Econ 201 ECON 201 Macro Economics
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This 8 page Study Guide was uploaded by Courtney Finnigan on Wednesday January 20, 2016. The Study Guide belongs to ECON 201 Macro Economics at University of Washington taught by Dennis O'Dea in Fall 2015. Since its upload, it has received 99 views. For similar materials see Introduction to Macroeconomics in Economcs at University of Washington.
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Date Created: 01/20/16
Study Guide for Midterm 1 Macroeconomics Chapter 12 ● Economics: Choice among limited options ○ Micro: Individual Choice ○ Macro: “Social Choices” aggregate choices (government) ● Principles of Individual Choice: ○ Scarce Resources ■ Land, labor, time, physical capital, human capital ● Everything has anopportunity cost ○ What would you be doing if you were not here right now? ○ Foregone wages and fun ● Costs mean everything is a tradeoff ○ More of this, less of that ● There are gains from trade ○ If I have what you want, we can BOTH be better off ○ If we specialize, we can produce more ● Markets move towards equilibrium ○ Markets settle down around stable outcomes ○ Resources should be used efficiently (not wasteful) ■ No wasted opportunities, nothing to do with fairness Principles of Interaction 1. There are no gains from trade 2. Markets move toward equilibrium 3. Resources should be used more efficiently 4. Competitive markets are (usually) efficient 5. When they aren’t, governments can help a. Roads, education, health care Principles of EconomyWide Interactions 1. One person’s spending is another’s income 2. Spending isn’t always equal to productive capacity a. Sometimes resources sit idle! 3. Government can affect spending a. Direct spending b. tax cuts, incentives Positive economic Branch of economic analysis that describes the way the economy ACTUALLY works Normative economics: Makes predictions about the way the economy SHOULD work Chapter 3 The supply and demand model is a model that illustrates competitive market one with many buyers and sellers, works. ● When supply and demand intersect, that is the equilibrium price ○ The supply and demand model is based on the principle that the price in a market moves to itequilibrium pric, omarketclearing pric, the price at which the quantity demanded is equal to the quantity supplied. ● The demand schedule shows the quantity demanded at each price and is represented graphically by a demand curve. ● A movement along the demand curve occurs when a price change leads to a change in the quantity demanded. ● Increasing or decreasing demand means shifts of the demand curve—a change in the quantity demanded at any given price. ● An increase in demand causes a rightward shift of the demand curve. A decrease in demand causes a leftward shift. ● Supply curves shift upward and demand curves slope downward Five reasons why the demand curve would shift: ○ A change in the prices of related goods or services,substitutes oromplements ○ A change in income: when income rises, the demandformal goods increases and the demand fnferior goods decreases ○ A change in tastes ○ A change in expectations ○ A change in the number of consumers The market demand curvefor a good or service is the horizontal ndividual i demand curves of all consumers in the market. ○ The supply schedulshows thuantity suppliat each price and is represented graphically upply curve. ○ A movement along the supply curoccurs when a price change leads to a change in the quantity supplied. ○ Increasing or decreasing supply hifts of the supply cua change in the quantity supplied at any given price. ○ An increase in supply causes a rightward shift of the supply curve. ○ A decrease in supply causes a leftward shift. Five reasons why the supply curve shifts: ○ A change in input prices ○ A change in the prices of related goods and services ○ A change in technology ○ A change in expectations ○ A change in the number of producers Shifts of the demand curve and the supply curve can happen simultaneously. However, the curve that shifts the greater distance has a greater effect on the changes in equilibrium price and quantity. (Skip chapters 45) Chapter 6: Macroeconomics is the study of the behavior of the economy as a (Unlike micro, which is the study of individual’s choices) Macroeconomics differs from microeconomics in the type of questions it tries to answer. Keynesian economics was first created during the Great Depression ● It advocates the use ofmonetary policy ○ Changing the quantity of the money in circulation to manipulate the state of the economy. Performed by central banks and Fiscal policy ● The use of presidential and congressional spending and taxing powers to manipulate the state of the economy (changes in govt. sending to affect overall spending) to fight economic slumps. Prior to the 1960’s and 70’s, the economy was thought to beselfregulating. ● This policy is now considered to be old and not many people still believe this is the way to go Keynesian vs. Neoclassical How much can government control vs. There is not much the govt. can do The Keynesian approach explains the short run (ups and downs of the economy) and Neoclassical is more longrun. Recessions: The most important effect of a recession is its effect on the ability of workers to hold and find jobs. Part time workers suffer the most from recession. Inflation and Deflation: The inflation rate is the annual percent change in the aggregate price level. The economy has price stability. Inflation: Who is harmed? People holding money. People’s purchasing power falls, and their cash now buys fewer goods. Who gains? People who owe others cash. This leads to uncertainty… Open Economy: One that engages in free trade Trade deficit: A country imports more than it exports Trade Surplus: A country exports more than they import VOCAB: Paradox of Thrift: When families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending Recessions (Contradictions): Are periods of economic downturn when output and employment falls (6 months long) Expansions (Recoveries): Periods of economic upturn when output and employment are rising Business Cycle: Shortrun alteration between recessions and expansion PriceStability: Change of overall level of prices... Changes slowly or not at all Chapter 7 Gross Domestic Product (GDP) ● GDP measures the total value of all final goods and services produced in the economy during a given year. It does not include the valueintermediate goods (goods used to produce some other good). An example of an intermediate good would be the rubber bought to produce a car. ● Intermediate goods differ fnvestment goods because investment goods do not get used up. Circular Flow Diagram Equation: Y= C + I + G + (XM) Y = Income received, C= Consumption Spending, I= Investment Spending, G=government spending, X= Imports, M= Imports Aggregate Spending: the sum of consumer spending, investment spending, govt. purchases of goods and services 1. Add up the VALUE ADDED of all producers 2. Add up all spending on domestically produced final goods and services 3. Add up all income paid to factors of production GDP: What’s in and what’s out? Included: ● Domestically produced final goods and services ● New construction of structures ● Changes to inventories Not included: ● Intermediate goods and services ● Inputs ● Used goods ● Financial assets like stocks and bonds ● Foreign produced goods and services Stock: Claim to further profits Nominal GDP: measured using TODAY’S PRICES (current) ● P x Q in any given year ● Makes comparing GDP across time hard ● Did output rise, or just prices? VOCAB: Government Transfers: Payments by the government to individuals for which no good or service is provided in return. Financial Markets: Banking, stock and bond markets which channel private savings and foreign lending into investment spending. Inventories: Stocks of goods and raw materials held to facilitate business operations Final goods and services: Goods and services sold to the end user Net Exports: Difference between the value of exports and the value of imports Price Index: Measures the cost of purchasing a given market basket in a given year where that cost is normalized so that it is equal to 100 in the selected. Chapter 8 The twin goals of reducing inflation and unemployment are the main concerns of macroeconomic policy. Employment is the number of people employenemployment is the number of people unemployed and actively looking for work. ● Unemployment rising = GDP falling Discouraged workers: Nonworking people who are capable of working but have given up looking for a job because of the state of the job market (subset of marginally attached) they no longer think looking for a job is worth it. :( Marginally attached workers:Would like to be employed, but have looked for a job in the recent past but are not currently looking for work. An example would be people who have chosen to go back to school Underemployment: Number of people who work part time because they cannot find fulltime jobs. The unemployment rate generally falls when the growth rate of real GDP is above average and generally increases when the growth rate of real GDP is below average. Frictional Unemployment: Unemployment due to the time workers spend in job search (there is less of this during a recession). Structural Unemployment: Unemployment that results when there are more people seeking in a labor market than there are jobs available at the current wage. A lowerthanexpected inflation rate is good for lenders and bad for borrowers. Many believe policies that depress the economy and produce high unemployment are necessary to reduce embedded inflation. Becauisinflatiois very costly, policy makers try to prevent inflation from becoming excessive in the first place.
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