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Econ 1 - Final Study Guide

by: Elena Stacy

Econ 1 - Final Study Guide Econ 1

Elena Stacy
GPA 3.0

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The final will only cover Macro, so these notes only cover macro concepts
Introduction to Economics
Monica Deza
Study Guide
GDP, trade, Policy
50 ?




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This 6 page Study Guide was uploaded by Elena Stacy on Saturday August 6, 2016. The Study Guide belongs to Econ 1 at University of California Berkeley taught by Monica Deza in Summer 2016. Since its upload, it has received 223 views. For similar materials see Introduction to Economics in Economcs at University of California Berkeley.


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Date Created: 08/06/16
Macro Study Guide Intro to Macro o Recall:  Macro = study of the economy as a whole; aggregate economy; national economy; GDP, etc.  Micro = behavior of individuals, individual firms, companies, etc. - Key focuses: o Unemployment level o Output o Price Levels Module 15: The measurement and Calculation of Inflation Consumer Price Index: - Consumer Price Index (CPI): measures the cost of purchasing a given market basket in a given year of a typical family  Market basket: hypothetical set of consumer purchases and goods o Base year is always set to 100  I.e. if your CPI = 132, that means that what you could buy with $100 in the base year now costs you $132 CPI = (Cost in a given year/cost in base year) x 100 - Changes in CPI are indicative of inflation o CPI can be used to calculate exact inflation rates  Inflation is simply the change in CPI (relative to a particular year) Inflation rate = [(C1I – C0I )/0PI ] x 100 Producer Price Index: - Producer Price Index (PPI): changes in prices of goods and services purchased by producers o Things that producers need to purchase, and their variations in price. Sometimes called wholesale price index for this reason Module 10: The Circular Flow and Gross Domestic Product Measurements of Aggregate Output - Gross Domestic Product (GDP): total value of all final goods and services produced in an economy in a given period o Does not include:  Intermediate goods: goods and services bought from one firm by another firm to be used as inputs into the production of final goods and services  Inputs  Used goods  Stocks & Bonds  Goods & services produced abroad - Calculating GDP: o Aggregate Spending method: the sum of total spendingon domestic goods final goods and services  GDP = AE (Aggregate Expenditures) = C + I + G + NX Module 11: Interpreting Real Gross Domestic Product - Aggregate output: the total quantity of final goods and services produced within an economy o Mathematical notation: Aggregate output = Y  In equilibrium, aggregate output is the same as aggregate expenditures (people want to buy the same amount that is produced) • AE = Y - Real GDP: the total value of al final goods and services produced in the economy during a given year, calculated using the prices of a selected base year - Nominal GDP: total value of all final goods and services produced in the economy during a given year calculated with the priced current in the year in which the output is produced Module 12: The meaning and Calculation of Unemployment - Employment: you are considered employed if you have a job (part time or full time both included) - Unemployment: people who are actively looking for a job, but aren’t employed  Does not include: • Retired people • Students • Discouraged workers (only counts those looking for jobs in the past four weeks) o Labor force = employed + unemployed o Unemployment rate = (unemployed/labor force) x 100 Module 16: Income and Expenditure The Multiplier: - Marginal Propensity to Consume (MPC): increase in consumer spending when disposable income rises by $1 MPC = change in consumer spending / change in disposable income - Marginal Propensity to Save (MPS): increase in household savings when disposable income rises by $1 MPS = 1 – MPC - Multiplier: the ratio of the total change in real GDP (caused by a change in aggregate spending) to the size of the change Multiplier = 1 / (1 – MPC) = 1 / MPS Module 17: Aggregate Demand – Introduction and Determinants - Aggregate demand curve: shows the relationship between price level and the quantity of aggregate output demanded by households, firms, government, and the rest ofthe world *Notice that the X & Y axis are different than in the demand curve we have seen before* o Downward sloping due to the wealth effect & interest rate effect  Wealth effect: an increase in aggregate price level reduces purchasing power  Interest rate effect: purchasing power is reduced on money holdings as aggregate price level increases Module 19: Equilibrium in the Aggregate Demand/Aggregate Supply Model - Short run macroeconomic equilibrium: quantity of aggregate output is equal to the quantity demanded o AE = Y - Demand shock: an event that shifts the aggregate demand curve o Shifts occur the same way that we’ve seen with the regular supply & demand curve - Supply shock: an event that shifts the aggregate supply curve - Stagflation: stagnation of output and inflation happening at the same time - Long run macroeconomic equilibrium: where short run equilibrium point intersects with the Long Run Aggregate Supply Curve (LRAS) - A recessionary gap occurs when aggregate output is below potential output o Corresponds to high unemployment (implies a recession)  The economy is self-correcting in the long run - An inflationary gap occurs when aggregate output is above potential output Module 31: Monetary Policy and the Interest Rate - Monetary Policy: central bank’s use of changes in the quantity of money or the interest rate to stabilize the economy o Expansionary  Lower interest rates  Increase money supply o Contractionary monetary policy  Increase interest rates  Decrease money supply - Changes to the supply of money (MS curve) will affect the equilibrium interest rate (r) Effects of Monetary Policy Graphically: Module 20: Economic Policy and the Aggregate Demand/Aggregate Supply Model - Fiscal policy: the use of taxes, government transfers, or government purchases of goods and services to stabilize the economy o Expansionary  Increase in govt purchases  Tax cuts  Increase in govt transfers o Contractionary  Reduction in govt purchases  Increase in taxes  Reduction in govt. transfers - Fiscal policy is SLOW Module 43 & 44: Exchange Rate Policy / Macroeconomic Policy - Exchange rate regime: rule governing policy toward the exchange rate o Fixed exchange rate: govt keeps the exchange rate against some other currency or a particular target o Floating exchange rate: when the govt lets the exchange rate go wherever the market takes it  US follows this policy - Devaluation: reduction in the value of currency that is set under a fixed exchange rate regime - Revaluation: increase in the value of a currency that is set under a fixed currency exchange


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