a low supply of

credit (low confidence, slow export growth, QE + low interest rates)

Government expenditure in AD is called

current government expenditure (state services (schools and wages) as well as spending on capital)

negative output gap

current ouput or GDP is lower than the UK's potential output

What will a government budget deficit do to the supply and demand model for loanable funds?

decrease the supply of loanable funds, raising the equilibrium interest rate, and reducing the equilibrium quantity of loanable funds

Two groups of world economies

developed countries Developing countries

Budget balance

difference between tax revenues and public spending (does not have to balance in the short term)

Access to the sea and proximity to major centers of economic activity help account for...

differences in the cost of transporting goods.

The accumulation of physical capital is subject to

diminishing returns

The accumulation of knowledge capital at the firm level is subject to...

diminishing returns.

what income you have left over once fixed cost (Schools fee, energy bills) has been met

discretionary income (if you have floating rate interest from before the recession then your discretionary income has increased as morguage rates have decreased)

what does GDP not value?

environmental quality, leisure time, non-market activity, such as at home child care, an equitable distribution of income

The total value of saving in economy must...

equal the total value of investment.

when prosperity is distributed equally among society's members

equality

for the economy as a whole, income ................ because every dollar a buyer spends is a dollar of income for the seller

equals expenditure

when the price has reached the level where quantity supplied equals quantity demanded

equilibrium price

productivity depends on the _________, ____, ______ available to workers

equipment, skills, and technology

Positive output gap sucks in imports because of

excess demand

If price level is above equilibrium there will be a

excess supply (if below = excess demand)

in the long run, inflation is almost always caused by __________, which causes the value of money to fall

excessive growth in the quantity of money

Natural Capital represents the resources that...

exist irrespective of human activity

If the expected rate of inflation is 4% and the nominal interest rate is 6% then ____________.

expected real interest rate is 2% (Nominal = expected real + expected inflation).

The effect of resources on a country's economic growth will depend crucially on the degree to which the...

exploitation of a natural resource stimulates or impedes production in other sectors backward or forward linkages

_____ represents foreign spending on the economy's goods and services

exports

How do you find NX?

exports- imports

Lack of unification had advantages for economic growth such as...

external competition served as a check on governments power, if another country gained an advantage then they would be able to dominate the other country so rulers did not want to stifle growth, people can leave one country easier and go to another.

when the production or consumption of a good affects bystanders

externalities

two causes of the price system not working right

externalities and market power

Recession;

fall in GDP over 2 consecutive quarters

Supply side deflation is caused by

falling costs of inputs and as result in fall in commodity prices and technological advances (good inflation - higher standards of living and increase firms productive capacity)

depreciation of pound

falls in value against other major currencies (current account is imports and exports)

Investment in new technology in production line should allow resources to be made (3 things)

faster, with fewer defects, out of less resources

Multipier (k) = (words)

final change in expenditure / initial injection

intended for the end user

final goods

Stocks

financial securities that represent partial ownership of a firm, if you buy a stock you become a partial owner of the firm.

Countries open to trade more able to import tech. by... (effect on efficiency)

firm building a factory in another country will bring tech.

Demand side policies are

fiscal and monetary

What Kinds of Policy Suffer From Lags?

fiscal and monetary policies

polocies designed to reduce the budget deficit is called

fiscal austerity (increased taxes, decreased government spending - can backfire if it pushes economy into recession - negative multiplier effect)

A change in gov spending it likely to have magnified affect as result of

fiscal multiplier

Change in government budget deficit that leads to a more than proportional change in increase in AD is called the

fiscal multiplier

Inflation squeezes real income and in especially hurts those on

fixed incomes (pension annuity, bond holders - they want deflation)

what is the Circular flow of income

flow of goods and service between households and firms and their corresponding payments in money terms

Income is a

flow of money arising from current economic activity measured over a particular time period

Three reasons why GDP is hard to predict

fluctuations in confidence cant be measured, external factors, cant predict exchange rates

What can shifts in aggregate demand contribute to?

fluctuations in output

the obstacles which prevent labour from moving from one area to another to find work represents

geographical immobility

Mobility of labour refers to the ability of workers to change jobs both

geographically and occupationally (2.5 million unemployed suggest that the labour market does not always operate efficiently)

Institutions and culture can change but...

geography can't

Progressive tax

gets larger as income rises

So if T=tax MM and G=Gov. spend MM and Y=recessionary gap then if G goes up by 1, Y goes up by 4, the tax MM goes up by one, Y has to...

go down by 3 so together the G MM and T MM=1

Fiscal policy in concerned with changes in

government expenditure, borrowing and taxation (used counter cyclically smooth out volatility)

Evaluation of fiscal policy - crowding out

government has to cover higher interest rates on bonds has they are borrowing more to persuade people to buy bonds - requires firms to do the same - less pass rate of return test = less investment - reducing Ad and depressing LRAS

fiscal policy

government manipulation of its spending and taxation in order to affect aggregate demand

all spending on the goods and services purchased by the government at the federal, state, and local levels.

government purchases (G)

What does the "G" stand for in the equation for GDP?

government spending

What is public saving?

government tax revenue minus government spending (T - G)

a non binding price ceiling....

has no effect

a non binding price floor....

has no effect

Intrinsic Value

has value outside of its use as money (anything with intrinsic value is a commodity)

Separate countries...

have higher chances of war between neighboring states which wastes resources

why is gross domestic product important?

having a large GDP enables a country to afford better schools, a cleaner environment, health care; many indicators of the quality of life are positively correlated with GDP

G will be greater than T in expansionary fiscal policy or when the economy is

heading into recession (increase G on welfare benefits and decrease in T)

Automatic budget surpluses and deficits can...

help stabilize the economy. when the economy moves into recession, wages and profits fall, reducing taxes that households and firms owe to the gov. Basically the households and firms have received an automatic tax cut that keeps spending higher than it would've been.

Natural Resources are...

helpful to economic growth but are neither necessary nor sufficient to achieve growth.

what is equality?

how evenly the benefits from using resources are distributed

what is efficiency?

how much a society can produce with its resources

Fisher Rule Formula

i = r+n i= nominal interest rate r= real interest rate n= inflation rate

Bonds Formula

i=(fv-p)/p=interest/yield for bond

How do you find productivity?

ide the quantity of output by the number of hours worked (number of units produced per hour)

Evaluation for change in AD put the component into perspective

ie not as big a effect as same % change in C

What would cause would cause prices and real GDP to rise in the short run?

if aggregate demand shifts right

What could cause you to be frictionally unemployed?

if job seekers and employers need time to find one another (this kind of unemployement is usually brief)

what would cause would cause prices to fall and output to rise in the short run?

if short run aggregate supply shifts right

what causes a surplus?

if the current price is above the equilibrium price

what causes a shortage?

if the current price is below the equilibrium price

What could cause you to be structurally unemployed?

if the number of jobs available in the labor market is insufficient to provide a job for everyone

What does the misperceptions theory tell us?

if the price level is higher than people expected, then some firms believe that the relative price of what they produce has increased, so they increase production

Increased demand for labour will not cause unemployment if there is

immigration

Commodity prices and tariffs are particularly important for Britain as we

import most of our raw materials

a High value pound is good for inflation because

imported goods reduce prices (30% of CPI are imports) and vice verso when the exchange rate is low imports raise inflation

the portions of C, I , & G that are spent on goods and services produced abroad

imports

governments may intervene in markets to...

improve efficiency (or tradeoff) and promote equality

How are real variables measured?

in goods

How are nominal variables measured?

in monetary units

What are the two ways in which monetary policy can be described?

in terms of the money supply or in terms of the interest rate

When does nominal GDP equal real GDP?

in the base year

When is monetary neutrality most relevant?

in the long run

When are Real and Nominal Variables Independent?

in the long-run aggregate supply and demand

When are Real and Nominal Variables Intertwined?

in the short-run aggregate supply and demand

something that induces a person

incentive

SRAS slopes upwards as higher prices give firms more

incentive to supply more

.... is a flow of money - how much you earn over a period of time

income

Direct taxes are on

income and wealth, profit (capital gains tax least important tax)

If interests rate fall then investment will

increase (more passes the rate of returns test)

If minimum wage rises then consumer spending will

increase (the poorest spend the most)

three ways to close recessionary gap

increase Gov. spending and lower taxes, decrease gov. spending and raise taxes or increase both taxes and Gov. spending by the same amount, doing both will close gap and balance budget.

Expansionary fiscal policy =

increase in G and lower T (if negative output gap, increase in government sector employees / increased disposible income as tax declines = increases AD)

A rise in the FTSE 100 may will cause wealth effect but it may also

increase in Yd because of increase in dividends (rise in consumer confidence

Debt can...

increase interest rates and which would lower investment spending and create crowding out.

A shift of a demand curve is a?

increase or a decrease in demand

Expansionary fiscal policy may also reduce budget deficit in long term if it leads to longer term economic growth as this will

increase tax revenues

Evaluation of fiscal policy - leakages

increased savings, imports and taxation could could mean affect on AD is smaller than expected

If tax reduction and simplification are effective the economy will experience...

increases in labor supply, saving, investment, and the formation of new firms, Increasing Real GDP at all levels!

Increases in price cause

increases in the quantity supplied

Investment has a duel role on the economy of

increasing AD and AS

Supply side policies are aimed at

increasing AS and increasing firms willingness and ability to supply at any given price level

What does an increase in government spending do to aggregate demand?

increasing government spending increases aggregate demand

Discretionary Fiscal Policy can increase the Fed. Budget during recessions by...

increasing spending or cutting taxes to increase Agg. Demand.

market demand is the sum of ____

individual demand

The presence of monopolies is a source of...

inefficiency and leads to misallocation of factors of production.

If positive output gap (higher the GDP potential GDP - overtime from workers) - lots of pressure on

inflation

If the money supply grows faster than the real GDP

inflation

rise in the general level of prices

inflation

negative output gap (lots of spare capacity) - less pressure on

inflation (used to counter unexpected increase demand, this may not be a good thing if already below 2% target, BOP improve)

society faces a short-run tradeoff between what two things?

inflation and unemployment

Compute the inflation rate using CPI using the...

inflation rate formula

If QE is embarked upon when there is no slack in the economy then

inflation will result

Change in national output =

initial change in investment * multiplier

There is a inverse relationship between investment demand and

interest rates

QE is only embarked upon when

interest rates can no longer be lowered (way of increasing supply of money in economy without printing money)

What is one reason that the aggregate demand curve is downward sloping (as defined by the interest rate effect) ?

interest rates fall, which stiumulates the demand for investment goods

The transmission mechanism refers to the effects of ........ on ....

interest rates on AD

used as components or ingredients in the production of other goods

intermediate goods (not included in GDP)

Increased profits will cause firms to expand production which in turn will increase business

investment

What is the Source of the Demand For Loanable Funds?

investment

What is the source of demand for loanable funds?

investment

total spending on goods that will be used in the future to produce more goods, includes capital equipment, structures, and inventories

investment

15% of AD is (1 million jobs)

investment (but is most volatile so has big effects)

What does the "I" include in the equation for GDP?

investment (new housing, equipment, inventories, structures, etc.)

Firms capital stock will only increase if

investments > capital consumption

Credit easing

involves purchase of debt securities in order to inject liquidity into the banking system and increase lending as a way to stimulate the economy. Consists of mortgage-backed securities, corporate bonds are added to the federal governments balance sheet as a credit.

unemployment is not caused by too little aggregate demand but...

is caused by the widespread failure of individual prices to convey accurate information to entrepreneurs and investors about what specific products they should produce and about how best to produce these products. Therefore, such unemployment cannot be cured by more government spending or other efforts to raise aggregate demand. Instead, such unemployment

Someone working 10 hours per week__________

is counted as employed

SRAS is drawn on assumption that quantity and quality of resources is constant, as these can only be changed in

long run

Expansionary monetary policy is called a

loose or easy policy

If inflation is below 2% then the BoE will

loosen monetary policy

Cycle of poverty

low incomes mean no saving which means few funds go to firms which means no investment which means no growth which means low income

Exploitation of workers

low wages, bad conditions, child workers. Still better than alternatives

QE leads to increased price of government and commerial bonds which is beneficial as it

lowers coupon payments reducing government spending and lowers borrowing costs that encourages C and investment as more projects will pass the rate of returns test

Land rich countries were...

magnets for immigration

what are the 2 characteristics of rational people?

make decisions by evaluating costs and benefits of marginal changes, and ignore sunk costs

incremental adjustments to an existing plan

marginal changes

Proportional tax

marginal rate of tax remains constant

The slope of the T curve is dependent on the

marginal rate of taxation

a group of buyers and sellers (need not be in a single location)

market

group of buyers and sellers of a particular product

market

Macroeconomic equilibrium occurs at .... .... ... intersection of supply (SRAS) and Aggregate demand

market clearing price

shows how the total quantity demanded of a good varies as the price of the good varies, while all the other factors that affect how much consumers want to buy are held constant.

market demand curve

allocates resources through the decentralized decision of many households and firms as they interact in markets

market economy

governments can improve efficiency when there is...

market failure

when the market fails to allocate society's resources efficiently

market failure

a single buyer or seller has substantial influence on market price (example: monopolies)

market power

Market Exchange Rate

market where people ( and firms/governments/banks) can buy and sell currencies. Rate is determined by the interaction of supply and demand just as other prices are.

To problems of a current account surplus

may cause exchange rate to appreciate, become increasingly reliant on exports

To measure the effectiveness of a stimulus package we must...

measure its affects on real GDP and employment. Must separate from the effects of other factors such as Fed. Reserve monetary policy and other typical changes in real GDP and employment.

Investment ___________________.

measures purchases of things like trucks, factories, and machines to be used in the production process

standard of living

measures welfare of people living in the economy

We can measure the degree of integration between two economies by...

measuring the differences in prices.

Why is the Federal Reserve an Independent Policymaking Body

members of the board of governors are appointed for 14-year terms

Government spending needs to provide ..... ..... that the public sector would not supply

merit goods

Explicit Costs

monetary amounts paid (wage)

What is considered commodity money?

money that takes the form of a commodity with intrinsic value

Fiat Money

money whose value derives from government decree

What is considered fiat money?

money without intrinsic value, used as money because of government decree

Lowering inflation will make us more or less internationally competitive

more

The closer the prices of the same goods or factors of production in two countries the...

more integrated are their markets for goods.

The smaller the tax wedge the...

more of that economic activity will occur, it's an incentive

The fact that wealthy countries are geographically clustered may represent an additional obstacle for the development of many poor countries because...

most developing countries are isolated and not close to wealthy countries and don't get the benefits of spillover.

Investment may be the smallest component of AD (15%) but it can have a large effect as it is the

most volatile

a change in price causes a _______ the demand curve

movement along

Change in price level equals

movement along curve

a ______ occurs when price changes

movement along the demand curve

If only the price of a product changes there is a...

movement along the supply curve

The limited nature of FOP means constraint on

national output

level of unemployment at Yp =

natural level of unemployment

Output additionally with labor needs...

natural resources

Expansionary fiscal policy may be appropriate if there is a

negative output gap (spare capacity as to the left of Yp as the government is injecting into the economy to increase AD)

Converting Money Formula

new = original (current year's CPI / original year's CPI)

what is the formula for percent change?

new- old/old x 100

What is the "P x Y" portion of the quantity equation also equal to?

nominal GDP

includes change in price and change in output

nominal GDP

values output using current prices

nominal GDP

If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?

nominal GDP but not real GDP

what is the definition of GDP deflator?

nominal GDP/ real GDP x 100

Real change in variable =

nominal change - inflation rate

Real rate of interest is

nominal interest rate - inflation rate

Current problem with expansionary monetary policy

nominal interest rates cant fall below zero so run out of road

maximum price of gasoline is $7 per gallon, example of...

non binding price ceiling

government says cant sell gas for less than 35 cents is an example of

non binding price floor

what causes a market to fail?

not allocating resources efficiently

Johnny has been without a job for 2 years since his employer shut down. But seeing no prospects he last looked for a job 2 months month (and has not even applied for one in three months). Johnny is _____________.

not counted as unemployed (One must be actively looking for a job to be counted as in the labor force and unemployed. One must be in the labor force to be either unemployed or employed. Johnny is not in the labor force and therefore is not unemployed.)

Ring fenced spending means that it will

not fall in real terms (Health, schools, international development)

A unsecured loan is

not tied to the value of another asset (Student overdraft, bank loan, credit card)

Unemployment rate =

number of people unemployed as a percentage of the labour force

How do you find the unemployement rate?

number of unemployed / (number of employed + number of unemployed) x 100

Frictional Unemployment

occurs because job seekers and employers need time to find one another

Structural Unemployment

occurs because the number of jobs available is insufficient to provide jobs to everyone

Frictional unemployment:

occurs when workers are temporarily between jobs.

Structural unemployment:

occurs when workers do not have the necessary skills to fill job openings in the economy. (also known as a skills mismatch).

A budget surplus Increase the total amount...

of saving in the economy, shifting the supply curve for loanable funds to the right, decreasing the interest rate and increasing investment and saving.

Savings ratio is 0.06 it means

on average households in UK saved 6% of any income it earned. (therefore it consumed 94% of its disposable income) It is not the amount saved on a increase of Yd but the amount saved of all Yd

what is the relevant cost for decision making?

opportunity cost

whatever must be given up to obtain an item

opportunity cost

Markets are usually a good way to do what?

organize economic activity?

The only way to increase a nations wealth is to increase its real output

out put=stuff.

Difference between output level and potential level =

output gap

GDP = no. of workers *

output per worker (productivity)

SRAS curve is upward sloping because price...

over the short run as the price level increases, the quantity of goods and services firms are willing to supply increases.

Increase in minimum wage would increase the

participation rate

Who is considered to be in the labor force?

people employed and people unemployed

What happens when the stock market crashes?

people feel poorer, consumption decreases, aggregate demand shifts to the left

What happens when there is a boom in th stock market?

people feel wealthier, consumption increases, aggregate demand shifts to the right

An increase in the price level means

people will have to hold more money on hand b/c the dollar buys less

inflation is measured in

percent change

Consumers base their spending on their...

permanent income which reflects the consumers expected future income. Ex: doctor spending money or taking loans based on future salary.

inflation target

permitted range for the increase in price levels measured by the CPI

The first 10,000 of your income is called your

personal allowance

Inflation conflicts with unemployment as the ...... curve shows

phillips (there is a rade off)

Environmental exploitation

pollution of poorer countries, deforestation, destroying habitats

Countries with little capital are...

pooor

GDP growth many not lead to increased standard of living if there is

population growth (Per capita GDP is still the same)

if Ad increases then it is called a

positive demand shock

Fiscal policy on increases investment in capital to help work force (reduction /health) will have ... .... when supplied

positive externality

a legal maximum on the price of a good or service

price ceiling

rent control is an example of a....

price ceiling

legal minimum on the price of a good or service

price floor

What is On the Vertical Axis of a Short-Run Model of Aggregate Demand and Supply?

price level

Level of real GDP determined by the number of workers, capital stock ( machines, factories, equipment), and available tech which means changes in the...

price level do not affect the level of real GDP in the LONG RUN.

Interest rates are the

price people pay to borrow and the income they receive when they save

to calculate GDP, sum up _____

price x quantity

Compounding Interest Rate

principal(1+interest rate)^time period = amount investment is worth

Productivity is defined as ______________.

production of hour per work

Related to YP, recession can have permanent effect on

productive capacity

the amount of goods and services produced per unit of labor

productivity

the most important determinant of living standards is ?

productivity

Compliment Goods

products that are usually jointly consumed (associate), such that a decrease in the price of one product will cause increase in demand for the other product.

A negative output gap decreases cost of FOP which then causes .... ..... to increase

profit margin (increases incentive to supply)

The extent to which economic growth increases the tax rate depends on the

progressivity of the tax (average tax and number of tax bands)

the ability of an individual to own and exercise control over scarce resources

property rights

what must we have for markets to work right?

property rights

Marginal propensity to save =

proportion of any increase in income that is saved

Unit of Account

provides buyers and sellers a common reference point for valuing goods and services (units/dollars)

how does the government enforce property rights?

providing police and courts

Cutting interest rates and ..... lowers the price of a £

quantitative easing

amount of a good that buyers are willing and able to purchase

quantity demanded

What is On the Horizontal Axis of a Short-Run Model of Aggregate Demand and Supply?

quantity of output

amount that sellers are willing and able to sell

quantity supplied

refers to the amount suppliers wish to sell

quantity supplied

When the price of a good falls selling the good is less profitable and the...

quantity supplied will decrease.

When the price of a good rises, producing the good is more profitable and the...

quantity supplied will increase

If debt becomes too high the Gov. must...

raise taxes to high levels or cut back on other types of spending to make interest payments on the debt.

BoE increases interest rates by

raising bank rate (raised commercial banks costs - higher rates of interest)

Demand for imports reflects

rate of economic growht

Economic slowdown is when

rate of growth drops below trend

A company will only invest if

rate of return is greater than rate of interest on loan use to finance investment (or if out of retained profits must be greater then bank interest rate)

Regressive tax

rate of tax falls as income rises

during a shortage, sellers must....

ration goods

systematically and purposefully do the best they can to achieve their objectives (self interest)

rational people

includes only change in output

real GDP

indicates total economic activity...

real GDP

values output using a baseyear

real GDP

which form of calculating GDP is corrected for inflation?

real GDP

two most improtant factors that cause Shifts in the money demand curve

real GDP and Price level

High productivity means what for real GDP and income?

real GDP is large and incomes are high

_____ main indicator of the average person's standard of living

real GDP per capita

Classical Dichotomy

real and nominal variables are separate

Boom:

real national output greater than trend (more business investment, less unemployment, higher real wages, + imports, increased government tax revenues)

Workers don't want to accept nominal wage cuts so inflation is a good way of reducing

real wages and costs for firms

Profits affect business investment, profits may decline as a result of

red tape, taxes, factors of production cost

Immobility in long term can

reduce quality of human capital and lead to lower productivity and competitiveness

Supply side policy to scrap red tape may

reduce quality of life (cost benefit analysis)

Contractionary fiscal policy may be used to

reduce size of budget deficit (called Fiscal Austerity)

Why does an increase in the price level decrease the quantity demanded?

reduces the real value of money and makes consumers poorer, discourages investment spending, and reduces net exports

Why interest rates should not be zero (4)

reduces wage flexibility, make monetary policy less effective, need to be able to have negative interest rates to stimulate economy, Deflation is potentially worse

A simplified tax code would increase economic efficiency by...

reducing the number of decisions households and firms make solely to reduce their tax payments and force workers for H&R block to work at something else.

"Business Cycle"

refers to the fluctuation in the amount of goods and services produced

Critism of Indirect taxes (Excise duties) - they have a

regressive impact (effect lower incomes more)

A normative statement ___________________________.

relies on personal values (A normative statement is opinion-based (a value-based statement) as opposed to a 'positive' statement, which is fact based.)

how do we calculate excess reserves?

reserves - required reserves

Growth of many countries in the western hemisphere was...

resource driven

what does scarcity mean?

resources are limited

With higher economic rents come higher benefits of rent seeking so...

resources are wasted on such activities

Policy to tackle positive output gap

restrictive fiscal policy

In the long run, small differences in economic growth...

result in big differences in living standards Compounding interest contributes to this.

Contractionary Policy

results in a decrease in aggregate demand

A permanent increase in Gov. Purchases in the long run

results in complete crowding out and the decline in consumption, investment, and net exports offsets the increase in Gov. purchases.

An increase in Gov. purchases in the short run

results in partial crowding out.

the farther a country is from the equator the...

richer the country is

as buyers increase, demand curve shifts....

right

for a normal good, increase in income shifts demand curve...

right

why could recession have permanent effect on prodution capacity? (2)

rise in business failure + CV gaps make the unemployed unemployable

If consumers come to demand more oranges and fewer grapefruits the price of oranges must...

rise relative to the price of grapefruit so citrus growers know to produce more oranges and fewer grapefruit.

Why there is such a difference between claimant count and LFS (ILO)

rules don't allow a lot of people to claim benefits (too much is savings, other half earns too much)

Reduced interest rates punishes

savers

Why can nominal rates of interest not fall below zero

savers would convert deposits into cash

Net savings =

saving - borrowing

A budget deficit has reduced the level of total...?

saving in economy and increases the interest rate which reduces the level of investment by firms which means that gov. will have crowded out firms.

What can fiscal policy influence in the long run?

saving, investment, and growth

What is the Source of the Supply For Loanable Funds?

savings

Withdrawals form circular flow of income =

savings, taxation, imports

the limited nature of society's resources

scarcity

what concept does economics primarily deal with?

scarcity

Firms can tell that housholds are saving money instead of spending by...

seeing the interest rate go down and loanable funds rate go up.

Consumer confidence is often

self fore filling prophecy

predictions can often become

self fore-filling prophecies (they are particularly important before someone makes a big purchase)

what guides decisions in a market economy?

self-interest and prices

If countries are open to trade in goods then the same good will...

sell for the same price in both countries

Problems of expansionary fiscal policy - (£51billion to....)

service debt (total stock of bonds * average interest rate on bonds)

Differences between fiscal and monetary policy (2)

set every month by MPC vs set annually by government (chancellor of the exchequer)

a_____occurs when a non-price determinant of demand changes (like income or # of buyers)

shift in the demand curve

A change in supply means a...

shift in the supply curve if a change occurs in one of the other variables not including price.

If any other variable changes there is a...

shift of the supply curve

an increase in the number of sellers will cause the supply curve to....

shift out

changes in determinants other than price _______ supply curve

shift the

an event that changes tastes or preferences in favor of a good or service_____

shifts demand out

Fluctuations in the real GDP and the price level are caused by...

shifts in the aggregate demand curve or in the aggregate supply curve.

as income increases, demand curve for inferior goods

shifts left

when quantity demanded exceeds quantity supplied

shortage

a binding price ceiling leads to....

shortages

rapid growth then there is not spare capacity will cause inflation because of the

shortages in the factor market (increased prices)

Aggregate demand curve shows

shows quantity of domestically produced g&s that would be bought a different values of the general price level

SRAS curve shows

shows total quanitity of g&s that would be bought a different values of the general price level each year(factors of production cannot change but price can)

Nominal value of something measured in 'Current prices'

simple unadjusted numerical value (distorted by inflation)

The more urbanized a country comes the

smaller the average family (rural urban migration)

The higher the tax rate the...

smaller the multiplier effect

Government expenditure in AD (24% of AD) does not include

social capital (this is counted for in I) and transfer of payments (nothing in return i.e benefits)

How does 0% inflation decrease wage flexibility and possibly lead to unemployment

some firms need real wages to fall to maintain employment but workers are very reluctant to accept nominal pay cuts

The ouput gap measures how much

spare capacity / productive potential there is in the economy

Indirect taxes are on

spending (VAT)

Consumption =

spending by households on goods and services

If money supply grows at the same rate as real GDP

stable

3 measures of GDP not the same because of (average is taken

statistical errors, tax evasion

What are the three explanations for the upward slope of the short-run aggregate supply curve?

sticky wages, sticky prices, and misperceptions

Industrial development resulting from backward or forward linkages can...

stimulate growth in other economic sectors

Wealth is a

stock of assets (wealth can generate income - dividend on shares)

Competitiveness of UK goods =

strength of pound, elasticity of demand for exports (non price factors - reliability, marketing, after sales service) protectionism

General price level rises - infalation - higher interest rates from banks =

stronger currecny

Occupational immobility can lead to ...... unemployment

structural

the mismatch of skills and location between job seekers and job providers gives rise of immobility of labour and is called

structural unemployment

what should the government do for producers of positive externalities?

subsidize the producers

two goods for which an increase in the price of one leads to an increase in the demand for the other

substitutes

costs that have already been incurred

sunk costs

refers to the position of the supply curve,

supply

Negative output gap encourages increases ..... as the price of the FOPs decrease

supply (When a country deviates from Yp it will be self correcting)

what happens to current supply when expected prices rise?

supply decreases (shifts left)

what happens to supply when the price of an input increases?

supply decreases (shifts left)

what happens to supply when there is an increase in the price of a substitute in production?

supply decreases (shifts left)

what happens to supply when there is an increase in the price of a compliment in production?

supply increases (shifts right)

an increase in input prices will result in.....

supply shifting in

What causes a shift in the short run aggregate supply curve?

supply shock

when quantity supplied exceeds quantity demanded

surplus

a binding price floor leads to....

surpluses

Business rates

tax on business property based on value of property paid to local council

Capital gains tax

tax on increase of price of asset when it is re-sold

Tax revenue =

tax rate * tax base

Negative economic growth effect on distribution of income depends on

tax rates

Equity of incomes if often dependent on

tax rates both direct and indirect and their progressivity

what should the government do for producers of negative externality?

tax the cost of the externality

The tax base for income is

taxable income (

how much of an input is required for a unit of output

technology

The substitution bias _________________.

tends to overestimate the true rate of inflation (Substitution bias: when the switch to lower price alternatives is not captured in the market basket (and hence the CPI)

WE WILL BURY YOU- Kruchev meant...

that communism would become world dominating economic power..

interest rate

the cost of borrowing and the income on savings (the rate in usually determined by BOE)

The RPI includes .... when the CPI does not (rest of Europe uses the CPI)

the cost of home ownership (mortgage interest payments, council tax, property insurance)

What is one reason that the aggregate demand curve is downward sloping (as defined by the exchange rate effect) ?

the currency depreciates, which stimulates the demand for net exports

Fluctuations in actual output reflect the operation of

the economic cycle

budget deficit (fiscal deficit) may occur if there is a expansionary fiscal policy or

the economy enters recession (increase on welfare benefits and decrease in tax revenues - causing tax base to shrink)

Policies that increase the incentives to save and invest will increase ...

the equilibrium level of loanable funds and the level of real GDP per capita

What has the most important effect on a small economy in terms of aggregate deamnd?

the exchange-rate

What happens to the federal funds rate then the Federal Reserve uses open market operations to buy government bonds?

the federal funds rate decreases

Who controls the money supply in the US?

the federal reserve (FED)

What is the Marginal propensity to consume (MPC)

the fraction of extra income that households consume rather than save

In QE the second hand government and commercial bonds are bought with digitally created BoE money and then place in the ownership of

the government

What is the quantity theory of money?

the hypothesis that changes in prices correspond to changes in the monetary supply

What has the most important effect on the US economy in terms of aggregate demand?

the interest rate

What is the discount rate?

the interest rate on loans that the federal reserve makes to banks

What is human capital?

the knowledge workers gain through training, education, and experience

Relative prices are...

the main source of both this knowledge and these incentives. Relative prices are the prices of some goods and services relative to the prices of other goods and services.

GDP

the market value of all final goods and services produced by resources with the U.S. in a given year = C + I + G + (X - M)

what is GDP?

the market value of all final goods and services produced within a country in a given period of time

gross domestic product is....

the market value of all goods and services produced within a country in a given period of time

What do we use to study fluctuations?

the model of aggregate demand and aggregate supply

Trade weakens... (Effect on efficiency)

the monopoly power of domestic firms

injection of new demand into the circular flow of income is likely to lead to

the multiplier effect (K) (fades overtime because of withdrawals)

What are the two effects that fiscal policy can have on aggregate demand?

the multiplier effect and the crowding out effect

The Claimant count measure of unemployment measures

the number of people seeking unemployment benefits (Out of work in last 4 weeks, age 16-65 and internationally recognised)

The LFS measures

the number who are jobless but would like work, are available for work and have looked for work in the last month

What does CPI measure?

the overall cost of the goods and services bought by a typical consumer

what is considered currency?

the paper bills and coins in the hands of the (non-bank) public

What is the reserve ratio?

the percentage of deposits that the bank keeps as reserves (it then loans out the rest)

What does "P" stand for in the quantity equation?

the price level

Why is the Long-Run Aggregate Supply Curve Vertical at the Natural Rate of Output?

the price level has no bearing on the economy's long-run level of real output

What is the interest rate?

the price of a loan (the amount that borrowers pay for loans and the amount that lenders receive on their saving)

Exchange rate =

the price of one currency expressed in terms of another

Exchange rate;

the price of one currency expressed in terms of another, the amount of one currency that can be bought with a unit of another (then probably reference data so a pound would have bought .... Euro)

What Does CPI reflect?

the prices of all goods and services bought by consumers

Marginal propensity to import

the proportion of any increase in incomes that is spend on imports

What does the aggregate demand curve show us?

the quantity of all goods and services demanded at any given price level

what is productivity?

the quantity of goods and services produced from each unit of labor input

What does "M" stand for in the quantity equation?

the quantity of money

What does "Y" stand for in the quantity equation?

the quantity of output

What is the classical theory of inflation also known as?

the quantity theory of money

What is inflation tax?

the revenus a government creates by printing money

If countries are open to movements of factors of production then...

the same factor should earn the same income in both markets.

increase in technology means fewer inputs per unit output, similar to a decrease in input prices, resulting in

the supply curve shifting out

What determines production?

the total amount of goods and services produced

What is productivity?

the total amount of goods and services produced per worker

What is national saving?

the total income in the economy that is left after paying for consumption and government purchases (Private + Public Saving)

What does "V" stand for in the quantity equation?

the velocity of money

Increasing the distance between two countries by 1% lowers...

the volume of trade between them by .85%

What has the least important effect on the USeconomy in terms of aggregate demand?

the wealth effect

What is a "unit of account"?

the yardstick people use to post prices and record debts

What is nominal GDP?

the yearly production of final goods and services valued at current prices (price from the current year)

What happens if the gov't increases spending holding taxes constant or decreases taxes holding spending constant?

there is a crowding out effect

goods that the typical houseshold doesn't buy are only included in the GDP deflator if....

they are made in the United States

what happens to prices when the government prints too much money?

they rise (inflation)

What do positive supply shocks include (these shirt the short run aggregate supply curve)?

things like decreases in oil prices or an unexpected great crop season

What do adverse supply shocks include (these shirt the short run aggregate supply curve)?

things like increases in oil prices, a drought that destroys crops, and aggressive union actions

Unemployment is

those who are seeking work but are unable to find a job

High and unexpected inflation have a greater cost for whom?

those who save than for those who borrow

Contractionary monetary policy called a

tight policy

If inflation is above 2% then the BoE will

tighten monetary policy

availability of credit decreases when banks (not just lending to consumers but to other banks as well)

tighten their lending criteria (credit crunch and decrease in C home owners have to pay a higher rate on their mortgage repayments and lay down a larger deposit)

Evaluation for change in AD long run effects different to short run effects because of

time lag (adjustment of C and laying off workers)

The way to cure this unemployment is...

to allow prices to adjust so that they better reflect consumer desires and the realities of resource availabilities.

Why would the federal reserve sell bonds?

to decrease the money supply

Why would the federal reserve buy bonds?

to increase the money supply

Why is GDP revised

to reflect new and improved data

What is physical capital?

tools, machinery, equipment, and structures used to produce goods and services

Employment rate calc

total employed / working age *100

In closed economy investment spending is equal to

total income-consumption spending-Gov. purchases. I=Y-C-G

Aggregate demand is the =

total planned spending on domestically produced g&s

Two reasons why GDP may increase

total quantity of G&S in improving or that the price of G&S is increasing

savings ratio (the AVERAGE propensity to save)

total savings as a percentage of deposable income (s/Yd)

GDP (measure of economic activity) = The government publishes all three measures and takes a average

total value of domestically produced g&s during a year (total national expenditure of domestic g&s / national income arising from production of g&s per year) measure of national income

Differences in transport costs correlate well with differences in...

trade volume and income per capita

government purchases does not include _______ such as social security or unemployment insurance benefits

transfer payments

here are several ways in which changes in interest rates influence aggregate demand, output and prices. These are collectively known as the

transmission mechanism of monetary policy

Business investment makes up more than ..... the amount of social investment by government so has a far larger effect.

twice

GDP per capita in areas within 60 miles of the sea is...

twice as high as GDP per capita of places in land

Which way does the aggregate supply curve slope in the short run?

upward

A fall in house prices apart from negative wealth effect will mean people have less equity available to

use as collateral for borrowing

Nominal Variables

variables that are measured in monetary units nominal wage is $ per hour

Real Variables

variables that are measured in physical units real wage is 1/2 pizza per hour

The LRAS on a graph is...

vertical

when there is a fierce competition for jobs people are more likely to accept

wage cuts

income to households from firms comes in the form of

wages, dividends and bonus (conversely consumer spending provides firms with income)

..... is a stock of assets, it is what you own (property, savings, bonds)

wealth

Higher income workers often have a income from

wealth

How is wealth redistributed when infation is expected to be low, but turns out to be high?

wealth is redistributed from creditors to debtors

How is wealth redistributed when infation is expected to be high, but turns out to be low?

wealth is redistributed from debtors to creditors

"organizing economic activity" means determining which 4 things?

what goods to produce, how to produce them, how much of each to produce, and who gets them

In economics, what is the cost of something?

what you give up to get it (opportunity cost)

Demand pull inflation (expectations can be self fore-filling; consumers will bring forward their spending to beat the price rise and cause demand pull inflation)

when AD rises above Yp and firms encounter shortages of factors of production (inputs)- increase in units cost as firms seek to protect their profit margins

Wealth effect

when asset value changes causes a change in spending (multiplier + confidence)

A secured loan is

when borrower uses another asset as collateral

When is the government running a budget surplus?

when it spends less than it collects in tax revenues

When can the government improve market outcomes?

when markets fail to produce efficient or fair outcomes

'Convergence' is_____________

when poor countries grow (in terms of GDP) faster than rich countries

Inflation Tax

when the government pays its debts by printing money

What does the sticky-price theory of the short-run aggregate supply curve suggest?

when the price level is higher than expected, some firms will have lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied

The Natural Rate of Unemployment Occurs When?

when there is 0% cyclical unemployment

When is an economy at its natural rate of unemployment?

when there is no cyclical unemployment

GDP measures the value of production that occurs ________ whether done by its own citizens or foreigners there

within a country's borders

malinvested

workers and resources will be invested in production processes that do not best meet the demands of consumers

Economically inactive

working age neither in or seeking work

what is the equation for GDP

y= c + I + G +nx

Rule of 70

years it takes a variable to double = (70) / (the growth rate) the annual growth rate of the variable.

if multiplier is 2 then 10 pounds of new spending will lead to

£20 of extra income (2 times greater increase in national income compared to initial injection)

How much did it cost to service debt last year

£51bn

Current account deficit in 2014

£71 billion (X(injections)-M(leakages))

Balance of payment deficit 2014

£72 Bn (bottom of the G7)

3 groups

Institutions culture Geography

Discount Rates

Interest Rate the Fed charges on its loans.

Targets of Fed (IR, MS)

Interest Rates in long term........ money supply in the short term

Interest on Reserves (Tool)

Interest on reserves (IOR) is the rate at which the Federal Reserve Banks pay interest on reserve balances, which are balances held by DIs at their local Reserve Banks. One component of IOR is interest on required reserves, which is the rate at which the Federal Reserve Banks pay interest on required reserve balances. Which would give banks an incentive to keep more Reserves.

Nominal Interest Rate

Interest rate as usually reported without a correction for effects of inflation.

Real Interest Rate

Interest rate corrected for effects of inflation. Real Interest rate= (nominal interest rate)-(inflation rate)

Determinants of business investment

Interest rates, availability of credit, business confidence, profits (70% of investment out of retained profits + increased profits encourages firms to expand production)

Law of Demand

Inverse relationship between the price of a product and the quantity of the product demanded. Ex: Increase in Price, Decrease in quantity demanded Visa Versa

What happens if Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China

Investment rises by $1800, net exports fall by $1800, GDP is unchanged

Contractionary Fiscal Policy

Involves decreasing Gov. purchases or increasing taxes to reduce increases in aggregate demand that seem likely to lead to inflation.

Private saving

Is Equal to what households retain of their income after purchasing goods and services and paying taxes.

the government is trying to get around how much inflation?

2%

Average rate of economic growth since WW2

2.24%

Economic growth in 2014

2.6% (provided government with increased revenue)

fiscal austerity increase in vat from 17.5% to .... in 2010

20%

Openness refers to...

Flow of resource factors, people, ideas from country to country.

Budget surplus

When the Fed Gov.'s expenditures are lower than its tax revenues.

Store of Value

a means of transferring purchasing power from the present to the future

a change in the price causes ___________ supply curve

a movement along the

Economic Rents

a payment to a factor of production that is in excess of what is required to elicit the supply of that factor.

What could cause you to be cyclically unemployed?

a recession

What is it called when Inflation induces people to spend more resources maintaining lower money holdings?

a shoeleather cost

Macroeconomic objectives

aims of the government to improve economic welfare

X-M measures the extent that international trade

boosts or holds back the economy

Dis-savings

borrowing

Reduced AD may cause unemployment as labour is a form of

derived demand

Unemployment Rate Formula

# of unemployed/employed+unemployed

Natural Resources are...

A determinant of economic growth

Technological change

Change in the quantity of output a firm can produce using a given quantity of inputs.

How interest rates affect Aggregate Demand (CIN)

Consumption Investment Net eXports

What happens if Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston?

Consumption and GDP rise by $200

CPI Formula

(Basket cost Current year)/ Basket Cost Base Year) X 100

How do you calculate inflation from the CPI?

(CPI in Current Year - CPI in Base Year)/(CPI in Base Year) x 100

Inflation Rate Formula

(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100

How do you find the labor force participation rate?

(Labor Force / Adult Population) x 100

TANSTAAFL

(There ain't no such thing as a free lunch)- because of scarcity everything has a opportunity cost.

How can you convert the quantity equation to account for percentages?

(percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output)

Unemployment rate formula

(unemployed)/(employed+unemployed)

With aggregate supply and demand curve; ... is on x axis

Real National Output (RNO) or GDP

The ways Europeans benefited from Geography...

1. size of Eurasia with similar climates and water ways 2. domestication of agricultural plants and animals that formed the agricultural economies. 3. Exposure to animals that gave them disease that they over time became immune to.

Economic Model Steps

1. Decide on assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test a hypothesis. 4. Revise the model if it fails to explain economic data well. 5. Retain the revised model to help answer questions in the future.

What are the four steps to analyzing economic fluctuations?

1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD-AS diagram to see how the shift changes Y and P in the short run. 4. Use AD-AS diagram to see how economy moves from new SR eq'm to new LR eq'm

What five criteria make a good suitable for use as a medium of exchange? (Acc, Stand, Dur, ValRW, Divis)

-Acceptable/usable to most people -Of standardized quality so that any two units are identical. -Durable so that value is not lost by spoilage -Valuable relative to its weight so that large amounts are transportable and easy to trade. -Divisible so that it can be used in purchases of both low priced and high priced goods.

Categories of Gov. Expenditures (Gr, Nat. D Int, Trans. Pay)

-Grants to state and local Gov's- Payments by Federal Gov. to support state/local. -national debt interest- Payments to holders of the bonds the Federal Gov. has issued to borrow money. -Transfer Payments- Social security, Medicare, unemployment insurance, fastest growing Gov. Expenditure.

Budget deficit / Budget surplus

...

Current rate of inflation

0%

The number of people unemployed by the Claimant count measure is

0.82 million

The sum of Gov spending and tax multiplier has to equal...

1

How do you find the multiplier?

1 - (1/MPC)

How many people employed in the investment sector

1 million

600 miles of distance from one of the most developed regions of the world raises transport costs by...

1 percent.

to determine the effects of equilibrium....

1) decide whether event shifts s curve, d curve, or both 2) decide in which direction the curve shifts 3) use supply demand diagram to see how the shift changes equilibrium of price and quantity

A cut in the tax rate affects equil. RGDP through two channels (Inc. Dis. Inc., Inc. ME)

1. A cut in the tax rate increases the disposable income of households increasing consumer spending. 2. A cut in the tax rate increases the size of the multiplier effect.

PCE pros (CBP)

1. Allows the mix of products or basket goods to CHANGE each year. 2. Includes the prices of more goods and services than the CPI, a BROADER form of inflation. 3. PAST values of PCE can be revised.

pros of inflation targeting (ana)

1. Announcing explicit targets for inflation draws public attention to what the Fed can ACHIEVE. 2. Announcing inflation target provides an anchor for inflationary expectations (People believe inflation will always go back down to NORMAL). 3. Inflation targets promote ACCOUNTABILITY for the Fed by providing a yardstick against which its performance can be measured.

Technology has three affects

1. Any increase in tech means an increase in Capital 2. Any change in capital with new tech is because the technology made the capital productive. 3. New tech does not suffer from diminishing returns

3 ways labor productivity can increase

1. Capital Mobility 2. Trade as technology 3.Trade enhancing tech advancement.

Three approaches to determine whether being open to the world economy will cause a country to be rich

1. Compare Growth Rates of income in closed/open 2. Examine how growth rates change when countries become open/closed. 3. Consider the impact of geographic factors that affect a country's openness.

Why the change in the price of inputs is slower than the change in the price of price level 3 reasons (movement along SRAS curve)

1. Contracts make wages sticky 2. Firms are often slow to adjust wages 3. Menu costs make some prices sticky.

Why timing is harder with fiscal policy than monetary policy

1. Control over monetary policy is concentrated in the hands of the FOMC, and can change the policy at any of the meetings. 2. The president and congress all have to agree on fiscal policy and fiscal policy takes much longer.

Two ways economic openness contributes to a higher level of tech...

1. Countries open to trade more able to import existing tech. abroad. 2. Interactions among countries allow for the transfer of softer tech. such as innovative organizational techniques.

Reasons for a Resource Curse

1. Countries with rich resources do not develop the cultural attributes for economic success. 2. Over-consumption 3. Industrialization 4. Politics

5 Problems with GDP (Dep, Obsc GI, G&B, ESoN, MOO)

1. Doesn't take depreciation of capital into effect. 2. Obscures Growing inequality and encourages depletion of resources. 3. Can't differentiate between the good (education) and the bad (cigarettes) of things that people spend on. 4. Doesn't measure economic services of nature. 5. Measures only output and makes no claims on the quality of that output or social progress or happiness.

Three ways climate affects economic growth

1. Effects on production, importantly agriculture 2. Influences human input into production because the prevalence of disease and climate and how Temp. affects ability to work. 3. Affects the economy by making a location more or less pleasant to live.

Reasons for the recession

1. Excessive desire to expand home ownership. 2. Fed. too loose with Monetary Policy, deflation fears create too low of interest rates. 3. Breakdown of the financial system, bubble bursts and liquidity crisis, intrabank lending dried up.

Four key factors for why some low income countries grow slowly... (FWPL)

1. Failure to enforce the rule of law 2. Wars and revolutions 3. Poor public education and health 4. Low rates of saving and investment

How does the BLS calculate CPI (Fix, Find, Compute, Choose, Compute)

1. Fix the basket 2. Find the prices of goods/services in the basket at one point in time. 3. Compute baskets cost 4. Choose a base year and compare it to other years.(Use CPI formula) 5. Compute the inflation rate using CPI in (Inflation rate formula.)

Merton's Examples of Unintended Consequences (Ig, Er, iii, BV, SDP)

1. Ignorance 2. Error 3. Imperious Immediacy of Interest 4. Basic Values 5. Self Defeating Prediction

Variables that can SHIFT market demand (In, Pr of RG, T, P&D, Ex FP)

1. Income 2. Prices of related goods 3. Tastes 4. Pop. and Demographics 5. Expected future prices.

5 Variables that shift the SRAS Curve (Incr LF&CS, TC, HH/F Exp, Adj. W4Err, SS)

1. Increases in labor force and capital stock 2. Technological change 3. Expectations of future price level 4. Adjustments of workers/firms to errors in past expectations about price level 5. Unexpected changes in price of Nat. Resource (supply shock)

Why people buy bubble assets?

1. Investor is caught up in the enthusiasm of the moment and fails to gather sufficient info about the true value of the asset. 2. Investor may expect to profit from buying the asset at inflated prices if the investor can sell that at higher price before bubble pops.

How to measure openness?

1. Law of one price 2. Openness index

3 main Monetary Policy Targets of the Fed

1. Money Supply 2. Interest Rate 3. Federal Funds Rate

3 Monetary Policy Tools of the Fed.

1. Open Market Operations 2. Discount Policy 3. Reserve Requirements

Fed's policy tools

1. Open Market Operations 2. Discount Policy 3. Reserve Requirements 4. Monetary Policy Goals of Fed can be conflicting.

Fed's 4 main monetary policy goals to promote well being for the whole economy

1. Price Stability 2. High Employment 3. Stability of financial markets and institutions 4. Economic Growth

Variables that shift market supply (Pr I, TechC, PrSP, N#F, ExFP)

1. Prices of inputs 2. Technological Change 3. Prices of substitutes in production 4. Number of firms in the market 5. Expected Future Prices

cons of inflation targeting (ufid)

1. Rigid numerical targets for inflation diminish the FLEXIBILITY of monetary policy to address other policy goals. 2. Monetary policy affects inflation with a lag, inflation targeting requires that the Fed uses forecasts of future inflation which may be INACCURATE. 3. Holding the Fed accountable only for a goal of low inflation may make it more DIFFICULT for elected officials to monitor the Fed's support for good economic policy overall. 4. Inflation targets may increase UNCERTAINTY over whether the Fed will take prompt action to return the economy to full employment following a recession.

3 Problems with CPI (Sub B, IntroN, U QC)

1. Substitution Bias- Not all prices rise proportionately, so consumers buy substitute goods when one good becomes too expensive. 2. Introduction of new goods- With new goods comes more variety to choose from, which reduces the cost of maintaining the same level of economic well being. 3. Unmeasured Quality Change- Quality of good decreases from one year to the next while its price remains the same. The value of the dollar falls because you're getting a lesser good for the same money.

The 8 Basic Principles of Economics (T, RD, OC, DM, IW=IO, CW=LV-HV, I, ME=R)

1. TANSTAAFL 2. People make rational decisions 3. People consider the opportunity cost of every choice 4. People make decisions at the margin 5. The only way to increase a nations wealth is to increase its real output 6. The only way to create wealth is to move resources from a low value to a high value 7. Information is valuable and costly 8. A market economy leads to a better allocation of resources

Which households not effected by inflation;

Welfare benefits are index linked

Deficits occur automatically in recessions because...

1. Wages and profits fall, causing Gov. tax revenues to fall. 2. The Gov. automatically increases its spending on transfer payments when the economy moves into recession.

Three sources of foreign currency demand for U.S Dollar... (FG, FI, FEx)

1. Want to buy american goods 2. Want to invest in US (factories or stocks/bonds) 3. People who believe that the value of the dollar will be higher in the future than it is today.

of 30 million workers how many are on the minimum wage

2 million

UK debt

1.5 trillion

The LFS measure of unemployment says that .... are unemployed

1.91m

reasons for why Wealthy countries are near each other is because...

1.Countries have influence on each other (spillovers) 2. Nearby countries share similar characteristics that are important for growth.

Government Spending Multiplier Formula

1/(1-MPC) or 1/MPS

How do you find the change in aggregate demand by using the multiplier effect?

1/(1-MPC) x change in government expenditures

Multiplier =

1/(sum of propensity to withdraw = save + tax + import on any extra income)

average income in rich countries is _____ more than the average income in poor countries

10

If the CPI rises from 200 in year 1 to 220 in year 2, the rate of inflation is ____________.

10% (220-200)/200 = 10%

Deposit on new house is typically

10% (this is why wealth effect is bad for first time buyers)

How many Federal Reserve regional banks are there?

12

The rate of inflation is the measure of the average increase in prices over the last

12 months (measured on the CPI)

as of Q2 of 2015, what was the GDP of the United States?

17.9 trillion

How many public sector workers in the UK

5.4 million

Current rate of unemployment

5.5% (it has been gradually falling)

How much does it cost to service debt per year

51 billion more the MoD

What % of I is funded out of profits

70%

Rule of 70 formula

70/Growth rate

the U.S standard of living is about _____ times larger than 100 years ago

8

The Tax cut multiplier

A decrease in taxes raises disposable income, consumption, and Real GDP and visa versa. Always negative number. Tax Multi.= Change in equil. RGDP/Change in taxes

Inflation Rate

= (GDP deflator in current year - GDP deflator in previous year) / GDP deflator in previous year = ((new money supply - old money supply) / old money supply) x 100

Labor Force Participation Rate

= (labor force / adult population) x 100

GDP Deflator

= (nominal GDP / real GDP) reflects the prices of domestically produced goods and services

Unemployment Rate

= (number of unemployed / labor force) x 100

What is the Velocity Formula?

= (price level x quantity of output or real GDP) / quantity of money V = (P x Y) / M

CPI

= (total basket cost of current year / total basket cost of the base year) x 100

Spending Multiplier

= 1 / (1 - marginal propensity to consume)

GDP in Closed Economy

= C + I + G

National Savings

= GDP - consumption - government spending = Y - C - G = private savings + public savings = investment

Private Savings

= GDP - consumption - taxes = Y - C - T

Real GDP

= SUM(quantity x base year's price) IS corrected for inflation

Nominal GDP

= SUM(quantity x current price) NOT corrected for inflation

Reserves

= demand deposits - loans

Required Reserves

= demand deposits x required reserve ratio

Opportunity Cost

= explicit costs + implicit costs

Total Change in Demand

= initial change in spending x spending multiplier

Real Interest Rate

= nominal interest rate - inflation rate = ((new quantity - original quantity) / original quantity) x 100

Public Savings

= taxes - government spending = T - G

Labor Force

= unemployed + employed

A lower price level means...

A decrease in the quantity of money demanded at each interest rate, need less money at hand to buy same goods.

Bank Run

When many depositors decide to withdraw money from a bank

Quarter

A 3-month period

Fractional Reserve banking system

A banking system in which banks keep less than 100 percent of deposits as reserves.

Jigsaw Puzzle

A billion pieces of a jigsaw puzzle would be impossible for one person to pick up and put together, but with enough people the puzzle could be picked up and put together. Yet for the jigsaw puzzle to be a picture that everyone likes even decreases the chances of the puzzle being successful. The jigsaw puzzle is a metaphor for knowledge of how things work with the economy. It would be impossible for one planner to solve the or predict what the puzzle would be and how to make it pretty. That is why its best to let make a picture by itself. People are the individual puzzle pieces and they will arrange themselves where they want to be over time without even meaning to make a pretty picture. Each person wants a loud beep when connecting a piece of the puzzle or in the real world more money or better trade.

Aggregate Demand Curve shows

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households firms and the Gov

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

When the Gov. runs an expansionary fiscal policy the result is...

A cyclically adjusted budget deficit.

When the Gov. runs a contractionary fiscal policy the result is ...

A cyclically adjusted budget surplus.

Crowding out

A decline in private expenditures as a result of an increase in gov purchases.

Instruments of Fed

Banking reserves, Federal funds rate

Budget deficit

a situation in which the government spends more than it takes in in taxes.

Pop. and Demographics

As demographics of a community change so does the demand for certain goods.

3 main ways Aggregate Demand Curve shifts ANY VARIABLE OTHER THAN PRICE LEVEL CHANGE THE CURVE SHIFTS (G, HH Exp, FV

Changes in Gov policies Changes in expectations of households/firms changes in foreign variables

What is the equation for aggregate demand?

AD = C + I + G + NX

Absolute Advantage

Ability of an individual firm or country to produce more of a good or service than competitors using the same resources.

Comparative Advantage

Ability of an individual or a firm or country to produce a good or service at a lower opportunity cost than competitors.

Economic Growth

Ability of economy to increase production of goods and services.

Entrepreneurial Ability

Ability to bring together the other factors of production to successfully produce and sell goods and services.

Faster flow of info (force propelling globalization)

Access to current information aids both trade and capital investment.

Openness gets a country...

Access to resources, integration, and increased labor productivity.

Fiscal Policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

Human Capital

Accumulated knowledge and skills that workers acquire from education and training or from their life experiences.

A key determinant of economic growth is...

Accumulation of knowledge capital

Example

Accused Poland of dumping golf carts into the US Market. Since Poland was communist at the time there was no "fair price" to compare it to in Poland. So the Dept. of Commerce uses Canada and how much their golf carts are sold for in Canada as collateral which is unfair. Later the DoC used constructed value.

When retained earnings are not enough to finance growth firms...

Acquire funds from households either directly through financial markets (stocks/bonds) or indirectly through intermediaries (banks).

Monetary Policy

Actions the FED takes to manage the money supply and interest rates to achieve macroeconomic policy objectives.

What are the two kinds of supply shocks?

Adverse supply shocks and positive supply shocks

Aggregate Supply

Aggregate supply (AS) is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time.

Climate effects on production

Agricultural output per worker differs greatly between tropical and temperate regions. Temperate countries produce 300X more output than workers in tropical countries.

Labor

All forms of work.

Short run growth

Changes in real GDP caused by alterations in AD

Investment Tax Credits

Allow firms to deduct from their taxes some fraction of the funds they have spent on investment. which increases incentives and after tax returns.

How do you calculate todays prices from prices in an earlier era by using CPI?

Amount in today's dollars = amount in year T dollars x (CPI today) / (CPI in year T)

GDP Deflator Formula

Amount in year 1 x (Price level today)/(price level year 1)

Growth rates matter because...

An economy that grows too slowly fails to raise living standards.

Monetary policy

Changes in the supply of money and the availability of credit initiated by a nation's central bank to promote price stability, full employment and reasonable rates of economic growth.

Trade Deficit

An imbalance in international trade in which the value of imports exceeds the value of exports.

Technological change is more important than..

An increase in capital in explaining long run growth

Adjustments of workers and firms to errors in past expectations about the price level

An increase in price level one year while the workers wages were sticky will make the workers want to increase their wage contracts for the following years, which will make it harder for firms to produce the same level of output b/c increased wages (inputs)

Medium of Exchange

An intermediary (mutual) instrument used to facilitate the sale, purchase or trade of goods between parties. In modern economies the medium of exchange is currency. Money is a medium of exchange when sellers are willing to accept it in exchange for goods or services. Sell a good for money then buy what they want with that money.

Supply-side shock

An unexpected event affecting AS

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

Keynes: what guides Business cycle?

Animal Spirits and expectations.

Asset

Anything of value owned by a person or firm

Industrial Revolution

Application of mechanical power to the production of goods.

Money

Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.

Velocity of Money

Average number of times each dollar turns over, AKA is used in the money supply is used to purchase goods and services included in GDP.

GDP = (in terms of price a good)

Average price * volume of goods

Financial system works by...

Channeling funds from savers (consumers) to borrowers (banks, firms) and channels returns on the borrowed funds back to savers.

Fannie Mae and Freddie Mac and the secondary market for mortgages continued...

Banks made more money buying MBS's because they knew F and F were going to buy them from them. Banks started buying high risk mortgages and also started giving out adjustable rate mortgages to increase borrowing. This created a collateral debt obligation.

Demographics

Characteristics of a population like age, race, and gender. Also the amount of people.

Individual income tax

Cutting ii tax raises entrepreneurship and the encouraging of new businesses, also increases return to saving.

Business/Trade Cycle

Fluctuations of economic growth around trend (our deficit is consistent so not a result of this - more fundamental problem)

MPC of the BoE meet every month and set it own interest rate known as the

Bank rate (Base rate)

Why the aggregate demand curve is sloping down

Because a fall in the price level increases the quantity of real GDP demanded.

Why does trade allow people to specialize?

Because of comparative advantage and the ability for countries to produce what they're best at and make more of it to trade for what they're not good at.

how can prices can differ in two markets

Because of short run currency fluctuations (one country's currency depreciates) or differing market conditions.

Why can't the Fed target both the interest rate and the money supply?

Because the Fed controls the money supply but not the money demand, which is determined by decisions of households and firms as they weigh the trade-offs of the convenience of money and low interest rate V.S high interest rate and low convenience of other deposits.

Reasons why USSR's communism did not become economic dominating world power...

Because with communism in USSR there was no investment or incentive to innovate technology, only investment in capital.

Why is transportation important?

Because workers go where demand is, brings goods from all over the world and information, access to more resources.

Positive Externality

Beneficial side effect that affects an uninvolved third party. Where a person can benefit to society by benefiting themselves.

Free Riding

Benefiting by research and development of other firms.

Three main sources of technological change

Better machinery and equipment Increases in human capital Better means of organizing and managing production

Government debt is bought off in the form of

Bonds (interest rate on these can create a debt trap)

Intellectual Property Rights

Books, films, software, and ideas people have their rights too.

Over-Consumption

Booms in income from natural resources are temporary. Early large amounts of income lead countries to raise their price which cannot be sustained long term and investing countries find cheaper places to trade resulting in a lower level of income for the resource country.

Every time the Fed. Gov. runs a budget deficit the Treasury must...

Borrow funds from investors by selling treasury securities to pay off Gov. debt.

M2 Money

Broader definition of money, includes all of M1, plus savings account deposits, small denomination time deposits, balances in money market deposit accounts in banks, and non-institutional money market fund shares.

Three main types of investment

Business investment (55%), New dwellings (25%), Social Capital (20% - things like schools)

Fall in consumer confidence will lead to less ..... ....

Business investment (less incentive to supply)

Quantitative Easing (Tool)

Buying securities beyond the short term Treasury Securities that are in open market operations.

How Fiscal Policy increases aggregate demand in a recession...

By decreasing taxes or increasing Gov. spending consumers have more money increasing aggregate demand and visa versa.

Discount Policy

By lowering the discount rate the Fed can encourage banks to take additional loans and thereby increase their reserves. With more reserves, banks will make more loans to households and firms. which will increase checking account deposits and the money supply.

We sometimes consider alternatives to GDP such as the HDI because _____________.

GDP does not measure some important aspects of well-being (such as health)

If savings ratio increases, courtiers paribus, the ... will decrease

C

Defict currently in UK (£108bn) financed by

borrowing (increase in national debt of £1.37 trillion)

Component of AD =

C + I + G (current government expenditure) + (X-M = net exports)

National expenditure =

C + I + G + E

aggregate demand =

C + I + G+ NX

Example of economic growth in unified/not unified

Chinese sailors killed if they traveled to far or built a ship, Christopher Columbus who couldn't get financed by Portuguese went to the neighboring country and got a ship there.

Downside of economic growth

environmental damage, sucks in imports, increased inflation, distribution of wealth

Nearby countries share similar characteristics that are important for growth

Close countries share similar climates, have common characteristics that are difficult to measure

4 main reasons Aggregate Demand Slopes

C+I+G+NX Consumption spending Investment spending Government spending Net Exports

rank AD components in terms of what proportion they make up

C,G,I,X-M

Something that could cause demand side deflation

Collapse in housing market, Collapse in consumer confidence, Restrictive fiscal policy

The wealth effect

Change in the price level affects consumption. Household with 10,000 likely to spend but if price level increases 10% they'll spend less therefore reducing the demand for goods.

Choose a base year and compare it to other years using the...

CPI Formula

Inflation Rate for CPI

CPIt - CPIt-1 /CPIt-1 x 100 CPIt= later year CPIt-1= earlier year

Positive money characteristics

Can use it to buy goods, services, or financial assets.

Law of Unintended Consequences

Can't see the reaction to what laws will do. The general observation that the actions of people and governments always have effects that are not expected or intended.

The largest US trading partner (in terms of total value tradedm exports plus imports) is ____________.

Canada

Summary of Capital and technology on economic growth sustainability

Capital deepening improves labor productivity but is subject to diminishing return which the return will eventually=0. Sustained growth from technological change is possible because technology and knowledge are public goods ex: assembly line

Two main factors of labor production

Capital per worker and technological change

How to look at data and find a causation from a correlation?

Compare data from time period before variable and data from time period after ex: education, Increased Education after 1980, compare GDP before 1980 to see what rate was before education increase and then compare GDP after 1980 to see if there was an increase.

Money market model

Concerned with short-term nominal rate of interest- the interest rate most affected by increases and decreases in the money supply

Positive analysis

Concerned with the "What is?"

Normative analysis

Concerned with the "What ought to be?"

Constructed Value

Constructing an estimated cost then adding on 8 percent for profit to get what the price should be in the U.S. However communist countries like Poland have no profit and very low wages so the 8% profit cost wouldn't work there so they used Spanish wage rates which were much higher meaning Poland had to pay a much higher "fine or tariff" then they should have.

Around 60% of AD is

Consumer Expenditure

CPI

Consumer Price Index- Measure of overall costs of the goods/services bought by a typical customer.

Tastes

Consumers can be influenced by advertisements.

Expected future prices

Consumers chose not only which products to buy but when to buy them.

Direct finance

Consumers give money directly to firms (financial markets) through stocks and bonds, high risk high reward.

Indirect finance

Consumers give money to banks (financial intermediaries) who lend it to firms through loans, low risk low reward.

Sharing Economy

Consumers share bikes, cars, clothes, tools, apts, and skills and extracting more value from what they already own. (Uber, UHaul, Hotels.)

The largest single component of GDP is _____________

Consumption

To bring Real GDP back to potential GDP congress and president use...

Contractionary fiscal policy to decrease gov. purchases or increase taxes, which will shift aggregate demand curve to the left. Pres. and Cong. can stabilize economy by using fiscal policy to affect the price level and level of real GDP.

With rising inflation

Contractionary to decrease gov. purchases or raise taxes. Real GDP and price level fall.

Sticky Wages

Contracts and failure to predict future price level increases lead workers to have lower wages, allowing for firms to pay them less and sell their product at the higher price level. Earning more profit.

cost pull inflation

Costs rise independently of AD (firms save profits so pass on to consumer in form of higher prices (if you have stagnation and inflation = stagflation)

Convergence

Countries that start out rich will get richer but at a slower rate compared to countries that started off slow.

Loss of national sovereignty

Countries that want firms to come to them will change policies and laws to be more appealing to firms, includes removing restrictions on environmental pollution and workers rights. Also Gov. must keep taxes low cause corp. can just leave.

Climate and Disease

Countries with a poor health environment will in equilibrium be both poorer and less healthy than countries with a good health environment.

Hidden price of foreign capital...

Country becomes subject to whims of international investors because of control.

NI contribution tax

Cover the costs of a state pension and the health service

Patents and copyrights affect technology and capital and growth by...

Creating incentives for innovation by guarentteing the profits from their product for a period of time.

Copyrights

Creator of a book or film have the rights to it till they die.

Spillover

Cross border effects that countries have on each other

Problems of expansionary fiscal policy, rate of return test harder to pass)

Crowding out (if needs money or more risky then higher interest rates on bonds - force firms to increase rate on corporate bonds)

What are the two components of the money supply?

Currency and demand deposits

What happens if Jane spends $1200 on a computer to use in her editing business. She got last year's model on sale for a great price from a local manufacturer

Current GDP and investment do not change, because the computer was built last year

Long Run Aggregate Supply Curve

Curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

The long run aggregate supply curve (LRAS)

Curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

Short Run Aggregate supply curve shows

Curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

Corporate income tax

Cutting Corp. i tax would encourage investment spending by increasing the return on new investments in equipment, factories, buildings and increase tech. change.

How does a higher interest rate effect the aggregate demand curve?

Decreases quantity demanded (shifts aggregate demand curve to the left)

A decrease in real GDP means...

Decreases the quantity of money demanded as a medium of exchange to buy goods and services at each interest rate. SHIFT L

People make rational decisions

Decisions in our best interest if not then not predictable.

Crowding Out

Decline in private expenditures as a result of an increase in Gov. Purchases.

How does a decrease in consumption (or wealth) effect the aggreate demand curve?

Decreases quantity demanded (shifts aggregate demand curve to the left)

Two factors that determine labor productivity?

level of Technology and quantity of capital per hour worked

Supply side policies may cause ...... unless there is a simultaneous rise in AD

Deflation

Natural Capital is not created by...

Deliberate Investment

Gov Policy -Interest rates increase

Demand curve shifts to the left because higher interest rates rise the cost of borrowing to firms and consumers which means they will consume and invest less and visa versa.

Bank Reserves

Deposits that banks keep in cash in its vault or on deposit with the Fed. Required to keep 10% of their checking account deposits.

Catching up

Developing countries will eventually catch up to the standards in developed countries.

Over Consumption cont...

Developing countries with early income boom from resources will expect the levels of income to be constant and will borrow money to fund investment projects leading to debt.

Inflation Gap

Difference between current inflation and a target rate.

Profit

Difference between revenue and costs.

Tax Wedge

Difference between the pretax and post tax return to an economic activity determined by the marginal tax rate.

Balance of Trade

Difference between value of exports and imports.

Capital Deepening is subject to...

Diminishing Returns. ex: 1 machine=+15, 2 machine=+10, 3 machine=+5

Financial Security

Document that states the terms under which funds pass from the buyer (consumer, household) of the security who provides the funds to the seller (firms).

When Backward and forward linkages are present the exploitation of a natural resource can...

Drive the development of the economy as a whole

Trade-Offs

Due to scarcity, producing more of one good or service means producing less of another.

In the long run, a country will experience an increasing standard of living only if..

It experiences continuing technological change

Information is valuable and costly

Most valuable info is decentralized. All info is out there and no one person knows it all.

Financial intermediaries

Firms such as banks, mutual funds, pension funds, and insurance companies that borrow funds from savers and lend them to borrowers.

A change in quantity supplied means...

Movement along the supply curve because of a change in price.

Increases in labor force and capital stock

Firms will supply more output at every price if it has more workers and physical capital. Increase in workers/capital=increase in output supplied

Employment rate formula

ER= (# of unemployed)/(labor force)

Negative money characteristics

Earns very low or no interest.

Capital Mobility

Easier to move capital around, buy, sell, transport.

Technology sustains...

Economic Growth and is a key factor

Supply side policies such as cuts in benefits have trade off between

Economic growth and equality

what are the 6 macro economic goals

Economic growth, low inflation, low unemployment, Satisfactory Balance of Payments, Equitable (fair) distribution of income, Protection of environment

Income

Effects the willingness and ability of a consumer to buy a good.

Upwards increase on prices when increase in AD depends on the

Elasticity of SRAS

Cyclical Unemployment

Employment when economy has slowed so fewer workers are needed for these goods.

Size of Eurasia with similar climates and water ways

Eurasia is large so there are a wide array of species that could be domesticated and help benefit the people, also the geographical orientation along the east-west axis contains a similar climate which allows for agriculture techniques to be widely used and spread. Also with size comes access to water ways.

Household

Everyone in a home

Banking Reserves

Excess Reserves, required reserves

The cause of inflation is?

Excessive growth in the supply of money. To fix inflation simply stop printing more money and putting it into circulation.

Patent

Exclusive right to produce a product for a period of 20 years from the date the patent is applied for.

Process of economic growth depends on... ETAB

Expand operations Train workers Adopt new technology Buy additional equiptment

SR (actual growth) economic growth is a result of

Expansionary FP or MP

In recession

Expansionary policy to increase gov. purchases or cut taxes. Real GDP and price level rise.

GDP can be measured in

Expenditures- Final sum of purchases by consumers. Income Approach- Measured in sum of incomes and costs. Value Added- Sum of value added at each stage.

Reasons for anti globalization (5) (HEEIL)

Exploitation of workers Inability of poor countries to compete Environment problems loss of national sovereignty Hidden price of foreign capital

Supply side economics

Fiscal policies expanding the productivity capacity of the economy and increasing the rate of economic growth

Marginal

Extra or additional

Formula for the Taylor Rule

FFR Target rate= Current inflation rate+ Equilibrium real FFR+ (1/2)x Inflation Gap) + (1/2)x output gap).

Find the prices of goods/services in the basket at one point in time.

FIND IT

Income per capita is dependent on...

Factor endowments (resources) and labor productivity

There is still risk of investing in poor countries because..

Failure to enforce law, corruption, war. Why invest in factory and tech if a dictator could just take it?

Equity

Fair distribution of Economic Benefits.

Because their wages are typically lower, young people in the U.S. (ages 20-24) usually have had a lower unemployment rate compared to older workers (25-54, for example).

False (The young typically have higher unemployment rates than older people. The text has details. A large part of this is related to lack of experience and the fact that younger workers tend to be more recently hired (and so are the first ones to be laid off during a recession, for example))

Self Defeating Prediction

Fear of consequence driving people to find solution before the problem occurs.

Stability of markets

Fed promotes the stability of markets so that an efficient flow of funds from savers to borrowers will occur.

Contractionary monetary policy

Fed's policy of increasing interest rates to reduce inflation. Fed decreases the money supply and increases interest rates.

Greenspan Doctrine

Fed. Reserve should not pop bubbles before they would naturally pop. Problem is how do you know it's a true bubble.

Fed. expansion is better In open market because...

Fed. can use Consumption, investment, and Net Exports to expand money supply, whereas in a closed economy there is are no exports or imports, can only us C+I

When the Fed decreases the money supply the interest rate...

Fed. will sell T. Bonds and withdraw funds from interest paying bank accounts. Banks will have to offer higher interest rates to retain consumers to deposit money. Higher short term interest rates increase the opportunity cost of holding money with no interest, so more people deposit money causing a MOVEMENT UP MONEY DEMAND CURVE

What kind of money is the US dollar bill considered to be?

Fiat money

Security

Financial Asset, stock or bond, that can be bought and sold in a financial market.

Bonds

Financial Securities that represent promises to repay a fixed amount of funds. Firms pay back price of bond with interest.

Fix the basket

Find which goods are more important to consumers.

Firms are slow to adjust wages

Firms re-adjust wages slower than the price level changes, firms benefit from this because lower input of wages, yet higher output with increased price level= more profit.

QE increases .... begins with L

liquidity

Inability of poor countries to compete

Forces small farmers and firms to compete at international level with large corps. Not bad, resources adjusted to other markets aka adjustment assistance

When GDP increases then what will also increase (payed for by the government)

Foreign aid (0.7%) and fee for UN

Inflation Targeting

Framework for conducting monetary policy that involves the central bank announcing its target level of inflation.

A lack of Frost in Tropical Countries is bad because...

Frost kills disease Frost kills exposed organisms and insects that eat crops humans need. Frost kills microorganisms in the soil that could cause sickness. Frost slows the decay of organic materials, decreasing the loss of fertility

Two ways of measuring income

GDP GNP

Net investment income is the difference between

GDP and GNP

measures inflation of goods produced in the US

GDP deflator

GDP=

GDP= C+I+G+ (X-M) C- Consumption spending by households on durable/non durable/services. I- Investment spending by firms on building factories, software (Non-Residential) or building a house for others, inventories or inputs (Residential) G- Government spending by government at all levels (local, state, federal) X- EXports M- IMports

What determines Growth?

Geography (landlocked), Climate, culture, Government/Institutions.

Determinants that are immune of the problem of income affecting government or gov. affecting income

Geography, climate, natural resources

Patents

Give an inventor intellectual rights.

Inferior Good

Good for which the demand increases as income falls and decreases as income rises.

Normal Good

Good for which the demand increases as income rises and decreases as income falls.

Commodity Money

Good used as money that also has a value independent of its use as money. (Deer skins, Tobacco warehouse) Main problem is that its value depends on its purity. Ex: gold can be mixed with other metals and now isn't valuable.

Complements

Goods or services that are used together. The more consumers buy of one the more they'll buy of the other. (PB&J)

Prices of related goods

Goods that can be used for the same purpose or (substitutes).

Non Durables

Goods that last less than 3 years.

Durables

Goods that last longer than 3 years. Affected more by business cycle than non durable goods.

Subsidizing Research and Development

Gov can use subsidies to increase the quantity of research and development that takes place.

Using Patents and Copyrights

Gov's increase incentive to engage in R&D by giving firms the exclusive rights to their discoveries for a period of time.

Automatic Stabilizers

Gov. spending and taxes that automatically increase or decrease along with the business cycle. Ex: when the economy is expanding and employment is increasing, gov spending on unemployment insurance will automatically decrease cause less people have lost jobs.

How Aggregate Demand graphs shift

Government Policies 1. Interest rates increase or decrease 2. Personal income tax or Business taxes increase or decrease. Expectations 3. Future expectations are good or bad. Foreign Variables 4. Growth rate of domestic GDP relative to Foreign GDP increases or decreases. 5. Exchange rate of the dollar relative to other currencies increase or decreases

Two most important variables that cause the money demand curve to shift

Real GDP Price level

Unit of account

Has a unit of measure or currency used to value goods at a cost. Unit of account gives buyers and sellers a way of measuring value in the economy in terms of money.

Patents prevent Creative Destruction by...

Having a company patent everything, like apple did with rounded corners in a phone, so other companies cant make better phones for cheaper.

Hayek and Friedman's views of money

Hayek favored denationalization of money, getting government completely out of the business of issuing money and controlling the money supply. Competitive market forces would instead be responsible for supplying sound money. Friedman became so skeptical of central banks that he argued that government be stripped of any power and responsibility to regulate the supply of money.

Current Account

Records current short term flows of funds in and out of a country.

Financial account

Records purchases of assets a country has made abroad. Usually Long Term Investments

How interest rates affect investment

Higher interest rates on corporate bonds or on bank loans make it more expensive for firms to borrow, so they will undertake fewer investment projects, higher interest rates also rises the cost of buying a new home for consumers lowering the demand. Lower interest rates make it less expensive for firms to borrow so they will borrow more and increase investment, and also lower mortgage loans making housing cheaper to buy.

Loanable Funds market slopes upwards with...

Higher interest rates, because people save their money in banks and banks loan the money out to firms.

How does population growth affect productivity?

Higher population growth can depress economic prosperity by reducing the amount of physical capital per worker (but It also raises the pace of the technological process)

Consolidated Alchemy

Hoax about transmutation process that many people invested in until it was found out to be fake.

What key groups participate in markets?

Households and Firms.

Why the demand curve for money is downward sloping

Households and firms have a CHOICE between holding money (which earns no interest) and holding other financial assets such as US Treasury Bills (which earn interest but have to be sold to buy stuff).

Households vs Banks in investing

Households don't have the knowledge or tools to be able to truly asses the true risk of lending to firms, Banks asses risk better that is why it is safer to lend money to them to give to firms.

How does inflation push savers and benefit borrowers

If inflation raises above the nominal interest rate then real interest rates will be negative

Number of firms in the market

If more firms enter the market for a good the graph shifts to the right and visa versa.

Prices of substitutes in production

If the price of a substitute good increases more people will want the other good and the graph will shift to the right.

Expectations of future price level

If workers believe there will be an increase in price level they will demand an equal amount of increase in their wages. this increases the amount of costs in the economy.

Example of Keynesian economic problem

If you have all of the parts of, say, an automobile scattered randomly about a large room, the main reason you do not have a functioning car is not that you do not want, or that you fail to "demand," such a car. Instead, the chief reason you have no functioning car is that those parts aren't fitted together in ways that allow them all to operate smoothly together so that a drivable and reliable car exists. It's true that no one will exert the energy and initiative required to assemble all of the parts into a working vehicle if there is no (or too little) demand for such a vehicle. But your desire to have a drivable car is not really the main obstacle standing between you and a working vehicle. The main obstacle is the challenge of mobilizing all the knowledge involved in assembling these pieces into a car and motivating people to put forth the effort to perform that assembly. The desire of nearly everyone to possess and consume automobiles, along with lots of other goods and services, can be depended upon always to exist. The challenge is to ensure that producers have the knowledge and the incentives actually to produce the goods and services that people want. The challenge, in other words, is to get the economic details right so that producers have both the knowledge and the incentive to produce the "right" mix of outputs

Imperious Immediacy of Interest

Immediate interest overriding long term interests.

Economic Growth

Important to raising living standards, stable economic growth met by high employment price stability and stable financial markets and institutions.

Describe depreciation of pound effect on imports

Imports more expensive so less are demanded at higher price so fall in expenditure on imports (export led growth)

Foreign Variable- Growth rate of domestic GDP relative to the growth rate of foreign GDP

Imports will increase faster than exports, reducing net exports

Foreign Variable- The exchange rate of the dollar relative to foreign currencies

Imports will rise and exports will fall if foreign currency is at a lower value than dollar because you can buy more foreign goods for less money which will shift the graph to the left because exports will fall and visa versa.

Ignorance

Impossible to anticipate everything.

Error

In analyzing the problem with whats worked in the past.

Why do humans trade?

In human nature because of mutual benefit.

Aggregate Demand

In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels.

what makes people likely to respond to a policy change?

Incentives: if it changes either the costs or benefits of their behavior

Natural Resources

Include land, water, oil, iron, and other materials used to produce goods.

Federal Gov. Expenditures

Include purchases plus federal government spending such as social security payments that do not involve purchases.

Civilian Employment

Includes all individuals who worked at least one hour for a wage or salary, self employed, or working 15 hours a week, Also includes vacation, leave, labor dispute.

Transfer Payments

Income from Gov. that households receive which includes social security and unemployment insurance payments.

Civilian Unemployment

Individuals who are not working but are able and looking for a job. 30 days without a job=unemployed.

Economic Growth started when...?

Industrial Revolution in England in 1750.

Too much bank reserves can cause...

Inflation

The BoE primary goal is to control

Inflation (secondary role is to support governmental macro economic targets)

Hayek Tiger Analogy

Inflation is like grabbing a "tiger by the tail." Once someone grabs a tiger's tail, that person is at risk of being bitten when he lets go. Holding on to the tiger's tail, delays facing the risk of being bitten. But holding on makes the tiger angrier, so that when it finally does break free and it eventually will, the beast will be more likely to attack with greater fury. Each moment the person holding the tiger's tail is tempted to hold on a bit longer to delay the risk of being mauled, only making the tiger more mad. At some point the tiger will become so furious that it will manage to break free on its own. The danger to the person who held on to the tiger's tail for that long will be enormous. The difficulty of stopping inflation is like the difficulty of letting go of a tiger's tail. The mechanics of doing either task are incredibly easy: just stop printing money (to stop inflation) or relax the muscles in your hand (if you're holding the tail). Yet in light of the anticipated consequences of stopping inflation or of releasing a tiger's tail, the task is challenging.

Firms are willing to increase the quantity of goods supplied because inputs...

Inputs like wages and resources rise slower than the price level is. Price good sold for - price of inputs for good = profit

Factors of production

Inputs used to make goods or services.

A unified country is good for economic growth because...

It has a larger market with higher gains for specialization, Productive ideas should also spread more easily in a unified country.

Inflation is bad for current account price competitiveness as

It raises prices and makes them less competitive

Fed. can't directly tell firms how many people to hire so

It sets up targets that it can directly affect, which in turn affect variables such as real GDP, employment, and price level.

If Countries differ in their health environment than...

It will affect income and actual health

Real GDP cannot continue to remain over potential GDP because..

It would cause inflation

Another way geography affects economic growth is through...

Its effects on the size of states as well as the conduct of the government.

The symbol for withdrawals

J

A economy is in equilibrium when

J = W

Productive capacity = (supply)

LRAS

Better means of organizing and managing production

Labor productivity increases if managers can do a better job of organizing production. With organized production firms require less people and keep track of things better.

Low Hanging Fruit

Larger gains from investing in poor countries because the technology is not as advanced which means you would have higher gains due to less diminishing return, as country becomes more advanced you get more diminishing return.

MPC means

Marginal Propensity to Consume (by consumers when they get additional money.)

MPS means

Marginal Propensity to Save (by consumers when they get additional money.)

Increase in Yd will increase C depending on

Marginal propensity to consume

What does the size of the multiplier effect depend on?

Marginal propensity to consume (MPC)

Factor Markets

Market for factors of production like labor, capital, natural resources.

Product Markets

Markets for goods like computers, or for services like medical treatment.

Producer Price Index

Measures the cost of a basket of goods/services bought by firms rather than consumers.

What are the three functions of money?

Medium of exchange, unit of account, store of value

Focus Groups

Meetings with consumers to see what new products they'd like to see produced.

Prices of input

Most likely cause of shift in supply, If a piece of a good goes up in price smartphones will become less profitable and shift to the left.

Menu Costs make prices sticky

Menu Costs are prices that firms set and advertise their products at. It costs money to change those advertisements, so some firms decide to keep the prices the same as the menu costs even when the price level increases. Which means that those firms are selling their goods cheaper than their competition and have a higher demand.

What are 3 costs of inflation?

Menu costs, infation tax, shoeleather costs

Non Tariff Barriers

Methods to prevent the sale of imports apart from tariffs or quotas (anti dumping duties, VER's, Excessive Standards)

Keynesian economics ignores the...

Micro-economic details of an economy. How well or poorly each of the economy's many individual parts "fit" together and work together to generate goods and services for consumers, and to create job opportunities for workers.

New Growth Theory by Paul Romer

Model of long run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

Economic Growth Model

Model that explains growth rates in real GDP per capita over the long term.

Aggregate Demand and supply model

Model that explains short run fluctuations in real GDP and the price level.

Circular Flow Diagram

Model that illustrates how participants in markets are linked

How do you find the money multiplier from the reserve ratio?

Money Multiplier = 1 / R (where R = reserve ratio)

Injection

Money entering the CIRCULAR FLOW OF INCOME

Fannie Mae and Freddie Mac and the secondary market for mortgages...

Money flowed in through buyers of bonds to Fannie/Freddie, F and F used the money to buy mortgages from banks, banks made money then buying and selling mortgages.

Hayek Fiat Money Problems

Money is only good because of faith in the Gov. Fiat money is printed and used by the Gov. to finance its expenditures that people don't want to fund because people hate when their taxes are raised.

Two main Fed Targets are

Money supply and interest rates.

If the federal reserve buys bonds with new dollars, how much does the money supply increase by?

Money supply increases = (amount of bonds) x (money multiplier)

Fiat Money

Money that is authorized by a central bank or Gov body that does not have to be exchanged by the central bank for gold or some other commodity money. Is risky because you have to trust the Gov because it is not backed by anything and could become non redeemable. Fiat money

A trade deficit means

More Foreign investment and visa versa

Surplus

More exports than imports.

2. Increases in human capital

More human capital equals more productivity in labor because of more education.

Deficit

More imports than exports.

Countries have influence on each other in ways like...

More likely to trade with each other, spread jobs with each other to take advantage of low wages (Maquiladora Plants), wealthy countries are good examples for their neighbors. Unstable countries send refugees and military aggression.

If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her nominal GDP for 2001?

Nominal GDP = (1 x 15) = 15

Real GDP

Nominal GDP plus the price level. Price set at a base year. Current output valued at base year prices.

What is the difference between nominal variables and real variables?

Nominal variables are measured in monetary units ($), whereas real variables are measured in physical units

Not accounted for in the Real GDP

Non Market production- illegal production like drug trade or babysitting or stay at home moms not accounted for.

Unemployment rate

Number of unemployed as a percentage of the labor force.

If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her real GDP for 2001?

Real GDP = (2 x 15) = 30

Systematic Risk

One thing fails everything fails.

Creative Destruction

Only way to get ahead in a market is to come up with a new, better idea.

Tools of the Fed

Open Market Operations, Reserve Requirements, Discount Policies, Quantitative Easing, Interest on Reserves

Which tool to control the money supply is used most often?

Open-market operations

What tools are available to control the money supply?

Open-market operations, term auction, changes in reserve requirements

Opposition to trade openness from...

Org. that benefit from having monopolies in one country or have a comparative disadvantage to foreign companies.

Firm

Organization that produces a good or service.

Trade as technology

Organizational techniques and efficiency like specialization and comparative advantage for a country to trade.

What is the catch-up effect?

Other things equal, relatively poor countries tend to grow faster than relatively rich countries

GDP as value of domestically produced G&S is calculated by

P*Q (average price*volume of goods

How the Fed measures interest

PCE scale

The strength of the pound will affect exports depending on their...

PED

Over Patenting can decrease innovation because...

Patenting everything which can decrease innovation because new competitors can't make new products ex: apple with phones and round corners and blue light

When GDP increases above potential level households and firms have to... and the government has to....

Pay higher taxes and the Gov. makes fewer transfer payments

In surplus the Treasury...

Pays off some existing bonds.

The phrase "no such thing as a free lunch" explains which accounting principle?

People face trade-offs

Climate effect on humans

People in warm climates cannot work hard because they will overheat. Technology lessens this effect. Warming technology is far cheaper and simpler than cooling tech.

Frictional Unemployment

People unemployed because it takes time for skilled workers to find a job that uses their skills. Ex: college kids after graduation. Usually a short time

Discouraged Workers

People who have stopped looking for a job/gave up.

Subsidizing Education

People with technical training carry out research and development, so by providing free education or loans the Gov. provides incentive to get more educated.

Inflation Rate

Percent increase in price level each year from previous year.

Output Gap

Percentage difference between real GDP and potential GDP.

Mercantilist

Person who believes a nations economic health depends on having a trade surplus and that imports are bad and destroy jobs while exports are good and create jobs. They fail to understand you can't control exports independently of imports. They don't understand that a trade deficit is the flip side of a capital surplus.

Capital

Physical goods like computers and machines or tools to produce other goods.

With aggregate supply and demand curve; ... is on y axis

Price level

How do you calculate CPI?

Price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100

A bubble occurs when...

Prices of the asset rise above the levels that can be justified by the profitability of the firms issuing it.

Technology

Process a firm uses to produce goods.

The Dutch Disease

Process by which the presence of a natural resource is ultimately detrimental to the domestic manufacturing sector

Globalization

Process of countries becoming more open to foreign trade and investment.

Scientific Model

Process of developing models, testing hypothesis, and revising models.

Securitization

Process of transforming loans or other financial assets into securities.

Productive Efficiency

Produce goods for cheapest price, the most we can.

Labor productivity

Production/no of workers (output per unit of input)

Technological Change

Productivity of producing a good increases more of the good will be produced and it will shift to the right.

Retained Earnings

Profits that are reinvested in the firm rather than paid to the firm's owners. Sometimes not enough money however.

Capital Deepening implies that capital does not...

Purely affect economic growth because diminishing return will eventually=0

Investment improves to the two ... of the FOPs

Qs

development is a measure of

Quality of life

Economic growth model says increases in real GDP per capita over time result from two main factors

Quantity of capital available to workers and technological change.

Fees paid to companies (included in G) who are providing a service to the government - example

RAF maintenance

Two key technologies have reduced the cost of transportation and propelled economic integration.

Railroad and steamship

Tropical Countries have poor agriculture because...

Rain fall patterns are heavy and inconsistent and erodes the soil. Seasonal pattern of sunlight in the temperate zones is inconsistent for growing some crops. Lack of Frost.

GDP Deflator

Ratio of nominal GDP to real GDP. Reflects prices of all goods and services produced domestically v.s CPI which reflects all prices bought by consumers.

The government purchases multiplier

Ratio of the change in equilibrium Real GDP to the initial change in government purchases. Gov. Purchase Multi.=Change in equil. RGDP/Change in Gov. purchases

What does investment include?

Spending on new capital, such as machines, equipment, tools, or buildings

The three negatives of inflation

Squeezes real incomes, Loss of international competitiveness, Savers are punished and borrowers are rewarded

Low Rates of saving and investment

Stock and bond markets do not exist in low income countries and households have no savings because wages are so low. This means no investment for firms and contributes to cycle of poverty

The uk has traditionally used the RPI and as a results things such as..... are linked to it

Student loans, rail fare increases, and index linked government bonds

Macroeconomics

Study of economics as a whole. (inflation, economic growth).

What two things explain the law of demand?

Substitution Effect Income Effect

What are the 3 problems with the CPI?

Substitution bias, introduction of new goods, and unmeasured quality change

Civilian Labor Force

Sum of people employed and unemployed ages 16 and older.

LR (trend growth) economic growth relies on 2Qs of the FOPs which will result from (2)

Supply side policies and actions taken by firms

a change in the cost of resources (wage rates, rents, raw materials) that causes the SRAS to shift is called a

Supply side shock

Taylor Rule Formula

TFFR= II + EFFR + (1/2 x inflation gap) + (1/2 x Output Gap) TFFR= Target FFR EFFR= Current FFR II= Current inflation rate Inflation gap= II - target inflation gap Output gap= rGDP - Potential GDP

Currency Appreciation

When market value of a country's currency increases relative to the value of another country's currency.

Demand Schedules

Tables that show the relationship between the price of a product and the quantity of the product demanded.

Corporation tax

Tax on companies profits

Taxes on dividends and capital gains.

Taxes on stocks, taxed twice cause corp. income tax, cutting taxes on stocks would increase the supply of loanable funds from households to firms, increasing saving and investment and lowering the equilibrium real interest rate.

Two major causes have driven globalization

Technological advances have eased the movement of goods and info. Changes in economic policy have lowered barriers to trade.

What are some things that could cause a shift in the long-run aggregate supply curve?

Technological progress, price of imported natural resources, and an increase in the capital stock

Trade is a form of...

Technology

Two Components of Productivity

Technology and Efficiency

Common Mistakes people make about the larger economy...

That economic recessions are caused by too little overall demand. That the cure for recessions is a set of government policies that increase demand.

Law of one Price

That good should cost the same in each market if transportation costs are low.

Standard of deferred payment

That money is accepted to settle a debt. Money can serve as a standard of deferred payment in borrowing and lending.

Resource Curse

That over the long run, the presence of natural resources can actually impede economic growth.

An increase in real GDP means...

That the amount of buying and selling of goods and services has increased which increases the amount of quantity of money that people want to hold so they can buy and sell goods easier with money as the medium of exchange at each interest rate. SHIFT R

Why is CPI the most commonly used measure of prices and inflation?

The CPI better reflects the goods and services bought by consumers

Expansionary Monetary Policy

The Fed's policy of decreasing interest rates to increase real GDP. Fed increases the money supply and decreases interest rates.

Lender of last resort

The Fed, makes loans to banks who cannot get the funds from elsewhere.

The Gov. spending multiplier has higher absolute value than the Tax cut multiplier because...

The Gov. spending multiplier does not have the initial cut of taxes from the beginning large amount like the tax cut multiplier.

Deficits can be bad if...

The Gov. spends money on bad things.

Criticism of the CPI

The basket will be very unrepresentative for some people such as students and they will experience different inflation rates (there is a different tracker for pensioners as they have a different pattern of spending)

Failure to enforce the rule of law

The ability of a Gov to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts.

People make decisions at the margin

The additional benefit when benefit=cost it is equilibrium. Scattering- Farmers have land on both sides of the river in case of flooding to one side.

Budget deficit =

The amount by which government expenditure exceeds government revenue

Quantity Supplied

The amount of a good or a service that a firm is willing and able to supply at a given price.

Quantity Demanded

The amount of a good or service a consumer is willing and able to purchase at a given price.

Equilibrium in the market of loanable funds determines...

The amount of loanable funds that flow from lender to borrower the real interest rate that lenders will receive and that borrowers must pay.

Open Market Operations (Tool)

The buying and selling of Treasury Securities by the Fed in order to control the money supply. Buy more TS, banks have more money, Buy less TS, banks have less money.

Risk

The chance that the value of a financial security will change relative to what you expect. Ex: buy a stock at $125 sell it at $225

What is the crowding out effect?

The change in aggregate demand that results from fiscal expansion changing the interest rate

Substitution Effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.

Information

The collection and communication of information, or facts about borrowers and expectations about returns on financial securities. Ex: Can gather info on what the stock or bond will go to and the likelihood of getting paid back or earning more or less.

Stopping inflation can be difficult because

The control of the money supply is in the hands of the government so stopping inflation is made difficult by politics.

Monetary policy is concerned with

The cost of money (interest rates) and the supply (QE)

Cyclically adjusted budget deficit or surplus

The deficit or surplus in the federal government's budget if the economy were at potential GDP.

Market Demand

The demand by all the consumers of a given good or service.

Savings =

The difference between INCOME & CONSUMPTION

Net Foreign Investment

The difference between capital outflow from a country and capital inflows.

Bank Profit comes from...

The difference of interest they charge people loans and what they have to pay depositors back.

Recession Phase

The phase in the business cycle when production, employment, income decrease. Phase ends in a trough. Lasts usually a few months, usually begins with a decline in spending by firms on capital goods (machinery, factories, buildings) or by households on durable goods. (cars) As spending declines firms lay off workers which lowers income which lowers spending again.

Catch up

The prediction that the level of GDP per capita in poor countries will grow faster than in rich countries

Another important determinant of openness to trade is...

The proximity to major centers of economic activity.

Adam Smith said the most important geographical determinant

The proximity to the ocean or other water ways.

Foreign Portfolio Investment

The purchase by an individual or a firm of stocks or bonds issued in another country

Foreign Direct Investment

The purchase or building by a corporation of a facility in a foreign country.

Purchasing Power

The quantity of goods a consumer can buy with a fixed amount of income.

Labor Productivity

The quantity of goods and services that can be produced by one worker or by one hour of work.

A higher price level means...

The quantity of money required for a given amount of buying and selling has gone up, this increases the quantity demanded/needed at each interest rate. Need more money at hand to buy same goods. Ex: Cars in 1970 cost 3,000 in 2015 cost 30,000. SHIFT R

Simple Deposit Multiplier

The ratio of the amount of deposits created by banks to the amount of new reserves.

Ceteris paribus condition

The requirement that when analyzing the relationship between two variables such as price and quantity demanded other variables must be held constant.

Required Reserves

The reserves that a bank is required to hold based on its checking deposits.

Whether exploiting a given natural resource will result in backward or forward linkages that promote economic growth depends on...

The resource, transport cost, state of economy.

Inputs

The resources (land, labour, capital, enterprise) that go into producing goods and services

Firms determine whether to borrow funds based on...

The return they expect to make on an investment with the interest rate they must pay to borrow the necessary funds.

Law of price

The same good will sell for the same price in both markets.

Multiplier Effect

The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.

BOP defintion

The set of accounts where all transactions between the uk and other countries are recorded

When the Fed increases the money supply the interest rate...

The short term interest rate must fall until it reaches a level at which households and firms are willing to hold the additional money. Ex: Fed puts 50 billion into circulation by buying T. Bond, banks lend out money and lower interest rates, consumers buy short term assets with additional money. MOVEMENT DOWN MONEY DEMAND CURVE.

Spontaneous Order

The spontaneous and unintended emergence of order out of the self-interested actions of individuals; an unintended consequence of human action, with emphasis placed on the word unintended.

Microeconomics

The study of how households and firms make choices and affect markets.

Economics

The study of scarcity and resources as a social science. Study of choices consumers, businesses, and governments make to reach goals with scarce resources.

Public Choice

The study of the economic motives and attitudes of voters and public officials in collective decision making.

Total saving in the economy (S) is equal to...

The sum of private saving and public saving.

Gross Domestic Product

The sum total of the value of all the goods and services produced in a nation

Financial System

The system of financial markets and financial intermediaries through which firms acquire funds from households.

The tropics have a concentration of disease because...

The temperature never reaches freezing allowing for more diseases to survive. Because humans evolved in tropical regions and spent millions of years there, so parasites had time to evolve.

Price stability

When prices rise the value of money decreases cause it buys less. steady inflation rates keep price stable

Natural Capital

The value of a country's agricultural lands, pasture lands, forests, and subsoil resources like metals coal oil

Which one of the following is counted in GDP?

The value of the wood purchased at Home Depot by someone making a homemade table. (Must be market produced (transaction with a buyer and seller) of a newly produced good or service. Use autos are not newly produced. Homecooked meals are not market transactions. Neither is child care.)

Why the aggregate demand curve is sloping down 3 reasons for increase/decrease price levels (Wii=Price)

The wealth effect The interest rate effect The international trade effect

The hope is that buy buying In QE these bonds three things will happen

The wealth effect will be caused as a result of the back of rising bond prices. Also the increased money bank now have could be lent out. Lower bond yields because higher prices and less supply = allows the government/firms to borrow at a lower rate = +I +C +G

Supply for loanable funds depends on...

The willingness of households to save and by the extent of Gov. saving or dissaving

base year

The year which is chosen as the point of reference for comparison with other years

Europe remained politically fragmented because...

Their geography, which is fertile land in certain cores and has numerous natural barriers like mountains and bodies of water.

Quantity theory of money

Theory about the connection between money and prices that assumes that the velocity of money is constant.

What happens when the money supply increases?

There is an excess supply of money that will result in an increase in spending and later inflation

Entrepreneurs can do what to the economic growth...

They come up with new inventions that revolutionize the world and then create new inventions from the money they made off the first invention.

When banks gain reserves...

They make new loans and the money supply expands

Evaluation point wages and negative output gap

They may not fall as of trade unions and minimum wage (rents will have period of denial then drop)

When banks lose reserves...

They reduce their loans and the money supply contracts.

Easiest way for developing countries to gain access to technology is...

Through foreign direct investment where foreign firms can buy domestic firms or build factories.

Open Market Operations

To control the size of the money supply the Fed buys and sells treasury securities (bonds/bills). The more securities the Fed buys from the banks the money supply increases and visa versa. Open Market Operations are easily reversible, easy to implement and can be either large or small open market operations.

Why do we need money?

To make exchange easier and money allows people to specialize and become more productive.

Problems with Transfer Payments (social security)

Too many old people so taxes would have to be unrealistically high to support them with the same benefits as before or now. Most people who will benefit from it did not pay for it. Takes up far too much of budget for other programs.

Savings ratio

Total SAVINGS as a percentage of DISPOSABLE INCOME

Revenue

Total amount received for selling a good or service.

Two primary forms of economic integration among countries

Trade Flow of factors of production

Effect of Geographical barriers to trade

Trade is affected by how far the countries are, if the countries are landlocked, and how big the countries are. Experiments: Closing of Suez Canal, Increased cost in air freight shipping

The only way to create wealth is to move resources from a low value to a high value

Trade is good.

other factors of income per capita

Trade, institutions, culture, geography

Free Trade

Trading between nations without PROTECTIONISM

Barter Economies

Trading goods for goods directly, must be mutual and must both want each others goods.

Human Capital

Training and skills humans possess.

Lighter weighing objects make...

Transportation easier

Substitute Goods

Two or more goods that satisfy a similar need, so that one good can be used instead of the other. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.

Top to importers of British G&s

US or Germany

High employment

Unemployed workers decrease GDP below its potential level. Keeping employment steady keeps economy well off.

Structural Unemployment

Unemployment because they don't possess the skills employers want. Ex: phone operators because of better phone tech. Usually a long time

Natural Rate of unemployment

Unemployment cause of certain levels of structural/frictional unemployment.

Underemployment

Unemployment cause scarce resources are not put to their best uses.

Nominal Exchange Rate

Value of one country's currency in terms of another country's currency. Determines how many units of foreign currency you can buy with $1.

Basic Values

Values that would prohibit certain actions if long term outcome is unfavorable.

Allocative Efficiency

When production is in accordance with consumer preference. Benefit=Cost.

Market Equilibrium

When quantity demanded equals quantity supplied.

Compute baskets cost

Use data to calculate the cost of basket goods at a set time.

Allocative Efficiency

Use resources to make goods we want most.

Gov. Policy can help increase the accumulation of knowledge capital in 3 ways.. (PSS)

Using Patents and copyrights Subsidizing research and development Subsidizing Education

Discount Policies (Tool)

Using discount loans and rates to banks.

Velocity Formula

V=PxY/M

Budget Deficit

When the Fed Gov.'s expenditures are higher than its tax revenues.

A market economy leads to a better allocation of resources

Voluntary trade results in benefit for both or else they wouldn't trade. Will lead to more efficient economy.

Wars and Revolutions

Wars make it impossible for countries to accumulate capital or adopt new technology.

Aggregate Demand slopes for three main reasons

Wealth Effect Interest Level Effect International Trade Effect

Countries with high capital are...

Wealthy

Open Economies

What almost all economies are today, have interactions in trade and finance with other countries.

Federal Gov. purchases

When Gov. purchases a good or service they receive the good or service in return. Ex: Aircraft carrier or secret service agent. Purchases have been falling since 1950.

Capital Outflow

When an investor in the U.S buys a bond in another country or government builds a factory in another country.

Capital Inflow

When another country builds a factory in the U.S or when an investor invests in a U.S bond.

How changes in openness affect growth

When countries open up more to growth they grow more. When countries restrict opening up trade their growth lowers.

Product efficiency

When goods and services are produced at the lowest possible cost.

Demand Curve for money slopes downward cause...

When interest rates on Treasury Bills and other financial assets are low, the opportunity cost of holding money is low, so people hold a higher quantity of money because they don't make as much money with Treasury Bills with low interest. Visa Versa

Inflation

When the economy's overall price level is rising.

Discretionary Fiscal Policy

When the government takes action to change spending or taxes.

Currency Depreciation

When the market value of a country's currency decreases relative to the value of another country's currency.

How interest rates affect Net Exports

When the value of the dollar rises, households and firms in other countries will pay more for goods produced in the U.S, and U.S households and firms will pay less for goods produced in other countries, this makes imports increase and exports decrease, causing a decrease in net exports. and VISA VERSA

Behavioral response

When workers change their actions as a result of a tax change.

Centrally Planned Economy

Where Government decides how economic resources will be allocated.

Market Economy

Where decisions of households and firms allocate economic resources.

Poverty/Unemployment Trap

Where individuals receive more money from benefits than from working

Mixed Economy

Where most economic decisions are by buyers and sellers but government plays a significant role.

Current account deficit

Where the VALUE of imports exceeds that of exports

Regressive Tax

Where the marginal tax rate falls as income rises

Demand for loanable funds depends on...

Willingness of firms to borrow money to engage in new investment projects such as building factories or R&D

Domestication of agricultural plants and animals that formed agricultural economies

With large size of Eurasia comes more plants and animals that can be used for agriculture which leads to more efficient food production, denser populations, and advanced civilizations.

Any increase in tech means an increase in capital because...

With new technology, more people want to use it and is not subjected to diminishing returns.

Participation rate

Workforce/ Working population *100

what is the equation for GDP?

Y = C + I + G + NX

Calculating growth rate formula

Y1/Y0-1=G Y0= value of base year Y1= value after 1 year

Aggregate Demand Curve components Y=

Y= C + I + G + NX

Tax Money Multiplier Formula

Y= Tx - MPC(1-MPC) Tx= change in tax or tax income

GDP Formula

Y=C+G+I+(X-M)

Gov. Purchases multiplier formula

Y=G/(1-MPC)

Per worker production function formula

Y=f(K,T) f=function k=capital per worker t=tech.

The Tax Cut multiplier formula

Y=tax cut x MPS

LRAS is assumed to be vertical at

Yp

The maximum capacity of the economy without inflation is

Yp

Foreign Direct Investment

a capital investment that is owned and operated by a foreign entity

The availability of...

abundant land drove most economic growth in the Americas

supply side policy

action by gov designed to promote market force in order to increase economic growth of shift LRAS/PPF outwards or increase productive capacity

What is the multiplier effect?

additional shifts in aggregate demand that result when fiscal policy increases income and thereby increases consumer spending

if something is measured in constant prices (measure in terms of the prices prevailing in one year) then it has been

adjusted for inflation (more relevent)

what is the production function

af( L, K, H, N)

aggregate supply

af( L, K, H, N) (labor, capital, human capital (skills), natural resources.

What happens whe the FED sells bonds?

aggregate demand decreases

What happens when the FED buys bonds?

aggregate demand increases

What would cause price levels to rise in the short run?

aggregate demand shifts right or aggregate supply shifts left

in a perfectly competitive market

all goods are exactly the same, buyers & sellers so numerous that no one can affect market price each is a "price taker"

Fiscal policy is concerned what type of government expenditure

all government expenditure (current government spending (wages), social capital, transfer payments)

What are loanable funds?

all income that is not used for consumption or government expenditures

Medium of Exchange

an accepted method of payment for goods and services

Double Coincidence of wants

an economy that relies on barter requires the unlikely occurrence that two people each have a good or service that the other wants

Budget surplus

an excess of tax revenue over government spending

what is an externality?

an external impact on the environment where economic efficiency may be enhanced by government intervention

current account

balance of payments between imports and exports (trade in goods and services)

when tax revenues intersect with government spending the government is said to have a

balanced budget

What are demand deposits?

balances in bank accounts that depositors can access on demand by writing a check

QE is ineffective if

bank then do not lend the money out in fear of creditors defaulting

How do banks create money in a fractional reserve banking system?

banks create money when they make loans

Jared Diamond in Guns, Germs, Steel says that Europeans were able to develop and take control of the Americas, Australia, and Africa because they...

benefited from geography in many ways.

Government borrow through selling

bonds

Treasury Securities are AKA

bonds

rapid growth will cause .... to develop which will put pressure on .... and cause .... to halt

bottlenecks and inflations and cause expansion to halt (as limited workers = rise in wage, limited land = increased rents)

fluctuations in economic activity, such as employment and production

business cycle

What are short run economic fluctuations called?

business cycles

The created money from QE increase the quantity of money in the economy by

buying second hand government bonds from financial institutions

how do rational people make decisions at the margin?

by comparing the marginal costs and benefits of each decision

how does money act as a store of value?

by providing a means of transferring purchasing power from the present to the future

How does money act as a medium of exchange?

by providing an accepted method of payment for goods and services

how does money act as a unit of account?

by providing buyers and sellers a common reference point for valuing goods and services

Loanable funds model of the interest rate is concerned with...

concerned with long term real rate of interest, determined by the demand and supply for loanable funds

Monetary policy EV. Effects of change of interest rates

can take up to two years

Injections into circular flow of income =

capital investment + government spending + exports

A index number is useful it you want to show

change in a relative value at a particular point in time

what causes a change in quantity demanded?

change in price

what causes a change in quantity supplied?

change in price

what causes a movement along the demand curve?

change in quantity demanded

a movement along a fixed S curve

change in quantity supplied

what causes a movement along the supply curve?

change in quantity supplied

a shift in the supply curve, occurs when a non price determinant of supply changes

change in supply

Fiscal policy can affect AD (provide demand stimulus) and can be used to (it is one of the two instruments that can do this, this other is monetary policy)

change pattern of spending and redistribute wealth (through different rates of tax)

Money Neutrality

changes in the quantity of money only impact nominal prices, not production

Wealth affect, housing as example allow more credit to be taken out as house can be used as

collateral (it also increases consumer confidence)

Bank rate is the rate at which

comercial bank borrow overnight from the BOE

What kind of money is a gold coin considered to be?

commodity money

The size of the city of London's financial services gives if a

comparative advantage (Surplus of services in BOP)

Investment allows economy to be more

competitive

If inflation in the Uk is higher than in other countries the Uk will become gradually less

competitive (Exports fall - AD and GDP fall - unemployment)

a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price

competitive market

two goods for which an increase in the price of one leads to a decrease in the demand for the other

compliments

one way to measure the economy's inflation rate is to....

compute the percentage increase in the GDP deflator from one year to the next

Another word for capital consumption is

depreciation

If you are very leveraged (Uk government) then you have a high

debt to income ratio

increase of goods price =

decrease in purchasing power = real consumption falls (also less international competitiveness)

demand for steel is ...... from the demand for cars

derived

In credit crunch loan to value or loan to income ratios will be

decreased

Decreases in price cause

decreases in the quantity supplied

If the money supply grows slower than the real GDP

deflation

a graph of the relationship between the price of a good and the quantity demanded

demand curve

what happens to demand when income increases for an inferior good?

demand decreases (shifts left)

what happens to the demand curve if the price of a compliment rises?

demand decreases (shifts left)

How do we calculate reserves?

demand deposits - loans

how do we calculate required reserves?

demand deposits x required reserve ratio

what happens to current demand if expected future prices increase?

demand increases (shifts right)

what happens to demand when income increases for a normal good?

demand increases (shifts right)

what happens to demand when population increases?

demand increases (shifts right)

what happens to the demand curve if the price of a substitute rises?

demand increases (shifts right)

inferior good

demand is negatively related to income

for a normal good....

demand is positively related to income

Supply side growth conflicts with other objectives less than

demand side growth

Goals of Fed (monetary policy) (EG, SoM, PS, HE

economic growth stability of Markets Price stability high employment

Evaluation: any change in AD could be offset by another change

economic growth overseas counteracts decrease in business investment

the study of how society manages its scarce resources

economics

Trade is to allow the firms in a country to take advantage of... (Effect on Efficiency)

economies of scale by giving them access to a larger market for their output.

Robert Fogel

economy historian best known for work suggesting that a significant factor in long-run economic growth is improvements in worker health from better nutrition

If withdrawals exceed injections then

economy will shrink (GDP decline = national income decline)

when society gets the most from its scarce resources

efficiency

what is efficiency vs equality?

efficiency is how much a society can produce, equality is how evenly the benefits are distributed

what important tradeoff does society make in regards to the first principle of economics?

efficiency vs. equality

What is real GDP?

is the yearly production of final goods and services valued at constant prices (price from the base year)

Car parts analogy means...

is to get the economic details right so that producers have both the knowledge and the incentive to produce the "right" mix of outputs.

Disposable income _______________.

is total income minus taxes.

What do we assume about government spending in regards to aggregate demand?

it is fixed by government policy

What is the slope of the aggregate supply curve in the long run?

it is vertical

Why does a decrease in the price level increase the quantity demanded?

it raises the real value of money and makes customers wealthier, encourages greater spending on investment goods, and stiumulates net exports

What does the crowding out effect do to aggregate demand?

it reduces the increase in aggregate demand

in the short run, when inflation falls, what happens to unemployment?

it rises

What happens to the aggregate supply curve if the price level is higher than expected?

it shifts right

How will velocity be effected if money changes hands more frequently?

it will rise

If the money supply increases by 5%, then what would happen to nominal GDP?

it would also rise by 5%

What would an increase in the money supply do to prices and GDP in the short run?

it would cause them to rise

what does a country's standard of living depend on?

its ability to produce goods and services

Ways the fiscal policy affects supply side

labor incentives, capital spending to create best environment for business, funding of R&D and investment in human capital.

House price decrease is particularly important as it makes up a

large proportion of income

the claim that the quantity demanded of a good falls when the price of a good rises, other things equal

law of demand

the claim that the quantity supplied of a good rises when the price of the good rises, other things equal

law of supply

Increase in AD many not be as much as expected because

leakages from the circular flow in form of savings, imports, taxation

Why is Substitution Bias a problem for the CPI?

the CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive (overestimates inflation)

Why is introduction of new goods a problem for the CPI?

the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced (overestimates cost of living)

what gives a person market power?

the ability to influence market prices

Usually, the short run aggregate supply curve only shifts in response to what?

the aggregate demand curve

What does fiscal policy influence in the short run?

the aggregate demand for goods and services

Weighting in the CPI index reflects

the amount of income spent on it

What is private saving?

the amount of income that households have left after paying for their taxes and consumption (Y-T-C)

What is the money multiplier?

the amount of money the banking system generates with each dollar of reserves

fluctuations in economic activity, such as employment and production

the business cycle

Hayek argued that distortions in the prices of capital goods in relation to consumer goods are...

the chief source of booms and busts. The reason has to do with the central role of one particular set of prices: interest rates.

What tells us that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation?

the classical dichotomy

What does the slope of the aggregate supply curve in the long run represent/indicate?

the classical dichotomy (it indicates monetary neutrality)


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