EC 111 Final Exam Study Guide
EC 111 Final Exam Study Guide EC 111
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This 5 page Study Guide was uploaded by Conner Jones on Sunday May 1, 2016. The Study Guide belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 73 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 05/01/16
EC 111 Final Exam Study Guide Key formulas: Equation for GDP – Y=C+I+G+NX Net exports (NX) = Exports-imports Amount in today’s dollars = amt. in year T Dollars X (price level today/price level in year T) real interest rate = nominal interest rate – inflation rate private savings = income – tax – consumption (Y – T – C) (income not used for consumption or taxes) public savings = tax revenue – government spending (T – G) national savings = private savings + public savings (portion of national income not used for consumption or government purchases) investment (in closed economy) (Y – C – G) = national savings budget surplus – an excess of tax revenue over government spending o taxes – gov’t spending o public savings budget deficit – shortfall of tax revenue from government spending o gov’t spending – taxes o – (public savings) The Value of Money = 1/P o P=price level like CPI or GDP deflator Velocity of Money = (P x Y)/MS o the rate at which money changes hands Nominal GDP = P x Y net exports (NX) = value of exports – value of imports o trade deficit – excess of imports over exports o trade surplus – excess of exports over imports o balanced trade – exports = imports NCO = NX S = I + NCO Real exchange rate = (Nom ex rate) x (domestic cost of basket)/ (foreign cost of basket) The quantity equation: MS x V = P x Y Key terms: Circular flow diagram- visual model of the economy, shows how dollars flow through markets among households and firms o Households- own factors of production, sell them to firms for income/buy goods and services o Firms- buy or hire the factors of production, use them to produce goods and services/sell goods and services Factors of production- resources used to produce goods and services (inputs) o Labor o Land (natural resources) o Capital (machines used in production) o Entrepreneurship (idea) PPF- graph that shows combination of two goods that economy can produce with available technology Opportunity costs- what must be given up to produce another good Positive v Normative statements o Positive- describes the world as it is o Normative- attempts to describe the world how it should be (value judgment) Medium of exchange – an item buyers give to sellers when they want to purchase goods Unit of account – yardstick people use to post prices and record debts Store of value – an item people can use to transfer purchasing power from present to the future Commodity money – has uses besides being money (gold, diamonds) Fiat money – just money because government says so (US dollar) Money supply (money stock) – amount of money in the economy o Includes: currency (paper bills, coins) and demand deposit (checking account) Measure of money supply o M1 – currency, demand deposits, and other checkable deposits o M2 – everything in M1 plus savings deposits, money market funds, and small time deposit (certificate of deposit under $100,000 o M3 – M1 and M2 plus large time deposits (certificate of deposit over $100,000), repurchase agreements Banks and monetary policy o Central banks – an institution that oversees the banking system and regulates the money supply o Monetary policy – the setting of the money supply by policymakers in the central bank o Federal reserve – the central bank of the US (created in 1913 after bank failures in 1907, Panic of 1907) Made up of 7 members Made up of 12 fed reserve banks, closest one in Atlanta Fed is the bank of the banks Controls money supply by setting monetary policy o Federal Open Market Committee (FOMC) – 12 members, meet every 6 weeks in Washington DC, discuss economy and monetary policy Bank reserves o Fractional reserve banking system – banks keep a fraction of deposits as reserves and uses the rest to make loans o Reserve ratio – fraction of deposits banks must hold in reserves o T Account – shows a simplified accounting statement that shows a bank’s assets and liabilities Money multiplier – the amount of money the banking system generates with each dollar of reserves (1/R) Fed’s 3 tools of monetary control 1. Open market operations (OMO’s) – the purchase and sale of US government bonds by the fed a. To increase money supply fed buys government bonds b. To decrease money supply fed sells government bonds 2. Reserve requirement (RR) – amount of money banks are required to keep in reserves and not loan out a. To increase money supply fed decreases the reserve requirement b. To decrease money supply fed increases the reserve requirement 3. The discount rate (DR) – the interest rate on loans the fed makes to banks a. To increase money supply fed decreases discount rate (encourages banks to borrow more reserves from fed) b. To decrease money supply fed increases discount rate (discourages banks from borrowing more reserves from fed) Federal funds rate – interest rate that banks charge another bank bank run – when people get scared, suspect their bank is in trouble, and withdraw all of their funds leverage – use of borrowed money to supplement existing funds for purposes of investment leverage ratio – (reserves + loans + securities) / Capital capital requirement – government regulation specifying a minimum amount of bank capital quantity theory of money – prices rise when the government prints too much money (long run inflation) Money Supply (MS) – controlled by Fed, how much money is out there Money Demand (MD) – how much wealth people want to hold in liquid form, positively correlated with P nominal variables: measured in monetary units (ex: hourly wage, price) real variables: measured in physical units (ex: real GDP, what you can buy with wage) classical dichotomy – the theoretical separation of real and nominal variables monetary neutrality – the proposition that changes in the money supply that do not affect real variables Hyperinflation – occurs when inflation exceeds 50% a month; caused by government printing way too much money The inflation tax- when government prints money it causes inflation, the loss in value of currency is called inflation tax the fisher effect – In the long run, money is neutral so a change in money growth rate affects the inflation rate but not the real interest rate nominal interest rate = inflation rate + real interest rate inflation fallacy: most people think inflation erodes real incomes or purchasing power shoeleather costs – the resources wasted when inflation encourages people to reduce their money holdings menu costs – the costs of changing prices tax distortions – inflation makes nominal income grow faster than real income closed economy – does not interact with other economies around the world open economy – interacts freely with economies around the world trade deficit – excess of imports over exports trade surplus – excess of exports over imports balanced trade – exports = imports net capital outflow (NCO) – domestic residents’ purchases of foreign assets minus foreigners’ purchase of domestic goods (also called net foreign investment) o when NCO > 0 is capital outflow o when NCO < 0 is capital inflow foreign direct investment – domestic residents/firms set up a foreign subsidiary (ex: McDonalds opens outlet in Moscow, Disney builds theme park in Hong Kong) foreign portfolio investment – domestic residents purchase of foreign stocks or bonds (ex: American buying stock in Toyota) NCO = NX o In an open economy: S (savings) = I (domestic investment) + NCO (net exports) o When S > I (investment) then NCO < 0 (capital flows into country) o When S < I (investment) then NCO > 0 (capital flows out of country) Nominal exchange rate: the rate at which one country’s currency trades for another Real exchange rate: the rate at which goods and services of one country trade for goods and services of another country Purchasing power parity (PPP): a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries GDP (Gross domestic product)- the market value of all final goods and services produced within a country in a given period of time Nominal GDP- values output using current prices, not corrected for inflation Real GDP- values output using prices of a base year, corrected for inflation GDP deflator – nominal GDP/real GDP X 100 (GDP deflator for base year is ALWAYS 100) Inflation rate – current year GDP deflator - previous year GDP deflator/previous year GDP deflator X 100 (New-Old)/Old indexation – when a dollar amount is changed due to inflation and is automatically corrected by law or contract financial system- group of institutions that helps match saving of one person with investment of another financial markets- institutions through which savers can DIRECTLY provide funds to borrowers financial intermediaries- institutions through which savers can INDIRECTLY provide funds to borrowers mutual funds – institutions that sell shares to public and use proceeds to buy portfolios of stocks/bonds investment – the purchase of new capital Bureau of Labor Statistics (BLS) – measures unemployment in US labor force – the total number of workers including employed and unemployed in the market Natural rate of unemployment – normal rate of unemployment around which actual unemployment rate fluctuates Job search – the process of matching workers with their appropriate jobs Union – a worker association that bargains collectively with employers over wages, benefits, and working conditions Efficiency wages: firms voluntarily pay above equilibrium wages to boost worker productivity
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