Economics Final Exam Study Guide
Economics Final Exam Study Guide ECON 2305 - 001
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This 9 page Study Guide was uploaded by DulyNoted on Thursday December 10, 2015. The Study Guide belongs to ECON 2305 - 001 at University of Texas at Arlington taught by Ronnie W Liggett in Summer 2015. Since its upload, it has received 445 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at University of Texas at Arlington.
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Date Created: 12/10/15
MACROECONOMICS FINAL EXAM STUDY GUIDE Open Market Operations (Chapter 16) “No such thing as a free lunch” Opportunity cost - Everything has a cost Fed tools of monetary policy 1. discount loans 2. reserve requirements 3. open market operations What is an open market? - Buying/ selling government securities o In you need money NOW you can sell the bond -- it’s marketable (the money you get depends on current interest rates ) - Key tool of monetary policy - Flexible - Reversible Money Market Q: What explains the downward sloping demand curve for money? A: The Opportunity Cost of Money Equilibrium in the Money Market The federal reverse controls the money supply, making the line vertical Monetary Policy at Work They bought bonds, put dollars into economy, And Increase Money Supply Monetarist View They loan out excess reserves You can’t force people to borrow and banks to lend *Bond – form of debt with the intention to make a profit via interest LIQUIDITY TRAP: A liquidity trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. Chapter 6 Funding the Public Sector TAX SYSTEM 1. Progressive - Higher income = higher tax rate - Personal income tax - Corporate income tax 2. Flat/Proportional 3. Regressive - Higher income = lower tax rate - Sales Excise tax PROGRESSIVE TAX EXAMPLE - Romo Income Est. = $11,500,000 Est. Income Tax = $4,499,915 Est. 39.1% - Rocco with wife and 2 kids Income Est. = $40,000 Est. Income Tax = 0 Flat Tax Reagen – 1984 (11%) Forbes, Perry (15-21%) What is fair? EXMAPLE: Assume flat tax 15% Joe - $15,000 (based on $100K taxable) Rocco - $ 4,500 (based on $30K taxable) What about deductions? Family? Rocco pays nothing… Regressive Tax Sales and excise taxes = $1,200 yearly Rocco = 4.0 % Joe = 1.2% Alcohol Cigarettes Lottery Federal Income Tax Progressive 10% - 3.6% Largest source of Federal Revenue Tool of Fiscal Policy (how do you deal with this if a flat rate?) “TAKE THIS MONEY AN INVEST IT AND YOU DON’T HAVE TO PAY INCOME” - Charitably contributions - Home purchases (Mortgage Interest) - Interest on municipal bonds (school/city/local) Complex (ridiculously) Social Security Tax Also called “Payroll” FICA of 1935 Matching program (Elasticity) Our National Debt Issue. What are the Issues? What can we do about it? Cut spending? – the DEFICIT (duh) Taxes (but increase on who?) Default? Re finance Sale of assets Show US Citizens some seriousness Issue? Too much spending and not enough revenue What is the congressional dilemma? Super committee- why did they fail…. Budget Philosophies 1. Balanced Budget -Revenues = expenditure -Amend the Constitution *Problem? On the national level, congress doesn’t want their hands tied. 2. Cyclically balanced Let natural business cycle balance out. 3. Functional Finance Meet Macro Goals- keep things stable *PAGE 308 per text Reduce Government spending… Increase Tax Revenues for an expanding economy Video: Obama Budget Cuts Visualization https://www.youtube.com/watch?v=cWt8hTayupE The 2012 National Road Trip https://www.youtube.com/watch?v=P5yxFtTwDcc *Good to Know per Professor Liggett (this was for the ‘pop’ quiz we took in class Monday) 18 of 60 questions = supply and demand. FLOOR IS ABOVE EQUILIBRUM – Leaves us with shortage Economic Resources Land – labor-capital – entrepreneur ability – human capital Human resources = property resources Result of price ceiling is a shortage Multiplier determined from the M = 1/1-MPC Fiscal Policy (Contractionary/decrease in taxes and Expansionary/Increase in taxes) Fed purchases bonds in the open market = expand money supply Selling bonds takes money out of the economy = shrink money supply DOLLAR IS STRONGER = Less exports DOLLAR IS WEAKER = more exports Crowding out – When the government wants money and goes into private sector so others are crowded out of the market place ACA Hot dogs – inferior good. AS income goes up demand for inferior good goes down. Consumer Surplus (Above equilibrium)/ Producer surplus (below equilibrium) Domestic Vs International Trade - Logistics (transportation/shipping) (What can be shipped? Good and bad) - Customs/religions -holidays -female/male - Currency - Tax issues (different structure and rates) - Government/ political - Communication/Language - Work Policies Basic Argument Free Trade vs. Protectionism Free Trade “Do what you do best and trade for the rest” Free trade = specialization Roots of Economic Prosperity - Private property (and its protection) - Rule of Law - Political Stability *We depend on trade and commerce. Barriers to Trade - Tariffs (Taxes) - Revenue (things we need and want in country) - Protective (influence the amount of activity that is coming in) - Embargo (Complete prohibition) - Quota (limitation) - Voluntary restriction (trying to by USA only to keep our industries up) Arguments Against - Jobs (complete with other countries for other jobs/export jobs overseas/different wage rate) - Dumping (undercutting prices to drive retailers out then raising prices) - Military self sufficiency - Infant industry (startup industry) - Licensing/ Quality Issue General Topics What do countries export? - Various goods - Services What does immigration really mean? - Export of workers - Graphically? Mexican trucking Issue -part of NAFTA -what does it mean? Mexico-Remittances -$$ returned to Mexico by workers in U.S. - Simplified in 2001- Bush/ Fox agreement -US simplified Banking Rules -Jumped 17% in Nov. 2ed largest generator of foreign currency What’s a foreign car? Somewhat blurry? The 3 issues: - Where is it built? Honda built in Ohio, Ford built in Mexico - Where do parts come from? - Where do the profits (dollars) go? P, Q = No trade P2, Q2 = Free trade Q1, Q3 = Lost Domestic Output Q3, Q2= Import P3, Q4 = Equilibrium with tariff (reaction to what domestic supplies didn’t like) What do tariffs do to equilibrium prices equilibrium consumption? Tariff Quota – higher price for consumer at expense of protecting domestic production Study Chapters 3 + 4 for Supply and Demand Exchange Rates When a tariff is added who is hurt/helped? Hurts consumer Helps domestic producer Gives government help via tariff revenue Tariff added to all cars imported from Japan, what happens to demand for American made autos Increases demand for American made Price competing goods has increased. If Japanese auto becomes increasingly popular, what happens in the foreign exchange market for yen relative to dollar? Yen appreciates in value Demand for yen shifts right Currency Question – Norwegian Kroner Thursday US$ = .1752 Kroner Friday US$ = .1851 Kroner Kroner became more expensive. Kroner appreciated relative to the dollar or the dollar depreciated relative to Kroner Monday- KR per $US = 5.85 Kroner Tuesday- KR per $US = 5.94 Kroner What happened? US dollar has appreciated relative to Kroner/ Kroner depreciated relative to US $ Planning on buying a Volvo (Sweden) Assume the only deciding factor is COST Price in Fort Worth = $38,747 Price in Gothenburg Sweden = Kr 249,701 Exchange Rate $1 =6.22 Kr Buy in Fort Worth 249,701 Kr divided by 6.22 = 39, 984 How is the market for the Mexican peso impacted by the following? 1. Improvements in Mexican production technology yield superior guitars and many musicians around the would buy these a. Increased demand for pesos = the peso appreciates 2. Perceptions of political instability surrounding regular elections in Mexico make international investors nervous about future business prospect in Mexico a. Decrease demand for pesos = depreciation of peso 3. On Wednesday, the exchange tare between Japanese yen and us l was .010. On Thursday it was .009. Did the dollar appreciate or depreciate against yen? a. Appreciate. It took less $$ to purchase the yen LONDON PURCHASES LEWISVILLE SLUGGER EXAMPLE Cost of bat - $39 each Exchange rate 1.43 dollars = 1.00 euros 12,000 bats How many pounds do they need for the purchase? 12,000 x $49 = $588,000/1.43 = 411,189 Increase demand, increase demand for dollar, and keep dollar strong. End goal of economic activity is consumption - This is not a negative or greedy goal - Consume better - Consume safer - Tv for 200 rather than 300 what does it mean? - $$$ freed up to acquire other things GOOD TO KNOW: ***42 gallons of gas in barrel Final Exam Info and Other thoughts Monday 12/14 8am. 1 ½ hours In this room Test – 62 questions Chapter - # OF Qs Chapter 6 - 12 Chapter 14 - 8 Chapter 16 - 9 Chapter 32 - 11 Chapter 33 - 5 SD – 16 Video- 1 The law of supply states that price and quantity demanded are Inversely related Decrease in the number of buyers in an area will result in A leftward shift in the curve demand (change in parameters shift in curve) As the price of apples goes up the demand for apples goes down (quantity demand) Implied At the price which quantity demanded exceeds quantity supplied a shortage is experienced, which push the price upward toward equilibrium NO questions on balanced payments REVIEW: Page 754 Question 32 -6 South shore/ East Isle Comparative advantage and specialization Bagels and donuts are substitute goods Price of bagels goes up demand for donuts go up Equilibrium price of donuts go up as well Terms of trade Market for breakfast cereal/soft drink impact from excise tax on sugar Changed parameter If fed wants to increase money supply Use discount rate Open market operations – buy bonds Graphically in money market True or false: Federal Reserve can stimulate economy by lowering taxes FALSE Largest source of revenue for federal government Personal income tax Sales tax is a regressive Social security is a flat tax and is a payroll tax, pay as go, matching system In the in class wheat example, exports down and GDP does down = Depreciation STATIC VS DYNAMIC
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