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Econ 200, Final Study Guide

by: Brianna Dowell

Econ 200, Final Study Guide ECON 200

Marketplace > James Madison University > Economcs > ECON 200 > Econ 200 Final Study Guide
Brianna Dowell
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This study guide covers concepts that may be on the final.
Amanda Deerfield
Study Guide
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This 13 page Study Guide was uploaded by Brianna Dowell on Saturday April 30, 2016. The Study Guide belongs to ECON 200 at James Madison University taught by Amanda Deerfield in Spring 2016. Since its upload, it has received 107 views. For similar materials see Macroeconomics in Economcs at James Madison University.


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Date Created: 04/30/16
ECON 200 Final Study Guide IMPORTANT ! This information will be worth more on the final! Price controls Government establishing prices to be charged for goods and services Price ceiling Legal max. price; prevents prices from rising; set below equilibrium price Rent control Landlords are unable to raise rent Price floor Legal min. price; prevents prices from falling too low; set above equilibrium price Surplus Quantity supplied is greater than quantity demanded (ex. ugly sweater goes on sale) Shortage Quantity supplied is less than quantity demanded (ex. sold out concert tickets) SECTION ONE VOCAB Definition Macroeconomics The branch of economics that studies the overall working of a national economy Scarcity The state of being in short supply; shortage. Forces us to make choices Incentives Something that encourages or penalizes us Goods Tangible items that are produced and ECON 200 have value Services Intangible items, but still have value Factors of Production Land, labor, capital, entrepreneurship Land Gifts of nature Labor Work, time, and effort put into producing goods Capital Tools, machines, buildings Human Capital Knowledge and skill that is obtained from education, training, and experience; has increased over time Entrepreneurship Organizes land, labor, and capital Self-interest Choices you think are best for you Social interest Choices best for society as a whole; 2 dimensions: efficiency and equity Opportunity cost The loss of potential gain from other alternatives when one alternative is chosen Production possibilities frontier (PPF) Boundary of what can and cannot be produced PPF Example  Points on frontier are good Opportunity cost equation = Give up Get Marginal cost Opportunity cost of producing one or more unit of a good Marginal benefit Maximum amount a consumer is willing to pay to consume that additional unit of a good or service Comparative advantage When a person can perform an activity at a lower opportunity cost than anyone else Absolute advantage When a person is more productive than others; ex. England during the Industrial Revolution Economic coordination To make coordination work, 4 complimentary social institutions have evolved: firms, markets, property rights, money ECON 200 Firms Economic unit that hires factors of production to produce and sell goods/services Market Arrangement that enables buyers and sellers to do business with one another Property rights Ownership and control over a resource or good. Includes our labor Money Generally accepted as a means of payment Social institutions Norms; 2 kinds: formal and informal Formal Written law (ex. fraternities and sororities) Informal No written law (ex. hallway traffic) Demand Unlimited desires 1. Want it 2. Can afford it 3. Made a definite plan to buy it Law of Demand The higher the price of a good, the smaller is the quantity demanded and vice versa Quantity demanded Amount consumers plan to buy What are the 2 reasons why change in Substitution effect and income effect price, changes quantity demanded? Substitution effect When relative price of a good rises, we seek an alternative Income effect When price of a good rises relative to income, people can’t afford it, so quantity demanded decreases ECON 200 Demand curve As price changes we move along the curve. BUT, if anything besides the price changes it will cause a change in demand and the curve will change. What are the six main factors that shift Prices of related goods, expected future the demand curve? prices, income, expected future income, population and preferences Substitute good A good that can be used n place of another good (ex. bud light and miller light) Complement good A good that is used in conjunction with another good (ex. tequila and limes) Future income Expected increase income means demand increase Population Large population  greater demand Preferences People that have the same income may have different demands Supply If a firm supplies goods or services, then the firm… 1. Has the resources and technology to produce it 2. Can profit from producing it, and 3. Has made a definite plan to produce and sell it Law of Supply The higher the price of a good, the greater is the quantity supplied and the lower the price the smaller the quantity ECON 200 Supply Curve As price changes, we move along the curve. If something else changes, the curve will move. Golden Rule Anything that makes it more expensive to produce means we produce less What are the six main factors that shift Prices of factors of production, prices of the supply curve? related goods produced, expected future prices, number of suppliers, technology, state of nature Substitute in production Another good that can be produced using same resources (ex. energy bars and trail mix) Complements in production 2 goods that must be produced together (ex. whole milk gets skimmed and now we have skim milk and heavy cream) Future prices If price of good is expected to rise, supply of the good decreases Number of suppliers Larger the number of suppliers, the greater is the supply of the good Technology Advances in technology create new goods and lower cost of producing existing goods State of nature Includes all natural forces that influence production (ex. weather) Market equilibrium Where quantity demanded equals quantity supplied Gross Domestic Product (GDP) The market value of all final goods and services produced within a country in a given year Market value Dollar value Real GDP Adjusts our GDP measurement for inflation Final goods and services Things that undergo no more processing before they’re sold Intermediate goods Good/service used as a component of a final good (ex. bike tires) ECON 200 Spending: Expenditure Method GDP = Consumer expenditure + Investment + Government + Net exports Do we count stocks and bonds in GDP? No, because they don’t produce anything Exclusions of GDP 1. Used goods and services 2. Household production 3. Underground production 4. Government transfer payments 5. interest on debt 6. Leisure time Inflation When overall price level is rising Consumer price index (CPI) Measures trends in the prices of certain goods Price Index Equation Market basket A fixed basket of goods (ex. housing, transportation, food); Stays the same! Index numbers Allows us to reference everything to a base period Reference base period Period we compare everything to; base period is always 100 Percentage Change Equation SECTION TWO VOCAB Definition Per Capita GDP or “standard of living” Economic indicator to compare countries. Measured by dividing GDP over population. Bureau of Labor Statistics (BLS) Conducts survey called “Current Population Survey,” which is a monthly household survey that collects info on employed and unemployed Working age population The total population within a set range of ages (i.e. 16-65) that is able to work Labor Force Consists of those employed and unemployed Employed Currently has a job Unemployed Does not have a job, but is searching for one People not in labor force Some homeless, retired, students, disability, stay at home mom/dad Labor Force Participation Rate ECON 200 Calculating unemployment rate Marginally Attached Worker Does not have a job and has not made effort to find a job in past month, but is willing to work Discouraged Worker Has not made an effort to find a job in past month, because they got discouraged in past attempts 3 Macroeconomic Goals 1. Economic growth 2. Stable prices (no volatile inflation) 3. Low unemployment 4 types of unemployment Fristional, structural, seasonal, cyclical Frictional unemployment Arises due to normal friction in the economy. Ex. students searching for a job Structural unemployment Comes from changes in the structure of the labor market; indicates tech innovation. Ex. a machine takes your job Seasonal unemployment Seasonal jobs. Ex. dressing as santa in Nov. and Dec. Cyclical unemployment Unemployment due to recession. Cyclical unemployment moves with the Business Cycle The Business Cycle Natural Rate of Unemployment = Frictional unemp. + Structural unemp. Zero unemployment Is bad! It causes inflation. Loanable Funds Market Money that is used to save and lend to borrowers for investing ECON 200 Types of financial intermediaries Banks, mutual funds, savings and loans, insurance companies, stocks and bonds Banks Takes deposits and make loans available Mutual Funds A company that sells stocks and bonds to other comapanies for you Insurance Companies Invest your premium in other compainies. Ex. Warren Buffett owns Geico and invests in companies, like Coca-Cola Treasury Bond Issued by U.S. government (an I.O.U.) Preferred Stockholders Stock that pays a fixed dividend Common Stock Receives profits based on ratio of shares held Retained earnings Reinvesting money into a corporation Thomas Malthus Economist during 1700s that believed a population incresase would lead to famine, but he didn’t acount for technological innovation. This is known as the Malthusian Trap. Nominal Interest Rate Amount a borrower pays a lender including interest Real Interest Rate Nominal interest – inflation Default risk Likelihood of being paid back after lending out money National Savings The total savings in an economy from households, business, and the government Government budget surplus  Increase supply of loanable funds. Real interest rate falls and quantity rises This increases investment Government budget deficit  Increases demand for funds. Less investment, b/c interest rate is higher Aggregate Demand Sum of the demand for all final goods and services. Comprised from the ECON 200 componenets of GDP Aggregate Demand Curve If price level changes, we move along the curve. Things that will shift curve = consumption, investments, government. 3 reasons why the aggregate demand 1. The wealth effect curve slopes downward 2. The interest rate effect 3. The open economy effect The Wealth Effect A rise in price level lowers buying power of money and decreases quantity of real GDP demanded The Interest Rate Effect A. If price level ↑, people spend more and save less. Interest rates ↑ and real GDP ↓ B. If price level ↓, people save more and spend less. Interest rates ↓ and real GDP ↑ The Open Economy Effect A. If price level ↑ in U.S., we will import ↑ and export ↓. This means real GDP will fall. B. If price level ↓ in U.S., imports ↓, exports ↑ and real GDP demanded rises. Aggregate Supply Relationship between quantity of goods and services suppliers are willing to pay at a given price level. 2 kinds of curves Short Run Aggregate Supply (SRAS) Too short of a time period for input prices to change ECON 200 SRAS Curve 1. As prices increase, so does quantity supplied  unemployment ↓ 2. As prices decrease, so does quantity supplied  unemployment ↑ Long Run Aggregate Supply (LRAS) Long enough time period for input prices to change; vertical line LRAS Curve Change in price level does not change amount of real GDP supplied. All together Anything that increases quantity/quality of a factor of production, increases both long run and short run shift in the same direction. SECTION THREE V OCAB Definition Labor productivity Quantity of real GDP produced by one hour of labor Consumption function Relationship between disposable income and consumption expenditure ECON 200 Disposable income = Income – taxes Autonomous consumption Minimum level of consumption that would still exist even if a consumer had zero income Dissaving Spending more than one has earned in a given period Saving Consumption is less than income Marginal Propensity to Consume (MPC) Change in consumption = Change in income Marginal Propensity to Save (MPS) = Change in savings Change in income Induced expenditures The 4 macroeconomic sectors (household, business, government, foreign) that are related to and affected by the level of income or production George Akerlof (1940 - ) American economist and University Professor at the McCourt School of Public Policy at Georgetown University. He won the 2001 Nobel Memorial Prize in Economic Sciences. George Akerlof Lecture Capitalism can sometimes encourage people to be immoral. For example, selling something that doesn’t work American Recovery and Reinvestment Increased public spending in order to Act of 2009 save jobs and stop further economic deterioration Multiplier A factor by which an increment of income exceeds the resulting increment of savings or investment. Barter Exchange of goods and services (a.k.a. trade) Money Any commodity or token generally accepted as a means of payment Token money Has value because people give it value Commodity money Has intrinsic value Medium of exchange An object (like money) that’s accepted in return for goods and services Store of value Holds its value Unit of account Allows us to compare prices Liquidity How quickly you can use your assets to buy something, like pocket money The Federal Reserve Central bank of the U.S. established in 1913 and known as the Banker’s Bank The Federal Reserve Roles Operates a nationwide payment system and conducts monetary policy A Bank’s Assets Assets are things that are owned including cash, loans, and bonds ECON 200 A Bank’s Liabilities Liabilities are things that are owed including demand deposits, savings, and time deposits A Bank’s Capital Differences between their assets and liabilities is their profit Required reserves Minimum amount that a bank must hold and not loan out Excess reserves Money that gets loaned out What is the Federal Reserve comprised Board of governors, district banks, and of? the federal open market committee Board of Governors Composed of 7 members that serve 14 year terms, are appointed by the president, and confirmed by the Senate District Banks Private component of the Federal Reserve composed of 12 districts Federal Open Market Committee Comprised of 7 governors and 5 presidents who vote on actions they should take regarding monetary policy Monetary policy Management of money supply and interest rate 3 tools of the Federal Reserve 1. Required reserve ratio a. High RR  low money supply b. Low RR  High money supply 2. Open Market Operations (OMOs) a. Injects money into money supply 3. Discount rate a. interest rate for lending to other banks Expansionary policy Means a lower interest rate ECON 200 Contractionary policy Means a higher interest rate Quantity of money demanded Amount of money that households choose to hold Fiscal policy Policy to affect our economy through the federal budget National debt The total amount of money that a country's government has borrowed, by various means Automatic stabilizer Features of fiscal policy that stabilizes Real GDP without action by the government Imports Bring (goods or services) into a country from abroad for sale. Makes consumers happy and producers unhappy Exports Send (goods or services) to another country for sale. Makes consumers unhappy and producers happy


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