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Economy Notes from whole Semester.

by: Joy Bullington

Economy Notes from whole Semester. ECON 2105

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Joy Bullington
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Macro Economics entire semester notes
Economics in a Global Society
Dr. Lee
Economics, Macro
75 ?




Popular in Economics in a Global Society

Popular in Economics

This 45 page Bundle was uploaded by Joy Bullington on Thursday September 22, 2016. The Bundle belongs to ECON 2105 at Georgia Southern University taught by Dr. Lee in Spring 2015. Since its upload, it has received 8 views. For similar materials see Economics in a Global Society in Economics at Georgia Southern University.


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Date Created: 09/22/16
Economics Chapter 1 What is Economics?  Economics is a subject that we must confront in our daily lives.  We spend a great deal of our time thinking about economic issues everyday; o changes in prices o buying decisions o use of our time o concern about future Ten Principles of Economics  Economy- one who manages a household  Household- making many decisions o Allocate scarce resources  Ability, effort, desire, and income.  Society- also making many decisions o Allocate resources (labor) o Allocate output  Resources are scarce  Scarcity o The limited nature of society’s resources  Economics o Study of how society manages its scarce resources  Economists study: o How people make decisions o How people interact with one another o Analyze forces and trends that affect the economy as a whole How people Make Decisions Principle 1: People face trade-offs  Making decisions o Trade off one goal against another o Student- time o Parents- income o Society  National defense vs. consumer goods  Clean environment vs. high level of income  Efficiency vs. equality You must pick one over the other, there is no wrong answer  Efficiency o Society getting the most it can from its scarce resources (sports)  Equality o Distributing economic prosperity uniformly among the members of society o The pie is divided into individual slices Principle 2: The cost of something is what you give up to get it  People face trade-offs o Make decisions  Compare cost with benefits of alternatives(college education)  Opportunity cost o Whatever must be given up to obtain one item: college education for college athletes, regular students… Principle 3: Rational people think at the margin  Rational people o Systematically & purposefully do the best they can to achieve their objectives: you are the owner of the firms. Need a decision for labor, quantity of products… to maximize the profit.  Marginal Changes o Small incremental adjustments to a plan of action: additional 1 hour study vs. taking a nap o airplane case  cost $100,000  200 seats  $500 ticket  5 empty seats  3 people are offering to pay $300 for lasts seats  Marginal benefit - $300  Marginal cost ->$300  So the let people on plane o Marginal benefit of water vs. diamond o Limited edition product ect.  Marginal benefits o Additional benefits  Marginal costs o Additional costs  Rational decision maker o Take action if benefits>costs Principle 4: People respond to incentives  Incentive o Something that induces a person to act o Because rational people make decisions by comparing costs and benefits, they respond to incentives o Crucial to analyzing how markets work  Higher Price (apple price increases) o Buyers – consume less o Sellers – produce more  Public policy (Europe vs. U.S. in gasoline tax) o Change costs or benefits o Change people’s behavior Principle 5: Trade Can Make Everyone Better off  Trade o Is not a sport where one side wins and the other side loses o Allows each person to specialize in the activities he or she does best o Enjoy a greater variety of goods and service at lower cost (ex. Clothes) Principle 6: Markets are usually a good way to organize economic activity  Communist countries – central planning o Government officials (central planners)  Allocate economy’s scarce resources  What goods and services were produced  How much was produced  Who produced and consumed these goods and services  Market economy – allocates resources o Through decentralized decisions of many firms and households o As they interact in markets for goods and services o Guided by prices and self interest  Adam Smith’s Laws (Father of economics) o 1 – Self-interest – why work? To make good for yourself o 2 – competition – better product o 3 – supply and demand  Capitalism o Companies are private o Money is invested  Promote efficiency o Avoid market failure  Promote equality o Avoid disparities in economic wellbeing  Efficiency or equality? o There is no right or wrong/ should be or shouldn’t be answer for this. (ex. World best basketball player vs. world’s best chess player/ BB player would get more money if efficiency  Property rights o Ability of an individual to own and exercise control over scarce resources  Market failure o Situation in which the market on its own fails to produce efficient allocation of resources o Main possible causes? Externality and market power Principle 7: Governments can sometimes improve market outcomes  We need government to make “invisible hand magic” work o Enforce property rights – individuals can own and control scarce resources o Ex) restaurant owners, producing movies  Property rights o Ability of an individual to own and exercise control over scarce resources  Market failure o Situation I which the market on its own fails to produce an efficient allocation of resources o Main possible causes? Externality and market power  Causes for market failure o Externality (negative)  Impact of one person’s actions on the well- being of a bystander o Market power  Ability of a single economic actor to have a sustainable influence on market prices (single producer sells at unreasonable price because they are only one selling item) Principle 8: a country’s standard of living depends on its ability to produce goods and services  Large differences in living standards o Among countries: huge variation o Over time there is a shown increase in GDP in some countries  Productivity o Production (output) ÷ Labor (input)  Ex) USA vs Mexico – 100 markets ÷ 10 workers = 10 >5  Explanation: difference in productivity  Productivity o Quantity of goods and services produced form each unit of labor input o Higher productivity = higher standard of living o Growth rate of nation’s productivity = growth rate of its average income  Business cycle o Fluctuations in economic activity  Employment  Production Principle 9: prices rise when the government prints too much money  Inflation o An increase in the overall level of prices in the economy  If income doubles but economy triples, you become poorer  Causes for large inflation o Growth in quantity of money (produce more of the product)  Labor ^ unemployment rate goes down  Value of money falls  Deflation o Things get cheaper Principle 10: society faces a short-run trade-off between inflation and unemployment  Short-run effects of monetary injections: o Stimulates the overall level of spending  Higher demand for goods and services  Firms – raise price; hire more workers; produce more goods  Lower unemployment  Short-run trade-off between unemployment and inflation o Key role – analysis of business cycle o 2008 recession  Housing market bubble burst – 2006 housing market peaked  Peak caused subprime loaning  At end of 2008 value of houses lowered so subprime loaners did not pay back banks The roe of assumptions  Assumptions o Can simplify the complex world o Focus our thinking – essence of problem  Different assumptions o To answer different questions o Short-run or long-run effects  Economic models o Diagrams and equations o Omit many details o Allow us to see what’s truly important o Built with assumptions o Simplify reality to improve our understanding of it  Ceteris Paribus – holding others constant or everything else is equal  Microeconomics o The study of how households and firms make decisions o And how they interact in markets o Individual  Macroeconomics o The study of economy-wide phenomena, including inflation, unemployment, and economic growth o Between two parties  Positive vs Normative analysis o Positive statements  Describes the world as it is  Descriptive  Confirm of refute by examining evidence  Fact o Normative Statements – you have to be really tall be a good basketball player (look for the word “should”)  Attempt to prescribe how the world should be  Prescriptive  Opinion Economics Chapter 2  Markets o Goods and services produced by firms for households  Firms  Household Production Possibilities Frontier curve  As long as production is on the curve, it is efficient  If above curve, unattainable because there are not enough resources  If below curve, resources are being wasted, inefficient Economic Growth on the PPF  Can be curved line o If concave down curve the opportunity cost is increasing  Economic growth o Can increase production for two products at the same time. o Entire curve shits up o Increasing marginal opp. cost  Technical improvement in one product but not the other o Curve would move up the y axis but not on the x and visa versa  Questions o A o A o C o D o A Absolute Advantage  Refers to a country’s ability to produce a certain good or service more than another country with same amount of resources  Compare amount of production US | China Comp|100| 50 Chop | 70 | 100 US has absolute advantage in computers and china has absolute advantage in chopsticks Comparative Advantage  Refers to a country’s ability to produce goods or services using LOWER opportunity cost YOU | Neighbor Apple | Cherry | Apple | Cherry All your time on apple | 20 | 0 | 30 | 0 All your time on cherry | 0 | 20 | 0 | 60 Absolute. Adv.  Apple – Neighbor 30 > 20  Cherry – Neighbor 60 > 20 Opportunity Costs You, apple 1. Opp. Costs of ___20 ___ apple is ___20___ cherry. 2. Then divide both by first number; 20/20=1 and 20/20=1 Neighbor, apple 1. Opp. Costs of ___30 ___ apple is ___60___ cherry. 2. Then divide both by first number; 30/30=1 and 60/30=2 Comparative Adv. Apple  you have comp. adv. Over neighbor because 1<2 opp. Cost. You, Cherry 1. Opp. Costs of ___20 ___ apple is ___20___ cherry. 20/20=1 Neighbor, cherry 1. Opp. Costs of ___60 ___ apple is ___30___ cherry. 30/60=1/2 Comp. Adv. Cherry  Neighbor has comp. adv. In cherry b/c ½<1 opp. Cost. Trade You  Neighbor You <- Neighbor 10 apples 15 cherries By trading between 2 people who specialize in one product, they can both go above their ppf curve. Q. Minnie | Mickey Hats | 40 | 50 Umbrella| 10 | 5 Abs. Adv. Hats: Mickey Abs. Adv. Umb: Minnie Comp. Adv. Hats; Mickey: 50 hats 5 umb, 5/50=1/10 Comp. Adv. Hats; Minnie: 40 hats 10 umb, 10/40= ¼ Comp. Adv. Hats: Mickey Comp. Adv. Umb; Mickey: 5 umb 50 hats, 50/5= 10 Comp. Adv. Umb; Minnie: 10 umb 40 hats, 40/10=4 Comp. Adv. Umb: Minnie Extra Credit  2 cause of market failure o Externality – effected by someone else o Market power  In the short run society faces a trade-off between blank and unemployment. If the gov. increases the money supply, what happens? o Inflation  If the ppf curve is bowed outward, it is because of o Increasing marginal opp. Cost Test Questions Pancake | Waffles 600 | 0 450 | 150 300 | 250 150 | 325 0 | 375 Q. What’s the opp. Cost of increasing the productivity of pancakes from 150 to 300? a. 75 waffles Hours Open | Total Revenue 1 | 275 2 | 375 3 | 450 4 | 500 5 | 530 6 | 550 Q. using marginal analysis, how many hours should john extend his hours of operation? Cost of his worker: $25/hr a. 1 hr – adds $100>25 2 hr – adds 75>25 3 hr – adds 50>25 4 hr – adds 30>25 5 hr – adds 20 < 25 Canada | USA Honey | Syrup | Honey| Syrup | 0 | 60 | 0 | 50 | 10 | 45 | 10 | 40 | 20 | 30 | 20 | 30 | 30 | 15 | 30 | 20 | 40 | 0 | 40 | 10 | 50 | 0 Q. Abs Adv. Honey: USA Syrup: CAN Comp. Adv. Honey: USA USA: 50/50=1 CAN: 60/40= 3/2 Comp. Adv. Syrup: CAN USA: 50/50=1 CAN: 40/60=2/3 Power Point Questions B B C A A C C A Chapter 3 Markets and Competition  Market o A group of buyers and sellers of a particular good or service o Buyers  Determine the demand for the product o Sellers  Determine the supply of the product  Competitive market o Market in which there are many buyers and many sellers o Each has a negligible impact on market price o Price and quantity are determined by all buyers and sellers  As they interact in the marketplace  Perfectly comp. market o Goods offered for sale are all exactly the same o Buyers and sellers are so numerous  No single buyer or seller has any influence over market price Demand curve has negative slope because of “law of demand”  When the price of goods rises, quantity of demand of goods falls  When quantity demanded increases, the graph shifts right. There is no price change. If it decreases, the graph will shift to the left. Change in Income  If income goes up, causes graph to shift to the right because quantity demanded increases  If income goes down, causes graph to shift to the left because quantity demanded decreases Inferior Good  For a cheaper product that is not very good, Ramen, a lower income would increase quantity demanded; graph shifts right  When your income goes up, you buy less ramen, buy more good food. So quantity demanded decreases, graph shifts less. Change in the Prices of Related Goods  If two goods are substitutes, two brands of gas, price of each product effects demand. o If QT falls people will buy less BP and demand curve will shift to the left for BP. o IF QT price rises people will buy more BP and curve will shift right for BP.  If two products are compliments, Coffee and cream, their prices effect each other. o If price of cream goes up, people will buy less coffee, and graph shifts left for coffee. o If price of cream goes down, people will buy more coffee, and graph shifts right for coffee. Change in Taste  If consumer’s tastes change, they may buy more or less. Q) You lose your job, and as a result, you buy fewer itunes music downloads. Itunes is what type of good? A) Normal good Q) Popeye’s income fell by 30%, so he went to Walmart and bought more spinach. Spinach is? A) Inferior good Change in Population  When population increases, quantity demand increases while price stays the same. Graph shifts to the right.  When population decreases, quantity demand decreases while price stays the same. Graph shifts to the left. Change in Expected Future Price  If price is expected to go up, people will buy more before the price increases. So, the quantity demand increases, graph shifts right.  If price is expected to go down, people will buy less and wait until the price goes down. So, the quantity demand decreases, graph shifts left. Perfectly Competitive Market  Lots of producers and buyers  Prices and quantity are determined by both buyers and sellers Extra Credit Question: A) Law of Demand Q) Book bag Market. If 10 book bag companies exit the market. What will happen to the price? A) Price will stay the same. Too little to effect whole market. Questions B B A A B B Supply Curve  Positive curve; opposite of demand curve; because of “Law of Supply” o When price of goods rises, quantity of goods increases  Market quantity of total quantity supplied o Ben and Jerrys ice-cream together = Market quantity o If jerry dies, ben’s ice-cream = market quantity  If quantity supplied increases but price stays the same, the graph shifts to the right  If quantity supplied decreases but price stays the same, the graph shifts to the left  Change in Input Price o Higher input prices = decrease in supply(shift left) o Ice-cream input examples  Cream, sugar, milk, workers, building, ice-cream machines o Lower input prices = increase in supply(shift right) Factor’s that Change Supply Curve  Change in input price o More expensive to make product, and you make less profit o Make less o Supply curve shifts left  Change in technology (increase) o Production goes up o Lowers cost o Make more o Curve shifts right  Ex) you have 100 markers o You can sell 100 today for $5 or 20 today for $5 and 80 tomorrow for $10  Makes supply curve shift left for TODAY o If price for today is $2  Supply curve will shift right for today  Change in number of production o If there are more producers selling a product, supply goes up o Curve shifts right o And opposite  If price changes, moves along supply curve; does not shift o Called change in quantity supplied C A A A D Market Equilibrium (Q*)  Supply and demand curve on same graph; makes perfect “X”  Both buyers & producers are happy Price Q d Members Qd, Non- Qs members $10 1,000 500 600 $15 800 400 600 $20 600 300 600 $25 400 200 600 $30 200 100 600 Q. If both members and non-members are allowed to buy tickets, what will be the equilibrium price? a. $25 Supply and Demand Curve  Equilibrium Point is where supply and demand curve intersect o Q =Q =d s * o P =P dP s  Change in Income o Shifts demand curve to the right  New Equilibrium Point (shifts to the right and up)  Change in price o Price of pizza goes from 5 to 10  Quantity demanded decreases and quantity supplied increases  To find points on graph, draw horizontal line across, where price is  So in the end of the day, there are leftover pizzas.  There is a SURPLUS of however many pizzas are leftover o Price of pizza goes from 5 to 2  Quantity demanded increases and quantity supplied decreases  So, people want more than there is; people end up with nothing  There is a SHORTAGE of however many pizzas they need Q) Roses are currently selling for $20/dozen. But Equilibrium price is $30. What would we expect? A) Increase in demand and decrease in supply. Ends with shortage of roses. Extra Credit: D=Q =d600-300P S=Q =s400+700P Find P & Q * Q = 1600-300P=1400+700P 200=1000P P=200/1000=100/500=50/250=25/125=5/25=1/5 P =1/5 Q =1600-300(1/5) 1600-60=1540=Q * Q) You produc* apple*pie. Price of apples increase what will happen to P and Q of apple pie? A) Cost to make pie goes up, so supply goes down. Graph shifts left. P will go up and Q goes down A B 1. When a cold snap hits FL, Price of orange juice goes up in supermarkets. a. So quantity supplied will decrease, and P* will go up 2. When the winter turns warm in NE, Price of hotel rooms in Caribbean go down. a. So quantity demanded will decrease, and P will* decrease 3. When a war breaks out in Middle East, Price of gas goes up and Price of used Cadillac goes down. * a. Quantity supplied of oil goes down, so P will go up b. Quantity demanded of gas guzzling Cadillac will go down, so quantity supplied will go up, and P will go down 4. Ketchup is a complement for hotdogs. Price of hotdog goes up. Ketchup, Tomato, Tomato Juice, Orange Juice market? a. Ketchup i. Quantity demanded will go down, so P* will go down b. Tomato i. Quantity demanded will go down, so P* goes down c. Tomato Juice i. Quantity supplied will go up because tomatoes are cheaper, and P* will go down d. Orange Juice i. If OJ is a substitute for TJ, and sense TJ P* is lower, quantity demanded for OJ will decrease. So, P* of OJ will fall. Extra Credit Question: In 2015, number of births is temporarily high. How does baby boom affect the price of babysitting service in 2020 and 2030? Hint: 5 yr old kids need babysitters, and 15 yr old kids don’t 2020 price would increase because quantity demanded increases 2030 price would decrease because quantity supplied increases Q. Cigarettes can cause lung cancer, but production of cig. Increases in New York A. Quantity demanded decreases but quantity supplied increases. Demand shifts left and supply shifts right. Causes P* to decrease Chapter 8 GNP: Ownership / Nationality GDP: Location Ex) McDonald’s (U.S. Company) in Korea makes profit U.S. Korea GDP No effect Increase GNP Increase No effect Ex) Jane pays John $30,000 to do her landscaping in 2015. In 2016, they get married ad John still does landscaping, but now is not getting paid. So, marriage can reduce GDP. Ex) John: apple farmer Jane: apple lover David: apple juice producer John sells $1,000 of apples to Jane to eat. GDP is $1,000 John sells David $20,000 of apple to make juice. If he sells $40,000 of juice, GDP is $40,000. Ex) steel company sells steel to a bike company for $150. Bike comp. produced bikes and sold them for $250. Together these 2 transactions contribute $250 to GDP. GDP => “Y” GDP = C + I + G + Nx = consumption + Investment + Government spending + Net Export Education – export Buying a house – investment If Export > Import then there is a trade surplus If Export < Import then there is a trade deficit Export-Import= Balance of Trade Ex) your friend bought brand new Honda Accord for $30,000. A year later, you bought it from your friend for $20,000. The contribution to GDP is $30,000. B C C D A A B C Q. Consumption: $5,000 Export: $200 GDP: $10,000 G: $1,000 Import: $600 I? a. 10,000=5,000+I+1,000+(200-600) I = $4,400 Q. If U.S. citizens buy TVs that are made in Korea by a Korean company, then Net Export will ______ and GDP will ______. a. Export will decrease because Nx = EX-IM and IM increased, but EX stays the same GDP will not change because Nx decreases but consumption increases Q. Honda is a Japanese-owned company that produces cars in American plants. In 2008, Honda produced $25,000,000 worth of cars and sold $12,000,000 in the US and $13,000,000 in Mexico. In addition, it sold $2,000,000 worth of cars from last year’s inventory in US. Contribution to US GDP in 2008? a. $25,000,000 Year Pwaffles Qwaffles Ppancakes Qpancakes 2008 $2 100 $1 100 2009 $2 120 $2 150 2010 $2 150 $3 200 2011 $4 180 $3 220 Nominal GDP?  NGDP= (P of w * Q of w) + (P of p * Q of p) and use current year’s price 2008 = $300 2009 = $540 2010 = $900 2011 = $1380 Real GDP?  Base year is given (2009)  Use the price for that year and don’t change it. 2008 = ($2 * 100) + ($2 * 100) = $400 2009 = ($2 * 120) + ($2 * 150) = $540 2010 = ($2 * 150) + ($2 * 200) = $700 2011 = ($2 * 180) + ($2 * 220) = $800 GDP Deflator? NominalGDP  GDP Def. = RealGDP ∗100 2008 = (300/400) * 100 = 75 2009 = (540/540) * 100 = 100 (ALWAYS 100 in bas year) 2010 = (900/700) * 100 = 129 2011 = (1380/800) * 100 = 173  In 2010 there was an increase in GDP by 29 % due to INFLATION Inflation Rate between year 1 and year 2? GDPdeflator for year 2−GDPdeflator for year1 = ( GDPdeflator for year1 )∗100 2008-2009 ((100-75)/(75))*100 = 33% 2009-2010 ((129-100)/(100))*100 = 29% 2010-2011 ((173-129)/(129))*100 = 34.1% Q. A country’s real GDP rose from 500 to 550 while its nominal GDP rose from 600 to 770. Inflation rate? A. Deflator (yr1) = (600/500)*100 = 120 Deflator (yr2) = (770/550)*100 = 140 Inflation Rate = ((140-120)/(120))*100 = 16.7% Q. If the price of all goods and services produced in to economy rose while the quantity stayed the same, which GDP would rise? A. Nominal Q. If prices of G & S produced in the economy increases while the quantity stayed the same… Nominal GDP will increase Real GDP will stay the same Chapter 9  Adult population (+16 yrs) o Employed – part-time or full-time & paid or not o Unemployed – looking for a job o Not in labor force – people who are not looking for a job  Mary worked part time for her mom’s business for a payment – employed  Larry was absent from work due to flu – employed  Matt is waiting to be called to a job from which he was laid off – unemployed  David was fired but hasn’t looked for a job in the last 2 months – not in labor force Labor Force  Employed + unemployed = labor force Labor force participation rate  (Labor force / adult population) * 100 = labor force participation rate Unemployment Rate  (number of unemployed / labor force) * 100 = unemployment rate Q. John lost his job and immediately begins looking for another. Other things the same. How will this effect unemployment rate and labor force participation rate? A. Unemployment rate will increase and labor force participation rate will not change Q. Adult pop: 234.9 million Labor force: 154 million Employed: 141.6 million Unemployed rate? LFPR? A. 154 = 141.6 + unemployed Unemployed = 12.4 million Unemployment rate = (12.4/154)*100= 8.05% LFPR = (154/234.9)*100 = 65.56% Q. Adult pop: 4 million Labor force participation rate: 75% Unemployed: 0.25 million Unemployment rate? A. LFPR = 75 = 100*(LF/4,000,000) .75 = LF/4 million Labor Force = 3,000,000 Unemployment Rate = (.25 million/3 million)*100 = 8.33% Q. Adult pop: 6 million Labor force participation rate: 70% Employed: 3.8 million Unemployment rate? A. LFPR = 70 = 100*(LF/6 million) .7 = LF/6 million LF = 4.2 million Unemployed = LF – 3.8 = 4.2-3.8 = 0.4 million Unemployment Rate = (0.4/4.2)*100 = 9.5% Q. Adult pop: 25 million Labor force participation rate: 60% Unemployment rate: 6% Employed? A. Unemployment Rate = (Unemployed/LF)*100 LFPR = 60 = 100*(LF/25 million) .6 = LF/25 million LF = 15 million Unemployment Rate = 6 =100*(unemployed/15 million) .06 = unemployed/15 million Unemployed = 0.9 million Employed = LF – unemployed = (15 million – 0.9 million) = 14.1 million 3 Types of Unemployment 1. Frictional – job matching, expectations for a job are too high a. Dell – you, sales go down, laid off b. Apple – popular, sales go up, need more production input or labor 2. Structural – you have outdated skills, Quantity demanded of workers is less than quantity supplied a. Minimum wage law b. Unions c. Efficiency wages – when a company pays workers more than other company’s 3. Cyclical – lose job because of recession in economy Government pays unemployed 50% of what they made for 26 weeks. This causes frictional employment to increase C B Natural (or normal) Rate of Unemployment  Consists of frictional and structural unemployment  Around 5% or 6% all the time Official Unemployment rate  All three types of unemployment  Official unemployment rate – natural rate of unemployment = cyclical unemployment Q. John is a stock broker, he had several job offers, but he turned them down because he thinks he can find a better job offer. A. Frictional Q. Curtis has looked for work for a long time and realized there are more people looking for a job than there are jobs available. A. Structural Minimum Wage Law  If minimum wage is increased there will be a greater supply of workers than demanded, companies cannot afford to pay as many workers anymore. So, there is a surplus of workers and people will lose their jobs.  If minimum wage is decreased workers will leave and cause a shortage. So, companies will continue to pay their current workers the same amount before the law change. So, a decrease does not affect unemployment Wage Qd Qs $7 9,000 14,000 $6 12,000 12,000 $5 15,000 10,000 Q. What is the equilibrium market wage and equilibrium quantity? A. $6; 12,000 Q. What happens if wage is raised to $7? A. there will be a surplus of 5,000 workers who are now unemployed Q. What happens if wage is set at $5? A. if company still pays them $6, then there will be 0 unemployed Q. Minimum wages create unemployment in markets where they create a shortage of labor or surplus of labor, and this type of unemployment is _________. A. Structural Unions Efficiency Wage  One company offers more money to employees than other companies so more people will want to work there. Creates surplus Unemployment Insurance US Germany $100,000 $100,000 50% 90% $50,000 from Gov $90,000 from Gov $60,000 job offer $60,000 job offer US citizen will take the job because it is $10,000 more than insurance, but German citizen will not take it. So, a higher unemployment insurance does not help unemployment rate. D A CPI (every 10 years)  In 2010 you buy stuff for $1,000  In 2011 you buy same stuff for $2,000  So there was inflation Q. Books are given a greater weight than magazines. Which will people buy more? Books Calculating CPI 1. Fix basket; what products do consumers buy 2. Find prices of each item at each point in time 3. Compute basket of goods 2010: ($1) 4 Hotdogs + ($2) 2 hamburgers = $8 2011: ($2) 4 hotdogs + ($3) 2 hamburgers = $14 2012: ($3) 4 hotdogs + ($4) 2 hamburgers = $20 CPI (Cost of basket year / cost of basket base year) * 100 Base year is 2010 2010: (COB 2010 / COB 2010) * 100 = (8/8)*100=100 2011: (COB 2011 / COB 2010) * 100 = (14/8)*100=175 2012: (COB 2012 / COB 2010) * 100 = (20/8)*100=250 Inflation – increased $150 Inflation rate B/w 2010 and 2011 ((GPI year 2 – CPI year 1) / CPI year 1) * 100 ((CPI 2011 – CPI 2010) / CPI 2010) * 100 = ((175-100)/100)*100 = 75% ((250-175) / 175) * 100 = 43% Q. when the CPI increases, will family have to spend more or less? More Amount in today’s dollars = Amount in year T dollars * (price level today / price level in year T) Q. Babe Ruth’s salary was $80,000 in 1931. CPI in 1931 was 15.2 and about 232 now. How much is it in today’s value? A. 80,000 * (232 / 15.2) = $1.2 million Q. Henry Ford paid his workers $5 a day in 1914. If CPI was 10, how much is the Ford paycheck worth now? CPI is 232. A. 5 * (232/10) = $116 Extra Credit Question 1 Answer is “McDonalds” Extra Credit Question 3 Q. Hank Aaron got paid $92,500 in 1967, and the CPI was 33.4. CPI today is 232. How much today? A. 92,500 * (232/33.4) = $642,000 Q. Ruben earned $60,000 in 2001; CPI = 177 Ruben earned $80,000 in 2006; CPI = 221.25 His 2006 salary in 2001 dollar? A. 80,000 * (2001/2006) = 80,000 * (177/221.25) = $64,000 Salary has gone up by $4,000 Q. In 1970, Jim earned $12,000; CPI = 40 In 1980, Jim earned $24,000; CPI = 70 In 1990, Jim earned $36,000; CPI = 130 1970 and 1980 income in 1990? A. 12,000 * (130/40) = $39,000 B. 24,000 * (130/70) = $44,000 Q. His income was lowest in ______? Highest in _____? A. 1990, 1980 Real Interest Rate = Nominal Interest Rate – Inflation Rate Q. CPI 2006 = 225 CPI 2007 = 234 Nominal Int. Rate = 6.5% Real Int. Rate? A. Inflation Rate = (234-225 / 225) * 100 = 4% 6.5-4 = 1.5% Q. 2008 2009 2010 Salary $60,000 $65,000 $72,000 CPI 200 212 233.2 Real Int. Rate 3% 3.6% 3.3% Nominal Int. Rate in 2009? A. 3.6 = X * ((212-200) / 200 ) * 100 = 6 3.6 = X – 6 Chapter 10  Previous real GDP * (1+g) = current real GDP o Ex) Real GDP 1950 = $2,182 billion o Real GDP 2012t= $15,471 billion o 2182 * (1+g) = 15471 o Solve for g o T is the growth rate (62 years)  Number of years to double GDP = (70 / Growth Rate) o Q. GDP doubles between 2005 and 2020. What is the average annual growth rate? o 15 = (70/growth rate) Q. growth rate rises from 3% to 4%, number of years required to double GDP will be decreased from ______ to ______. A. 70/3 = 23.3 70/4 = 17.5 Q. Real GDP grew from $20 billion to $40 billion between 2003 and 2013. What is the average annual growth rate? C Financial Markets  Company gives you stocks or bonds and you give company money Financial Intermediaries  When you make deposit into bank, you get interest from bank.  Other people borrow money from bank and pay interest Bond Market  $10,000 -> Principle  1 yr -> term  10% interest  You get $11,000 back – debt finance Factors that decide interest rate – term, credit risk, tax treatment Term  Short Term – safer / less benefit, low interest rate  Long Term – riskier / more benefit, high interest rate  Perpetuity – no term, never get principle $ back, but pays interest forever Credit Risk  Government – safer, low interest  Cooperation – riskier, high interest Tax treatment  Corporations - you pay income tax, highest interest rate  federal government – you pay income tax, second highest  Municipal bonds – tax free, lowest interest rate Extra Credit Q. Rank interest rate highest to lowest. A. corporations, Federal government, municipal Stock  When more people want stock from a company, quantity demanded increases, demand curve shifts to the right, so price of stock also goes up  When people need to get rid of stocks fast, quantity demanded goes down and quantity supplied increased. Supply curve goes right, demand goes left, so price drops. Mutual Funds – don’t put all eggs in one basket  You have $500, $200 to stocks, $200 to bonds, $100 to other Y (GDP) = C + I + G + NX (Ex-IM)  Closed economy – Net Export = 0 (Y=C+I+G)  Open economy – Net export is not 0  I = Y – C – G  I = S (savings) Y – C – G + T – I (Y – C – T) + (T – G) (Y – C – T) : >0, private savings (T – G) : If T < G – public savings If T > G – budget surplus If T = G Balanced Budget Q. GDP: $11 trillion C: $7 trillion T: $3 trillion Gov runs a surplus of $1 trillion. private savings and public savings and natural savings? A. Private = (11-7-3) = $1 trillion B. Public = (3-G) = 1 (given) so G is 2 and public savings is 1 C. Natural – 2 (add all together) Chapter 13 Aggregate Demand and Aggregate Supply  Supply and demand curve o X-axis – real GDP o Y-axis – CPI / GDP deflator  Normal supply curve is short run  Long run is vertical; quantity of product is not affected by price; Potential GDP on x-axis Pizza 2015 (base yr) 2016 $10 $20 100 pizzas 100 Nom GDP $1000 Nom GDP $2000 Real GDP $1000 Real GDP $1000 Long-Run  Production = f(K,L,R…)  All inputs are variable Short-Run  Some inputs are variable but not all GDP = C + I + G + (Ex-Im) = AD factors If C goes up, GDP goes up and everything else stays the same  AD curve shifts to the right Expansion  Production increases  Unemp. Decreases  Price increases  Income increases  Inflation Recession - opposite as above Wealth Effect 1. Higher income, you can buy more 2. Price decreases, you can buy more Interest Effect Rate  If interest rate goes up, investment falls  When investment falls, GDP decreases  AD curve shifts left International Trade Effect US Mexico 2015 $100 $100 2016 Inc 100% $200 Inc 50% $150 Export stays the same, import increases, net export falls, GDP decreases, AD shifts to the left If US raises price of exports Export goes down and Import increases; GDP decreases Q. German car exports were hurt in 2009 as a result of recession. How would this affect Germany’s AD? A. Export decrease, GDP Decreases, AD shifts left Q. US GDP growth rate is slower relative to other countries’ GDP growth A. US export goes up, GDP goes up, AD shifts right Q. Impact of Hurricane Katrina on consumes was to make them very pessimistic about their future income. How did this affect AD? A. consumption goes down, GDP dec, Ad goes left Supply Shock  Unexpected increase in natural resources prices o Ex) oil $ increases  Makes supply curve shift left o Causes inflation and recession = stagflation Q. Stagflation usually results from ______ A. supply shock Q. Supply shock causes _____ A. supply curve to shift left Q. Hurricane Katrina destroyed oil and natural gas refining capacity in Gulf of Mexico. Price went up. In short run, what happens to price and unemployment rate? A. Both increase Chapter 14 Money:  Medium of exchange  Gives value to a product  Storage value; does not have to be used right away Currency ($) – most liquid asset Arts (painting) – least liquid asset Cars/stocks – second Money Stock – quantity of money circulating the economy  Credit card – not money stock, not source of money Measure of money stock  M1 – demand deposits, travelers checks, checking account  M2 – includes everything from M1 plus savings account  When you take $ out of savings, it goes to cash. So M1 increases but M2 doesn’t change Q. John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account. What happened to M1 and M2? A. M1 – increased by $2,500 M2 – no change Q. Derek decides to forego a major appliance purchase and save money. He transfers $2,100 from his checking account to his savings account. M1 and M2? A. M1 – decreases by $2,100 M2 – no change Federal Reserve Bank  Bank’s bank – lends money to banks  Control money supply Open market operation (buying / selling bonds)  When the Fed buys the bond, money goes to the economy (public) Fractional Reserve Bank system – assets = liabilities 10% Assets Liabilities Reserve - 100 Deposit -1,000 Loans - 900 Money Multiplier = 1/R R – Min. reserve in fraction 50% min reserve 1/(1/2) = 2 Q. Minimum reserve requirement = 10% of $10,000 Deposit – 10,000 Reserve – 1,000 Loans – 9,000 Money multiplier? A. 1/(1/10) = 10 $1 -> $10 Q. $10 million excess reserve $400 million deposit $335 Million loans Min. Reserve Requirement? A. Min reserve + 10 million excess Deposit = 400 = loans + reserve = 335 + 65 Total reserve = min reserve + excess reserve 65 = Min reserve + 10 Min reserve = 55 Q. Bank has $20,000 deposits, $15,000 in loans. It has loaned out all it can. Give the reserve requirement and the min reserve requirement. A. deposit = 20,000 = Loans +reserve = 15,000 +5,000 5,000 / 20,000 * 100 Q. $500 reserve 10% min res $7 excess res Loans? A. 10% of deposit + 7 = 500 Min res = 493 Deposit = 493/(1/10) = 4,930 Loans = deposit – res = 4930 – 500 = 4430 Open Market Operation  Too much $ (inflation) o The Fed sells bonds to the people  Econ need $ o Fed buys bonds – money supply in economy goes up Interest of Reserve (Total)  If fed raises interest rate of reserve o Banks have more reserve and less loans  money supply decreases  If Fed lowers interest rate of reserve o Banks have less reserves and more loans  Money supply increases Fed wants to increase the money supply  Discount rate – interest rate that the fed charges the banks o If it is lowered, the banks are encouraged to borrow money from Fed and money supply goes up  Interest on Reserve o If it is lowered; Increase money supply D B C D D D Extra Credit) South Korea Pollution has a _____ externality Negative, the government will tax Extra Credit) Last pres who stood up against the fed/ JFK Extra Credit) code name in secret meeting for JP Morgan Hula Girl Bagpipes Decrease, decrease


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