Macro Econ Test Study Guide
Macro Econ Test Study Guide 36926
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This 5 page Study Guide was uploaded by Lael Wynne on Tuesday March 8, 2016. The Study Guide belongs to 36926 at University of Illinois at Chicago taught by Officer in Spring 2016. Since its upload, it has received 44 views. For similar materials see Principles of Macroeconomics in Business at University of Illinois at Chicago.
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I'm pretty sure these materials are like the Rosetta Stone of note taking. Thanks Lael!!!
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Date Created: 03/08/16
Econ Midterm Exam 2 Inflation- sustained percentage increase in price level/ index Doesn’t have to be constant Inflation (PGDP)↑= Value of dollar↓ In the short run: Inflation in the price of commodities can differ from inflation in price of resources In long run both are the same Anticipated Inflation: Inflation expected by decision makers o Example: businesses, households Decision makers take steps to protect themselves from the inflation Unanticipated Inflation: Inflation takes decision makers by surprise; not expected Don’t take steps to protect themselves from inflation Predictions: 1) Adaptive expectation- forecast based on actual outcomes in recent past; “seeing & believing” a. Quick/slow to adjust 2) Rational expectation- take all available info into account a. Anticipating change in government policy b. “Looking forward” c. Correct on average; quick to adjust 2 Reasons for the Law of Demand: 1) Substitutes a. As price of commodity ↑= switching products to substitutes b. Alternative goods 2) Price increases a. Spending more money on a commodity Factors that shift Demand curve: 1) Income ↑= D shifts up; Income ↓= D shifts down 2) Price of substitute 3) Expectations a. Most important b. Optimistic: curve shifts outward c. Pessimistic: curve shifts inward Quantity Supplied- Number of physical unites of the commodity that firms/sellers want to sell & are able to produce over a given time period (implicit) Supply is always effective supply Willingness to supply backed up by ability to produce Revenue for the unite of ration= P/ opportunity cost per unit of output P↑ if the ratio of (P/opp. Cost) ↑= Quantity Supply ↑ Supply shock- creates a shift in the S curve: 1) Unexpected 2) Temporary 3) S curve shifts outward= “Positive” S shock 4) S curve shifts inward= “Negative” S shock Aggregates (Decision Makers): Business “Business sector” Households “Household sectors” Governments “Government sector” Countries “Foreign sector” Market Aggregates: Goods & services market; Real GDP Resources market; labor inputs Loadable funds market; lending funds Foreign exchange; exchange Simple market: No government & no foreign sector; Close economy G=0 X=0 M=0 NX=0 Markets No foreign exchange market No loadable funds market Investments= 0 Savings (SV): Savings= (Y-T) –C T= Net taxes Resources- goods & services, hired/purchased by producers of GDP to produce GDP Net taxes (T) = (Taxes-Government transfer payments) Total government spending = (G +Gov. Transfer payments) 3 Types of budgets: 1) Balanced; G=T; G-T=0 2) Deficit; G>T; G-T if positive 3) Surplus; T>G; T-G if positive Typically: T>0 Gov. deficit; G>T Net savings of households > 0 I>0 Net I> 0 Businesses borrow from households to finance business investments Real interest rate= (Nominal- inflationary premium) I= R + inflationary premium= expected inflation I ↑= PBONDS↓; I↓= P BONDS Trade Surplus: If (X-M) is positive= goods & services surplus If (M-X) is positive= goods & services deficit Any shift in D or S of foreign exchange causes foreign exchange rate to change What makes D or S shift?: 1) Expansion a. GDP ↑ then Income ↑= ER ↑= Depreciation 2) Recession a. GDP ↓ then Income ↓= ER ↓= Appreciation 3) Inflation at home a. U.S. goods & services are more expensive compared to foreign goods and services b. Imports ↑ then Exports ↓ Aggregate demand (AD)- quantity of domestically produced goods & services that households, businesses, government, and foreigners are able and willing to purchase over a given time period AD schedule: Table AD curve: Graph Shows for A DGvaries with price (P), holding fixed all other determinants of AD Law of Demand: 1) Purchasing power of money ↑= wealth of consumers ↑= consumption ↑= AD↑ 2) Don’t need as much money for transactions 3) International substitution effect a. P↓= (P/P FOREIGN= Exports ↑ & Imports ↓= NX ↑= AD ↑ b. Symmetrical= P↑= AD ↓ Aggregate supply- totality of all goods & services that domestic firms/ businesses are willing to produce over a given time period Changes only with LAG: 1) Increase payment on laborers 2) Wages, especially with unions 3) Raw materials 4) Rental rate of facility space 5) Rental rate of big capital In the long run, people/firms anticipate price inflation correctly P =P EXPECTED ACTUAL Long run “Normal”- at full employment; natural rate of unemployment Production possibilities curve: C (physical units) C 0 0 I (Physical Units Points along the curved line represent full employment PPF- max combination of the 2 commodities Negatively sloped- produce more of one good (I), you have to produce more of (C) PPC Assumes: 1) Given amount of resources (ex: land, labor, physical capital) 2) Given level of technology 3) Full & efficient use of resources; actual full employment Ex: If there’s 100 million workers and the natural rate of employment is 5%, then full employment (FE)= 95 million workers at work Equilibrium in the Goods & Services Market: AD SRAS P Excess Supply (P↓) P1 PACTUAL P2 Excess Demand (P↑) 1 Y Y0 P= P1, means an excess of supply; unplanned inventory P= P2, means excess of demand In the time period of this analysis, equilibrium happens
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