ECO 2013 Final Exam Study Guide:
1) Civil Adult population: All civilians 16 years of age & older.
a. Excludes institutionalized in prisons/ mental hospitals
b. Excludes those in military
2) Unemployment Rate: number of unemployed as a percentage of total labor force.
a. Does not include discouraged workers
b. Unemployed / labor force
3) Inflation: The gradual rise in prices annually. Measures the changes in cost of living
a. 2 sources of inflation:
i. Demand pull
ii. Cost push
4) Why is inflation so unpopular?
a. People on fixed income are harmed by inflation b/c the purchasing price of their income goes down.
b. Creditors are harmed by inflation b/c both the principle loans & interest payments are usually fixed.
c. Reduced the ability to make long-term plans
d. Forces buyers & sellers to pay more attention to prices – less time for production – overall productivity if economy falls.
e. Decreases your purchasing power*
Tools of Fiscal policy
1) Government Spending
3) Transfer Payments
4) Expansionary fiscal policy:
a. Government spending increases
b. Tax decrease
c. Transfer payments increase
i. Aimed at increasing AD (shift to right) in order to return eco. to full employment
ii. Policy used to close a contractionary gap If you want to learn more check out Who is the British political acivist and leader of the British suffragette movement who helped women win the right to vote?
5) Contractionary fiscal policy:
a. Government spending decreases
b. Tax increases
c. Transfer payment decrease
i. Aimed at decreasing AD (shift to left) in order to return eco. to full employment.
ii. Policy used to close expansionary gap
d. GDP = G x [ 1 / 1 – MPC ] GDP = NT x [ -MPC / 1 – MPC ]
1) What is Money?
a. Is anything that is accepted in exchange for other goods/services or for the payment of debt. (checks, cash, travelers checks)
b. Our current financial system uses fiat money, which means it has no intrinsic value, but is recognized as legal tender.
2) Functions of Money; M1
a. Medium of Exchange: goods/ services are exchanged for money b. Unit of Account: Money is used to compare values of a wide variety of goods/ services. We also discuss several other topics like jmu eng 222
c. Store of Value: Money is saved & used for future purchases
3) Liquidity: An assets liquidity is determined by how fast, easily, & reliably it can be converted to cash.
4) Shifts in demand for Loanable Funds: Anything that changes the rate of return on potential investment will cause the demand for loanable funds to change: a. Investment tax incentives
b. Technological advances
d. Product demand
e. Business expectations
5) Shifts in Supply of Loanable Funds: A shift in the supply curve of loanable funds occurs when a factor increases or decreases the country’s willingness to save at any given interest rate: (consumers&government reps the supply) a. Economic outlook We also discuss several other topics like servsafe chapter 2 notes
b. Incentives to save
c. Income or asset prices
d. Government deficits
6) Role of Financial Institutions
a. Reducing information costs: Screen & evaluate the credit of potential borrowers
b. Reducing transaction costs: Provide standardized financial products c. Diversifying assets to reduce risk: Pool funds from many savers & lend to many borrowers
d. Main goal is to bring people that want to save*
7) Bond Prices and Interest rates: Most loanable funds are in the form of bonds. A bond is a form of debt used to fund a business. Bonds contracts include: (if interest rates go up, bonds decreases)
a. Coupon rate (interest rate of bond)
b. Maturity date
c. Face value of the bond (the value at maturity)
i. The actual price of a bond changes with market interest rates, which determine its yield, the return earned over the life of the bond.
8) Calculate Yield and Price of a Bond: Yield = Interest payment / Price of bond –OR—
Price of bond = Interest payment / Yield or interest rate If you want to learn more check out asynchronicity in growth
1) Reserve Ratio, Excess Reserves: Required reserve = initial deposit x R
a. Excess reserves = initial deposit- required reserve
b. Total deposits = initial deposit x 1/r (money multiplier)
2) Money Creation:
3) Money Multiplier: measures the maximum amount the money supply can increase when new deposits enter the system.
a. Multiplier = 1 / Reserve Requirement
b. The lower the reserve requirement, the higher the money multiplier 4) Money Leakages
a. A leakage is the departure of money from the lending cycle because of an action taken by a bank, individual, or a business.
b. Leakages cause the actual money multiplier to be lower than the potential money multiplier.
i. Causes of money leakages:
1. Banks choosing to hold excess reserves
2. Individuals & businesses holding money in cash
3. Cash held by foreign consumers, businesses, & Don't forget about the age old question of Bipedalism and early ancestors, what makes us human?
5) Leak adjusted multiplier: Leakage – adjusted multiplier – 1/(reserve require. + excess reserves + cash holdings) Don't forget about the age old question of mgmt 405 exam 2
6) Tools of Monetary Policy
a. Reserve requirement ratio: required ratio of deposit funds held in reserve
b. Discount rate: interest rate charged by the fed to banks
c. Open Market Operations: Fed buying and selling bonds on the open market (t-bills)
7) Federal Funds rate: The interest rate that financial institutions charge each other for overnight loans used as reserves.
a. This is closely watched interest rate that affects many other interest rates
b. The fed sets the target federal funds rate, then alters the supply of money to achieve its target.
1) Goals of monetary policy:
a. Economic growth w/ low unemployment
b. Stable prices w/ moderate long-term rates
2) Expansionary Monetary policy: Used in times of economic downturn to boost AD. The Fed purchases bonds in open market operations to push the interest rate lower, leading to more spending & investment.
3) Contractionary Monetary policy: Used when inflationary pressures build up in the economy. The Fed sells bonds in open market operations to push the interest rate higher, slowing down or reducing AD.
4) Classical monetary theory: Classical economists focus on long-run adjustments in economic activity:
a. They assume that wages, prices, & interest rates are flexible b. As a result, labor, product, & capital markets are expected to adjust to keep the economy at full employment
i. A product of the classical theory is the quantity theory of money.
5) Keynesian monetary theory: John Maynard Keynes thought that an expansionary monetary policy:
a. Could create more activity for a healthy economy in the short-run. b. Would have no effect even in the short run when an economy is in the midst of a deep recession or depression.
6) Monetarists theory: Milton Friedman’s approach
a. Monetarists believe monetary policy can be effective in the short run. b. They also believe that increases in the money supply will cause inflation in the long run.
7) Demand Shock and effectiveness of monetary policy:
a. Can come from reductions in consumer demand, investment, government spending, or net exports
8) Supply shocks and effectiveness of monetary policy: Can arise from changes in
a. Resource costs
b. Inflationary expectations
i. For negative supply shock, a decline in real output will be accompanied by an increase in the overall price level.
ii. Can end up with higher inflation.