ECO 2013 Study Guide
If the whole supply curve shifts right...
an increase in the supply
appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy exports decrease and imports increase
Discount rate
fed charges banks
3 functions of money
medium of exchange, unit of account, store of value
Law of supply
producers offer more of a good as its price increases and less as its price falls
Janet is receiving a 5% pay raise. If the rate of inflation is 2%, then Janet's purchasing power is
rising
Marginal utility
satisfaction or usefulness obtained from acquiring one more unit of a product if you use less, you get more
How to fix surplus
to lower the price (put milk on sale to get to equilibrium price)
Income approach to calculating GDP
add up all the income earned during the year by people who are involved in the production of goods and services
real gdp
adjusted for inflation (best measure of economic growth)
Loanable funds
all income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund new investment projects
Price change goes
along demand curve change
ad decrease
consumer spending
Which group is helped by inflation?
debtors
GDP deflator
deflates nominal gdp Nominal GDP/Real GDP x 100
Technological advancements have led to lower prices and an increase in the sale of color laser printers. How does this affect the market for traditional inkjet printers?
demand curve shifts left
investment income
earnings from dividends, interest, and rent
cost demanded equals cost supplied
market equilbirum
Change in quantity demanded
movement along curve on graph: when price goes down from 3 to 2 dollars, quantity goes form 10 to 20 only price changes quantity demanded (move along curve)
tax multiplier
one less than spending multiplier
Most economists believe that the consumer price index _____ the rate of inflation.
overstates
Falls below equilibrium or above equilibrum
price rises: quantity supplied increases and quantity demanded decreases price decreases: quantity supplied decreases and quantity demanded increases
When price increases...
quantity supplied increase and change in price moves along curve
Something other than price change
shift demand curve ex: milk causes baldness: causes demand curve to shift left (at every price, people will buy less and decrease demand)
Law of supply
the direct relationship between price and quantity supplied ex: when the price goes up for milk, the quantity producers make will increase (incentive to make more profit)
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
Federal funds rate
the interest rate at which banks make overnight loans to one another (what banks charge each other)
Law of diminishing returns
the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal output of the variable input to decline and become smaller and smaller
Nominal GDP
the production of goods and services valued at current prices
Velocity of money
the rate at which money changes hands
annualized method
multiplying the earned income figure by the ratio of the number of months in a year divided by the number of months for which income data is available
Nominal gdp
not adjusted for inflation (measured in current prices)
Normative questions
questions about how things should be
Inflation goes up, that will decrease
real interest rate
Assume that Motorcycles are a normal good. If there is an increase in number of companies producing motorcycles and a decrease in income (assume motorcycles are a normal good), the equilibrium could move to which point?
shift curve right and shift the actual point down
Fiscal policy goes with
spending multiplier
spending multiplier effect
states that a small change in spending causes a much larger change in GDP
3 reasons demand curve is downward sloping
substitution effect income effect law of diminishing marginal utility
If a car is produced in Detroit in 2013 but not sold until 2014, it should be included in _____ GDP, and its value should be counted in _____.
2013; inventory change
Not included in GDP
- intermediate goods and services - non production transactions - used goods - financial assets like stocks and bonds - foreign-produced goods and services
What shifts aggregate demand?
-anything that increases factors of GDP (C+I+G+F): cuts in taxes, increase in slaeries/profits, low interest rates on loans, exports > imports -anything that decreases factors of GDP: increase or new taxes, imports > exports, bad perception of economy
fractional reserve banking system
A banking system in which banks keep less than 100 percent of deposits as reserves, loan out the rest, that ends up being spent, goes to another bank and continues
depreciation
A decrease or loss in value exports increase and imports decrease
deficit spending
Government practice of spending more than it takes in from taxes tax revenue less than expenditure
net transfers
Foreign aid, money sent to Americans or their families living overseas
Expenditures approach formula
GDP = C + Ig + G + Xn
Which statement is TRUE regarding a country with a very large informal economy?
The burden of taxes is spread less evenly among the population.
aggregate demand formula
AD = C + I + G + (X-M)
Trade deficit
An excess of imports over exports
expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
contractionary fiscal policy
Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.
Substitute good
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
Real GDP per capita formula
Real GDP per capita = Real GDP / Population or [(G(t+1) - G(t))/G(t)] x 100, where G(t+1) is real GDP per capita in 2015 US dollars in year t+1 and G(t) is real GDP per capita in 2015 US dollars in year t
Nominal interest rate
Real Interest Rate + Expected Inflation
Natural Rate of Unemployment (NRU)
The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
Types of unemployment
frictional, structural, cyclical
M1 money supply
includes all currency plus checking accounts and traveler's checks (highest liquidity)
crowing out effect
the loss of funds for private investment caused by government borrowing increase interest rates government tries to help but actually hurts the consumers
oppurtunity cost
the loss of potential gain from other alternatives when one alternative is chosen. Assume that a student attends a four-year college with tuition costs of $20,000 per year; room and board costs of $5,000 per year; and books/entertainment costs of $1,000 per year. If the student did not go to college, she would work at a job that pays $25,000 per year but still face the same room and board, as well as entertainment expenses. The opportunity cost of attending college for this student for four years is 100,000 because you are losing the opportunity to make 25,000 per year for those 4 years
financial account
the part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country
unemployment rate formula
unemployed/labor force x 100
frictional unemployment
unemployment that occurs when people take time to find a job
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
Why is AD downward sloping?
wealth effect, interest rate effect, foreign trade effect
Trade surplus
when a country exports more than it imports
inflationary gap
when aggregate output is above potential output
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods (move away from products price higher)
Change in demand
when price doesnt change (stays at 3 dollars) but the curve shifts due to the 5 determinants (5 shifters only change the demand)
Complement goods
Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.
How to find growth rate of real GDP?
(current year/past year) - 1
Current account
1. net exports 2.investment income 3.net transfers
Deflation
A situation in which prices are declining
What happens to the demand for a product when the price decreases?
Demand stays the same but the quantity demanded increases
financial account deficit
Inflow is less than the outflow.
AD increase shift right
Investment
Income effect
Price goes down, people buy more because the purchasing power has increased (each dollar gets them more milk)
nominal gdp formula
Price x Quantity
velocity of money equation
V = (P x Y) / M
Disinflation
a reduction in the rate of inflation
Demand for loans is based on
consumer borrowing
Demand pull inflation
demand pulls up prices
ad decrease
net export
Nominal wage
the dollar amount of the wage paid
Supply to the...
sky
percent change in gdp formula
year 2 - year 1/year 1 times 100
Positive questions
"what the consequences will be". These questions are objective. A question about the consequences of specific policies or institutional arrangements. It involved what will be. These questions align with economic analysis. Which would BEST represent a positive statement? Taxes on sugary drinks cause people to drink less of them.
3 economic goals?
1. promote economic growth 2. limit unemployment 3. keep prices stable (limit inflation)
nominal gdp equation
= # units produces * avg mkt price
AD decrease shift left
Expectations
PPF (Production Possibilities Frontier)
a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced the steeper the line is: the greater the less steep: opportunity cost is less compared to another steep line
MPC equation
change in consumption/change in income
Real wage
the wage rate divided by the price level
inverse relationship between interest rates and quantity of loans demanded
true
Above the PPF
unattainable
3 shifters of money supply
1) setting reserve requirements (ratios) 2) lending money to banks and thrifts (discount rate) 3) open market operations (buying and selling bonds)
5 shifters of supply
1. Price of Resources ex: huge increase in price for dairy cows for milk will cause supply to decrease 2. Number of Producers ex: more producers=increase supply 3. Technology ex: new milking techniques 4. Taxes and Subsidies subsidy: when gov gives money to have more output (Shift right) tax: take money away and raise the price (shoft left) 5. Expectations ex: producers think they can make more profit on products a few weeks from now, they will hold back supply for now and supply more later
3 causes of inflation
1. The Government Prints TOO MUCH Money (The Quantity Theory) 2. DEMAND-PULL INFLATION 3. COST-PUSH INFLATION
spending mulitplier
1/(1-MPC)
simple spending multiplier
1/MPS
Inferior good
a good that consumers demand less of when their incomes increase
higher interest rates
decrease investment and both consumption and investment decrease
Marginal cost
change in total cost / change in quantity Admission prices to Dollywood are $50 for a one-day ticket, $80 for a two-day ticket, and $100 for an annual pass. Based on these prices, the marginal cost of visiting Dollywood the second day is _____, the third day is _____, and the fourth day is _____. $30; $20; $0
AD increase
consumer spending
Law of demand
consumers buy more of a good when its price decreases and less when its price increases
Law of demand
consumers buy more of a good when its price decreases and less when its price increases (inverse)
PPF is not producing but
consuming
disequilbirum
price goes up people dont want to buy more milk quantity demand: 10 gallons at 5 dollars quantity supplied: producer produce more milk at 50 gallons of milk THIS IS A SURPLUS (quantity of surplus here: 40 gallons)
SRAS curve shifts left when
price level increases and GDP decreases
Interest rate Effect
(when price level goes up, people buy and save less and involves higher interest rates and less invesment spending; decrease in quantity demanded) if price levels fall, people buy and save more, more can be lent out, lowers interest rates, and increases quantity demanded
Cause Demand Curve to shift
1. Taste/Preferences ex: kids who have milk in morning do better in school 2. Number of Consumers Ex; more population in city 3. Price of Related Goods ex: substitute: almond milk and cow milk are substitutes (as price goes up for almond milk, demand for cow milk will increase) complement: price of cereal falls, decrease demand for milk 4. Income normal good: increase in income, demand will increase and decrease income demand decreases inferior good: increase in income demand falls and decrease in income demand rises 5. Expectations ex: if you think the price of milk will decrease next week, you'll buy less today
Spending multiplier equation
1/MPS or 1/1-MPC
Money multipler
1/reserve requirement
CPI equation
100 x (cost of basket in current year/cost of basket in base year)
CPI equation
100 x (cost of basket in current year/cost of basket in base year) base year index= 100 if you see a 120, prices went up 20 percent if you see a 200, prices went up by 100
Suppose the market basket of goods and services cost $3,500 in 1996 but today costs $4,250. Using 1996 as the base year, the consumer price index for today is
121.4
production possibilities curve
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed. scarcity, tradeoff, opportunity cost, efficiency scarcity: can't produce anywhere beyond curve ( tradeoff: give up videos for hats opportunity costs: a specific number of hats I give up to make a video (number of hats you loss= opportunity cost) below curve: inefficient line: efficient outside curve: impossible
Shortage
A situation in which quantity demanded is greater than quantity supplied
Shortage
A situation in which quantity demanded is greater than quantity supplied quantity demanded - quantity supplied 70
Surplus
A situation in which quantity supplied is greater than quantity demanded fix itself
Supply
A stock of a resource from which a person or place can be provided with the necessary amount of that resource.
quantity demanded vs. demand
Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand.
Cost push inflation
Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.
income approach formula
GDP = wages + rents + interest + profits
Quantity Supply
How much of a good or service producers are willing and able to supply at one price level
Simple Tax Multipler
MPC times 1/MPS or MPC/MPS
MPS equation
MPS=(Change in Savings)/(Change in Income)
Money multiplier goes with what policy?
Monetary policy
Quantity Theory of Money Equation
Money Supply (M) x Velocity (V) = Price (P) x Real output (Y) if money supply goes up by 10 percent, so does price! when you increase money supply as velocity stays the same and quantity stays the same= equivalent change in prices
real gdp formula
Nominal GDP/Price Index
How to find net domestic product
The net domestic product (NDP) equals the gross domestic product (GDP) minus depreciation on a country's capital goods. Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.
Normal good
a good that consumers demand more of when their incomes increase
durable good
a good that lasts for at least three years when used regularly
Refer to Figure 3-7. Assume that the graphs in this figure represent the demand and supply curves for coffee. What happens in this market if buyers expect the price of coffee to rise?
demand only will shift right
reserves
deposits that banks have received but have not loaned out
Demand goes to...
dirt
financial account surplus
inflow is greater than outflow
ad increase
investment
Law of diminishing marginal utility
law of decreasing additional satisfaction (as you consume anything the additional satisfaction will start to decrease) ex: 1 gallon of milk: very 2-3 gallon: some utility each additional milk you buy will give you less utility
If a country calculates its real GDP using the year 2012 as its base year, the value of its real GDP will be _____ its nominal GDP as long as prices have risen since 2012.
less than
A ________ demand curve for shampoo would be caused by a change in the price of shampoo.
movement along the
How to find the total change in gdp?
multiplier times initial change in spending
Which component is NOT used to measure GDP via the income approach?
net exports
Real interest rate
nominal interest rate - expected inflation rate
SRAS curve shifts right when
price level decreases and GDP increases
year over year method
subtract last uears number from this years number divide difference by last uears number percentage of that
Market for Sunbalm example
summer becomes winter supply: no effect (it will keep producing sunbalm) demand: demand goes down (price and quantity fall)
What happens to the supply for a product when the price increases?
supply stays the same but only affects quantity supplied
Marginal benefit
the additional or extra benefit associated with an action change in total benefit/change in quantity At an amusement park, Sue achieves an enjoyment value of 10 on her first roller coaster ride and an enjoyment value of 6 on her second ride. Her marginal benefit from her second ride is 6
money multiplier
the amount of money the banking system generates with each dollar of reserves
personal consumption expenditures
the expenditures of households for durable and nondurable consumer goods and services
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
Marginal Propensity to Save (MPS)
the increase in household savings when disposable income rises by $1
deflationary gap
the level of aggregate demand in the economy is not sufficient to buy up the potential output that could be produced by the economy at the full employment level of output.
real wealth effect
when price level falls, the assets of consumers have more purchasing power so consumers buy more (real wealth goes up when prices fall) when price level rises and there's more inflation, purchasing power falls and you buy less goods and services (inflation=less real wealth)
Exchange rate effect
when prices increase in one country, they buy from another cheaper country and quantity demanded falls (export more goods and services because other countries want to buy more of our stuff)