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Macro Exam 2 Notes

by: Kalea Lucas

Macro Exam 2 Notes ECON 1002

Kalea Lucas
GPA 3.5
Introduction to Macroeconomics
Dr. Michael Jones

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These notes have been taken from every lecture since the last exam
Introduction to Macroeconomics
Dr. Michael Jones
Study Guide
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This page Study Guide was uploaded by Kalea Lucas on Sunday March 13, 2016. The Study Guide belongs to ECON 1002 at The University of Cincinnati taught by Dr. Michael Jones in Spring 2016. Since its upload, it has received 44 views. For similar materials see Introduction to Macroeconomics in Business at The University of Cincinnati.


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Date Created: 03/13/16
Macroeconomics Economic Growth KLucas The Solow Method amp Catchup Growth 0 How to de ne Capital Growth Consider law of diminishing returns 0 At a certain point capital cannot grow anymore it has reached its limit There will be a point at which capital will be equal to investment due to depreciation a As capital increases Depreciation increases at a constant rate 0 Output increases at a diminishing rate 0 New CapOd Cap Old Investment Old Depreciation The Economics of Ideas 0 Keys to Increasing technological knowledge 0 IncenUves o Institutions that encourage investment in physical and human capital in RampD Research and Development 0 Potential Problem with Ideas 0 Ideas are nonrivalrous Meaning The use of an idea by one individual does not mean less of the idea available to someone else 0 Government Role in Product of New Ideas 0 Offers subsidies to promote RampD Market Research and Development 0 Innovations in medicine and technology require more capital 0 Larger markets yield greater rewards Institutions of Economic Growth Dependable Legal System 0 Competitive and Open Markets Changes in Investment Spending Affects GDP Expectations about future business conditions 0 Technology 0 Degree of excess capacity 0 Business taxes Changes in Government Spending Affects GDP 0 Transportation Projects 0 Military Spending Changes in Consumer Spending Affects GDP 0 Consumer Wealth Household borrowing Consumer expectations 0 Personal taxes 2 Types of Growth 1 CatchUp Growth 0 Take advantage of technology resources etc already in existence 0 2 Cuttingedge Growth 0 Primarily about developing new ideas ln ation An increase in the average level of prices 0 Inf Rate Current PriceOld PriceOld Price x 100 Price indexes are used to measure in ation 1 CPI Average price of goods bought by a typical consumer 2 PPl Average price received by producers 3 GDP Gross Domestic Product De ator Measures the average price of all nal goods and services CPI represents percent change between new and old prices Quantity Theory of Money 0 1 General relationship between in ation money real output and pdces o 2 Critical role of the money supply in regulating the level of prices Cost of In ation In ation is a type of tax While many jobs have disappeared many have been replaced Unemployment Rate 0 16 yrs and up 0 Not institutionalized prison 0 Not in the military 0 Are actively looking for work The unemployment rate taken as a percentage is found through the following equation UnemployedUnemployed Employed x 100 3 Types of Unemployment o Frictional Structural Cyclical Aggregate Demand Real GDP desired at each price level Inverse Relationship Real Balance Effect Interest Effect Foreign Purchase Effect quot In the long run we re all deadquot John Maynard Keyes Keyes Insight oShort Run Output may not equal potential output 0 Can either be higher booms or lower recessions 0 Prices are sticky as a result of demand can determine output pdces o No crowd out occurs Average Propensity to Consume 0 Fraction of total income consumed consumptionincome Average Propensity of total income saved savingincome o Marginal PC change in consumptionchange in income oMarginal PS change in savingchange in income 0 MPCMPS1 NonIncome Determinants of Consumption and Savings Wealth o Borrowing Expectations 0 Real Interest Rates The Keynesian Cross is a model of the demand for goods and services oPAECIGNX o C equals exogenous consumption consumption unrelated to current income C bY T Exogenous Income UGovt purchases ULump sum taxes UNet Exports Price the ratio between two goods Demand for Money Transactions demand for money 0 Asset Demand for money 0 Total demand for money Interest Rates 0 Equilibrium interest rates change with the shifts in money supply and money demand 0 Interest Rates and Bond prices 0 Inversely related 0 Bond pays xed annual interest rate 0 Lower bond price will raise the interest rate Treasury Bill matures in less than a year Treasury Note matures in between 1 and 10 years Treasury Bond matures in greater than 10 years US Money Supplies 0 Total reserves All major banks have accounts at the Federal Reserve System govt bank and commercial banks bank 0 Currency Almost 800 billion or 2500 per person 0 A lot is held by people in other countries 0 Panama Ecuador and El Salvador use the US dollars as their of cial currency 0 Dollars are held by others in unstable countries to protect their wealth Checkable deposits are deposits you can write checks on or can access with a debit card 3 Ways to De ne Money 0 The monetary base currency in bank vaults currency in reserves 0 M1 Currency circulation checkable deposits 0 M2 Everything in M1 savings deposits Time deposits less than 100000 and money market accounts Banking System 0 Board of Governors 12 Federal Reserve Banks 0 Commercial Banks 0 Thrift Institutions Savings and Loan Mutual Savings Credit Unions 0 The Public Households and Internships Bank101 0 Back in the day very dangerous to travel with all of your wealth on your person so they would deposit the physical money in one place and get a receipt to cash wherever you were headed o Realized the receipts were convenient and worth the same as the gold that backed it o The idea of storing money bank came along 0 Then the system of saving investing and loaning came into play 0 Problems Occurred because banks were subject to panics because there supply was heavily in uenced by the level of demand Banks lend to each other in order to meet federal reserve requirements Commercial Paper System However now banks are not lending their money and are instead making pro t on fees


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