FINAL EXAM STUDY GUIDE
FINAL EXAM STUDY GUIDE ECON2020
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This 5 page Study Guide was uploaded by Morgan Genelin on Thursday April 28, 2016. The Study Guide belongs to ECON2020 at University of Colorado taught by Murat Iyugan in Winter 2016. Since its upload, it has received 58 views. For similar materials see Principles of Macroeconomics in Economcs at University of Colorado.
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Date Created: 04/28/16
Definitions: Opportunity Cost: the cost of what we must give up (usually the cost of the second best alternative) Marginal Cost: The cost of adding another good Ceteris Paribus: All things equal Production Possibilities Frontier: Show the value of trade by expressing opportunity cost as slope Absolute Advantage: one is better in absolute terms Comparative Advantage: One is better in relative terms Compliments: Increase in price A, decrease supply/demand B Substitutes: Increase in price A, increase supply/demand B Normal Good: Income increases so demand increases Inferior Good: Income increases so demand decreases Tariff: Imposing a tax on imported goods Quota: Setting a limit on the number of imports Depression: a deep and prolonged downturn Recession: A downturn when output and employment are falling (shorter than depression) Expansion: GDP increases Contraction: GDP decreases Trade Surplus: exports are greater than imports Stock Variable: Total amount inside something (wealth, debt) Flow Variable: amount measured OVER TIME (income, spending) Positive Analysis: Explains how it is (factual) Normative Analysis: Explains how it ought to be Nominal GDP: The sum of all final goods and services produced within an economy over a given period of time measured in current prices Real GDP: Sum of all final goods and services produced within an economy over a given period of time measured in constant prices Frictional Unemployment: Natural cycle between workers and jobs Structural Unemployment: Natural cycle with the business cycle: recessions and depressions and such Cyclical Unemployment: Short term Autonomous Consumption: what ‘a’ is. What the people consume that we cannot explain why. Facts: GDP grows on average 1%2% per year It is a phenomenon that people that are less well off (poor) die earlier Unemployment rate is an average 5% There are 12 federal reserve banks Side Notes: (I – S) > 0 Surplus (I – S) < 0 Deficit G>T Budget Deficit G<T Budget Surplus Government Budget Balance G T EX>IM trade surplus, net capital outflow IM>EX trade deficit, net capital inflow Variables Equations Y: Income/GDP Y = C + I + G + NX Finding GDP in an open economy C: Consumer Spending Y – T Disposable income G: Government Spending Y – T C Private Savings T: Tax T – G Public Savings I: Investment Y – C G National Savings S: Savings ( I – S) + NX = 0 National Income Account in Open Economy NX: Net Exports (ExportsImports) C = a +mpc (YT) Consumption Function K: Physical Capital H: Human Capital N: Natural resources L: Labor mpc: marginal propensity consumption Slope a: Intercept of what C is when YT=0 GDP Deflator NominalGDP RealGDP Consumer Price index Priceindex New−Priceindex old ∗100 FINDING CHANGES OVER TIME Price IndexOld Adult Population NEW−OLD OLD Labor Force Everyone18+¿ (nomatter if unemployeed∨employeed) Labor Force Participation Rate U+E=LF Unemployment Rate U+E Cost of inflation ∗100 Adult Population U Real inflation Rate Labor Force∗100 Fisher Equation P t+1 −P(t) ∗100=π P(t) Rule of 70 D (t+1) D (t) = (1+r) P(t+1) P t) Future Value Equation i=r+π Present value equation 70 =years¿double Initial rate of return %growthrate initialvalue1+rate )umberof years Marginal Propensity Consumption (mpc) Spending multiplier Futurevalue numberof years Increase of spending (change (+rate ) numerator to the increase) Aggregate Planned Expenditure With consumption function Return per year ∑ year factored in (1+rate) Addition of G adds to Ip Change∈Consumer Spending Change∈DisposableIncome CHAPTER 15 INFORMATION: Velocity of money→how fast themoneyrunsaround : P∗T = Product∗Price M MoneySupply V t¿ It is hard to calculate because we don’t observe T. So we can modify the equation and change T for Y. Rearranging the “quantity equation” =P∗Y ∆ M+ ∆V= ∆ P+ ∆Y (rearranged) SOME NOTES: o V is fairly constant in the short run o M is decided by the Federal government This means that it too can be considered a constant 3 channels of an increase in P to a decrease in Y Wealth Channel: money has less buying power than usual Interest rate channel: investment (P increase means inflation interest rates increase business investment decreases) Exchange channel: P increases exports decrease imports increase o The dollar against foreign currency depreciates SHIFTS OF THE DEMAND CURVE: Expectation, physical capital, money supply changes, policy changes, gov spending SHORT RUN SHIF SUPPLY CURVE: shocks to economy, foreign investment, productivity, commodity prices SOME PRICES IN THE SHORT RUN ARE FIXED/STICKY. o NEVER mess with the LRAS (long run aggregate supply) Government Policies in the economy: 1. Expansionary fiscal policy: move demand up a. Lower taxes b. Increase government spending 2. Contractionary fiscal policy: move demand down a. Raise taxes b. Cut spending 3. Expansionary monetary policy: move demand up a. Lower interest rates 4. Contractionary monetary policy: move demand down a. Raise interest rate Recessionary Gap: the y is less than the LRAS Expansionary Gap: the y is more than the LRAS MULTIPLIERS: FISCAL 1 mpc Gmultiplier: t multiplier: (ALWAYSwhentincreases,ydecreases) 1−mpc 1−mpc Definitions: Money Supply: checkable deposits and the currency in circulation Money Base: the sum of currency in circulation and bank reserves Functions of Money: a. Store of value dominated asset a. Most primitive way of transferring consumption b. Medium of exchanged a. Eliminated the double coincidence of wants c. Unit of account Types of money 1. Fiat money a. Worthless paper that is used as “tender” accepted by law b. So cash, coins, etc. 2. Commodity money a. Bartering exchange for goods b. Something people can attach value to i. Gold, cigarettes 3. Gold standard a. Precious metals/gems i. Gives value backing the worthless paper. Definitions of money Cash: paper money plus coins M1: cash and checking accounts o And travelers checks M2: cash, checking accounts, savings accounts o And travelers checks M3: we didn’t really go over this one Money multiplier: excessreserves: 1 money multiplier: money supply rr moneybase When the FED controls i and r: a. Federal funds rate: interest rate determined in the federal funds market b. Federal funds market: where if a bank can’t reach the set ‘rr’ then they can borrow from other banks for that one night. Those banks would charge an interest rate, and this interaction is what causes the federal funds market. c. Open market operations: buying and selling loans i. The government acts alone in this in order to either increase the money supply or decrease it. Money Market Equilibrium: a. Money demand curve: Md= (r ,p,y,t ,i) a. R is negatively related, p and y are positively related b. Shifts: aggregate price level change, change in income, change in technology, change in institutions b. Money supply curve: IT IS FIXED at what the fed says it is. c. LONG TERM INTEREST RATES DON’T MOVE WITH SHORT TERM ONES d. Assets and Liabilities must even out Money Neutrality: Classical dichotomy M * V = P * Y o M and P are nominal o V and Y are real Therefore only M can affect P and only V can affect Y (and vice versa)
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