Professor Pope- Econ 110 study guide
Professor Pope- Econ 110 study guide ECON 110
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This 8 page Study Guide was uploaded by Connor Workman on Tuesday March 29, 2016. The Study Guide belongs to ECON 110 at Brigham Young University taught by Professor Arden Pope in Winter 2016. Since its upload, it has received 24 views. For similar materials see Principles of Economics in Economcs at Brigham Young University.
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Date Created: 03/29/16
ECON 110 Test 3 Notes 14-Mar-16 - Macroeconomics o The course is at a crossroads. Future lectures will be much more descriptive. o GDP: Measures income of everyone in the economy, or how everyone is producing. Market value of all final goods and services produced within a country in a given period of time. Market prices reflect the values of the goods. Excludes some things o Products produced and sold illegally o Products that are produced and consumed at home. Components of GDP o Y = C + I + G + NX Y=GDP C = consumption I = Investment G = Government purchases Local, state and federal. Does not include transfer payments. NX = Net exports Real vs nominal GDP o Total spending rises from one year to the next Economy produces larger output of goods and services And/or goods and services are being values at higher prices o Real GDP Production of goods and services valued at constant prices (designate one year as a base and keep calculating so as to exclude inflation). So basically, don’t count the changes in prices. o Calculating the GDP deflator Divide Nominal GDP by Real GDP to find the percent of inflation. - Continued o Consumer price index Problems in measuring the cost of living. Substitution bias o Prices do not change proportionally o Another way to compare prices Dollar figures from different times Amount in year T Dollars * (price level today/price level in year T) o Indexation ECON 110 Test 3 Notes Automatic correction by law or contract CPI= inflation rate "next year, you'll have to pay me what you owe me plus the cpi or inflation rate". COLA: Cost of living allowance. o Nominal interest rate o Real interest rate Interest rate corrected for the effects of inflation. Nominal interest - inflation rate. o Extra When we go to war, we spend lots of money on wartime activities, which puts tons of money into the economy, and decreases the value of money leading to inflation. If you increase money supply faster than the economy grows, you see inflation. Calculating CPI Fix the basket o Which prices are more important to the typical consumer? o Different weight. Fix the prices o At each point in time Compute the basket's cost o Same basket goods o Isolate the effects of price changes. - Chapter 24: Measuring the Cost of Living o Chapter Introduction o 24-1 The Consumer Price Index Measure of the overall cost of the goods and services bought by a typical consumer. 24-1a How the CPI Is Calculated Price of basket goods and services in current year/price of basket in base year = 100 Inflation rate: (CPI year 2- CPI year 1)/(CPI year 1)*100 24-1b Problems in Measuring the Cost of Living Substitution bias: CPI doesn't account for the substitution affect. Introduction of new goods Unmeasured quality change 24-1c The GDP Deflator versus the Consumer Price Index ECON 110 Test 3 Notes o 24-2 Correcting Economic Variables for the Effects of Inflation 24-2a Dollar Figures from Different Times 24-2b Indexation 24-2c Real and Nominal Interest Rates o 24-3 Conclusion - Unemployment o There is a difference between unemployed, employed, and not in the labor force. Generally if you haven’t sent out a resume in a month you've given up. o Natural rate of unemployment Normal rate of unemployment rate where the unemployment rate fluctuates. Cyclical: How the unemployment rate fluctuates around the seasons. o Women are being put more into the labor force. o Stay at home dads, full time students, and retirees are not included in the unemployment rate. o Half of all spells of unemployment end when the unemployed leaves the labor force. o Discouraged workers are a problem. o Most unemployment spells are short, but there are some people that are always there, and make the unemployment rate higher. o Unemployment rate never falls to zero, o Frictional unemployment: It takes workers time to search for the jobs that best suit their needs. Explains relatively short spells of unemployment. o Structural unemployment Number of jobs available not sufficient to provide a job for everyone. Explains longer spells of unemployment. Results when wages set above the equilibrium price. Some frictional unemployment is inevitable. Changes in demand for labor among different firms. Changes in composition of demand. The economy is always changing.Jobs constantly created and destroyed. ECON 110 Test 3 Notes o Public policy Protects workers' incomes. Increases frictional unemployment. Unions try to strike and decrease the supply to hurt firms. o Unions We apparently need unions to help increase wages and increase quality of working conditions. Efficiency wages: Wages paid above equilibrium to increase worker productivity. - Money o Store of value Item people can transfer for purchasing power From present to future. o Liquidity Ease at which an asset can be converted into the economy's medium of exchange. o Commodity money Money that takes the form of a commodity with intrinsic value. o Intrinsic value: Item would have value even if they weren't used as money. o Gold standard: Money could be transferred to gold. o Fiat money: Money without intrinsic money, used as money by government decree. (fiat= order or decree). o Money is a Store of value unit of account Medium of exchange o Money stock: quantity of money circulating in economy. o Currency: paper bills in hands of public o Demand deposits: balances in bank accounts that we can access by writing a check. o Measures of money stock ECON 110 Test 3 Notes M1 Demand deposits, travelers checks Other checkable deposits, currency M2 Everything in M1 Savings deposits, small time deposits Money market mutual funds A few minor categories. o Federal reserve system Created in 1913 After series of bank failures in 1907 Its purpose is to ensure the health of the nation's banking system. o Board of governors Includes seven members holding 14 year terms. Appointed by president and confirmed by the senate. The chairman Directs federal reserve staff, presides over board meetings, testifies about fed policy in front of congressional meetings. Appointed by the president for four year terms. 12 banks make up the system, with a chairman chosen by each banks board of directors. Feds job Act as banks bank. Lender of last resort Monitors each banks financial condition. Facilitates bank transactions. Control money supply o Quantity of money available to society. ECON 110 Test 3 Notes Money supply; quantity of money available to economy Monetary policy: setting of the money supply. FOMC 7 members of board of governors 5 of the twelve regional bank presidents. o All twelve attend, but only five get a vote. They talk about the economy every six weeks in washington. Feds primary tools Open market operation o Purchase and sale of federal reserve bonds FOMC- increase money supply o Government purchases bonds FOMC- decrease money supply o Government sells bonds. o Reserves Deposits that a bank has received but not loaned out. o The simple case of 100% reserve banking All deposits are held as reserves. Banks do not influence the supply of money. Assets Liability Reserves $100 Deposits $100 o Fractional reserve baking Banks only hold fraction of deposits of reserves o Reserve ratio: The fraction that banks hold as reserves o Reserve requirement: Minimum amount of reserves that banks must hold, set by the federal government. - Money supply and demand. o Money supply Is vertical (constant) and money demand is downward sloping. Demand for money will go down as interest rates go up. o There is an equilibrium quantity of money. As money supply goes up, the value of your money goes down (shift in supply curve). o Quantity theory of money ECON 110 Test 3 Notes The quantity of money available in the economy determines the value of money. Growth rate in quantity of money available determines the inflation rate. Adjustment process Excess supply of money results in a new equilibrium and everything with higher prices. o Classical dichotomy Nominal variables: dollar prices. Not controlled for inflation. Real variables: Variables measured in interest rates, ect. Controlled for inflation. Classical dichotomy When you have changes in the money supply, its going to influence nominal variables, but not real variables. o Velocity of money Rate at which money changes hands. V= (P * Y) / M P= price level (GDP deflator) Y= real GDP M= Quantity of money It's almost like it is more money if it is being turned over fairly quickly. This is money turnover o Quantity of money M * V = P * Y M= quantity Proportional to (P * Y). V= velocity of money (last equation) Relatively stable P * Y = Dollar value of economy's output of goods and services. THIS shows an increase in the quantity of money. V is relatively constant, so there is almost a direct relationship between M and P. So if a bank increases the money supply rapidly, a high rate of inflation occurs. o Hyperinflation Inflation the exceeds 50% a month, or prices increase by 100 fold over a year. Examples Austria, hungary, germany, and poland. o Is inflation bad? Not really sure. We know hyperinflation is bad, but we don't know about normal inflation and deflation. o Bad things about inflation The inflation tax Revenue the government raises by creating/printing more money. Tax on everyone who holds money ECON 110 Test 3 Notes o When the government prints money, prices rise, and the value of the money in your pocket goes down. The fischer effect Increasing the money supply doesn't really increase our overall economy. As inflation goes up the nominal interest rate goes up. Inflation fallacy: inflation robs people of purchasing power (true when you are holding dollars in a way that is not generating interest. When prices rise Buyers pay more Sellers get more Inflation itself does not reduce purchasi
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