EC201 Textbook Reading
EC201 Textbook Reading ECON201
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This 11 page Study Guide was uploaded by devinau Notetaker on Friday April 3, 2015. The Study Guide belongs to ECON201 at University of Oregon taught by Professor Gulcan in Fall. Since its upload, it has received 57 views. For similar materials see Intro Econ Analy Micro >2 in Economcs at University of Oregon.
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Date Created: 04/03/15
Introduction Oikonomia Household Management Scarcity and Choice Four Economic Policy Criteria Efficiency Equity Growth Stability Positive Statements Statements of how economy does work Descriptive scientific Facts can either be true of false Normative Statements Statements of how economy should work Opinion no objective way to determine whether they are quottruequot Chapter 6 Introduction to Macroeconomics and Gross Domestic Product Gross Domestic Product GDP Market value of all final goods and services producednot sales within a nation during a specific period of time typically 1 year measures nation s output and income and reflects market value OutputGDPncome No doublecounting does not include second hand or used value GDP ConsumptionnvestmentGovernment SpendingNet Exports Consumption C Nondurable short period Durable long period affected by cyclical fluctuations Investment Private spending on tools plant equipment used to produce future output factories newly built house Investment ProductionSales Government Spending G Spending by all levels of government on final goods and services government employee salary money spent on national defense land Does not include welfare payments and unemployment insurance Net Exports NX Exports minus imports of final goods and services NXE typically negative for the US 3 uses of GDP Estimate Living Standards Measure Economic Growth Measure Business Cycle GDP does not adjust for population size Per Capita GDP GDP per person measures living standards for an average person Real GDP Adjusted for changes in price inflation Economic Growth Percentage change in real per capita GDP Recessions Short term economic downturns typically last 618 months No preset way to determine the start of recession Two consecutive quarters with decreasing GDP marks beginning Great Recessions US recession from Dec 2007 to Jun 2009 19 months Business Cycles Shortrun fluctuations in economic activity Economic Expansion From bottom oftrough to next peak high income Economic Contraction Period extending from peak downward to trough lose jobs Service Output that provides benefits without the production of a tangible product Intermediate Goods Those that firms repackage or bundle with other goods for sale at a later stage keyboard and monitor for a computer Not counted in GDP Assets without production does not count eg purchase of stocks and bonds Final Goods Goods that are sold to final users Gross National Product GNP Output produced by workers and resources owned by residents of the nation Nominal GDP Measured in current dollars and not adjusted for inflation Price Level An index of average prices of goods and services throughout economy GDP Deflator Measure of price level that includes price of final goods and services included in GDP Use to get real GDP from nominal GDP Expenditure Approach Computes GDP by measure total amount spent on all final goods in a penod Growth of nominal GDP Growth of real GDP growth of price level change nominal GDP change in real GDP change in price level Growth Rate Negative means economy is contracting GDP Across Countries Compare GDP across countries is exchange rate for relevant year Countries with high priceswages GDP overstates Purchasing Power Parity PPP Adjustment to look at how much of currency is required to actually buy goods and services Big Mac index GDP is 1D measure of combined production from different kinds of goods and services GDP is not perfect measure but difficult to include additional factors and difficult to interpret other factors Quality of environment not accounted for 10 US underground economy 45 developing countries underground Higher average working hours equals less leisure time Poor and developing countries have larger portion of non market shares Chapter 7 Unemployment Unemployment Worker who is not currently employed is searching for a job without success zero unemployment is not attainable results in lost income and production and human capital Structural natural Frictional natural Cyclical Unemployment rate ur Percentage of the labor force that is unemployed Creative Destruction Introduction of new products and technologies leads to end of other industries and jobs Structural Unemployment Caused by changes in industrial makeup structural of economy lasts longer than frictional Requires retraining of workers Frictional Unemployment Caused by delays in matching available jobs and workers Temporary time lags in labor market Occurs even in the healthiest economy Unemployment Insurance Government program that reduces hardship ofjoblessness by guaranteeing unemployed workers receive a percentage of former income Serves to reduce severity of overall economic contraction Better benefits to employees mean longer search time for employers equals higher frictional unemployment Not in Working Age Population Prison in Military Under 16 Cyclical Unemployment Caused by recessions economic downturns unhealthy falls to zero during healthy economy Natural Unemployment Sum of structural and frictional unemployment Natural Rate of Unemployment ur Typical rate of unemployment occurs when economy is growing normally near 5 in US Full Employment Output Y Output level produced in economy when the unemployment rate is equal to its natural rate Potential Output Y Real GDP YltY Economy is producing at less than full employment output levels unemployment rate is above natural rate indicates cyclical unemployment ultu Happen when economy is expanding beyond longrun capabilities YgtYultu Resources are being employed at levels that are not sustainable in the long run Labor Force Includes people who are already employed or actively seeking work Discouraged Workers Those who are not working have looked for a job in the past 12 months and are willing to work but have not sought employment in the past 4 weeks Not in labor force Marginally Attached Not in labor force wants to work full time searched in past 12 months Underemployed Workers Those have parttime jobs but who would like to have fulltime jobs Officially employed workers Labor Force Participation Rate Portion of the population that is in labor force LFPRlaborforcepopulation100 Recession cause increasing number of unemployed and discouraged workers Chapter 8 Inflation Inflation Growth in the overall level of price in an economy Caused by increases in a nation s money supply relative to the quantity of real goods and services in the economy Hyperinflation Period of very rapid increases in overall prices 50 per month Disinflation Decrease in the rate of inflation 3 to 1 per year Deflation When overall prices fall negative inflation O5 per year Consumer Price Index CPI Measure of price level based on consumption patterns of consumer most common price level used to compute inflation Reflects overall rise in prices for consumers on average Price Index basket pricebasket price in base year100 Inflation Rate CPI P2 CPI P1 CPI P1 100 Long run average rate of inflation in US is about 4 Not all prices of consumer goods rise eg electronics CPI to Equate Dollar Values over Time Price in today s dollars price in earlier timeprice level todayprice level in earlier time CPI Accuracy CPI overstates true inflation for three reasons Substitution of different goods and services Changes in quality and the availability of new goods services and locations Chained CPI Measure of the CPI in which the typical consumer s basket of goods is updated monthly Three largest category in CPI basket Housing Transportation and Food amp Beverages Shoeleather Costs Resources that are wasted when people change their behavior to avoid holding money Money Illusion When people interpret nominal changes in wages or prices as real changes Nominal Wage Wage expressed in current dollars Menu Costs Costs of changing prices Uncertainty about Future Price Levels Longterm agreements may not be signed if lenders firms and workers are unsure about future price levels Wealth Redistribution Surprise inflation redistributes wealth between borrowers and lenders Price Confusion Inflation makes it difficult to read price signals and this confusion can lead to a misallocation of resources Tax Distortions Inflation makes capital gains appear larger and thus increase tax burdens Capital Gains taxes Taxes on the gains realized by selling an asset for more than its purchase price Inflation Occurs when money supply grows faster than the real quantities of goods and services in an economy Increase Supply of Money Government decide to print money to help pay large debts Government decide to print money by surprise to spur temporary boosts to economic growth and employment Chapter 9 Savings Interest Rates and the Market for Loanable Funds Loanable Funds Market Market where savers supply funds for loans to borrowers SavingsgtBorrowinggtInvestmentgtOutputgtGDP Expected Benefits Potential investors evaluate the expected low of future productive services that an investment project will yield Expected Costs Potential investors compare projects with possible alternative uses of funds Expected Rate of Return Annual rate of return firm expects to obtain through investment Present Value Current market value of receiving F dollars in t years PV1r t F PV benefit gt PV cost commit project Interest Rate Price of loanable funds Supply curve Interest rate in US typically less than 2 Quantity of savings rises when the interest rate rises law of supply 3 factors determining level of loanable funds supply curve or cause shifts Income and Wealth Higher incomegtMore savings Time Preferences People prefer to receive goods and services sooner than later Strong time preferenceLess savings Consumption Smoothing Save more midlife Consume by borrowing earlylife Dissaving laterlife Dissaving People live on their savings Withdraw funds from previously accumulated savings Babyboomers dissavingLess overall savings Saving Rate Personal saving as a portion of disposable income Difficult to measure because people purchase assets houses and stocks as an alternative to save Interest Rate for Borrower Cost of borrowing Demand curve Profitmaximizing firms borrow to fund an investment if and only if the expected return on the investment is greater than the interest rate on the loan Real Interest Rate Interest rate that is corrected for inflation Rate of return in terms of purchasing power Nominal Interest Rate Interest rate before it is corrected for inflation Stated interest rate Productivity of Capital Level of demand for loans depends on productivity of firm Causes shifts in demand Investor Confidence Measure of what firms expect for future economic activity Based on irrational or rational factors Causes shifts in demand Fisher Equation Real Interest Rate Nominal Interest Rate Inflation Rate Equilibrium Savings Investment Every dollar borrowed require a dollar saved Chapter 10 Financial Market and Securities Financial Intermediates Firms help channel funds from savers to borrowers eg Banks Banks Private firms accepting deposits and extend loans Indirect Finance Savers lend funds to financial intermediates then loan these funds to borrowers Direct Finance Borrowers go directly to lenders Security Tradable contract entitling its owner to certain rights in direct finance Bond Security representing a debt to be paid Three important pieces for contract Name of borrower Repayment Date Amount Due at Payment Maturity Date Due date of payment Face Value pm Par value The amount due at repayment Interest Rate R face valueinitial priceinitial pricepmpopo Dollar price and interest rate of a bond have an inverse relationship Default Risk Risk that borrower will not pay the face value ofthe bond on maturity date Higher default risk Lower bond price Higher interest rate Increase in default risk cause drop in price that firms can charge for bonds and cause increase in their interest rates Bond Ratings Rating of bond BB and lower Noninvestment grade Junk Bonds Stocks Ownership shares in a firm Secondary Market Markets in which securities are traded after their first sale Lower cost of borrowing Treasury Securities Government bonds used to pay for national debt Home Mortgages A contract stating house buyers willingness to repay loan over several years 30 years Securitization Creation of new security by combining otherwise separate loan agreements Lowers interest rate in a bundle Chapter 11 Economic Growth and the wealth of nations Economic Growth Annual growth rate of per capita real GDP change nominal GDP per capita change price level change population Rule of 70 Annual growth rate of a variable is x the size of that variable doubles every 70x yea rs Resources Factors of production Inputs used to produce goods and services Natural Resources Physical land or resources occur naturally Physical Capital Aid in production of future output Human Capital Resource represented by quantity knowledge and skills of workers Institution Significant practice relationship organization in a society Technology Knowledge that is available for use in production Technological Advancement Introduces new techniques or methods so firms can produce more valuable output per unit of input Private Property Rights Encompass the rights of individuals to own property to use it in production and to own the resulting output Corruption is one of the most common and dangerous impediment to economic growth Chapter 13 The Aggregate Demand Aggregate Supply Model Aggregate Demand Total demand for final goods and services in economy CIGNX Increases in price level lead to decreases in quantity of aggregate demand Relationship between quantity of aggregate demand and price level movement along curve Wealth Effect Change in quantity of aggregate demand that results from wealth changes due to pricelevel changes When you buy less Interest Rate Effect Occurs when change in price level leads to change in interest rate and in aggregate demand When you save less Increase price level leads to less savings International Trade Effect When change in price level leads to change in quantity of net exports demanded world Domestic products too expensive less foreigners buy it Aggregate Demand Shifts When people demand all goods and all price levels Real Wealth Nation overall wealth increases stock market and real estate market inclines Expected Income Expectation of income in future that leads to more spending Expected Prices Future prices if expect high price in future spend more now Foreign Income Wealth in foreign nations grow Value of the Dollar Exchange rates of dollar in world markets strong dollar reduces net export thus reduces aggregate demand Aggregate Supply Total supply of final goods and services in economy LongRun Aggregate Supply is vertical at Y unemployment natural rate Economy moves toward full employment outputY in long run Shifts in LRAS does not increase workers workers just get more productive Shifts right when new technology advancement Shifts left when decline in resources or adoption of inefficient institutions Short Run Aggregate Supply SR when firm face fixed cost Inflexible Input Prices Sticky eg labor cost is set in the beginning of the year Menu Costs Increasing output instead of changing its price Money Illusion When people interpret nominal values as real values Shifts in SRAS LRAS curve shifts causes SRAS to shift too Supply Stocks Surprise event that changes firm s production cost Expected Future Prices Higher expected future prices causes workers to negotiate higher wages which reduces firm profitability leading to a lower quantity of aggregate supply Corrections of Past Errors in Expectations When workers renegotiate wages Increases Positive Supply Shocks Expectations of Future Adjustments to Lower Price Expectations Decreases Negative Supply Shocks Expectations of Future Prices being high Adjustments to higher price expectations Equilibrium LRAS SRAS AD u u at Y and P Cause of Inflation Demandpull Inflation Inflation initiated by an increase in AD CostpushSupply side Inflation Inflation caused by increase in costs Stagflation When output falling same time prices are rising Counter it by increasing AD which increases P even more Chapter 15 Federal Budgets Federal Budget Annual Statement of federal gov s rev and expenditures Finance activities of fed gov Achieve mac objectives Fiscal Policy Use of fed budget to achieve mac objectives full em sustained economic growth price level stability Transfer Payments Payments made to groups or individuals when no good or service is received in return Government Outlays Part of government budget that includes both spending and transfer payments Mandatory Outlays Payments to social security and medicare by law Discretionary Spending Spending that can be altered when government is setting annualbudget Interest Payments Payments to owners of US Treasury bonds kinda mandatory Social Security Government administered retirement funding program Medicare Mandated federal program that funds health care for US citizens 65 or older 153 tax rate split half between employee and employer Robert Powell suggested Increasing retirement age to 70 Adjust benefits computation to CPI Means testing for Medicare and SS benefits wealthies pay their own retirement Proportional TaxFlat Tax Burden is the same proportion of income for all households Progressive Tax Burden of income increases as income increases Regressive Tax Burden of income falls as income increases Excise taxes tax on gas sales tax Progressive Income Tax System Higher incomes pay larger percentage of taxes Marginal Tax Rate Rate you pay on any additional income you earn Influence behavior Average Tax Rate Total amount of tax you pay divided by your taxable income Debt Total of all accumulated and unpaid deficits Measured in S at particular moment Sum of accumulated deficits minus surpluses over time Deficit Flow variable measure in S per year Public Debt Portion of debt not held by US gov Budget Deficit When government outlays exceed revenue Budget Surplus Revenue exceeds outlays Austerity Involves strict budget regulations aimed at debt reduction Chapter 16 Fiscal Policy Monetary Policy Use of money supply to influence economy Fiscal Policy Use of government spending and taxes to influence economy Expansionary Fiscal Policy Government increases spending or decreases taxes to stimulate economy toward expansion Increase aggregate demand Contractionary Fiscal Policy Government decreases spending or increases taxes to slow economic expansion Too much spending leads to inflation when unemployment rate smaller natural rate Countercyclical Fiscal Policy Seeks to counteract businesscycle fluctuations Review concept One person spends becomes income to others New concept Increases in income generally lead to increases in consumption Marginal Propensity to Consume MPC Given change in income that is consumed Change in consumptionchange in income change Cchange Y S Y C Yincomeoutput Cconsumption Marginal Propensity to Save MPS Given change in income that is saved change Schange Y MPC MP5 1 Spending Multiplier mquots Total impact on spending from initial change of a given amount 11MPC 1MPS MP5 is higher for higherincome households Government Spending M change Ychange G Tax Multiplier MPCMPS Indirect impact on spending Not as impactful to economy as government spending BalancedBudget Multiplier change Y change G change T Recognition Lag The delay in recognizing recession or expansion through GDP or unemployment rate Implementation Lag Delay in implementing Impact Lag Takes time for complete effects to kick in Automatic Stabilizers Government programs that automatically implement countercyclical fiscal policy in response to economic conditions Progressive income tax rates Individual tax bills fall when incomes fall Taxes on corporate profits lower total tax bills when profits are lower Unemployment compensation increases GS when UR increases Welfare programs Increase GS during downturns Crowding Out Private spending falls in response to increases in GS AD does not increase if consumers do not spend after GS New Classical Critique Increases in GS and decreases in T are largely offset by increases in savings people choose to save when they expect tax to raise in future SupplySide Fiscal Policy Use of GS to affect supply side of economy Supply fiscal policy initiatives Research and development tax credits Reduces taxes for firms spending resources to develop new technology Policies that focus on education Subsidies for education expenses Lower corporate profit tax rates Lower taxes increase incentives for corporations to undertake activities that generate more profit Lower marginal income tax rates Lower income tax rates motivate individuals to worker harder and produce more Income tax revenue tax rate income Laffer Curve Increase TR Increase TRa Income Lower TR Increase TR Declined Income Chapter 17 Money and the Federal Reserve Currency Paper bills and coins used to buy goods Medium of Exchange People trade money for for goods and services Barter involves the trade of a good without a commonly accepted medium exchange requires double coincidence of wants Commodity Money Use of an actual good in place of money Commoditybacked Money Money that can be exchanged for a commodity at a fixed rate Fiat Money Money with no value except as the medium of exchange Currency Debasement Decrease in value of money that occurs when its supply increases rapidly high inflation Unit of Account Measure in which prices are quoted Goods are measured and valued in the dollar scale Store of Value Means for holding wealth Decline since people can invest it and store it elsewhere with returns Liquidity Property of Money Money being as medium of exchange and store of value the different forms Checkable Deposits Deposits in bank accounts from which depositors may make withdrawals by writing checks M1 Transaction Money Money supply measure composed of currency and checkable deposit Stock measure measured at a point of time M2Broad Money M1 saving deposits small time deposits Money Market Mutual Funds Better measure of economy s medium exchange since both checking and savings are easily available now Credit card is loan Not money Money Supply M Currency Deposits Balance Sheet Accounting statement that summarizes firm s key financial information Fractional Reserve Banking Banks hold only a fraction of deposits on reserve Required Reserve Ratio rr rr 01 Required Reserves rr deposits Excess Reserves Any reserves above required level ER Total R Required R Moral Hazard A part that is protected from risk behaves differently from the way it would behave if it were fully exposed to risk 100 on 250000 Simple Money Multiplier no excess reserves all currency deposited maximum situation m m 1rr Fed s 3 responsibilities Monetary Policy Controls US money supply and is charged with regulating it to offset macroecon fluctuations Central Banking Serves as a bank for banks Bank Regulation Ensuring financial stability of banks Federal Funds Deposits that private banks hold on reserve at the Fed Federal Funds Rate Interest rate on loans between private banks Discount Loans Loans from Fed to private banks Discount Rate Interest rate on the discount loans made from the Fed to private banks Open Market Operations Involve the purchase or sale of bonds by a central bank Quantitative Easing Targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets Chapter 18 Monetary Policy Expansionary Monetary Policy Central bank acts to increase money supply to stimulate economy Give funds to market Short run YI uD PI Contractionary Monetary Policy Central bank takes action that reduces money supply in economy Pull funds out of market Short run YD uI PD Monetary Neutrality Money supply does not affect real economic variables Monetary Policy ineffective in long run Monetary Policy was expected Downturn was due to a supply shift Phillips Curve Short run inverse relationship between inflation and unemployment only works 19605 Higher Inflation Lower Unemployment Long Run Phillips Curve Vertical line Inflation is the only factor that increases as everything backs to original in long run Adaptive Expectations Theory People s expectations of future inflation are based on their most recent experience last year 5 expect 5 Stagflation Combination of high unemployment and high inflation Rational Expectations Theory People form expectations on basis of all available information People start to stop underpredict inflation rate Active Monetary Policy Strategic use of monetary policy to counteract macroecon expansions and contractions Passive Monetary Policy Central banks purposefully choose only to stabilize money supply and price levels through monetary policy
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