×

### Let's log you in.

or

Don't have a StudySoup account? Create one here!

×

or

by: Andrea Lans

63

0

5

# Econ 102 Week 2 Notes Econ 102

Andrea Lans
UCLA

Get a free preview of these Notes, just enter your email below.

×
Unlock Preview

These notes cover chapters 3 and 4 of Macroeconomic Theory.
COURSE
Macroeconomic Theory
PROF.
Keskinel
TYPE
Class Notes
PAGES
5
WORDS
CONCEPTS
Economics, Macroeconomics
KARMA
25 ?

## Popular in Economics

This 5 page Class Notes was uploaded by Andrea Lans on Sunday October 9, 2016. The Class Notes belongs to Econ 102 at University of California - Los Angeles taught by Keskinel in Fall 2016. Since its upload, it has received 63 views. For similar materials see Macroeconomic Theory in Economics at University of California - Los Angeles.

×

## Reviews for Econ 102 Week 2 Notes

×

×

### What is Karma?

#### You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 10/09/16
Chapter 3: National Income Classical Model - Classical model: prices & wages ﬂexible; markets clear rapidly - Factors of production: K (capital), L (labor) • Production function: Y = F (K,L) (Y, K, L ﬁxed unless stated) - Reﬂects level of tech, constant returns to scale (double input, double output) - Returns to scale: constant, increasing (Y2 > zY1), decreasing (Y2 < zY1) - Factor prices: price/unit ﬁrms pay for factors of production (wage & rental rate) • Real wage = W/P P = price of output • Real rental rate = R/P - Marginal product of labor (MPL): extra output ﬁrm can produce using additional unit of labor; slope of production function • MPL = W/P = real wage; hire labor at this point • As L ↑ MPL ↓ and vice versa — 1350 in EU Black Death • Diminishing marginal returns: as 1 output ↑, MP ↓ - Marginal Product of Capital (MPK): demand curve for renting capital Rental rate: MPK = R/P • Neoclassical Theory of Distribution - Neoclassical Theory: Each factor input is paid its marginal product • Goods/labor markets perfectly competitive (price takers) • All labor is identical • Firms are proﬁt maximizing • Optimum demand for labor: π = PY - WL - RK (R = rental rate) - National income = labor income + capital income (constant returns to scale) • Y = (MPL x L) + (MPK x K) • Total output (total income) = payment to L + payment to K Cobb-Douglas Production Function - Y = AK L 1-a • capital income = MPK x K = aY MPK = aY/K • labor income = MPL x L = (1-a)Y • (1 - a) = labor income share Demand for Goods & Services ( Y = C + I + G) - Consumption: C = C (Y-T) • Disposable income: income after tax = Y - T (+ Transfer Payments) • Marginal propensity to consume (MPC): ΔC when disposable income ↑ \$1; slope of C (ΔC / ΔDI) - Investment: I = I (r) Ex: I = 1200 - 100r • • Real interest rate (r): cost of borrowing, opportunity cost of using one’s own funds to ﬁnance investment • I inversely related to r; more expensive to borrow if r high - Loanable funds market: supply-demand model of ﬁnancial system Demand (investment), supply (saving), price of funds (real interest rate) • • I (r) = demand curve for loanable funds • Private saving (Y - T - C) - Shift savings curve through preferences, tax laws (IRA, 401K, replace income tax w/ C tax) • Public saving (T - G); budget surplus if T > G, deﬁcit if T < G - Gov. ﬁnances deﬁcit by issuing Treasury bonds (borrowing) - Shift savings curve through ﬁscal policy (ΔG or ΔT) • National saving: S - National saving doesn’t depend on r • Private saving + public saving = Y - C - G = S - L.F. market equilibrium: • I = Y - C - G (L.F.) • Y = C + I + G (goods market equil.), no NX, closed economy (Autarky) - Reagan Deﬁcits: early ’80s- ↑ defense spending, big tax cuts • Policies ↓ national saving • Raised real interest rate, ↓ investment - Shifters of investment curve: technological innovations (buy new goods), tax laws that affect investment • ↑ I ↑ r, which ↑ saving & ↑ supply of loanable funds - ↑ r ↑ saving, makes borrowing more expensive, can ↓ saving through income effect Chapter 4: The Monetary System Money - Money: stock of assets that can be readily used to make transactions - Functions: • Medium of exchange • Store of value • Unit of account - Type: • Fiat money: no intrinsic value (paper currency) • Commodity money: has intrinsic value (gold coins) - Money supply: quantity of money available in economy • M1: Currency, demand deposits, travelers’ checks, checkable deposits • M2: M1 + small time deposits, savings deposits, money market mutual funds (MMMFs), money market deposit accounts • M = C + D Banks - Monetary policy: control over the money supply - Central bank: conducts monetary policy • Federal Reserve: U.S. central bank • Open market operations: Fed uses these to control \$ supply through purchase/sale of government bonds - Reserves (R): portion of deposits that banks haven’t lent Liabilities- deposits, capital, debt • • Assets- reserves, loans, securities - 100% reserve banking: system in which banks hold all deposits as reserves • No impact on \$ supply • Fractional reserve banking: banks hold fraction of deposits as reserves - Banks create money through loans; new \$ & new debt - Bank capital: resources bank owners have put into bank (liability) - Leverage: use of borrowed \$ to supplement existing funds for investment • Leverage ratio = assets / capital • Makes banks vulnerable - Capital requirement: minimum capital mandated to ensure banks will be able to pay off depositors; higher for banks w/more risky assets 2008 ﬁnancial crisis: losses on mortgages shrunk bank capital & slowed lending; gov’t • injected \$ to encourage more lending Model of Money Supply - Exogenous variables (given) Monetary base: B = C + R controlled by central bank • • Reserve-deposit ratio: rr = R / D regulations & bank policies • Currency-deposit ratio: cr = C / D household preferences • M = m x B - m = (cr + 1) / (cr + rr) - Money multiplier (m): ↑ in \$ supply resulting from \$1 ↑ in monetary base • If rr < 1; m > 1 Monetary Policy - Fed can change monetary base using: 1. Open Market Operations: Fed buy gov’t bonds using new dollars 2. Discount rate: interest rate Fed charges on loans to banks Lower discount rate, banks borrow more reserves, ↑ base • - Fed can change reserve-ratio using: 3. Reserve requirements: minimum reserve-deposit ration • Fed ↓ reserve requirements to ↓ ratio 4. Interest on reserves: Fed pays interest on bank reserves deposited w/ Fed • Fed pays lower interest rate on reserves to ↓ ratio - Fed can’t precisely control M due to household Δcr & banks holding excess reserves (Δrr, Δm, ΔM) Quantitative Easing - Fed bought long-term gov’t bonds instead of T-bills to ↓ long-term rates - Fed bought mortgage-backed securities to help housing market - After losses on bad loans, banks tightened lending standards & increased excess reserves, m fell - If banks lend more as economy recovers, rapid \$ growth causes inﬂation; “exit strategies” to prevent this •

×

×

### BOOM! Enjoy Your Free Notes!

×

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'

## Why people love StudySoup

Jim McGreen Ohio University

#### "Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Allison Fischer University of Alabama

#### "I signed up to be an Elite Notetaker with 2 of my sorority sisters this semester. We just posted our notes weekly and were each making over \$600 per month. I LOVE StudySoup!"

Bentley McCaw University of Florida

#### "I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

Parker Thompson 500 Startups

#### "It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!
×

### Refund Policy

#### STUDYSOUP CANCELLATION POLICY

All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email support@studysoup.com

#### STUDYSOUP REFUND POLICY

StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here: support@studysoup.com

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to support@studysoup.com