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ECON1020 Study Guide Midterm 2

by: Cory Sarrett

ECON1020 Study Guide Midterm 2 Econ1020

Marketplace > Tulane University > Economcs > Econ1020 > ECON1020 Study Guide Midterm 2
Cory Sarrett
GPA 3.82

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About this Document

These notes cover everything on the next midterm including equilibrium, government spending, household consumption, and money.
Toni Weiss
Study Guide
Economics, Macro, Macroeconomics, MPS, MPC, Household Consumption, Money, Government Expenditures
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This 9 page Study Guide was uploaded by Cory Sarrett on Saturday March 12, 2016. The Study Guide belongs to Econ1020 at Tulane University taught by Toni Weiss in Spring 2016. Since its upload, it has received 390 views. For similar materials see Macroeconomics in Economcs at Tulane University.


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Date Created: 03/12/16
ECON1020 with Toni Weiss Midterm #2 Study Guide What does MPC stand for? Marginal Propensity to Consume: for every dollar earned, how much gets consumed ∆▯ What is the formula for MPC? MPC= ∆▯▯ What does MPS stand for? Marginal Propensity to Save: for every dollar earned, how much gets saved What is the formula for MPS? ∆▯ MPS= ∆▯▯ MPC + MPS=? 1 What is the consumption function? C = a + MPC x Y d OR What does each part stand for? C = a + MPC x (Y-T) C- consumption a- autonomous consumption Yd- disposable income Y- income/Real GDP T- Net Taxes   What is autonomous consumption? The amount of money that would get consumed if there was no income being generated Graphically, what does each part of the a= y-intercept consumption function mean? MPC=slope Yd= x-axis C = y-axis What is the savings function? S = -a + MPS x Y d OR What does each part stand for? S = -a + MPS x (Y-T) S- savings a- autonomous consumption Yd- disposable income Y- income/Real GDP T- Net Taxes Which of the consumption and savings short run = consumption (not good in functions represents the short run? long long run when you need unexpected run? funds) long run = savings (not good in short run when economy needs stimulation) What determines how much a *disposable income is THE main household consumes in the short run? determinant of consumption Microeconomics Focus Individual expenses (time to find goods, financial literacy, etc.) Macroeconomic Focus Expectations in the economy (expected price changes, interest rates, etc.) How does wealth differ from income? Wealth = value of what you have (stock variable) Income = money (flow variable) What is the relationship between If disposable income increases, there is disposable income and the a movement to the right of my C consumption function? function. If disposable income decreases, there is a movement to the left along the C function. *causes a shift in the C function What is the relationship between increase: consumption decreases b/c interest rates and the consumption the amount we would have to pay goes function? up and high interest rates are incentive to save (the opportunity cost of consumption is high) decrease: consumption increases b/c we pay less (opportunity cost of consumption is low) *causes a shift in the C function What is the relationship between price increases: consumption decreases level and the consumption function? decreases: consumption increases *causes a shift in the C function What is real income? Every time something is produced, an equal amount of income is generated. Thus, Real Income = Real GDP OR Y=Real GDP C C = a + MPC x (Y-T)   MPC Y≣Real GDP 45º What will cause the consumption changes in the MPC function to pivot up or down? What will cause the economy to move change in GDP along the consumption function? What are the parts of Gross Private 1) Purchase of capital* Investment? 2) New Home Construction* 3) Changes in inventory levels** *can control, can plan on ** can’t control P What is the foPmula for Planned I = I - ∆’s in inventory levels Investment (I )? (b/c changes in inventory levels is all unplanned) It is a horizontal line (y=some value I ) P What is the formula for Aggregate APE = C + I Planned Expenditure (APE)? When are inventory levels rising? If I > I then inventory levels are rising P falling? If I < I then inventory levels are rising What about businesses does I tell us? I is what businesses are doing (actual) I ? I is what businesses want to do (planned) What determines I ? P -Interest rates (when they increase, I P decreases) -Previous GDP (not the current GDP though because by the time money is spent, after planning, GDP is irrelevant P in today’s dollar What will the graph APE = C + I look like? APE APE = a + MPC x (Y-T)+ I   C = a + MPC x (Y-T)   MPC Y≣Real GDP 45º Does what we plan on happening NOPE! We can plan on we want but it always happen? doesn’t actually happen? What is the difference between APE change in inventory and GDP? What is the definition of equilibrium? economy at rest where no one side is forcing change short-run equilibrium: GDP = APE Where can the equilibrium point be The equilibrium point is where the line located on the graph? with formula x=y (45º angle) which on our graphs APE = GDP! APE 45º Y≣Real GDP What happens to inventory, GDP, and GDP = APE: GDP, APE, & inventory APE when GDP = APE? GDP < APE? stay the same GDP > APE? GDP<APE: GDP increases, APE decreases, and inventory decreases GDP>APE: GDP decreases, APE increases, and inventory increases How do you solve for equilibrium Set APE = GDP: algebraically? Y = C + IP which is the same as P Y = a + MPC x (Y-T) + I What are government expenditures What the government spends on final (G)? goods and services à this does NOT include transfer payments What are government outlays? G + transfer payments + net interest What are the two types of government 1) Discretionary Spending: voted spending? on by Congress every year (what is spent on defense, FDA, etc.) 2) Mandatory/Entitlement Spending: not voted on, federal government has to spend this money by law, and if somebody falls w/in a certain characteristic, they are automatically entitled to some of these dollars (social security, medicare, medicaid, etc.) When do we have a balanced budget? When G=T, we have a balanced budget deficit? surplus? When G>T, we have a deficit (G-T) When G<T, we have a surplus (T-G) What is government debt? The total amount owed (stock variable) à outstanding bonds. We look at debt as a percentage of GDP which is nominal b/c we pay for it today’s dollar What are automatic stabilizers? structures w/in the Federal Budget that, while intended for a different purpose, also act to automatically stabilize the economy in times of over and under production Does a deficit go up during a YES! recession? - When we’re underproducing, GDP decreases, so our income decreases, so income taxes decrease, SO more people cross thresholds to entitle them to transfer payments. - When We’re overproducing, GDP increases, so our income increases, so income taxes increase, SO fewer people in thresholds with entitlement to transfer payments Does a debt to GDP ratio tell you about NOPE! economic health? What is the definition of Fiscal Policy? The increase or decrease in government expenditures (G) and/or net taxes designed to manipulate the economy (increase or decrease GDP) Are government expenditures a type of YES! It has to get spent no matter the autonomous expenditure? amount the government has. What is the equation to find our Y = C + I + G equilibrium point when including OR P government expenditures? Y = a + MPC x (Y-T) + I + G Are net exports an autonomous YES! expenditure? What is the equation to find our Y = C + I + G + NX equilibrium point when including net OR P exports? Y = a + MPC x (Y-T) + I + G + NX What are automatic destabilizers? structures built into the economy intended to create bigger changes in GDP including the size of the MPC and wealth. The greater the MPC, the larger the multiplier. Why would a large MPC create b/c when your multiplier is larger, small instability? changes in consumer optimism has a HUGE impact on GDP. 70% of GDP is made of household consumption. Why would a lot of wealth create b/c when assets are worth more, instability? people tend to spend more even when they don’t really have any money to spend, just assets that have the value of that money or more. Where is a recessionary gap on the recessionary gap APE graph? APE 45º Y≣Real GD Y* Y* Y* Where is the inflationary gap on the APE inflationary APE graph? gap Y≣Real GD 45º Y* Y* Y* How do we calculate a change in GDP? ∆???????????? =   1  ×  ∆???? (AKA the autonomous expenditure 1 − ???????????? multiplier) OR 1 ∆???????????? =    ×  ∆???? 1 − ???????????? OR 1 ▯ ∆???????????? =    ×  ∆???? 1 − ???????????? OR 1 ∆???????????? =   1 − ????????????  ×  ∆???????? OR −???????????? ∆???????????? =    ×  ∆???? 1 − ???????????? What is the formula for the tax −???????????? multiplier? 1 − ???????????? What is the relationship between the The tax multiplier ends up being one autonomous expenditure multiplier and less than the absolute value of the the tax multiplier? autonomous expenditure multiplier and negative. - tax multiplier is less becuase changed in taxes immediately affect households, and the consuming and saving behaviors keep their trends and have less of an impact on GDP than a change in government expenditures (people continue to save even when there is a decrease in taxes, and they definitely save with an increase in taxes) -smaller becuase when taxes increase, GDP decreases What are there lags in Fiscal Policy? It takes times to realize we are not at our potential GDP! What are the inside lags of Fiscal Inside Lags: Congress has to Policy? outside lags? vote/agree on a change in Fiscal Policy to reach our potential GDP Outside Lags: when the multiplier takes time to cycle through What are the three purposes of money? 1) store of value: money allows us to work one day, earn on income, and spend later 2) medium of exchange: allows us to exchange goods and services without resorting a barter system 3) unit of account: what allows us to make decisions on what we want to buy b/c money puts value on everyting in the same currency What has been used for money in the Gold, silver, shells, chocolate, past? Why these things? cigarettes, and salt have all been used as money. All of these things are portable, store value, divisible, and hard to counterfeit. What is commodity money? fiat commodity money: has value in and of money? itself ex) gold fiat money: has no intrinsic value ex) paper money What makes up M1 money? 1) all currency in circulation (not sitting in banks) 2) the value of all demand deposits (checking accounts) 3) travelers checks What makes up M2 money? 1) M1 Money 2) the value of savings accounts 3) short-term certificates of deposit (CDs) 4) money market mutual funds less than $100,000 What happens when some money is The transfer leaves M1 and M2 money transferred from one M1 category to unaffected. another? How do banks create money? The Fractional Banking System! The bank has a required reserve ratio, which requires that a certain percentage of what is deposited into the bank must be sitting in the bank’s fault or on reserve at the Fed. (It’s about 10%) What are assets? The value of everything that you own and what is owed to you. cash in vault +deposits at the Fed +loans +government bonds +fixed furniture and equipment +property =total assets What are liabilities? The value of everything you owe deposits + shareholder’s equity =total liabilities What is shareholder’s equity? How much of the assets belong to the owners (shareholders) total assets - liabilities What does it mean when we say a An “underwater” mortgage is when the bank is under water? balance of the mortgage loan is higher than the fair market value of the property. What is the discount rate? the interest rate that the banks pay to the Fed to borrow from it What are open market operations? the purchase and sale by the Fed of government securities in the open market How can the Fed change the money 1) changing the required reserve ratio supply?          - to increase supply, lower the required reserve ratio - to decrease supply, raise the required reserve ratio 2) changing the discount rate - to increase supply, lower the rate - to decrease supply, raise the rate 3) engaging in open market operations - to increase supply, purchase more securities - to decrease supply, sell more bonds How does an open market purchase of results in an increase in reserves and securities by the Fed affect the supply an increase in the supply of money by of money? an amount equal to the money multiplier times the change in reserves How does an open market sale of results in an decrease in reserves and securities by the Fed affect the supply an decrease in the supply of money by of money? an amount equal to the money multiplier times the change in reserves What is the government’s preferred open market operations! They can be means of controlling the money supply? used with some precision, extremely flexible, and a fairly predictable effect on the supply of money.


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