Economics Exam #1
Economics Exam #1 Economomics
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This 11 page Study Guide was uploaded by Maria Cagganello on Tuesday October 6, 2015. The Study Guide belongs to Economomics at DCH Regional Medical Center taught by Stephen Antoinetti in Fall 2015. Since its upload, it has received 23 views.
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Date Created: 10/06/15
Economics Exam Study Guide Part I Economic resources gt Land labor capital knowledge technology amp time Scarcity gt Choice gt Opportunity Cost gt finite resources unlimited wants economic problem opportunity cost lost value of best alternative given up not chosen Production Possibilities Curve PPC gt every combo of two goods that can be produced if we use resources fully and efficiently Point on curve production of two goods is attainable and resources are used fully and efficiently Inside the curve production of two goods is attainable but resources are not used fully and efficiently Outside the curve production of two goods is not attainable because there is a lack of resources 4 25 2 parts of the Market 1 Demand gt what consumers want gt gt price ltquantity demanded demanded Price thismattercom V Demand Quantity 11 Supply gt what producers want gt gtprice gt quantity supplied relationship bw price and quantity supplied Price Quantity supplied relationships bw price and quantity Movement along the curve gt A in price demanded Shift of the Demand Curve gt due to A in price of related good substitutivecomplementary A in consumer income A in of consumers tastes and expectations A quantity Movement along the curve gt A in price A in quantity supplied Shift of the Supply Curve gt due to A technology of producers production expectations price of resources Supply and Demand 2 types of related goods Price Supply Demand Quantity 1 substitute goodsgt goods used in place of another ex pens amp pencils gt price of substitute good gt demand of other good 2 complementary goodsgt goods that can be used together ex toothbrush amp toothpaste gt price in complementary good gt demand of other good Price Dollars per Unit 1 5 SI 11quot P1 up 5 P 0 P oint of Equilibrium P2 Sl rortage D Quantity Units per We ek QD Quantity Demanded QS Quantity Supplied Pe equilibrium price QDQS Xe equilibrium quantity QDQS when quantity supplied is greater than quantity demanded QS gt QD prices will decrease until they reach equilibrium price when quantity demanded is greater than quantity supplied QD gt QS Prices will increase until they reach equilibrium Macroeconomic Variables tell us story about where we are in the economy nations output income GDP in ation unemployment interest rates Nominal GDP gt Value of output in a given year measured with the prices of a given year NDGP Pgivenyear Xgivenyear Deflator GDP Implicit Price 00 Of Pgivenyear 2 Pbase year 0o A Of Pgivenyear 2 Pbase year M de ator 100 definition gt current value of newly produced final goods amp services in a give year GDP Real GDP gt Value of output in given year measured with prices of base year RGDP Pbase year Xgivenyear 100nominal GDPde ator finds out why Nominal GDP increased or decreased from base year to given year Econ Exam Part 11 Study Guide Chapter 578 amp 11 Macroeconomic variables Nations output amp income GDP In ation Unemployment Interest rates VVVV 1st economic variable gt Nations output amp Income Nominal GDP De ator Real GDP Price Indexes 1 GDP Implicit Price De ator 2 Consumer Price Index CPI 3 Producer Price Index PPI 5 Student Price Index SPI De ator gt Average price of all final goods from base year to given year Consumer Price Index CPI amp PPI ha e gt Average price of 3 V consumer gOOdS relationship from base year to given year Ex milk cheese shoes gtPPI gtCPI ltPPI lt CPI basket of Student Price Index SPI gt Average price of student goods from base year to given year 9 Consumer Price Index gt Average price of consumer goods from base year to given year Producer Price Index gt Average price of producer goods from base year to given year Ex cows leather etc gives us glimpse into the future 100 value of student goods in 2015 value of student goods in base year ng Xpy prices of given year times quantity of goods per year value of student good in given year Pby Xpy prices of base year times quantity of goods per year value of student goods in base year Reasons why GDP isn t a perfect measure of our nations output gt GDP doesn t include the value of Housework Volunteer work Illegal work Reasons why GDP isn t a perfect measure of a nation s happiness well being gt GDP doesn t include indicate The value of leisure not working gthappiness The value of externalities ex pollution gt extern lt happ How wealth is distributed gt income at gt income for everyone gt GDP does include The value of economic quotbadsquot ex gt production of jails lt happ 2nd economic variable gt In ation the increase in prices over a period of time per year doesn t compare prices to a base year unlike the De ator gt In ation in 2015 100 CPI in 2015 CPI in 2014CPI in 2014 gt lt in ation at lt prices gt lt in ation prices rise at lower rate In ation De ator 2nd economic variable 1St economic variable doesn t compare prices to a does compare prices to a base year but for the whole base year period 3rd economic variable gt unemployment gt consists of the Labor Force Labor Force 2 groups Not in the Labor Force Employed worked in the past week if not b c of gt If you re not looking for vacation strike work and haven t worked Unemployed you didn t work in past week but you in past week have looked for work in the past 4 weeks Ex full time student retirees institutionalized active military 100 unemployedlabor force 100Labor Force working age population 3 types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Jobs available for quotAquot skilled Jobs available for quotAquot skilled No jobs available for quotAquot or people people but not quotBquot skilled ppl quotBquot skilled people jobs for all jobs for some no jobs not serious serious most serious need to match ppl w iobs need to retrain ppl for fit skills need to create jobs The Business Cycle Peak Tumor Level of real output Time The Unemployment Rate underestimates the quottruequot problem of unemployment gt The Unemployment Rate does not recognize those who work part time or those who work below their skill educationtraining experience level are not considered effected by unemployment when they are discouraged labor workers who stopped seeking employment b c they couldn t find a job not part of labor force not considered unemployed 4th Macroeconomic variable gt Interest Rate 1 Nominal Interest Rate i 2 Real Interest Rate r Nominal Interest Rate i Rea Interest Rate r gt May be viewed as cost of borrowing How much Stuff we can buy with billed interest rate that we have gt May be viewed as return from lending RIR it nominal interest rate in ation earning interest rate rate r rate at which we can buy 1 rate at wh1ch money 1s grow1ng things Build a Model to Explain Economy gt Sectors of Economy 1 Household Sector 2 Business Sector 3 Government Sector 4 Monetary Sector 5 Foreign Sector Household Sector Model I 1 Household Consumption Spending 2 Household Savings Household Consumption Spending gt Consumption function gt identifies amount of consumption spending at each level of disposable income gt C a bYd I value of total household consumption spending autonomous consumption spending money not derived from earned income I slope ACAYd Egt marginal propensity to consume MPC Egt how much we spend of each additional dollar I disposable income Yd Y Egt Gross Income Y Taxes T Egt T 0 in Model 1 bc o gov that households are spending derived from current earned incomeopp of a 39LunLyner spending andsawno throw 4 39JWFO39Y G 3 0 Household Savings gt Savings function gt identifies the amount of savings at each level of disposable income gt S a 1bYd I total dollar amount of household savings I lost money out of savings b c value of a Igt slope ASAYd Egt marginal propensity to save Egt how much we save of each additional dollar I disposable income Yd Y Egt Gross Income Y Taxes T Egt T 0 in Model 1 bc o gov L39a chd S wch lsaasable mconedeJ MPC gt Marginal Propensity to consume b Ab MP5 gt Marginal propensity tospend 1b Egt consumption function rotates upward or downward Igt upward rotation o gt spending of each additional dollar of Yd Egt downward rotation o lt spending gt saving of each additional dollar of Yd Household wealth a gt how much we spend when our income is 0 get from others Aa a gt decrease of money from savings because of value of a loose out of savings Egt consumption function shifts upward or downward Igt upward shift 0 gt household wealth easecheapness of borrowing amp income expectations Igt downward shift 0 lt household wealth easecheapness of borrowing amp income expectations A a gtlt of Igt household wealth Egt ease cheapness of borrowing Egt income expectations gt Net accumulation of household assets what we own after we pay what we owe gt NOT current earned income is net income gt Ex property stocks bonds cash jewels Business Sector Realized Investment Spending ii g c Intended Investment Spending Zmiiime33 Realized Investment Spending Intended Investment Spending when iff Unintended Inventory 0 cats g 4 Lf1 L j 14 w 35 gt Money spend on physical capital firms expenditures on physical capital gt Ex new plants equipment machines tools etc gt Newly produced place to live expenditures on newly produced single multifamily dwellings gt Ex houses apartments condominiums gt Unsold goods left on shelves gt 2 parts glimpse into the future 0 Intended Inventory Accumulation 11A 0 Unintended Inventory Accumulation UIA Intended Inventory Accumulation Unintended Inventory Accumulation gt Amount firms want left in gt Amount firms don t stock inventory want intend to have left in gt They sell the amount they stock extra inventory want gt They sell too much depletion or too little accumulation of what they want Given Unintended Inventory Accumulation sell 2 little Given Unintended Inventory Depletion gt Prices will decrease sell 2 much gt lt production gt Prices will increase gt lt employment gt gt production economy will slow down contract gt gt employment b c lt demand economy will grow expand b c gt How much money will firms spend on physical capital gt Classical Theory of Investment Spending 0 1st thing a firm will do is identify its potential investment projects 0 2nd thing a firm will do is rank projects based on expected rate of return ROR o 31 01 thing a firm will do is borrow money to finance investment spending 0 4th thing a firm will do is compare the costs of borrowing to the expected return of lending to see which projects are profitable NIR 1 vs NIR 2 40 35 30 25 20 15 10 5 Expected Return from each project l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l 0 4 r 0 05 1 15 2 25 Investment spending Investment spending 1 get back 35 and pay 8 2 get back 20 and pay 8 3 get back 15 and pay 8 4 get back 5 and pay 8 not profitable
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