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ECON 252: Exam 2 Review

by: Zach Weinkauf

ECON 252: Exam 2 Review ECON 252

Marketplace > Purdue University > Economcs > ECON 252 > ECON 252 Exam 2 Review
Zach Weinkauf

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About this Document

These notes cover chapters 9-11 notes for Exam 2.
Andres Vargas
Study Guide
Economics, Macroeconomics
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This 6 page Study Guide was uploaded by Zach Weinkauf on Sunday March 27, 2016. The Study Guide belongs to ECON 252 at Purdue University taught by Andres Vargas in Fall 2016. Since its upload, it has received 97 views. For similar materials see Macroeconomics in Economcs at Purdue University.


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Date Created: 03/27/16
Chapter 9: Employment and Unemployment 9.1 – Measuring Employment and Unemployment  Potential Workers – includes everyone in the general population with three exceptions: o Children under 16 years of age o People on active duty in the military o Institutionalized people, like those in jail or nursing homes  Employed – a person holding a full-time or part-time paid job.  Unemployed – when a worker does not have a job, has actively looked for work in the prior four weeks and is currently available for work.  Labor Force – sum of all employed and unemployed workers.  Unemployment Rate – percentage of labor force that is unemployed. o Unemployment Rate = 100% x (Unemployed/Labor Force)  Labor Force Participation Rate – percentage of potential workers that are in the labor force. o Labor Force Participation Rate = 100% x (Labor Force/Potential Workers) 9.2 – Equilibrium in the Labor Market  Labor Demand Curve – depicts the relationship between the quantity of labor demanded and the wage. o Shifts by:  Changing Output Prices  Changing Demand for the Output Good or Service  Changing Technology  Changing Input Prices  Labor Supply Curve – the relationship between the quantity of labor supplied and the wage. o Shifts by:  Changing Tastes  Changing Opportunity Cost of Time  Changes in Population  Market-Clearing Wage – competitive equilibrium wage; every worker that wants a job can find one: the quantity of labor demanded matches the quantity of labor supplied. 9.3 – Why is there unemployment? 9.4 – Job Search and Frictional Unemployment  Job Search – the activities that workers undertake to find appropriate jobs.  Frictional Unemployment – unemployment that arrives because workers have imperfect information about available jobs and need to engage in a time- consuming process of job search. 9.5 – Wage Rigidity and Structural Unemployment  Wage Rigidity – the condition in which the market wage is held above the competitive equilibrium level that would clear the labor market.  Structural Unemployment – arises when the quantity of labor supplied persistently exceeds the quantity of labor supplied.  Collective Bargaining – contract negotiations between firms and labor unions.  Efficiency Wages – above the wage that workers would accept, where the extra pay increases worker productivity and improves the profitability of the firm.  Downward Wage Rigidity – arises when workers resist a cut in their wage.  Natural Rate of Unemployment – the rate around which the actual rate of unemployment fluctuates.  Cyclical Unemployment – the deviation of the actual unemployment rate from the natural unemployment rate. Chapter 10: Credit Markets 10.1 – What is the credit market?  Debtors – borrowers – economic agents who borrow funds.  Credit – loans that the debtor receives.  Interest Rate – Nominal Interest Rate – i – is the annual cost of a one-dollar loan, so i X L is the annual cost of an $L loan.  Real Interest Rate = Nominal Interest Rate – Inflation Rate  Credit Demand Curve – schedule that reports the relationship between the quantity of credit demanded and the real interest rate. o Factors that shift curve:  Changes in perceived business opportunities for firms.  Changes in household preferences or expectations.  Changes in government policy.  Credit Supply Curve – schedule that reports the relationship between the quantity of credit supplied and the real interest rate. o Factors that shift curve:  Changes in saving motives of households.  Changes in the saving motives of firms.  Credit Market – where borrowers obtain funds from savers. 10.2 – Banks and Financial Intermediation: Putting Supply and Demand Together  Financial Intermediation – channel funds from suppliers of financial capital to users of financial capital.  Securities – financial contracts.  Bank Reserves – consist of vault cash and deposits at the Federal Reserve Bank.  Demand Deposits – funds that depositors can access on demand by withdrawing money from the bank, writing checks, or using their debit cards.  Stockholders’ Equity = Total Assets – Total Liabilities 10.3 – What Banks Do 1. Banks identify profitable lending opportunities. 2. Banks transform short-term liabilities, like deposits, into long-term investments in a process called maturity transformation. 3. Banks manage risk by using diversification strategies and also by transferring risk from depositors to the bank’s stockholders, and in some cases, to the U.S. government.  Maturity Transformation – process by which banks take short-maturity liabilities and invest in long-term assets.  Insolvent – when the value of the bank’s assets is less than the value of its liabilities.  Solvent – when the value of the bank’s assets is greater than the value of its liabilities.  Bank Run – occurs when a bank experiences an extraordinary large volume of withdrawals driven by a concern that the bank will run out of liquid assets which to pay withdrawals. Chapter 11: The Monetary System 11.1 – Money  Money – the asset that people use to make and receive payments when buying and selling goods and service. o Functions:  Medium of Exchange – asset that can be traded for goods and services.  Store of Value – asset that enables people to transfer purchasing power in the future.  Unit of Account – universal yardstick that is used for expressing the worth of different goods and services.  Fiat Money – something that is used as legal tender by government decree and is not backed by a physical commodity (gold, silver, etc.).  Money Supply – adds together currency in circulation, checking accounts, savings accounts, travelers’ checks, and money market accounts. 11.2 – Money, Prices, and GDP  Quantity Theory of Money – Money Supply / Nominal GDP = Constant 11.3 – Inflation  Deflation – rate of decrease of a price index.  Effects of Inflation at Social Level: o A high inflation rate creates logistical costs. o A high inflation rate distorts relative prices. o Inflation sometimes leads to counterproductive policies like price controls.  Benefits of Inflation: o Government revenue is generated when the government prints currency.  Seignorage – government revenue obtained from printing currency. o Inflation can sometimes stimulate economic activity.  Real Wage = Nominal Wage / Price Index 11.4 – The Federal Reserve  Central Bank – government institution that monitors financial institutions, controls key interest rates, and indirectly controls the money supply. These activities constitute monetary policy.  Federal Reserve Bank – name of the central bank in the United States. o Things they do:  Influence short-term interest rates.  Influence the money supply and the inflation rate.  Influence long-term real interest rates.  Liquidity – funds available for immediate payment.  Federal Funds Market – market where banks obtain overnight loans of reserves from one another.  Federal Funds Rate – interest rate that banks charge each other for overnight loans in the federal funds market.  Causes for shift in Demand Curve of FFM: o Economic expansion or contraction. o Changing liquidity markets. o Changing deposit base. o Changing reserve requirement. o Changing interest rate paid by the Fed. For having reserves on deposit at the Fed.  Federal Funds Market Equilibrium – point where supply and demand meet. Real Interest Rate = Nominal Interest Rate – Inflation Rate Realized Real Interest Rate = Nominal Interest Rate – Realized Inflation Rate Expected Real Interest Rate = Nominal Interest Rate – Expected Inflation Rate  Inflation Expectations – beliefs about future inflation rates.


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