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UT / Economics / ECON 201 / econ 201 exam

econ 201 exam

econ 201 exam

Description

School: University of Tennessee - Knoxville
Department: Economics
Course: Intro Economics: Survey Course
Professor: Donna bueckman
Term: Fall 2015
Tags: Economics
Cost: 50
Name: Econ 201 Exam 3 Study Guide
Description: Covers all key terms and calculations that will be present on exam 3 in detail.
Uploaded: 04/03/2016
6 Pages 17 Views 11 Unlocks
Reviews

Eldon Emmerich PhD (Rating: )

If you want to pass this class, use these notes. Period. I for sure will!



ECON EXAM 3 STUDY GUIDE


what is Barter system?



Barter system: double coincidence of wants; difficult and can be inconvenient

Functions of Money: 

1. Medium of Exchange: buyers give to sellers for G&S

2. Unit of Account: measuring tool people use to record debt and make prices 3. Store of Value: item that’s purchase power lasts from present to future 4. Standard of Deferred Payment: not only exchangeable today; can buy today and  pay in the future

Types of Money: 

1. Commodity money: material with intrinsic value (ex. Gold)

2. Representative Commodity money: represents commodity  

3. Fiat money: “money” w/o intrinsic value; used because of gov’t decree

The Money Supply: quantity of money available in the economy  

• Currency: paper bills and coins in the hands of the public (non-bank) • Demand deposits: Bank account balances that depositors can access w/ a check  (checkable deposits)


what is indexation?



• Measuring money

o M1: Currency, Checkable deposit, Traveler’s check

o M2:  M1 plus savings deposits, small time deposits, money market mutual  funds, (cant be accessed immediately) If you want to learn more check out spinal cord injury lecture

Fractional Reserve Banking System 

• Banks keep reserves (fraction of deposits) and the rest is given out as loans:  Based on Goldsmith’s principle

• How they bank makes money

• Fed (The Federal Reserve): set reserve requirements; monetary policy tool o Regulate minimum reserve amounts (the fraction

• Reserve Ratio, R: fraction of deposits held as reserves If you want to learn more check out outermost meninx covering the brain

o Total reserves are a percentage  

• Banks Reserve Holding:

o Require Reserve: bank must hold

o Actual Reserve: what bank really holds

o Excess Reserve: amount beyond what bank must hold

                        *Actual Reserve = Required Reserve + Excess Reserve  


what is Hyperinflation?



The Money Multiplier: 

• The amount of money the bank system creates from each $1 of reserves:    $1/R

Bank T-account: Statement showing assets and liabilities

• Assets: what bank owns

• Liabilities: what bank owes to deposit

• Bank Capital: resources bank gets by issuing equity to its owners o Also bank assets minus liabilities    

• Leverage: borrowed funds pay for existing funds; investment purposes o Leverage Ratio: ratio of assets to banks capital  

2008-09 Financial Crisis:

Banks suffered losses in mortgage loans and in backed up securities. Caused by  widespread defaults.

• Credit Crunch: banks reduce lending because they have too little capital  o Fed and Treasury can inject money

• Capital Requirement:

o Gov’t regulation specifying minimum amount of capital- ensure banks can  pay off depositors and debts; a buffer

Measuring the Cost of Living: 

• Consumer Price Index (CPI): Key measurement of inflation use in the U.S o Use Bureau of Labor Statistics (BLS) to calculate  

o Measures ‘typical’ consumer cost of living

⋅ COLA basis: costs of living allowances/adjustments

Calculating CPIs: 

1. Make “Basket” = consumers surveyed; determine typical ‘shopping basket’ 2. Find Prices Don't forget about the age old question of which type of communication is highest in media richness?

3. Calculate basket cost

4. Select a base year and calc. index

5. CPI in any year equals

= 100 X (cost of basket in current year)/(cost of basket in base year) 6. Calc. Inflation Rate:

a. The percentage of change in the CPI from the previous period

b. Inflation Rate Equals  

= (CPI this year – CPI last year)/(CPI last year) X 100

CPI Problems: 

1. Issue Measuring Cost of Living

a. Substitution bias: prices change, we change. However; the Basket’s fixed 2. New Good Introduced Don't forget about the age old question of system of a down osu

a. Not included in CPI since new

b. Quality change not measured  

CPI Use: 

• Indexation: Automatic correction of inflation by contract or laws o COLA (cost of living allowances/adjustments) in multi year labor contracts o Adjustments in federal income tax bracket and social security payments • Compare Price Over Time: If you want to learn more check out ecu population

Amount in  “today’s”  dollars

Amount in T dollars We also discuss several other topics like physics 152

CPI (Price level) “today” CPI in year T

o CPI can adjust figures (costs) so they can be compare over time

• Real vs. Nominal Interest Rates:

o Nominal Interest Rate: Rate of growth measured in Face (dollar) value of a  deposit or debt. NOT corrected for inflation

o Real Interest Rate: Rate of growth in measured in purchasing power of a  deposit or debt.  Corrected for inflation

*Real Interest Rate = Nominal Interest Rate - Inflation

Cost of Inflation:     “Inflation erodes real incomes”= FALSE  

• Inflation:  the general increase in prices of things people wish to buy/sell o Cause CPI and nominal wages to increase together over long term  • Misallocation of resources create relative price variability

o Not all prices rise at the same time “blurred price signals”

• Inconvenience and inconvenience  

o Inflation alters “yardstick”(Unit of Account), thus complicating:

⋅ Planning long range

⋅ Comparing dollar amounts over time

• Hyperinflation: Inflation passing 50% per month

o Gov’t prints too much money: chasing same goods, prices increase Other Inflation Measurements: 

• Producer Price Index (PPI)

• International Price Index

• Employment Cost Index

• GDP deflator

• Core Inflation Index

   

Deflation: 

Downward pressure on price, not all bad • However:

o Low output (economic  

growth) = Low employment  

Bureau Labor Stats:

The ‘best’ measure of inflation for a  given application depends on the  intended use of the data

▪ Affects buyers, slows purchasing

o Increases value of debt = Increase burden

▪ Private and private debt

▪ Lending slows

o Create negative interest rates  

Gross Domestic Product (GDP): Income expenditure

The market value of all finial goods and services produced within a country in a given  period of time 

Finial Goods: for the end user

Intermediate goods: used to produce other goods GDP: Expenditure: 4 components 

Components add up to GDP Y= C +  I  + G  +  NX

1. Consumption (C): Total spending by on G&S by a household

2. Investment (I): Total spending on:  

o Capital equipment: help in the production of other G&S

o Structures (ex. factory, house)

o Inventories: goods that have been produced, but not sold

3. Government Purchases (G): Spending on G&S by the government at all levels  (federal, state, local). Excludes transfer payments (Social Security, UI benefits)  4. Net Exports (NX): NX = Exports  – Imports     (Trade balance: Surplus or Deficit)

GDP and Economic Well-Being 

• Real GDP per Capita: key indicator of average persons standard of living  o Real GDP per capital= real GDP population

• GDP Omissions:

o The environments quality  

o Leisure time

o Non-market activity

o Equitable distribution of income

• GDP’s importance to us:

o Large GPD means the country cant afford things like better schools, clean  environment, health care, etc.

o Indicators of life quality positively correlate with GDP

Business cycles:  

• Short-run economic fluctuations around the long run trend

▪ 4 phases:    1. Peak                                      (Back to Peak)

                                                         2. Recession                        4. Recovery             3. Trough

• Recession- Periods where real incomes falls and unemployment rises o Depression- sever recession (rare)

Real vs Nominal GDP 

• Nominal GDP:  Output at current prices. Not corrected for inflation • Real GDP: Values output using prices of a base year. Is corrected for inflation

The GDP Deflator: 

• It is a price index (measurement of overall prices).  Can be used to calculate  inflation

GDP Deflator = 100 X (Nominal GDP/ Real GDP)

Productivity: output per worker

• A countries standard of living depends on their ability to produce G&S o Depends on productivity: The value of output produced per unit of labor        

        Y = Real GDP (quantity of labor produced)         Productivity = Y/L         L = Quantity of Labor                                                 (output per worker)

Factors of Production 

• Physical Capital = k = Equipment and Structures used to produce G&S  o k/L = Capital per worker 

o Productivity is higher when the average worker has more capital  • Human Capital = H = Knowledge and Skills workers acquire  

o H/L = the average worker’s human capital  

o Productivity is higher when the average worker has more human capital

• Natural Resources= N = Nature provided imports  

o All else equal, more N lets the country produce more Y

o Countries don’t need N to be wealthy

Technological Knowledge 

• Society’s understanding of the best way to create G&S

o Advance in knowledge: increases production (more output from resources) • Technological change: Advances in knowledge applied (intervention/ innovation  combination)

Growth Polices 

• Foreign direct investment: capital investment owned and controlled by a foreign  entity  

• Foreign portfolio investment: capital investment financed by foreign money, but  is operated domestically  

• Education: Policy promotes investment in H (public schools, subsidies in college  loans)

o Education’s positive externalities: Each year of schooling, increase works  wage by 10%

o Opportunity cost: present and future income

• Health and Nutrition: Healthier works = more productivity; investment in H o Malnourished countries: raising caloric intake increases worker productivity • Property rights: Ability for people to exercise authority over resources they own o Stable government = stable constitution = law enforcement

• Political Stability: Justice system= Enforce contracts, address fraud/ corruption,  have effective courts

o Political instability: Uncertainty over whether property rights will be  protected in the future is created

• Free Trade:

o Inward-oriented policies: limits on investments from abroad. Avoid  interaction with other countries

o Outward- oriented polices: eliminate foreign investment and trade  restrictions. Promotes involvement with the world economy

Population Growth 

• 3 ways it can affect living standards:

1. Stretch Natural Resources: Technological productivity and progress  growth

2. Dilute the Capital Stock:

a. Larger population = Higher L = Lower k/L = lower productivity and  living standards  

b. Applies to H as well

3. Promote Tech. Progress: Larger population =

a. More scientist, engineers, inventors

b. More frequent discoveries

c. Faster tech progress/ economic growth

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