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Introduction to Macroeconomics Exam 1 Study Guide

by: Trevor Locke

Introduction to Macroeconomics Exam 1 Study Guide ECON 0110

Marketplace > University of Pittsburgh > Economcs > ECON 0110 > Introduction to Macroeconomics Exam 1 Study Guide
Trevor Locke
GPA 3.4
Introduction to Macroeconomic Theory
James Kenkel

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Extensive study guide for Exam #1 in Introduction to Macroeconomics!
Introduction to Macroeconomic Theory
James Kenkel
Study Guide
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This 7 page Study Guide was uploaded by Trevor Locke on Tuesday October 27, 2015. The Study Guide belongs to ECON 0110 at University of Pittsburgh taught by James Kenkel in Spring2015. Since its upload, it has received 33 views. For similar materials see Introduction to Macroeconomic Theory in Economcs at University of Pittsburgh.


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Date Created: 10/27/15
Macro Study Guide Employment Act of 1946 government s job to maximize employment production and purchasing power keep inflation rate low Major Macroeconomic Goals Economic growth increase output of goods and services Stable prices Maximum employment Smooth out business cycle fluctuations Fiscal policy congress amp president tax laws increase or decrease taxes government spending bills that start in the house Monetary policy federal reserve system influence the money supply influence interest rates Economic policy government actions to influence the economy Descriptive statements facts Positive statements true Normative statements opinions Fallacy of false cause a happened and then b happened therefore a must ve caused b to happen Fallacy of composition what holds for one person does not necessarily hold for everybody the paradox of thrift if i tell everyone to save money then there will be less money in the economy to save Ceteris Paribus Fallacy the other things being equal fallacy theory an increase in interest rates will lead to decreased borrowing theory if gasoline prices increase people will switch to smaller car Economic Decision Makers 1 Households maximize their utility 2 Business firms maximize profits 3 Governments protect private property enforce contracts promote competition regulate natural monopolies provide public goods 4 Foreigners Private goods vs Public goods rival and exclusionary Externality a cost or benefit that affects people not involved in an activity or market transaction negative noise polluted air litter positive good schools educated citizens medical improvements Goal 1 Promote Economic Growth Nominal Gross Domestic Product GDP the dollar value of final output of goods and services produced in the United States the growth rate of Nominal GDP is a deceptive indicator of economic growth Growth Rate New Old Old x 100 vaue of output calculated using prices that existed during the year when the goods and services were produced Pncelndex the index for year n is equal to Real GDP Year 1 prices Quantity measurement Nominal GDP quantities and prices To promote growth increase and improve capital plant and equipment factories buildings tools machinery full utilization of plant and equipment no excess capacity improve human capital the skills of the workforce reduce unemployment better education better job training Rule of 72 how long will it take for the quantity to double in size g annual growth rate expressed as an integer formula years required to double 72g Goal 2 maintain stable prices maintain the purchasing power of the dollar maintain a low inflation rate What causes deflation ack of aggregate demand people don t want to buy enough stuff causes unemployment firms lower prices Inflation causes problems when it is high andor when it is unanticipated variable inflation affects longrun planning loans interest rates must match or exceed inflation rates or else you get repaid with devalued dollars high inflation hurts lenders longterm investments are avoided Goal 3 Promote Full Employment who are the unemployed 1 new entrants 2 reentrants 3 job leavers 4 job losers what we worry about unemployed looking for work Goal 4 smooth out the business cycle recession two consecutive quarters of declining REAL GDP Classical Economic Theory there is a natural tendency for the economy to move toward full employment as a result there is no need for fiscal or monetary policy and government interference in the economy Classical Reasoning unemployed workers compete against each other wage rates will decline lower wages lead to increased profits increased profits lead to increased unemployment full employment will be restored Keynesian Economic Theory John Keynes argued that there is no automatic tendency to go to full employment unemployment is caused by lack of sufficient aggregate demand if demand is low production is low producers adjust output to satisfy the desires of consumers How to improve an increase in government spending will stimulate the economy a tax cut will stimulate the economy Pure capitalism no government intervention Pure command communism Mixed economics US and China today What types of goods will be produced consumption goods investment goods government goods Barter Economy i exchange my goods or services for your goods or services exchange requires a double coincidence of wants inefficient LaissezFaire Economy minimal government interference in the economy Command Planned Economy Capitalism emphasis on the free market system producers and consumers are free to make their own choices private ownership of property and means of production profit motive gives producers incentive to produce what people want prices are free to move up and down and provide signals about when to increase or decrease production Factors of production 1 Land all the natural resources 2 Labor 3 Capital tools equipment factories etc 4 Entrepreneurship risk taking by and leadership of the business owners Adam Smith The Wealth of Nations 1776 emphasized how a free market economy can allocate resources efficiently without central planning or government interference emphasized the virtues of the invisible hand that leads the private interests of consumers and producers toward socially desirable ends also emphasized the benefits of specialization Socialism significant amount of government interference in economic affairs government controls many industries high taxes significant redistribution of income imits the incentive to work government provides extensive health and unemployment benefits Who gets the output Capitalism based on income taent skills effort and good luck survival of the fittest Command economy government distributes the output imits incentives to work and invent Theory of Competitive Advantage two producers can both gain by specializing in the production of the item in which they have a comparative advantage and then trading with each other increase world output the ability of an individual firm region or country to make something at a lower opportunity cost than other producers what s given up what s gained Absolute Advantage the ability to make something using fewer resources than other producers use production possibilities frontier Effects of Trade Restrictions 1 An embargo which prohibits foreign firms or nations from exporting sugar to the US 2 A tariff which requires foreign firms or countries to pay taxes on their sales of sugar in the US 3 A quota which puts a limit on how much sugar a foreign firm or country can sell in the US Arguments Used to Favor Trade Restrictions 1 National Defense Argument excess competition 2 Infant lndustry Argument protecting emerging industries from foreign competition 3 AntiDumping Argument foreign countries sell items below their cost but this benefits US consumers 4 Protect American Jobs invites retaliation from foreign countries which causes trade to decrease Ideas demonstrated in Production Possibilities Frontier 1 Efficiency on PPF is efficient inside is inefficient 2 Scarcity outside PPF is unattainable due to scare resources 3 Economic Growth outward shift in PPF 4 Choice must choose where on PPF to produce Formula for Opportunity Cost per unit between 2 goods on a PPF what s given up what s gained Sole proprietor and partnership Before tax profits vs after tax profits Dividends portion of aftertax profits that are distributed to stockholders Board of Directors makes most corporate decisions 2 reasons to own a stock Capital Gains value of stock goes up Dividends paycheck to stockholders portion of aftertax profits that are distributed to stockholders Stock Mutual Funds different goals investors pool their funds with an investment company and ask a manager to make stock selections hiring a financial manageranalyst Fidelity Magellan amp Vanguard 500 Magellan buys stock of high growth companies ots of buying and selling to beat the market high expenses Vanguard invest in Fortune 500 companies New York Stock Exchange Wall Street ocation where shares of several thousand major corporations are bought and sold no new stocks The Bond Market Bond ega contract specify the terms of a loan between a borrower and a lender a bond is a certificate of debt issued by a government or corporation guaranteeing repayment of an initial loan plus interest Risky Borrowers cities and states with failing populations declining tax bases rising expenditures Some factors that influence the resale price of a bond if market interest rates rise the price of a bond declines US Government Securities Treasury Department writes checks to cover Federal Government Spending Treasury gets its revenue from taxes Treasury Bills maturity up to 1 year Treasury Notes more than 1 year to less than 10 years Treasury Bonds 10 years or more nterest is taxable Other factors that influence bond prices the inflation rate term to maturity taxabiity of interest The Real Rate of Interest For example if you are earning 4 interest per year on the savings in your bank account and inflation is currently 3 per year then the real interest rate you are receiving is 1 4 3 1 The real value of your savings will only increase by 1 per year when purchasing power is taken into consideration Marginal Tax Rates Tax Brackets What is a fair tax system Horizontal Equity people with equal incomes should pay approximately equal taxes Problem with Horizontal Equity people with equal incomes may have unequal deduc ons Vertical Equity involves the normative opinion that people in different situations should be treated differently Problem what is fair how much more taxes should the higher income person pay Classification of Taxes Progressive Proportional or Regressive 1 Progressive Tax System marginal tax rate increases as level of income increases 2 Proportional Tax System A tax system that requires the same percentage of income from all taxpayers regardless of their earnings 3 Regressive Tax System marginal tax rate decreases as level of income increases low income earners pay a higher proportion of income than high income earners incentivizes you to earn a higher income


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