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ECO 2019 Study Guide

by: farrellmiller

ECO 2019 Study Guide ECO 2013

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About this Document

Chapter 6-13. Very in depth
Joab Corey
Study Guide
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This 9 page Study Guide was uploaded by farrellmiller on Sunday April 24, 2016. The Study Guide belongs to ECO 2013 at Florida State University taught by Joab Corey in Spring 2016. Since its upload, it has received 17 views. For similar materials see Macroeconomics in Economcs at Florida State University.


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Date Created: 04/24/16
Final Exam Review Guide *This test is on Chapters 1­3 & 6­13* Chapter 7 GDP – Market value of all final goods and services produced within a country during a specific period There are two approaches for finding GPD: 1. Expenditure Approach – Y = C + I + G + N(x­m) a. Y = GDP b. C = Consumption c. I = Private Investment d. G = Government Consumption and Gross Investment e. N(x­m) = Net Exports – Net Imports 2. Resource Cost­Income Approach a. Y = Employee Compensation + Proprietors Income + Rent + Corporate Profits +  Interest Income + Indirect Business Taxes + Depreciation + Net Income of  Foreigners GDP – Produced within borders of a country GNP – Produced by citizens of the country (No matter where they live) PI= Cost∈CurrentYear Price Index – Cost∈BaseYear PI BaseYear Real Values –  RV=NominalValue x PICurrentYear Two Key Price Indexes: 1. Consumer Price Index 2. GDP Deflator GDP has limitations because it cannot count underground transactions and undocumented transactions. GDP   PerCapitaGDP= Population Per Capita GDP is a broad indicator of general living standards. Chapter 8 Expansion: GDP Rising, Unemployment Falling Peak: High Point of Economic Activity Contraction: GDP Falling, Unemployment Rising Trough: Low Point in Economic Activity Recession: Decline in Real GDP for Two or More Consecutive Quarters Depression: A Prolonged and Sever Recession Employed: Those are have a job. Unemployed: Those who have no job, but are looking. Civilian Labor Force = Employed + Unemployed ¿ Civilian LaborForce LaborForceParticipationRate= Population(16∧Older−Institutionalized) Unemployment Unemployment Rate= CivilianLaborForce ¿ Employed Employment¿PopulationRatio= Population(16∧Older−Institutionalized) There are 3 types of Unemployment: 1. Frictional Unemployment: Jobs available, but waiting for the right match 2. Structural Unemployment: Jobs available, but don’t have the skills for that job 3. Cyclical Unemployment: People want to work and have skills, but there are no jobs Full Employment Happens When Cyclical Unemployment = 0 S F Natural Rate of Unemployment ­ U* = U  + U S F  C Actual Rate of Unemployment – U = U  + U + U Natural Unemployment depends on: ­ Structure of the Labor Force (Young vs Old Workers) ­ Public Policy (Unemployment Benefits, Welfare, Regulations) (NewPI−Old PI)   Inflation Rate= Old PI Two Main Reasons for Inflation are: 1. Demand Rises Faster Than Supply 2. Rapid Increase in the Money Stock Chapter 9 There are 4 markets: 1. Goods/Services Market 2. Resource (Labor) Market 3. Loanable Funds Market 4. Foreign Exchange Market Real Interest Rate = Nominal – Inflation (r = i – π) The Interest Rate and Bond Prices are Inversely Related When Foreign Exchange Market is in Equilibrium:  Exports – Imports = Capital Inflow – Capital Outflow Aggregate Demand/Supply Market Chapter 10 Short­Run Long­Run LRAS Shifts ­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­SRAS Shifts with it AD Shifts PI & Y Move in Same Direction SRAS Shifts Opposite Direction Only PI Changes SRAS Shifts Y Moves in Same Direction SRAS Shifts Back PI Moves in Opposite Direction Nothing Changes Shifters of Aggregate Demand Curve Shifts Demand Curve Right Shifts Demand Curve Left Changes in Real Wealth Increase in Real Wealth Decrease in Real Wealth Changes in Real Interest Rate Real Interest Rate Decreases Real Interest Rate Increases Changes in Expectations of Optimism Pessimism Businesses and Households Changes in Expected Rate of Expect Inflation to Increase Expect Inflation to Decrease Inflation Foreign Income Increases Foreign Income Decreases Changes in Income Abroad Changes in Exchange Rate Dollar Depreciates Dollar Appreciates Shifters of Long­Run Aggregate Supply (LRAS) Curve  Shifts LRAS Curve Right Shifts LRAS Curve Left Change in Resource Base Resources Increase Resources Decrease Change in Level of Level of Technology Increases Level of Technology Decreases Technology Change in Institutions That Positive Laws Negative Laws Affect Productivity (Laws) Shifters of Short­Run Aggregate Supply (SRAS) Curve  Shifts SRAS Curve Right Shifts SRAS Curve Left Change in Resource Price Resource Prices Decrease Resource Prices Increase Changes in Expected Rate of Expects Inflation to Decrease Expects Inflation to Increase Inflation (Will Not Be on Test) Supply Shock Positive Negative Anticipated Changes in LRAS:  Causes both LRAS and SRAS curve to shift in same direction o Ex. The invention of a more efficient machine o Ex. Reducing economic freedom Unanticipated Changes in Aggregate Demand (AD):  Causes both the AD and the SRAS curve to shift in opposite directions o Ex. Real Interest Rate Declines Unanticipated Changes in SRAS:  Only shifts the SRAS curve, then shifts it back to its original position o Ex. Favorable Weather o Ex. Temporary Increase in Oil Prices Be able to actually shift the curves and know what happens to the equilibrium output and the equilibrium  price in both the short run and the long run. Know how the AD – AS model applies to business cycles (causes of recession and expansion), and how  the economy can correct itself: 1. Permanent income hypothesis ­ Peoples consumption depends on their long­run expected  permanent income rather than their current income.  People will: a. spend savings during recessions (spending decreases only slightly) b. save during expansions (spending increases only slightly) 2. Changes in real interest rates ­ stabilize aggregate demand and redirect economic fluctuations a. Recession: less investment → low interest rates → higher consumption and investment  (offsets recession) b. Expansion: more investment → high interest rates → lower consumption and investment  (offsets expansion) 3. Changes in resource prices ­ will help redirect economic fluctuations a. Recession: low demand → resource prices ↓ → SRAS to ↑ b. Expansion: high demand → resource prices ↑ → SRAS to ↓ Expansion: r↑ → C↓, I↓ → AD↓  W↑ → SRAS↓ Recession: r↓ → C↑, I↑ → AD↑ W↓ → SRAS↑ Chapter 11 Classical Keynesian 1. Prices are flexible 1. Prices are sticky 2. Economy can correct itself 2.   Economy will not correct itself 3. Say’s Law: Supply creates Demand       3.    Demand Creates Supply (Spending Matters)       4.    People respond to incentives       4.    People respond to animal spirits MPC = Additional Consumption / Additional Income Multiplier effect: M = 1 / (1­MPC) Keynesian view: Counter­cyclical policy: a policy that moves the economy in the opposite direction from the forces of the  business cycle. Recession: expansionary policy (budget deficit) Expansion: restrictive policy (budget surplus) Classical and Keynesian Agree On: There is a timing problem that exist with discretionary fiscal policy, which is why automatic stabilizers  exist. Automatic Stabilizers: Built in features that automatically promote a budget deficit during a recession and a budget surplus during an expansion (even without a change in policy). Chapter 12 Classical argument: Understand the process of crowding out: Crowding­out: a reduction in private spending due to higher interest rates generated by budget  deficits financed through government borrowing in the private loanable funds market. New Classical argument: People will save for the expected future tax increase required to offset the deficit (Ricardian equivalence). Paradox of thrift: When many people drastically increase their savings and reduce consumption, total  savings may decrease. More savings = less consumption = less $ going to local business = local business has less $ = less jobs. Most macroeconomists, both Keynesian and Classical believe: 1. Proper timing is crucial and hard to achieve. 2. Automatic stabilizers help redirect the economy. 3. Fiscal policy is less potent than originally thought. Know the relationship between taxes and growth: 1. High tax rates discourage work effort and productivity 2. High tax rates reduce capital formation 3. High tax rates encourage people to purchase less desired goods just because they are tax deductible Supply­side economics:  A lower marginal tax rate will give people the incentive to work more.  If the lower marginal rate is believed to be long term than it will shift both SRAS and LRAS.  Supply side economics is a long­run, growth oriented strategy, not a short­run stabilization tool. Chapter 13 Know the 3 functions of Money: 1. Medium of exchange 2. Store of value 3. Unit of account Know the difference between the M1 and M2 money supply: M1: Currency + Checking accounts + Travelers checks M2: M1 + Savings account + small denomination time deposits + money market mutual funds  Understand how fractional reserve banking works Money multiplier = 1 / reserve requirement ratio Federal Reserve Policy Expansionary Policy Restrictive Policy Open market operations Purchase government bonds Sell government bonds Reserve Requirements Lower reserve requirements Raise reserve requirements Extension of loans Extend more loans Extend less loans Interest paid on excess reserves Reduce the interest paid on  Increase the interest paid on  excess reserves excess reserves


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