Exam 2 review
Exam 2 review ECON 105 001
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ECON 105 001
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This 4 page Study Guide was uploaded by Sophie Turner on Monday October 12, 2015. The Study Guide belongs to ECON 105 001 at University of New Mexico taught by in Summer 2015. Since its upload, it has received 44 views. For similar materials see Macroeconomics in Economcs at University of New Mexico.
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Date Created: 10/12/15
ECON 105 Fall 2015 Prof Xiaoxue Li Exam 2 Review of Key Concepts Chapter 6 Consumer Price Index CPI calculation 100cost of basket in current yearcost of basket in base year CPI CPI in ation rate CPI this yearCPI last yearCPI last year100 CPI vs GDP de ator Imported goods included in CPI not GDP de ator Capital Goods Included in GDP if produced domestically not at all in CPI The Basket CPI uses fixed basket GDP uses basket of currently produced goods and services Problems with the CPI substitution bias new goods improvement of quality overstate or understate Substitution Bias Over time some prices rise faster than others Consumers substitute toward goods that become cheaper New Goods The introduction of new goods increases variety and allows consumers to find products that better meet their needs Unmeasured Quality Change Improvements in the quality of goods in the basket increase the value of each dollar Real interest rate vs nominal interest rate Real Interest Rate Corrected for in ation RealNominalIn ation Nominal Not corrected for in ation rate Chapter 7 Varied living standards and growth rates around the world A lot of variation in living standards and growth rate around the would Productivity The Average quantity of GampS produced per unit of labor input Four determinants of productivity and growth rate Physical Capital Per Worker K Human Capital Per Worker H Natural Resources per worker N Technological Knowledge A Diminishing returns and the catchup effect ECON 105 Fall 2015 Prof Xiaoxue Li The government can implement policies that rise saving and investment How can public policy affect productivity and growth K Direct Portfolio H Education and health care N Trade policies A Research funds Population growth affect productivity and growth through three different channels Stretch natural resources and Dilutes Capital Stock Chapter 8 Financial institutions financial market bond stock vs financial intermediaries bank mutual fund Financial Market Institutions through which savers can DIRECTLY provide funds to barrowers Higher risk Higher interest rate Financial Intermediaries Institutions through which savers can INDIRECTLY provide funds to barrowers How do the rates of return differ Different types of saving Private saving Portion of household income not used for consumption or taxes YTC Public saving Tax Revenue TG National saving Private saving Public Saving YCG Budget surplus vs budget deficit Surplus excess of tax revenue over gov spending TG Deficit Shortfall of tax revenue from gov spending GT In a closed economy saving equals investment ECON 105 Fall 2015 Prof Xiaoxue Li Investment I YCG Market for loanable funds A supply and demand model of the financial system Horizontal Axis Loanable Funds Vertical Axis Interest Rate Three government policies saving incentives investment incentives budget deficit Saving Incentives EX to provide tax benefits when household puts money in savings Right Shift for loanable funds Investment incentives EX Tax Rebate Right shift loanable funds Budget Deficit EX Use loanable funds model to analyze the effects of a Gov Budget Deficit Leftward Shift Increase in interest rate Crowding out effect Increase in budget deficit causes fall in investment Chapter 9 Present value and future value Present Value the amount that would be needed today to yield that future sim at prevailing interest rates PVFV1rquotN Future Value the amount of the sum will be worth at a given future date when allowed to earn interest at the prevailing rate FVPV1rquotN Compounding the accumulation of a sum of money where the interest earned on the sum earns additional interest Rule of70 If a variable grows at a rate of x percent per year that variable will double in about 70X years Risk aversion Individuals hate risk To mitigate that Adverse Selection and Moral Hazrd Insurance market two problems with the insurance market Adverse Selection A high risk person bene ts more from insurance so is more likely to purchase it ECON 105 Fall 2015 Prof Xiaoxue Li Moral Hazard people with insurance have less incentives to avoid risky behavior Diversification firmspecific risk vs market risk Diversification reduces risk by replacing a single risk with a large number of smaller unrelated risks Firm Specific Affects only a single company EX VW cheating scandal Market Risk which affects all companies in the stock market EX Great recession Tradeoff between risk and return Riskier assets pay a higher return on average to compensate for the extra risk of holding them Value of an asset Over Valued If share price gtvalue of stock Underrated Share pricelt value of stock Fairly Valued PriceValue of stock Fundamental analysis The study of a company s accounting statements and future prospects Efficient markets hypothesis The theory that each asset price re ects all publically available information about the value of the asset Index funds vs managed funds Index Funds Mutual Fund that buys all the stocks in a given stock index Managed Funds
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