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OHIO / Economics / ECON 1040 / What 3 things does scarcity make a society decide?

What 3 things does scarcity make a society decide?

What 3 things does scarcity make a society decide?


School: Ohio University
Department: Economics
Course: Principles of Macroeconomics
Professor: Nicholas dadzie
Term: Fall 2016
Tags: Economics and Macroeconomics
Cost: 50
Name: Econ 1040: Final Exam Study Guide
Description: An extensive 15 page study guide from material covered throughout the semester. It is sectioned off by each exam so if there is one you struggled with you can focus on that exam.
Uploaded: 04/20/2017
15 Pages 63 Views 3 Unlocks

Econ 1040: Final Exam Study Guide

What 3 things does scarcity make a society decide?

Exam #1

Chapter 1

A. Economics: The study of how humans coordinate wants and desires, given the decision money making mechanism, social customs, and political realities in society. B. The Economic Decision Rule

a. Marginal Benefit > Marginal cost (MB > MC)

b. Marginal Cost: The additional cost over and above costs already incurred c. Marginal Benefit: Additional benefit above what has already incurred C. Invisible Hand

a. The ability to know if an economy is working efficiently and effectively or not b. Who is it produced for? How much is produced? What is being produced? D. Opportunity Cost

a. The benefits of the next best alternative to doing something (TANSTAAFL) E. Normative and Positive Economics

a. Normative: The idea of “What should be?”

How does the invisible hand keep the economy running effectively?

b. Positive: The study of “What is?”

c. Art of Economics: Using the knowledge of positive economics to achieve the goals determined in normative economics

F. Adam Smith

a. ** Wealth of Nations (1776) **

b. Inquired into the nature and causes of the wealth of nations

c. Painful elaboration of the obvious

G. Microeconomics vs. Macroeconomics

a. Micro: The start of economics, the theory of price based on individual decisions, individual business decisions

b. Macro: The economy as a whole (Inflation, unemployment, growth, government, all the businesses together)

Chapter 2

H. Comparative Advantage

a. Lowest opportunity cost

What are positive and normative economics?

I. Absolute Advantage

a. Most efficient choice in production (Between a set of items)

J. PPC and PPF(Production possibilities curve and frontier) Don't forget about the age old question of How long after surgery can you get an infection?

a. Creates trade offs

i. Rates of change

b. Economic shifts out word shows growth in both of the goods

c. Bowed out shows increasing marginal opportunity costs

d. Efficiency and inefficiency

e. Attainability and unattainability

f. Growth and technology

g. We assume that more is better rather than having a scarcity of sources K. Rate of Change

a. Comes from the stem of the idea of diminishing marginal returns

i. Increasing marginal opportunity costs

b. Trade offs between two items (Ex: Soda and Peanut Butter)

L. Ceteris Paribus: All else Equal

M. Great Enrichment

a. Increase in the real per capita income around 1800

b. Increase from $3 a day to $130 a day

N. Economists

a. Adam Smith: Created the idea of the invisible hand

b. David Ricardo: The principle of comparative advantage

c. Thomas Malthus: The Malthusian Trap (Slight increase in per capita income around 8000 BCE)

d. Deirdre McCloskey: Human Economics

O. Laissez Faire Policy We also discuss several other topics like What current trends does research find true about marriage in the u.s.?

a. A “hands off” or relaxed concept on the economy

Chapter 3

P. Circular Flow Diagram

a. The flow of buying and selling products, goods and services between households and businesses

b. Government regulates the trade between the two

Q. Resource Market vs Product Market

a. Product: Businesses Sell goods and services and households buy

b. Resource: Households sell (Land and Capital) when Businesses buy

R. Goods

a. Public goods: Something that is available to everyone

b. Private goods: Something that someone has which prevents another person from having/using it If you want to learn more check out Explain why humans started to write?

Exam #2

Chapter 24

A. Business Cycle: Economic growth/expansion and contraction within an economy B. Classical Economics

a. Long Run → Growth → Supply Side → Classical Economics

C. Keynesian Economics

a. Short Run → Business Cycles → Demand Side → Keynesian Economics D. Jean Baptiste Say

a. Say’s Law: The motivator for the “Laissez Faire” policy

b. “The value of what you consume is equal to the value that you produce” c. General Gluts can occur

E. John Maynard Keynes

a. 1936: Implemented the general theory of employment, interest, and money b. Developed the difference between Macro and Micro economics

F. Monetary and Fiscal Policy

a. Monetary: Reduced interest rates

b. Fiscal: Government investment in infrastructure

i. Cumulative downward cycle

1. People reduce aggregate demand → People decrease production → People get laid off → (Repeat)

G. Depression and Recession

a. Recession: Decline in real output that persists for more than two consecutive quarters

b. Peak/Zenith: Top point in an upturn/expansion in economy

c. Trough/Nadir: Lowest point during a contraction/downturn

d. Contraction/Downturn: A decline in real output in an economy

i. This can lead to a recession

e. Expansion/Upturn: An increase in real output in an economy If you want to learn more check out What does "majority rule" mean?

f. The Great Recession

i. Lasted 18 Months

ii. December 2007 → June 2009

g. The Great Depression

i. Lasted 43 Months

ii. August 1929 → March 1933

H. Unemployment

a. Unemployment Rate: The percent of people willing(looking) and able to work, but cannot find a job

i. The current unemployment rate is 4.8% as of January 2017

ii. Total # of people Unemployed/Total Civilian Labor Force=

Unemployment Rate

iii. United States BLS standard for an unemployment rate is U3

b. Total Population

i. Civilian Non institutional population

1. Civilian Labor Force vs Not in Labor Force

a. Employed vs Unemployed

c. Unemployment affects(If these people were included)

i. Unemployment rate Increases

1. Discouraged workers

2. Underemployed

ii. Unemployment Rate decreases

1. Drug Dealers

2. Armed Forces

3. Home Makers

Chapter 25

I. Gross Domestic Product (GDP)

a. Total market value of all the final goods and services produced in an economy in one year If you want to learn more check out How energy is stored in chemical bonds?

b. GDP= C + I + G + NX (NX(Net Exports)= Exports - Imports)

J. Net Domestic Product (NDP)

a. NDP= GDP - Depreciation

b. Depreciation= Gross invested - Net Investment

K. Gross National Product (GNP)

a. What people are making in a country when they are not citizens If you want to learn more check out International bond refers to what?

b. GNP= GDP + Net Foreign Factor Income

c. Net Foreign Factor Income= income from citizens - Income from domestic non citizens

L. Aggregate income

a. Components

i. Employee Compensation

ii. Rents

iii. Interests

iv. Profits

M. Intermediate Goods

a. Goods that are purchased to make a final product

b. They are often sold between industries themselves

N. Flow vs. Stock

a. Stock: It is measured at one specific time and represents a quantity at that point in time

b. Flow: It is a variable measured over a period of time that represents a per unit of time measure

O. Top World GDP’s

1. USA → 18 trillion

2. China → 11.4 trillion

3. Japan → 4 trillion

4. Germany → 3 trillion

5. UK → 3 trillion

P. Inflation

a. A continual rise in the overall price level

b. Price Index: A measure of composite price

i. GDP Deflator: A price index that includes all goods and services in an economy

Q. GDP Calculations

a. Real GDP = (Nominal GDP/GDP deflator) x 100

i. The amount of goods and services measured at current prices

ii. Nominal GDP: Total amount of goods and services produced, adjusted for price level changes

b. GDP Deflator = (Nominal GDP/Real GDP)

c. Inflation = (Change in the Deflator/Initial Deflator) x 100

d. Real GDP measures change in productivity vs change in price

e. Index = (Price(Year that you are calculating)/Price(First year)) x 100

Chapter 10

R. Trade

a. Tariffs

i. They affect prices of imported goods

ii. They create government revenue for the country imposing the tariff

iii. Exports are not directly related to income

b. Quota

i. They create a limit on imports

ii. They cause and effect on quantity

c. Embargo and Sanction

i. When countries eliminate trade with another country

ii. This can be for political purposes

d. Regulatory Trade Restriction

i. This prevents goods that are low quality or that are not up to standard from being imported in the country

S. Free Trade organizations

a. NAFTA (North American Free Trade Agreement)

b. EU (European Union)

c. ASEAN (Among Southeastern Asian Countries/Nations)

T. Trade effects on growth vs output

a. Tariffs

i. Increase prices

ii. Decreases the quantity of the good

iii. Creates Taxes

iv. Taxes with tariffs help the domestic economy

b. Quota

i. Quantity control rather than a tax

U. Logical Fallacy and buying local

a. This is the idea that if you do not trade then people in the country will not trade with one another and people will do things themselves, thus damaging the economy

Exam #3

Chapter 26

A. Potential output vs Equilibrium output

a. Potential: The highest amount of output an economy can sustainably produce using existing production processes and resources

b. Equilibrium: The level of output toward which the economy gravitates in the short-run because of cycles/spirals in productions (Increasing or declining) B. Monetary and Fiscal Policy

a. Monetary: Money Supply and Interests → FED

b. Fiscal: Taxation and Spending

C. Fixed Price Levels → Short Run Assumption

a. (Aggregate does not equal the single market)

b. Social forces on wage/price change

c. Suppose they could change prices/wages

d. If everyone did it, relative prices/wages would not change

e. ** The effect would be deflation

D. Long Run → No Fixed Prices

E. Paradox of Thrift

a. In a recession people tend to decrease expenditures and increase spending b. ** Keynesian Analysis: When the Paradox of thrift holds, increased savings will set in motion a cycle of declining expenditures and production

F. Fallacy of Composition

a. “Buy local buy USA” (By locally owned products rather than foreign ones G. Aggregate Supply/Aggregate Demand Model

a. 3 Curves

i. SAS - Short Run Aggregate Supply

ii. AD - Aggregate demand (Expenditures)

iii. LAS - Long run aggregate Supply

iv. Vertical Axis: Price level of all goods

v. Horizontal Axis: Aggregate output (GDP)

b. Price is relative or Numeraire

c. 3 Plus Effects

i. Interstate effects

ii. International effect

iii. Money Wealth effect → Also called the real balance effect

1. And the Plus Multiplier

d. Shifts in AD (5 Factors)

i. Foreign income

ii. Exchange Rates

iii. Distribution of Income

iv. Expectations

v. Monetary and Fiscal Policy

vi. And the plus multiplier

Chapter 27

H. Adam Smith vs. Thomas Malthus

a. Smith: Through specialization and trade, market economies raise society’s standard of living

b. Malthus: His predictions became wrong because he failed to take technology into account.

i. Wrong about productivity: Output per unit of input

I. Potential output/Income vs. Equilibrium/expected output

a. Potential: Is in the Long Run

b. Equilibrium: Growth increases in the amount of goods and services an economy can produce when both labor and capital are fully employed

i. Growth matters a lot in the long run

J. Say’s Law: Supply creates its own demand (Idea)

K. Economic Growth

a. Economic Growth Per Capita: Everyone on average has more

i. Costs of growth: Pollution, resource exhaustion, loss of habitat

ii. Benefits: Increased consumption, decreased unemployment

b. Growth Rates: 1.9% in the US

i. Previously experienced growth rates around 3.5% before the Great


L. Rule of 72

a. # of years to double = 72/Growth Rate

M. Distribution: “Growth grows the pie”

a. Makes old goods more available/affordable

b. Creates new goods

c. Absolute vs comparative wealth (Personal items)

N. Redistribution: Zero Sum Game

a. Growth is good for everyone

O. Per Capita Growth = %output or income → % Change Population

P. 5 Sources of Growth

a. Compatible institutions

b. Investment and accumulated capital

c. Available resources

d. Technological development

Q. Classical Growth vs. New Growth

a. New: Technological advancement → More investment → Further technological advancement → Growth

i. Supported by Keynes

b. Classical: Early savings → Investment → Increased capital

i. Supported by Malthus and McCloskey

ii. Challenged by Keynes

R. Loanable Funds Market

a. Interest rates and demand loanable funds

i. As interest rates increase, demand cash decreases

ii. As interest rates increase then supply funds increase

iii. Consists in the long run

Exam #4

Chapter 28

A. Money

a. A liquid financial asset

i. Liquid: Easily exchangeable for other goods and services

b. How is it money?

i. Accepted in exchange for other goods

ii. Reference to value of other goods

iii. Store of wealth/value over time

B. Functions of Money

a. Medium of Exchange: Barter system → “Double coincidence of wants” b. Unit of Account

i. Example: Cigarettes during WWII

ii. *Review Top hat questions for great examples of what may be on the test* c. Store of wealth: Time component

C. Good Money (Requirements)

a. Limited Supply

b. Difficult to counterfeit

c. Durable

d. Small, Light, for value

e. *Belief system in value*

D. Federal Reserve Bank(FED)

a. U.S. Central Bank

b. Issue financial reserve notes(“Bills”)

i. Like a government bond(No interest paid)

E. Measures of Money

a. First: Currency in people's pockets

i. Checking account balances

b. Second: First plus savings and money market accounts, CDs, and retail money funds

F. Money Motives

a. Transaction: The need to hold money for spending

b. Precautionary: Holding money for unexpected expenses and impulse buying c. Speculative: Holding cash to avoid holding financial assets whose prices are falling

G. Reserves vs. Deposits

a. Reserves: The Currency a bank keeps on hand

b. Reserve Ratio: The ratio of reserves to deposits

c. Required Reserve Ratio: The amount of deposits a bank must hold i. Required reserve ratio is commonly 10%

d. Excess Reserves: The amount of money a bank holds above the required reserve ratio

e. Money Multiplier → 1/r(reserve ratio)

i. Exists at the end of the process: (Deposit x 1/r)

ii. New Money Created: (Deposit x 1/r) - D

1. Bonds

iii. Example: $100 x 1/0.1 = $1000

H. Role of Financial Sector

a. The market for creation and exchange of financial assets

i. An efficient way of saving and investing

b. Saving → Investing; Saving → Bank: Interest(Charge more for) → Investing c. Two Roles/Functions

i. Facilitates Trade → Money

ii. Transfer savings back to spending

I. Interest Rates

a. The prices that are charged or paid for the use of a financial asset

i. Mortgages

ii. Credit Cards

iii. Government bills

iv. Corporate Bonds

v. *Sorted based on risk, time, and type

J. Short term vs Long term (Interest Rates)

a. Short: Less than one year (Not well defined)

i. Savings deposits and checking accounts

ii. Money → money from money markets*

b. Long: Loanable funds market (Larger than 1 year) (Not as liquid)

i. Mortgages

ii. Government Bonds

1. 10 year treasury note

iii. Savings

1. Investment into the loanable funds market

2. Not invested in the money market

Chapter 29

K. Monetary Policy

a. Change banking system reserves to influence:

i. Money supply

ii. Credit availability

iii. Interest rates

b. Expansionary Monetary Policy

i. Increase Money Supply; Decrease Interest rates; Decrease unemployment (Increase output)

ii. Costs → Increased inflation; Increased trade deficits

c. Contractionary Monetary Policy

i. Decrease money supply; Increase interest rates; Decreased Inflation, decreased trade deficits

ii. Costs → Increased interest rates; Decreased economic growth/decreased money supply; (Increased unemployment); *Causing a recession

1. Recession 1980: A short double dip, but was caused from the

contractionary policy

d. Real Income, Nominal Income, and the price level

i. % Change real income = % change nominal - % change price level

L. FED Reserve System (CH29)

a. The banks for banks

b. 12 Regional banks plus the main branch

c. Est. 1913: Boston, New York, Philadelphia, Cleveland, Chicago, Atlanta, Minneapolis, St. Louis, Kansas City, Richmond, Dallas, San Francisco

d. Federal Open Market Committee (FOMC)

i. Primarily East coast cities

e. Board of governors - 7 people plus New York and 4 member banks

M. Functions, Mandates, and tools of the FED

a. Functions

i. Conduct monetary policy

ii. Supervise and regulate financial institutions

iii. Serve as a lender of last resort

iv. Provide banking to U.S. Government

v. Issue coin currency → IOU → Cash Money

vi. Provide financial solutions/services to commercial banks

b. Mandates

i. Maximize Employment

ii. Stabilize prices

iii. Moderate long-term interest rates

c. Tools

i. Open Market operations: The fed buying or selling T-Bills/Government bonds and securities

1. Increase Money supply: Buy Bonds (Decrease Interest rates)

2. Decrease Money supply: Sell Bonds

ii. Reserve Requirements: Minimum % that the banks must hold

1. Glass Steagull act(1933- 1999): Commercial vs Investment banks

a. Generally 10% reserve requirement for commercial banks

b. For investment banks its reserve requirement is 0%

(Sometime between 2% and 3%)

c. Prohibited commercial banks from investing in the

securities market

2. *Federal Fund Market → Federal funds rate(Banks charge each


iii. Discount Window Lending

1. Discount rate: Money the fed charges to commercial banks

Chapter 30

N. The Financial Crisis

a. In 2008, the financial system failed

i. Banks began to collapse

ii. The stock market crashed

iii. The U.S. economy went into a recession

O. Mortgage back securities

a. Bundles of mortgages sold on the securities market

b. There was a crisis with these when housing prices began to fall in 2006 P. Leverage

a. Buying an asset with borrowed money

b. Many banks used this to buy/sell mortgages

Q. Moral Hazard

a. When people’s actions do not represent the full cost of their actions b. Became a huge problem which lead to the financial crisis

c. An example/outcome of this is the “too big to fail” concept”

d. Banks knew they could get bailed out if their risky investments failed R. FDIC

a. A government institution that guarantees deposits up to $250,000 S. Dodd Frank Law

a. This was an attempt to minimize the too big to fail problem

b. Helped prevent banks from selling to risky individuals

Exam #5

Chapter 31

A. Deficit and Surplus

a. Deficit: Shortfall of revenue under payments

b. Surplus: Excess of revenue over payments

c. Both are considered flow concepts (Time component)

B. Debt

a. Accumulated deficits - Surpluses

b. Stock

c. Not a flow concept

C. Structural Deficit

a. Even if we are at our potential we’d have policy effects

i. Wall/Health Care

ii. Control (Government Control)

iii. S = A - C (Structural, actual, cyclical)

D. Cyclical Deficit

a. Below potential

b. Less control

c. A = S + C

d. Cyclical = Tax rate x (Potential - Actual)

e. Deficit = Surplus

E. Nominal vs Real

a. Inflation clears debt

b. Inflation leads to higher interest rates

c. Real deficit = Nominal deficit - (Inflation x Total Debt)

d. Debt has assets

i. Work force

ii. Natural resources

iii. Factories

iv. Houses

e. All goes back to MB > MC

f. Nominal: Deficit determined by looking at the difference between expenditures and receipts

g. Real: Nominal deficit adjusted for inflation

F. Government vs. Households

a. National debt(Gov.): $19,959,594,000,000 → 20 Trillion

b. Household Assets: 86 Trillion

c. GDP: 19 Trillion

d. Deficit = Out - In → 3.8 Trillion - 3.2 Trillion = 600 billion

Chapter 34

G. Thomas Carlyle - 1849

a. “Occasional discourse in the “negro” equation”

b. “Idle black men should be compelled to work”

c. Economics is the dismal science: The secret of the universe in supply and demand reducing the duty of human governors

H. Okun’s Rule of Thumb

a. A 1% rise in unemployment correlates with a 2% fall in output from trend* b. Change in output - Trend = -2 Change in unemployment

c. Change in unemployment = (Change in output - trend)/-2

I. Types of Unemployment

a. Cyclical: Temporary from business cycle events (recession)

b. Structural: Long term from fundamental changes (techonology, reservation wage) c. Frictional: People entering and exiting the job market

d. Natural (Target Rate): 4.5 - 5.0 (4.7)

i. Lowest sustainable unemployment rate

Chapter 34

J. Asset vs goods inflation

a. Inflation keeps expansionary policy in check

b. Asset inflation: House, gold, stock, bond

i. Rise in price > “real” value

c. Leads to an asset price bubble where you believe you are wealthy d. Goods Inflation: Rise in the price level

e. Inflation lead to an increase in money supply

i. Brought back by monetarism

f. Asset Price Inflation = Financial Bubble

K. Quantity Theory of Money

a. If real output is constant, the changes in price level are caused by changes in money supply

b. If money supply increases → price level increases

c. Assumptions

i. Velocity is constant

ii. Real output is independent of money supply

iii. Causation goes from money to prices

d. Inflation and unemployment are inversely Related

e. Downfalls

i. Velocity is not constant

ii. Government and banks respond to the changes in prices as well as the change in money supply

L. Equation of exchange

a. MV = PQ (Tautology)

i. Nominal output = Quantity of money (M) x Velocity of Money (V) ii. Nominal output = Price level (P) x Quantity of goods sold (Q) M. Costs and Benefits of inflation

a. Costs

i. Informational Costs

1. Money as a unit of account (Wanting no change over time)

2. Inflation the information in a price

ii. Institutional Costs

iii. Distributional Costs → Lenders to borrowers

1. Buyers to sellers (Goods inflation)

2. Cautious to risky investors (Asset inflation)

b. Benefits

i. Illusion of wealth (Self - Fulfilling prophecy) (change in relative raise) ii. Stimulate socio economic growth with expansionary policy

iii. Zero interest rate lower bound

c. Wage - Growth = Inflation

N. Phillips Curve (1958)

a. Relationship between unemployment and inflation

O. Stagflation (1970s)

a. High inflation and high unemployment

b. Observational short run

i. Expectation of inflation = and high unemployment c. Constant unemployment = long run

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