Econ 201 Exam 3 Study Guide
Econ 201 Exam 3 Study Guide ECON 201
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This 6 page Study Guide was uploaded by Ekene Tharpe on Saturday April 2, 2016. The Study Guide belongs to ECON 201 at University of Tennessee - Knoxville taught by Donna Bueckman in Fall 2015. Since its upload, it has received 298 views. For similar materials see Intro Economics: Survey Course in Economcs at University of Tennessee - Knoxville.
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Date Created: 04/02/16
ECON EXAM 3 STUDY GUIDE 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) • 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) 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 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 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 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 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: Amount in Amount in T CPI (Price level) “today” “today’s” dollars dollars 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) Bureau Labor Stats: • International Price Index • Employment Cost Index The ‘best’ measure of inflation for a • GDP deflator given application depends on the • Core Inflation Index intended use of the data Deflation: Downward pressure on price, not all bad • However: o Low output (economic growth) = Low employment § 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 Components add up to GDP GDP: Expenditure: 4 components 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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