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Eco 2013, exam 2 study guide

by: Lauren Carstens

Eco 2013, exam 2 study guide Eco2013

Marketplace > Florida State University > Economcs > Eco2013 > Eco 2013 exam 2 study guide
Lauren Carstens
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Good luck on the exam on Tuesday! I will still be posting this weeks notes on Friday and they have some graph pictures for extra reference.
Principles of Macroeconomics
Joan Corey
Study Guide
Macro, Economics, Exam 2 Study Guide
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This 8 page Study Guide was uploaded by Lauren Carstens on Thursday March 24, 2016. The Study Guide belongs to Eco2013 at Florida State University taught by Joan Corey in Spring 2016. Since its upload, it has received 85 views. For similar materials see Principles of Macroeconomics in Economcs at Florida State University.


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Date Created: 03/24/16
Macroeconomics Exam 2: Study Guide Chapter 7: Taking the Nation’s Economic Pulse  Gross Domestic Product: The market value of all final goods and services produced within a country during a specific time o Market Value: Goods and services are weighted according to the purchase price  Total spending is added to get the annual GDP o Final Goods and Services: purchased by the ultimate (last) user  Intermediate goods/services: purchased for resale or to produce something else  Intermediate goods are not counted in GDP because their value is included once it’s a final good o Production: Only produced goods/services are included in GDP (not transfers of money) o Within a country: GDP only counts what is produced in the country o During a specific period: GDP only counts what is produced in 2016, not what is sold  How to measure GDP o Expenditure approach (Y=C+I+G+NX)  GDP= consumption+ private investment+ Government consumption and investment+ Net exports (exports- imports) o Resource cost-income approach  Employee compensation (54.6%)  Proprietors’ income (7.7%)  Rent (3%)  Corporate Profits (12.4%)  Interest Income (3.2%)  Indirect Business Taxes (7.4%)  Depreciation (13.3%)  Net income of foreigners (-1.6%)  Gross National Product: Total market value of all goods and services produced by the citizens of a country o Includes production done by citizens abroad  Adjusting for Price Changes o Nominal values: values expressed in current dollars o Real values: Values that have been adjusted for the effects of inflation  Calculating real values  Real= Nominal x (PI base year/ PI current year)  Price Index: Measures the cost of purchasing a market basket at one time in relation to the cost of purchasing the same basket during an earlier time o PI= Cost of the bundle in the current year/ cost in the base year  Consumer Price Index: Indicator of general level of prices; designed to measure the impact of price changes on a typical bundle purchased by households  GDP Inflator: Reveals the cost during the current period of purchasing the items included in GDP; broader than CPI because it includes goods purchased by government and businesses  Limitations of GDP o Excludes non-market production (domestic) o Excludes the underground economy o Excludes leisure and human costs (physical risk and time) o Difficulties measuring quality variation and introduction of new goods o Excludes the cost of harmful side effects  Per Capita GDP o GDP/Population o General indicator of living standards (high economic freedom often correlates to high Per Capita GDP) Chapter 8: Economic Fluctuations, Unemployment and Inflation  Business Cycle: Fluctuations in the general level of economic activity (Graph of Real GDP vs. Time) o Moves in cycles and is measured by changes in real GDP and unemployment rate o Expansion: growing GDP and declining unemployment o Peak (boom): the height of the expansion phase o Contraction: characterized by falling GDP and rising unemployment o Trough: The lowest point of the contraction phase o Recession: A decline in GDP for 6 months (2 quarters)  Extended recession o Depression: A prolonged and severe recession  Labor Market o Employed: If someone has worked full-time or part-time in the past week or is on vacation or sick leave o Unemployed: A person who is not currently employed but is actively seeking employment or waiting to start or return to a job  If neither of these, they are not in the labor market (or under 16 or institutionalized) o Civilian Labor Force: Number of people age 16 or older who are employed or unemployed  Unemployed + Employed o Labor Force Participation Rate: Percent of population age 16 or older who is in the civilian labor force  Civilian labor force/ population 16 and older o Unemployment rate: Percentage of people in the labor force who are unemployed  Unemployed/ Civilian labor force o Employment/ population ratio: Percent of population age 16 and over who are employed  Employed/ population 16 and older  Unemployment o Frictional Unemployment: Unemployment from changes in the economy and imperfect information that prevent workers from being immediately matched with existing jobs  They will find a job but it may take a little while o Structural Unemployment: Unemployment due to structural characteristics of the economy that prevent the matching of available jobs to available workers  There are people that want to work and jobs available, but the potential workers lack the necessary skills o Cyclical Unemployment: Unemployment due to recessions and inadequate labor demand  People have the skills and want to work, but there are no jobs  High during recession  Negative during expansions o Places with higher worker benefits have higher unemployment because they don’t want to hire new people (it’s too costly)  Natural Rate of Unemployment: The normal rate when the economy is operating at a sustainable rate of output o What the economy can maintain for a long time, not the highest output o Natural = Frictional + Structural unemployment o Affected by structure of the labor force and public policy  Actual Rate of Unemployment o Actual= Frictional +Structural+ Cyclical Unemployment o During expansion: Natural >Actual o During recession: Natural < Actual  Affected by Cyclical Unemployment  Full Employment: Occurs when the economy is experiencing the highest rate of output that it can sustain o Exists when the economy is operating at the natural rate of unemployment  Potential Output: The level of output that can be achieved and sustained in the future given that we are operating at the natural rate of unemployment (full) o Expansion: Actual Output> Potential output o Recession: Actual output< Potential output  Inflation: An increase in the general level of prices (percent change in prices) o Causes the value of the dollar to decrease o High and variable inflation causes  Reduced investment  Distorted information delivered by prices  Less productive use of resources o Caused by:  Demand rising faster than supply  Rapid increase in the money stock  Hyperinflation Chapter 9: An introduction to Basic Macroeconomic Markets  The Labor Market o Price= wage (w) o Quantity= employment (E) o Labor Demand  Businesses demand labor  Downward sloping because as wage decreases, employers want to hire more  As demand increases, the employment and wage increase  As demand decreases, the employment and wage decrease o Labor Supply  Workers supply labor  Upward sloping because as wage increases, people are more likely to work  As supply increases, employment increases and wage decreases  As supply decreases, employment decreases and wage increases  Loanable funds market o Market that coordinates the borrowing and lending decisions of business firms and households  Borrowing money from the bank is demanding money  Putting money in the bank is supplying money o Price= real interest rate (r) o Quantity= amount saved or invested (Q ) s,I o Demand for Loanable Funds (investment)  Downward sloping because as the interest rate decreases, firms will want to borrow more money  Increase in investment: demand curve shifts right  Decrease in investment: demand curve will shift left o Supply of loanable funds (savings)  Upward sloping because, as the interest rate increases, people will want to save more and spend less  Increase in savings: supply curve shifts right  Decrease in savings: supply curve shifts left  Interest Rate o Nominal interest rate: the percentage of the amount borrowed that must be paid to the lender in addition to the repayment of the principle o Real interest rate: The interest rate for inflation (real cost of borrowing and lending money)  R= i – pi (inflation) o Interest rate and inflation  When the actual rate of inflation is greater than anticipated, borrowers gain and the lenders lose  When the actual rate of inflation is less than anticipated, the lenders gain and the borrowers lose o Interest rate and bond prices  Inversely related  The foreign exchange market: market in which the currencies of different countries are bought and sold o Appreciation: An increase in the value of a currency relative to foreign currencies o Depreciation: A reduction in the value of a currency relative to foreign currencies o Price= price of foreign currency o Quantity= the amount of foreign currency o Demand for foreign currency  Imports+ Capital outflows (domestic money invested abroad)  Downward sloping because as the dollar appreciates, people can import more and invest more in other countries o Supply of foreign currency  Exports + capital inflows (foreign money that is invested domestically)  Upward sloping because, as the dollar depreciates, foreign countries will demand more domestic exports and will invest more domestically o Equilibrium  When supply of foreign currency equals demand  Trade deficit: imports> exports  Trade surplus: exports > imports  Aggregate goods/ Services market: includes all final goods (goods that enter GDP) o Price= Price index (PI) o Quantity= real GDP (Y) o Aggregate Demand  Relationship between the price level and the quantity of domestically produced goods and services people are willing to purchase  Downward sloping because, as price level goes gown, quantity demanded goes up  A lower price increases the purchasing power of your money  A lower price will lead to a lower real interest rate, which increases consumption and investment  A lower price will make domestically produced goods less expensive relative to foreign goods o Aggregate Supply  Relationship between a nations price level and the quantity of goods supplied by its producers  Short Run Aggregate Supply Curve (SRAS)  Some things are fixed  Upward sloping because an increase in the price level will improve the profitability of the firms and increase profit  Profit= revenue-cost o In the short run, many costs are fixed  Long-run Aggregate Curve (LRAS)  Everything can change  Vertical because, in the long run, people have time to adjust so a higher price level will increase costs just as much as it increases revenue  Profit won’t change in the long run because, as you increase price, producers will increase your costs  Where SRAS = LRAS: actual price level = expected price level o Short-run equilibrium  When the aggregate demand (AD) and the SRAS intersect o Long-Run equilibrium  When the aggregate demand, SRAS and LRAS intersect  When we correctly anticipate price level  No expansion or recession o When real GDP> potential output, we are at expansion o When real GDP < potential output, we are in recession Chapter 10: Working with Our Best Aggregate Demand and Aggregate Supply Model  Anticipated changes are foreseen early enough to adjust and unanticipated changes are not  Shifters of Aggregate Demand o 1. Changes in Real Wealth  Increase in real wealth: shifts AD curve right (increases)  Decrease in real wealth: shifts AD curve left (decreases) o 2. Changes in the real interest rate  Interest rate rises: AD curve shifts left  Interest rate falls: AD curve shifts right o 3. Changes in the expectations of businesses and households about the future  Optimism: Shifts AD curve right  Pessimism: Shifts AD curve left o 4. Changes in the expected rate of inflation  Expected to increase: AD curve shifts right  Expected to decreases: AD curve shifts left  This makes sense because people will buy more now if it is EXPECTED to increase and buy more later if it is EXPECTED to decreases o 5. Changes in income abroad  Foreign income increases: AD curve shifts right  Foreign income decreases: AD curve shifts left o 6. Changes in exchange rates  Dollar appreciates: AD curve shifts left  Dollar depreciates: AD curve shifts right  Shifters of Aggregate Supply o Permanent Changes (shifters of LRAS and SRAS)  1. Change in resource base  Resource base increases, LRAS increases  Resource base decreases, LRAS decreases  2. Change in the level of technology  Technology increases, LRAS increases  Technology decreases, LRAS decreases  3. Change in institutional arrangements that affect productivity  Positive: LRAS increases  Negative: LRAS decreases o Temporary changes (shifters of only the SRAS)  Change in resource prices  Resource price increases, SRAS shifts left (recession)  Resource price decreases, SRAS shifts right (expansion)  Change in the expected rate of inflation  Expected inflation increases, SRAS shifts left  Expected inflation decreases, SRAS shifts right  Supply Shocks (an unexpected event that temporarily affects aggregate supply)  Negative: SRAS decreases  Positive: SRAS increases  Anticipated changes in long-run aggregate supply o Causes both the LRAS and SRAS to shift in the same direction  Unanticipated changes in aggregate demand o Causes both the AD and the SRAS to shift in opposite directions o Know how to recognize what the short term and long term affects of a situation will be on the graphs  Unanticipated changes in short-run aggregate supply o Only shifts the SRAS curve and it shifts back to its original position  These are always temporary changes GOOD LUCK!!


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