Final Exam Study Guide
Final Exam Study Guide eco 105
Popular in Principles of Economics: Macroeconomics
verified elite notetaker
Popular in Economcs
This 9 page Study Guide was uploaded by Daniel Hong on Sunday December 13, 2015. The Study Guide belongs to eco 105 at Pace University taught by Mark Weinstock in Fall 2015. Since its upload, it has received 71 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.
Reviews for Final Exam Study Guide
If you want to pass this class, use these notes. Period. I for sure will!
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 12/13/15
Macroeconomics Study Guide Chapter 5 Macroeconomics: the study of the nation’s economy as a whole and focuses on the issues of inflation. Microeconomics: small perspective Macroeconomics: larger perspective Inflation: sustained increases in the average prices of all goods and services. Gross Domestic Product (GDP): the total market value of final goods and services produced within an economy in a given year. Does not include stocks and bonds. (these are more into finance) Only includes goods and services. Intermediate Goods: goods that are used in the production process but are not the final goods and services. Example: Flour is an intermediate good because it is used in the process to make baked goods. But flour is not the final step of the process it is only an ingredient. The bread out of the oven is the final stage of the good. Real GDP: a measure of GDP that controls for changes in prices. Real GDP per capita (Per Capita – per person) Nominal GDP: the value of GDP in current dollars. Any other currency in the specific country. Economic Growth: sustained increases in the real GDP of an economy over a long period of time. Economists use GDP by dividing it into four broad categories Each of these categories correspond to different types of purchases that are represented in GDP. 1. Consumption Expenditures: purchases by the consumers 2. Private Investment Expenditures: purchases by firms 3. Government Purchasers: purchases by federal, state, and local governments. 4. Net Exports: net purchases by foreign sector (domestic exports minus domestic imports) Components of GDP Consumption Expenditures: purchases of newly produced goods and services by households. Private Investment Expenditures: purchased of newly produced goods and services by firms. Gross Investments: total new investment expenditures Depreciation: reduction in the value of capital goods over a one year period due to physical wear and tear. Machines that were brand new in the beginning but then it time it wear down and becomes old. Net Investments: Gross investment minus depreciation. Net Exports: Trade Deficit: the excess of imports over exports Trade Surplus: the excess of exports over imports GDP Equation: Y = GDP C = Consumption I = Investments G = Government Purchases NX = Net Exports Y = C + I + G + NX GDP = Consumption + Investments + Government Purchases + Net Exports Measuring National Income National Income: the total income earned by a nation’s residents both domestically and abroad in the production of goods and services. Gross National Product: GDP plus net income earned abroad. Personal Income: income, including transfer payments, received by households. Personal Disposable Income: personal income that households retain after paying income taxes. Measuring National Income through Value Added Value Added: the sum of all the income – wages, interest, profits, and rent – generated by an organization For a firm, we can measure value added by the dollar-value of the firm’s sales minus the dollar value of the goods and services purchased from other firms. How to use the GDP Inflator GDP Deflator: an index that measures how the prices of goods and services included in GDP change over time GDP Deflator = Nominal GDP/Real GDP x 100 Chain-Weighted Index: a method for calculating changes in prices that uses an average of base years from neighboring years. By Peak: recessions After the Trough: the expansion phase Recession: commonly defined as six consecutive months of declining real GDP. Depression: the common name for a severe recession. Transition Economy: country transitioning from a centrally planned economy to a market economy. Chapter 6 The Unemployed: Individuals who do not currently have a job but are actively looking for work. Actively looking is critical. How is unemployment defined and measured? Labor force: the total number of workers, both the employee and the unemployed Labor force = employed + unemployed The size of the civilian labor force is important. That is how we calculate the unemployment rate with the civilian labor force. Unemployment Rate: the percentage of the labor force that is unemployed 5.1% in the United States is the unemployment rate today. Unemployment Rate = unemployed/labor force x 100 Labor Force Participation Rate: the percentage of the population over 16 years of age that is in the labor force Labor Force Participation Rate = Labor Force/Population 16 years and older x 100 Hysteresis: if you don’t do your job for a while then you get rusty. Fall out of the pattern and you won’t be productive. Why should we even hire you if you don’t really do your work? Your knowledge can go down. (Not keeping up with the updates / being lazy) Once the unemployment runs out then you are going to look for a job more seriously Youth Unemployment: is a special category aged: 16-25 Alternative Measures of Unemployment and Why They Are Important Discouraged Workers: Workers who left the labor force because they could not find their jobs. Unable to find a job that they feel comfortable with in doing for a living. There are different reasons why people can’t find jobs. They like a job but they just stopped looking for one. Who Are the Unemployed? Seasonal Unemployment: the component of unemployment attributed to seasonal factors. (Lifeguards because the pool season is not year-round) Types of Unemployment: Cynical, Frictional, and Structural Cyclical Unemployment: Unemployment that occurs during fluctuations in real GDP Fluctuations in GDP is the business cycle Frictional Unemployment: Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and forms taking time to search for qualified employees. Structural Unemployment: Unemployment that occurs when there is a mismatch of skills and jobs. Hard Skills and Soft Skills are both very important in finding a job. If you talk in a way that you think is cool (cussing) then you won’t get hired because you are not talking like a well civilized employee. Something that you never want to be. There should always be structural unemployment because of people needs to be placed into their great skills. (innovation) Innovation is so important. Root of Unemployment: Drop out of school Get pregnant at a young age Make dumb and uncivilized choices Part Time: You are employed. (Not unemployment) But full time gets more benefits. U3 does not count discouraged workers and unemployment. U6 does count them. E-pop: employment to population ratio Seasonal Employees: The component of unemployment due to the seasons Natural Rate of Unemployment Natural Rate of Unemployment: the level of unemployment at which there is no cyclical unemployment. It consists of inly frictional and structural unemployment. 0 cyclical unemployment. But you still got frictional and structural unemployment. Labor mobility: is high in the United States / example: if you can’t find a job in New Jersey then you can go find a job in Pennsylvania. But you can’t do this in Europe because of language. Potential GDP: the GDP that your country could achieve if unemployment is at the natural rate. No cyclical and frictional then it is considered potential GDP. They want GDP to be close to potential as possible If your below potential GDP then you have a problem with unemployment Potential GDP minus Real GDP = Gap CBO measures potential GDP. (They have a lot of models to measure potential GDP but you should not 100% rely on them because they are not always correct.) Negative GDP: Potential GDP > Actual GDP Positive GDP: Potential GDP < Actual GDP This is not good because it can lead to inflation. Full Employment: the level of unemployment that occurs when the unemployment rate is at the natural rate. Unemployment Insurance: payments unemployed people receive from the government. Long-term Unemployment: Go more than 26 weeks of looking for a job. Consumer Price Index: a price index that measures the cost fixed basket of goods chosen to represent the consumption pattern of a typical consumer. Chapter 7 Closed Economy: Economy that trades very little with foreign countries. Open Economy: Economy that is open to trade. Classical Models (SUPER IMPORTANT): Economic models that assume wages and prices adjust freely to changes in demand and supply. “Downward nominal wage rigidity” Production Function: based on how much resources are in your economy how much GDP is produced (can make). Every country has resources. Stock of Capital: the total of all machines, equipment, and buildings in an entire economy. Labor: Human effort, including both physical and mental effort, used to produce goods and services. When there are only two factors of production, capital and labor, the production function is written as follows: Y=F(K,L) “Capital does not increase as fast as labor increase.” “Labor can be added a lot quicker.” “Only one way to make capital grow: investment.” Real Wage: the wage rate paid to employees adjusted for changes in the price level. Go by the real wage and not the nominal wage. 20 Crowding Out: the reduction in investment (or other component of GDP) caused by an increase in government spending. Closed Economy: an economy without international trade. ( C + I + G ) Chapter 9 Bifurcated: polarized, split. “In the long run everything is flexible.” “In the short run is when prices are sticky.” “Prices and wages adjust freely in the long run.” All the spending that goes on in the economy- when economists talk about aggregate demand. All the production of goods and services- what aggregate supply is. Fluctuations in the economy can be seen as failures in coordination. Business Cycle: Fluctuation in the economy. If the economy gets messed up than aggregate supply and demand cannot be equal. Short Run in Macroeconomics: the period of time in which process do not change or do not change very much. What is the Aggregate Demand Curve? Aggregate Demand Curve (AD): a curve that shows the relationship between the level of prices and the quantity of Real GDP demanded. Spending is aggregate demand and is also equal to C + I + G + NX. Why the Aggregate Demand Curve Slopes Downward? (Negative Slope) As the purchasing power of money changes, the aggregate demand curve is affected on three different ways: The wealth effect: the increase in spending that occurs because the real value of money increases when the price level falls. Aimed at consumer spending. The interest rate effect: with a given supply of money in the economy, a lower price level will lead to lower interest rates. The international trade effect: in an open economy, a lower price level will mean that domestic goods (goods produced in the home country) become cheaper relative to foreign goods, so the demand for domestic goods will increase. Decrease in interest rates Monetary policy affect the aggregate demand. Fiscal Monetary Policy Shifts in the Aggregate Demand Curve Changes in the supply of money An increase in the supply of money in the economy will increase aggregate demand and shift the aggregate demand curve to the right. Changes in Taxes A decrease in taxes will increase aggregate demand and shift the aggregate demand curve to the right. Changes in Government Spending At any given price level, an increase in government spending will increase aggregate demand and shift the aggregate demand curve to the right. How the Multiplier Makes the Shift Bigger Multiplier: the ratio of the total shift in aggregate demand to the initial shift in aggregate demand. Consumption Function: the relationship between the level of income and consumer spending. C = Ca + by (y = income) (b = MPC) Autonomous Consumption Spending: the part of consumption spending that does not depend on income. Marginal Propensity to Consume (MPC): the fraction of additional income that is spent. MPC = Additional Consumption / Additional Income Multiplier = 1/(1-MPC) 1-MPC = MPS Aggregate Supply Curve (AS): a curve that shows the relationship between the level of prices and the quantity of output supplied. The Long Run Aggregate Supply Curve Long Run Aggregate Supply Curve: A vertical aggregate supply curve that represents the idea that in the long run, output is determined solely by the factors of production. The Short Run Aggregate Supply Curve Short Run Aggregate Supply Curve: a relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand. The key factors to determine the costs firms must incur to produce output are: Input prices (wages and materials) The state of technology Taxes, subsidies, or economic regulations Supply Shocks: external events that shift the aggregate supply curve. Stagflation: a decrease in real output with increasing prices. Chapter 10 Fiscal policy: is the federal government – changes in government taxes and spending that affect the level of GDP. Revenue Neutral: its impact on the economy is neither negative nor positive. To stimulate the economy the government could increase spending. (Expansionary Policy) (Capital Deepening) Expansionary Policies: government policy actions that lead to increase in aggregate demand. Contractionary Fiscal Policy: concern is when the economy is overheating (going up too quickly) (hyperinflation- inflation being too high) Government policy actions that lead to decreases in aggregate demand. Our actual real GDP is growing more quickly than our potential GDP is growing. Both our actual and potential GDP are both growing. If there is spending than it would increase economic growth. As the government develops policies to stabilize the economy, it needs to take the multiplier into account. The total shift in aggregate demand will be larger than the initial shift. Stabilization Policies: policy actions taken to move the economy closer to full employment or potential output. There are limits to stabilization policy. (Stay close to the center line) Inside Lags: the time it takes to formulate a policy. Outside Lags: the time it takes for the policy to actually work. What makes the problem of lags even worse is that economists are not very accurate in forecasting what will happen in the economy. The inside lag on fiscal policies can be 18 months or more But the outside lag could realistically be 3 – 6 months from now from fiscal policy Monetary policies are short. Discretionary Spending: the spending programs that Congress authorizes on an annual basis Entitlement and Mandatory Spending: spending that Congress has authorized by prior law, primarily providing support for individuals. Social Security: a federal government program to provide retirement and a host of other benefits. Medicare: a federal government health program for the elderly. Medicaid: a federal and state government health program for the poor. Supply-side Economics: a school of thought that emphasizes the role that play in the supply of output in the economy. Laffer Curve: a relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged. Budget Deficit: the amount by which government spending exceeds revenues in a given year. Budget Surplus: the amount by which government revenues exceed government expenditures in a given year. Automatic Stabilizers: taxes and transfer payments that stabilize GDP without requiring policymakers to take explicit action. Deficits are not bad to automatic stabilizers. Deficits are bad for crowding out.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'