MACRO MIDTERM 1 STUDY GUIDE
MACRO MIDTERM 1 STUDY GUIDE Econ 105
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This 10 page Study Guide was uploaded by Jessica D'Aniello on Wednesday October 7, 2015. The Study Guide belongs to Econ 105 at Pace University taught by Prof Weinstock in Fall 2015. Since its upload, it has received 45 views. For similar materials see Macroeconomics 105 in Economcs at Pace University.
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Date Created: 10/07/15
WN MACRO STUDY GUIDE CHAPTER 1 List 3 Key economic questions Who What How The choices made by individuals rms and government answer 3 questions What products do we produce How do we produce the products Who consumes the products Discuss the insights from economics for a realworld problem such as congestion The roads in cities are very congested and cause people to lose up to 72 hours per year sitting in traf c also we lose 23 billon gallons of gas each year due to traf c When you drive onto a busy road most people slow down when there are cars in front of them causing traf c A possible solution to the traf c is to make people pay a congestion fee of 8 forcing people to either pay take mass transit or drive at different times rather than rush hour List the four elements of economic thinking 1 Use Assumptions to simplify Economists use assumptions to make things simpler and focus attention on what really matters For example if you use a road map to get from Seattle to san Francisco you make two unrealistic assumptions to simplify your planning The earth is at and the roads are at 2 Isolate Variables CETERIS PARBUS Economists are interested in exploring relationships in exploring relationship between two variables like the relationship between the price of apples and the quantity of apples consumer purchase Ceteris Paribus the Latin expression meaning that other variables are held xed 3 Think at the margin Economists often consider how a small change in one variable affects another variable and what impact that has on people s decision making Marginal Change a small Oneunit change in value Examples lfl study just one more hour by how much will my exam score increase Or lfl keep my barbershop open for one more hour by how much will my revenue increase 4 Rational people respond to incentives A key assumption of most economic analysis is that people act rationally meaning they act in their own self interest Philosopher Adam Smith founder of economics didn t say people are motivated exclusively by selfinterest but rather selfinterest is more powerful than kindness or altruism List three ways to use macroeconomics 1 Use Macroeconomics to Understand Why Economies Grow Why do some countries grow much faster than others 2 To understand Economic Fluctuations Should Congress and the president do something to reduce the unemployment rate 3 To Make Informed Business Decisions Study interest rates and in ation and how they affect the rm List three ways to use Microeconomics 1 To Understand Markets and Predict Changes How would a tax on beer affect the number of highway deaths among young adults 2 To Make Personal and Managerial Decisions If the existing coffee shops in your city are pro table and you have enough money to start your own shop should you do it 3 To Evaluate Public Policies CHAPTER 2 Apply the Principle or Opportunity Cost Opportunity Cost What you have to sacri ce to get something Opportunity cost incorporates the notion off scarcity no matter what we of there is always a tradeoff We must tradeoff one thing for another because resources are limited and can be used in different ways Ex Opportunity cost of money spent on books and tuition opportunity cost of college time 4 years 20000 per year economic cost or total opportunity cost Production possibilities curve A curve that shows the possible combinations of products that an economy can produce given that its productive resources are fully employed and efficiently used Apply the Marginal Principle Marginal bene t the additional bene t resulting from small increase in some activity Marginal Cost the additional cost resulting from a small increase in some activity Economics is about making choices marginal choices are looking at the effect of a small change Apply the Principle of Voluntary Exchange A voluntary exchange between two people makes both people better off If you voluntarily exchange money for a college education you must expect you ll be better off with a college education The college voluntarily provides an education in exchange for your money so the college must be better off too Apply the Principle of Diminishing Suppose output is produced with two or more inputs and we increase one input while holding the other input or inputs fixed Beyond some point called the point of diminishing returns output will increase at a decreasing rate Apply the RealNominal Principle What matters to people is the real value of money or income its purchasing power not its face value Nominal valueThe face value of an amount of money Real value the value of an amount of money in terms of what it can buy CHAPTER 3 Use Opportunity Cost to Explain the Rationale for Specialization and Trade Principle of Opportunity Cost the opportunity cost of something is what you sacrifice to get it Comparative Advantage the ability or one person or nation to produce a good at a lower opportunity cost than another person or nation Absolute Advantage the ability of one person or nation to produce a product at a lower resource cost than another person or nation Explain how markets allow Specialization and Trade lmport A good or service produced in a foreign country and purchased by residents of the same home country Export A good or service produced in the home country and sold to another country When a domestic rm shifts parts of its production to a different country they say the rm is Outsourcing List the roles of Government in a Market Economy Contracts specifies the terms of exchange facilitating exchange between strangers Insurance reduces the risk entrepreneurs face Patents increases the profitability of inventions encouraging firms to develop new products and production processes Accounting rules provides potential investors with reliable information about the financial performance of a firm Market Economy an economy in which people specialize and exchange goods and services in the market CHAPTER 5 Explain the Circular Flow The circular flow shows how the production of goods and services generates income for households and how households purchase goods and services produced by firms Identify the Components of GDP Gross domestic product GDP The total market value of final goods and services produced within an economy in a given year Economists divide GDP into four broad categories each corresponding to different types of purchases represented in GDP 1Consumption expenditures purchases by consumers 2Private investment expenditures purchases by firms 3Government purchases purchases by federal state and local governments 4Net exports net purchases by the foreign sector domestic exports minus domestic imports The GDP equation Y C G NX Y GDP 0 Consumption l Investment G Government Purchases NX Net exports Describe the Steps from GDP to Income Step 1 add to GDP any income earned abroad by US firms or residents and subtract any income earned in the United States by foreign firms or residents Step 2 Subtract depreciation from GNP When you subtract depreciation form GNP you reach the net national product NNP where net means quotdepreciationquot National Income is divided among six basic categories compensation of employees wages and bene ts corporate pro ts rental income proprietor s income income of unincorporated business net investment interest payments received by households from business and from abroad and other items About 62 of all national income goes to workers in the form of wages and bene ts National incomeThe total income earned by a nation s residents both domestically and abroad in the production of goods and services Gross national productGDP plus net income earned abroad Calculate Real and Nominal GDP Quantity Produced Price Year Cars Computers Cars 2011 4 1 10000 2012 5 3 12000 List the Phases of the Business Cycle Recession commonly defined as six consecutive months of declining real GDP Peak the date at which a recession starts Trough the date at which output stops falling in a recession Expansion The period after a trough in the business cycle during which the economy recovers Computers 5000 5000 Discuss the Relationship of GDP to Welfare GDP relationship to welfare Household and Childcare gdp ignores services such as cleaning cooking and providing free childcare because these services are nor transferred through markets so cannot be measured in GDP Leisure Leisure time is not included in GDP because GDP is designed to be a measure of the production that occurs in the economy Underground Economy GDP ignores the underground economy where transactions are not reports to official authorities Pollution GDP does not value changed in the environment that occur in the production of output CHAPTER 6 Define these Concepts The labor force the labor force participation rate and the unemployment rate The Labor Force the total number of workers both the employees and the unemployed The Labor Force Participation Rate the percentage of the population over 16 years of age that is in the labor force Unemployment Rate The percentage of the labor force that is unemployed Distinguish between cyclical structural and frictional unemployment Cyclical unemployment Unemployment that occurs during fluctuations in real GDP Frictional unemployment Unemployment that occurs with the normal workings of the economy such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees Structural unemployment Unemployment that occurs when there is a mismatch of skills and jobs Occurs when the economy evolves EX vinyl records going out of style then back in style Describe the costs of unemployment Excess unemployment means that the economy is no longer producing at its potential Unemployment Insurance Payments unemployed people receive from the government Workers who suffer from a prolonged period of unemployment are likely to lose some of their skills Hysteries Discuss how the Consumer Price Index is calculated Consumer Price Index CPI A price index their measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer EX in 1964 someone got a starting salary of 5000 Was that high or low We can t know without measuring what everything cost back then The CPI is widely used to measure changes in the prices consumers face It measures changed in prices of a fixed basket of goods a collection of items chosen to represent the purchasing pattern of a typical consumer CPI in year K cost of basket in year K Cost of basket in base year x 100 Explain the Difference between in ation and the price level In ation rate the percentage rate of change in the price level In ation rate how much a price grows every year Price level is usually examined through a basket of goods approach Summarize the costs of anticipated and unanticipated in ation Anticipated in ation in ation that is expected Unanticipated in ation in ation that is not expected
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