Exam 3 EC2301B Fall 2019

Consider the impact of taxes/tariffs on the supply and demand model

-a tax on suppliers shifts the supply curve up by the amount of the tax -a tax on demanders shifts the demand curve down by the amount of the tax -taxes and tariffs raise the equilibrium price are decrease the equilibrium quantity when in effect

What are business cycles?

-alternating rises and declines in the level of economic activity -fluctuations of real output around the secular trend growth rate -a short run temporary upward or downward movement of economic activity or real GDP that occurs around the growth trend

Deflation

-decrease in price level sustained

Keynesian economics

-economist who believe that business cycles reflect underlying problems that can be addressed by activist underlying policies -focuses on short run fluctuations and uses an activist government approach

Classical Economics

-economist who believed that business cycles are temporary glitches and who generally favor laissez-faire or nonactivist policies -Long run perspective (increase aggregate supply), focused more on supply side (edu; technological changes; natural resources; infrastructure investments)=1st version -supply side economics=2nd version -trickle down economics<- not long run, doesn't work -focuses on long-run growth and uses laissez-faire approach

How is economic growth measured?

-growth is measured by the change in total output over a long period of time and the change in per capita output -per capita output is output divided by the population

Genwine progress indicator

-health -happiness -education -leisure time -pollution reduction

Modern conventional economics

-is a blend of Keynesian and Classical economics approaches -the problems the economy faces today do not fit either model 100%

GDP (Gross Domestic Product)

-measures the market value of all final goods andf services produced in a year -formula for GDP= C+I+G+(x-m) where the four expenditure are C=consumption I=investment(not financial investments) G=gov. spending X=exports M=imports -The total market value of all final goods and services produced in an economy in a one-year period -is a flow not a stock measure of market economy

How to compare income over time?

-must adjust for price level (inflation) changes -when you do this your Nominal measures are changed to Real measures

Disinflation

-slowing or decline in the rate of inflation

Cyclical unemployment

-temporary unemployment resulting from fluctuations in economic activity

2 types of frameworks to analyze macro economics

-the long run growth framework focuses on supply -short run business cycle framework focuses on demand

Target rate of unemployment

-the lowest sustainable rate of unemployment that policy makers believe is achievable given existing demographics and the economy's institutional structure -associated with economy's potential output, the higher an economy's potential out put then the lower the economy's target rate of unemployment

Potential output

-the output that would materialize at the target rate of unemployment -highest amount of output an economy can sustainably produce from existing production processes and resources -the highest amount that can be produces (the ideal equilibrium point on a PPC)

Unemployment rate

-the percentage of people in the economy who are willing and able to work but who cannot find jobs -formula= (#of people unemployed/labor force)x100

Labor force

-those people in an economy who are willing and able to work

Frictional unemployment

-unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one -people leaving one job to go to another

Structural unemployment

-unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete -due to structural changes in the economy

Money Illusion

-when people mistake changes in nominal prices for changes in real prices -a situation that exist when economic agents change their behaviors in response to changes in nominal values, even though real values haven't changed

Wealth Accounts

A balance sheet of an economy's stock of assets and liabilities

Personal Consumption Expenditure (PCE) Deflator

A measure of prices of goods that consumers buy that allows yearly changes in the basket of goods that reflect actual consumer purchasing habits

Depreciation

A measure of the decline in value of an asset that occurs over time through use. Also: A decrease in the value of a currency

Purchasing Power Parity (PPP)

A method of calculating exchange rates that attempts to value currencies at rates such that each currency will buy an equal basket of goods. Also, a method of comparing income by looking at the domestic purchasing power in different countries

Price Index

A number set at 100 in the base year that summarizes what happens to a weighted composite of prices of a selection of goods (often called a market basket of goods) over time

Producer Price Index (PPI)

An index of prices that measures average change in the selling prices received by domestic producers of goods and services over time

Nominal GDP

GDP calculated at existing prices

GDP Vs. GNP

GDP: describes the economic output produced within the physical boarders of an economy, measures the value of all production within the boarders of a country GNP: describes the economic output produced by the citizens of a country, measures the volume of the output produced by a countries citizens regardless of the location

Final output

Goods and services purchased for their final use

Net Foreign Factor Income (NFFI)

Income from foreign domestic factor sources minus foreign factor income earned domestically

Technology is now being developed so that road use can be priced by computer. A computer in the surface of the road picks up a signal from your car and automatically charges you for the use of the road. How would this affect bottlenecks and rush-hour congestion?

It would decrease bottlenecks and rush-hour congestion.

Price Ceiling graph and its impact on market

P1-this price ceiling has no effect on the market because its above equilibrium P2-this price ceiling causes a shortage because its below equilibrium

Transfer payments

Payments to individuals by government that do not involve production by those individuals

Price Floor graph and its impact on market

Pf-price floor greater than equilibrium price causes a surplus=unemployment -A price floor will only impact the market if it is greater than the free-market equilibrium price by creating a shortage.

Quotas are quantity restrictions on imported goods. Demonstrate the effect of a quota on the price of imported goods.

Price will increase Quantity will decrease Straight line up and down

Intermediate products

Products used as input in the production of some other product

Quantity Restriction

Provision in a license limiting the quantity of goods that may or must be produced -QR increase equilibrium price and reduce equilibrium quantity

Per Capita output

Real GDP ÷ by the total population or Total output ÷ population

What is Aggregate Accounting?

Set of rules and definitions for measuring activity in the aggregate economy

Investment

Spending for the purpose of additional production

Is structural stagnation a Keynesian or a Classical theory?

Structural stagnation includes elements of both Keynesian and a Classical theory

What is the stock equivalent of the National Income Accounts?

The National Wealth Accounts

GNP (Gross National Product)

The aggregate final output of citizens and businesses of an economy in a one-year period GNP=GDP+Net Foreign Factor Income

Welfare loss

The excess of social costs over social benefits for a given output. A situation where MSB is ≠ to MSC and society does not achieve maximum utility.

Paradox of Thrift

The idea that when many households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and aggregate demand will reduce income and employment.

Nominal Interest Rate

The interest rate you actually see and pay when borrowing, or receive when lending Nominal Interest Rate=Real Interest Rate+Inflation Rate

What are the effects of an effective minimum wage on the number of unemployed in the market for unskilled labor?

The minimum wage causes a surplus in the market. This means that with a minimum wage unemployment rises

Nominal Wealth

The value of the assets of an economy measured at their current market prices

Real Wealth

The value of the productive capacity of the assets of an economy measured by the goods and services it can produce now and in the future

How does the impact on equilibrium prices (paid by consumers and received by producers) and quantity differ between parts a and b.?

There is no difference. The price consumers pay is higher in both scenarios

Say that equilibrium price fell and quantity remained constant. What would you say was the most likely cause?

There was a decrease in demand and a increase in supply

Say that the equilibrium price and quantity both rose. What would you say was the most likely cause?

There was an increase in demand and no change in supply.

Classical economists saw the depression as a political problem, not an economic problem. Why?

They believed labor unions were preventing the wage level from falling to its appropriate level

How do you show the effect of an effective price ceiling using a graph?

To have an effective price ceiling, the price ceiling must be below b the equilibrium price. An effective price ceiling causes a shortage in the market

How do you show the effect of an effective price floor using a graph?

To have an effective price floor, the price ceiling must be above the equilibrium price. An effective price floor causes a surplus in the market

Definition of Price Ceiling

a government imposed limit on how high a price may be charged in a market (ex. affordable housing)

Definition of Excise Tax

a tax that is levied on a specific good -excise tax reduce the quantity of goods demanded

Consumption

according to each component's share of an average consumer's expenditures.

Hyperinflation

inflation rate that is out of control ex. Germany remember photos

Definition of Price Floor

is a government imposed limit on how low a price can be charged in a market (ex. minimum wage)

Would Keynesian or Classical economists be more likely to emphasize the fallacy of composition?

keynesian economists would be more likely to emphasize the fallacy of composition.

3rd Payer Markets

the person who receives the good differs from the person paying for the good//the person choosing the product does not pay the entire cost -ex. health care market where people have insurance -in normal cases when the individual demander pays for the good, equilibrium quantity is where quantity demanded equals quantity supplied -in these markets equilibrium quantity and total spending are much higher -quantity demanded, price, and total spending are greater when a 3rd party pays rather than when a consumer pays

Dead Weight Loss

the reduction in economic surplus resulting from a market not being in equilibrium

As the problem of inflation grew in the 1970s, did Keynesian or Classical economics grow in importance?

Classical economics grew in importance because Keynesians didn't have a model for inflation

Did Keynesian or Classical economics support laissez-faire policy?

Classical economics supported laissez-faire policy

What conclusion can you draw about the difference between levying a tax on suppliers and consumers?

Consumers and suppliers are affected the same regardless of whether the tax is placed on the consumer or the supplier.

CPI (consumer price index)

-a measure of prices of a fixed basket of consumer goods, weighted according to each component's share of an average consumer's expenditures.

Structural stagnation

-a period of protracted slow growth and high unemployment

Inflation

-A continual rise in the overall price level -Inflation is a continual rise in the price level -CPI, PPI, PCE Deflator and GDP Deflator are all price indexes used to measure inflation, they measure goods prices and do not measure asset prices -Inflation= ( CPI(t) - CPI(t-1) / CPI(t-1) )x100 -Inflation=Nominal Interest Rate-Real Interest Rate

Aggregate Demand

-AD=C+I+G+(x-m) -AD=GDP -as savings rate goes up consumption rate goes down, investment rate goes down, government spending goes up

Aggregate Income

-Aggregate Income= compensation time employees + Rent + Interest + Profit -Aggregate Income equals Aggregate Production because whenever a pod is produced somebody receives income for producing it, profit is key to this equality -E = Employee income B = Business owner income/profit R = Rental income C = Corporate income I = Interest income G = Government income S = Government subsidies -Aggregate Income = E + B + R + C + I + ( G - S )

GDP Deflator

-An index of the price level of aggregate output, or the average price of the components of GDP, relative to a base year -GDP Deflator= (Nominal GDP/Real GDP)x100

Disinflation vs. Deflation

-Disinflation is an inflation rate that is decreasing but still less than 0 -Deflation is a negative inflation rate

Economic growth VS. Economic development

-Economic Growth: measured quantitatively by GPD per capita; means an increase in real national income / national output -Economic Development: Broader, means an improvement in the quality of life and living standards, includes quality of life measures (life expectancy, literacy rates, per capita energy consumption) EX.Good nutrition does not hinder economic development

Fiscal Policy

-Government policy that attempts to manage the economy by controlling taxing and spending -involves tax, governments spending

Monetary Policy

-Government policy that attempts to manage the economy by controlling the money supply and thus interest rates -policy that affects the amount of money flowing through the economy

Net Exports

-NE= exports - imports -Spending on goods and services produced in the United States that foreigners buy (exports) minus goods and services produced abroad that U.S. citizens buy (imports)

Real interest rate

-Nominal interest rate adjusted for expected inflation -Real Interest Rate= Nominal Interest Rate - Inflation

Value added

-The increase in value that a firm contributes to a product or service -Value Added= Value of Sales - cost of intermediate goods (inputs)

Real GDP

-The market value of final goods and services produced in an economy, stated in the prices of a given year. Also: Nominal GDP adjusted for inflation -Real GDP= (Nominal GDP/GDP Deflator)x 100 -the percentage change in Real GDP= the percentage change in Nominal GDP - Inflation

NDP (net domestic product)

-The sum of consumption expenditures, government expenditures, net exports, and investment less depreciation. That is, GDP less depreciation -formula for NDP= GDP-Depreciation -represents output available for purchase because production used to replace worn-out plant equipment (depreciation) has been subtracted

Recession

-a decline in real output that persist for more than 2 consecutive quarters of a year

Depression

-a deep and prolonged recession

How can Intermediate Goods be eliminated from GDP?

1.by measuring only final sales 2.by measuring only value added

Types of unemployment

1.cyclical 2.structural 3.frictional

Beliefs of Classical Economist

1.importance of real factors in determining the wealth of nations -Real Factors=growth in technology and factors of production -supply side model 2.optimizing tendencies of free markets 3.mistrust of government and dislike of regulation 4.did not believe that government needed to make sure that markets existed for all goods 5.money served as a means of facilitating transactions

Recommendations to better measure GDP

1.look at income and consumption rather than production 2.consider income and consumption jointly with wealth 3.emphasize the household perspective 4.give more prominence to the distribution of income, consumption, and wealth 5.broaden income measures to include non-market activities

Shortcoming of GDP

1.non-market activities 2.underground or informal economy 3.not a good measure of quality of life because it says nothing about distribution of income or output 4.doesn't include the environmental cost of production or other externalities 5.doesn't account for improved product quality 6.leisure and other noneconomic sources of well being are not captured 7.subcategories are often interdependent 8.comparisons across countries can be hard

Key insight of Keynesian Economics

1.prices and wages are sticky, especially in downward direction -sticky= opposite of pure market adjusting 2.paradox of thrift (applies to businesses and consumers) -in long run, savings -> growth -in short run, savings ->furthers economic decline 3.the importance of aggregate demand -aggregate demand based model short run 4.government should engage in stimulative monetary and fiscal policy

What is NOT counted in GDP?

1.value of resale goods 2.stocks and bonds 3.gov. transfer payments 4.work of house-spouses (AKA non-market activity)

Assumptions of Classical Economist

1.workers, consumers and entrepreneurs are motivated by rational self-interest -they maximize utility by not factoring sunk cost=consumers -they maximize profits=businesses 2.absence of money illusion 3.pure competition prevails in the markets for the goods and services and factors of production

In what way is the market for public postsecondary education an example of a third-party-payer market? What is the impact of this on total educational expenditures?

Because students don't pay the entire cost of the education. It increases total expenditures

Why are Total Expenditures by US citizens greater than production in the US?

Because the US has a trade deficit

Definition of Tariff

an excise tax on an imported good -Tariffs increase the cost of imported goods to domestic consumers

Potential output is not purely a physical measure based on the number of workers and existing factories because:

factories may be technologically obsolete.

Government Spending

goods and services that government buys

Net investment

gross investment - depreciation

Tariff vs. Excise Tax

only foreign producers selling goods pay Tariffs

Asset price inflation

when the price of assets rises more than their "real" value