Econ 2: Midterm 1 Study Guide
Econ 2: Midterm 1 Study Guide
Popular in Course
Popular in Economcs
verified elite notetaker
This 12 page Reader was uploaded by Annaamalaii Palani on Thursday April 24, 2014. The Reader belongs to a course at University of California - Santa Cruz taught by a professor in Fall. Since its upload, it has received 237 views.
Reviews for Econ 2: Midterm 1 Study Guide
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: 04/24/14
Module 1 The Study of Economics Individual Choice The Core of Economics o Economics Study of scarcity and choice o Individual choice decisions by individuals about what to do and what not to do o Economy a system that coordinates choices about production with choices about consumption and distributes goods and services to people who want them o Market economy economy in which production and consumption decisions are made by many firms and individuals each producer produces what they think will be most profitable and each consumer buys what they want Resources are Scarce o resource anything that can be used to produce something else o factors of production land labor capital entrepreneurship o land natural resources timber water minerals o labor effort of workers o capital manufactured goods used to make goods and services machinery buildings o entrepreneurship risk taking innovation 0 the sum of individuals decisions about where to allocate time and money becomes the society s choice about resources and their scarcity o opportunity cost value of what you give up when you make a choice Microeconomics vs Macroeconomics o microeconomics how individuals make decisions and how these decisions interact o macroeconomics overall ups and downs of the economy 0 economic aggregates economic measures such as GDP unemployment rate inflation rate Miememmmic llersm Macroeeonsomrina llllnesliens 5 Illueslliuns Maclroeednomiv 5 Should I go to colege or get a job How many people we Elll1liEI39BlI lo the econonly as a whole llis year What determines me many that Climatic offers Whatdetern1Iines lhe overall salary levels paid to to a new college graduarle sY in a given m1 What determines the eosl to a college of Wtlat delennines lhe overall level of prices lo the offering a new oourse economy am a whole Wharf agovernrnem policies should he arlopted to f government policies should be adopted in make it easier for mv lnronle students to pmrnote EII IIIIl IlBIII and s in the afford college econolny M a whole Wnal determines line number of ilhones What rletennines line overall trade in p egqmnen In rame p and linmcial aaels o the United Slala and me rest of me world Positive vs Normative economics o positive economics answers questions about how the economy works while normative economics is economic analysis that states how the economy should work Why Economists Disagree o Media the story is better when two economists disagree rather than when they agree the general consensus ends up not getting reported o Politics powerful interest groups hire economists who hold the same opinion o Economic Analysis o economists conduct analysis based on simplifying reality models graphs o two economists may disagree on the method in which the other economist simplified the economy and the situation Module 3 The Production Possibility Frontier ModelPPF TradeOffs The Production Possibility Frontier Model o trade off when you give up something to have something else o production possibility frontier model simplified reality containing an economy that produces only two goods shows us the concept of trade offs graphically Efficiency o efficient economy one in which there are no missed opportunities 0 the only way one can gain an advantage in an efficient economy is by rearranging the resources in a way that puts the other at a disadvantage 0 another inefficiency is involuntary unemployment people want to work but cannot find jobs c an economy is efficient in allocation when along with producers the consumers are as well off as they can be Opportunity Cost o opportunity cost of a goodservice is not only the price but also everything that one must give up in order to purchase that goodservice o constant opportunity cost when the opportunity cost of an additional unit doesn t change the ppf has a constant slope and is a straight line o economists believe that opportunity costs are typically increasing Economic Growth o economic growth means an expansion of the economy s production possibilities o two sources of economic growth o increase in resources land labor capital entrepreneurship o technology a new and more efficient way to produce goods and services Module 4 Comparative Advantage and Trade Gains from trade o trade people divide tasks among themselves and each person provides a good or service that others want in exchange for goods and services for what he or she wants o gains from trade by trading two people can get more of what they want than they would have had they been self sufficient o specialization each person engages in a task that he or she is good at Comparative Advantage and Gains from Trade An individual has comparative advantage in producing something if the opportunity cost of producing for that person is less than the opportunity cost of another individual PPF model provides a clear understanding of comparative advantage as long as people have different opportunity costs everyone has a comparative advantage and everyone has a comparative disadvantage absolute advantage one can produce more output with a given input than another individual Comparative Advantage and International Trade Economists have a positive view of international trade because they view it in terms of comparative advantage Section 1 Appendix variable quantity that can take on more than one value casual relationship value taken by one variable directly influences value taken by the other variable linear relationship if the relationship between two variables is a straight line positive relationship increase in one variable results in an increase in the other variable horizontal intercept x value when y 0 vertical intercept y value when x O slope how sensitive y variable is to a change in x change in y change in x nonlinear curve slope changes as you move along the curve absolute value value of the negative number without the negative sign time series graph successive dates on the horizontal axis and the values of a variable that occurred on those dates on the vertical axis pie chart share of a total amount accounted for by various components usually expressed in bar graph uses bars of various size and color to depict relative values of variables Module 2 Introduction to Macroeconomics Study of macroeconomics began to expand due to the Great Depression The Business Cycle Business Cycle alternation between economic upturns and downturns in the macroeconomy depression a prolonged downturn recession less prolonged downturn than depression employment and output are falling expansions recessions are followed by expansions or economic upturns in which output and employment increase macroeconomic analysis has created policies that stabilize the economy Employment unemployment and the business cycle Employment total number of people working for pay Unemployment total number of people looking for work but are unemployed o labor force sum of employment and unemployment o unemployment rate percentage of labor force that is unemployed o booming economy can push unemployment rate to 4 or lower Aggregate Output and the Business Cycle o output quantity of goods and services produced 0 during business cycles output and unemployment move in opposite directions when output is high unemployment is low and vice versa o aggregate output an economy s total level of output in a given time period Inflation Deflation and Price Stability o inflation rise in overall price level occurred between 1970 and 2009 o deflation drop in price levels o Inflation discourages people from holding on to cash as price rises the dollar can buy less People are more likely to invest o Deflation encourages people to hold on to their cash 0 price stability overall price level is either not changing or changing very slowly Economic Growth o Economic Growth increase in the maximum possible output of an economy The Use of Models in Economics o model simplified version of reality used to understand real life situations o two ways to make models o find or create a real but simplified economy o place the workings of an economy on a computer ie tax modeslarge mathematical computer programs o ceterus paribus all other things equal o thought experiments simplified hypothetical versions of real life situations Module 10The Circular Flow and Gross Domestic Product The National Accounts o national accounts consumer spending sales of producers business investment spending government purchases and a variety of other flows of money The Circular Flow Diagram o simplified representation of macroeconomy shows flows of money goods services and factors of production The Simple Circular Flow Diagram o 2 flows o goods services labor and raw materials in one direction o the money that pays for these things in the other direction o households individual or group of individuals that share the income o firms produce goods and services and hire individuals from households o product markets markets for goods and services 0 factor markets firms buy the resources needed to produce goods and services The CircularFlow Diagram This diagram represents the flows of money and goods and services in the economy In the markets for goods and services households Money Goods purchase goods and services from firmis gen and erating a flow of money to the firms and a flow SEMCES of goods and services to the households The money flows back to households as firmis pur chase factors of production from the house dU p U holds in factor markets 9 Fquotd5 ll services Goods and services Expanded Circular Flow Diagram o contains additional real world factors llouseliiolds Firms 0 consumer spending buying goods and services from firms o stocks shares of ownership of a company Factors Factor markets o bonds loans to firms in the form of an IOU that pays interest An Expanded CilrcularFlow Diagrarnz How illlloney Flows Tlhlrotiglii the Economy Government purcllmses of goods and services Governirnent borrowing Governrrilent taxes f GfllVElt39ll1n1llet139Z transfers C0TISLlt1Ef Private savings spending llouselliolds Wages profit interest rent Factor Financial gmdsf and markets mlarkets SEll V1CES Gross doirnestic Wages profit product interest tent g g if H T g T Bonronnng and stock Finrns issues by firms Investment Spemdmg Foreign borrowing Exponts and sales of stock Rest of world Irnports Foteign lending and putchlases of stock in factor markets households receive income through wages profit interest and rent government transfers what government pays to individuals without expecting a good or service in return ie unemployment insurance a disposable income income leftover after paying taxes and receiving government transfers an amount of one s income goes into private savings these private savings are then put into financial markets where individuals banks and other financial institutions buy and sell stocks and bonds as well as make loans Government spending ie military spending education etc Inventories goods and raw materials that firms hold to facilitate their operations 0 investment spending spending on new productive physical capital GDP o final goods and services goods and services sold to the final user 0 intermediate goods and services goods and services that are inputs into creating final goods and services Calculating GDP as the value of production of final goods and services c adding up the value of all final goods and services 0 value added difference between value of sales and values of inputs it purchases from other businesses Measuring GDP as Spending on Domestically Produced Goods and Services 0 adding up aggregate spending on domestically produced final goods and services flow of funds into firms to avoid double counting only add up value of sales to final buyers GDPCIGExIm GDP Consumer spending investment spending government purchases of goods and services exports imports Measuring GDP as factor income from firms in the economy o adding up income earned by factors of production in the economy Whats in and Whats out GDP o investment spending is in because it will last for a while Inputs are not counted because it is used up steel 0 stocks and bonds are not included because they don39t go into the production or sale of final goods and services c Included o Domestically produced final goods and services c Not included intermediate goods and services inputs used goods stocks and bonds foreign produced goods and services OOOOO Module 11 Interpreting Real GDP What GDP Tells Us c We need real GDP to measure actual changes in aggregate output rather than an increase in overall prices Real GDP A Measure of Aggregate Output o GDP is not a good measure of an economy s growth over time GDP will increase or decrease if overall price increases or decreases o aggregate output total quantity of final goods and services an economy produces Calculating Real GDP c To estimate true aggregate output we have to ask How much would GDP have increased if price did not change o Real GDP total value of goods and services produced by an economy in a year calculated with prices remaining constant from a given base year c Nominal GDP overstates growth What Real GDP Doesn t Measure o GDP per capita eliminates the factor of population in the calculation o Real GDP per capita is not correlated with quality of life Module 12 The Meaning and Calculation of Unemployment employed if and only if you have a job unemployed people who are actively looking for work but aren t currently employed labor force sum of employed and unemployed labor force participation rate share of the working age popuationabor forcepopulation age 16 and older 100 Unemployment rate Number of unemployed workerslabor force1OO discouraged workers individuals who want to work but aren t currently searching because they see little prospect of finding a job given the state of the job market o marginally attached workers people who say they would like to have a job and have looked for work in the recent past but are not currently looking for work o underemployed workers who would like to find full time jobs but are currently working part time because they can t find a full time job Module 13 The Causes and Categories of Unemployment job search workers who spend time looking for employment are engaged in job search frictional unemployment unemployment due to the time workers spend in job search Structural unemployment unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate o natural rate of unemployment normal unemployment rate around which the actual unemployment rate fluctuates o Cyclical unemployment deviation of the actual rate of unemployment from the natural rate 0 Natural unemployment frictional unemployment structural unemployment 0 Actual unemployment natural unemployment cyclical unemployment Module 14 Inflation An Overview Inflation and Deflation o Inflation can impose costs on the economy The Level of Price Doesn t Matter o Inflation doesn t make everyone poorer o real wage wage rate divided by price level o real income income divided by price level But the Rate of Change of Prices Does Matter 0 Inflation Rate Price Level in Year 2 Price Level in Year 1Price Level in Year 11OO o high rates of inflation impose significant economic costs o UnitofAccount Costs I unit of account role of money role of the dollar as a basis for contracts and calculations I unit of account costs costs arising from the way inflation makes money a less reliable unit of measurement o ShoeLeather Costs I high inflation rate discourages people from holding onto cash I shoe leather costs increased costs of transactions caused by a high inflation rate o Menu Costs I menu costs cost of changing a listed price I workers spend time placing stickers with new prices over old price tags Winners and Losers of Inflation nominal interest rate interest rate that is actually paid for a loan unadjusted for the effects of inflation real interest rate nominal interest rate adjusted from inflation real interest rate is nominal interest rate inflation rate disinflation when the inflation rate decreases Module 16 Income and Expenditure The Multiplier An Informal Introduction 4 simplifying assumptions o producers are willing to supply additional output at a fixed price o we take the interest rate as given o we assume that there is no government spending and no taxes o we assume that exports and imports are zero marginal propensity to consume the increase in consumer spending when disposable income rises by 1 mpc change in consumer spendingchange in disposable income marginal propensity to save the fraction of an additional dollar of disposable income that is saved mps 1mpc autonomous change in aggregate spending initial rise or fall in aggregate spending at a given level of real GDP multiplier ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change Consumer Spending consumption function an equation showing how an individual househod s consumer spending varies with the household s current disposable income autonomous consumer spending the amount a household would spend if it had no disposable income aggregate consumption function relationship between aggregate current disposable income and aggregate consumer speding CA MPCYd Yd disposable income Investment Spending Planned investment spending investment spending that firms intend to undertake during a given period inventories stock of goods held to satisfy future sales Inventory investment value of the change in total inventories held in the economy during a given period Unplanned inventory investment when a firm s inventories are higher than intended due to an unforeseen decrease in sales Actual investment spending planned investment spending plus unplanned inventory investment Module 17 Aggggate Demandlntroduction and Determinants aggregate demand curve shows relationship between aggregate price level and the quantity of aggregate output demanded by households firms the government and the rest of the world wealth effect of a change in the aggregate price level is the change in consumer spending caused by altered purchasing power of consumers assets interest rate effect ofa change in the aggregate price level rise in the aggregate price level depresses investment spending and consumer spending through its effect on the purchasing power of money holdings Fiscal policy the use of either government spendinggovernment purchases of final goods and services and government transfersor tax policy to stabilize the economy monetary policy the use of changes in the quantity of money or the interest rate to stabilize the economy Module 18 Aggggate Supply Introduction and Determinants Aggregate Supply reduction in aggregate demand a reduction of the quantity of goods and services at any given price Reason for plunge in price levels between 1929 and 1933 was the US economy moving down its aggregate supply curve relationship between aggregate price level and aggregate output Short Run Aggregate Supply Curve o in the short run a positive relationship exists between aggregate price level and aggregate output o Profit per unit of output Price per unit of output Cost of production per unit of output nominal wage dollar amount of any given wage paid sticky wages wages that are slow to fall in the face of high unemployment and slow to rise in the face of labor shortages o perfectly competitive markets producers take the prices as given imperfectly competitive market producers can somewhat choose what their prices will be Shifts of the Short Run Aggregate Supply Curve o Changes in Productivity I increase in productivity decreases production costs decreases quantity supplied and increases profit Shifts curve to the right I Decrease in productivity increases production costs increases quantity supplied and decreases profit Shifts curve to the left o Changes in Nominal Wages I increase in nominal wages increases production costs shifting curve to thele I decrease in nominal wages decreases production costs shifting curve to the right o Changes in Commodity Prices I commodity standardized input sold and bought in bulk quantities I increase in commodity prices shifts curve to left while a decrease in commodity prices shifts curve to right o Long Run Aggregate Supply Curve o in the long run aggregate price level has no effect on aggregate output o long run aggregate supply curve relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices including nominal wages were flexible o potential output level of real GDP the economy would produce if all prices including nominal wages were fully flexible o Rightward Shifts long run growth caused by I increases in the quantity of resources including land labor capital and entrepreneurship I increases in the quality of resources as with a better educated workforce I technological progress From the Short Run to the Long Run 0 economy is either on both curves simultaneously where the curves cross or on the short run curve only 0 if it is on the short run curve the economy will shift until the two curves cross and it is on both curves Module 19 Equilibrium in the Aggggate Demand Aggregate Supply Model The ADAS Model o the basic model we use to understand economic fluctuations Short Run Macroeconomic Equilibrium o short run macroeconomic equilibrium the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households businesses the government and the rest of the world Shifts of Aggregate Demand Short Run Effects demand shock an event that shifts the aggregate demand curve such as a change in expectations or wealth the effect of the size of the existing stock of physical capital or the use of fiscal or monetary policy supply shock an event that shifts the short run aggregate supply curve such as a change in commodity prices nominal wages or productivity stagflation combination of inflation and falling aggregate output Long Run Macroeconomic Equilibrium long run macroeconomic equilibrium the point of short run macroeconomic equilibrium on the long run aggregate supply curve recessionary gap aggregate output in this new short run equilibrium is below potential output recessionary gap inflicts a great deal of pain because it corresponds to high unemployment inflationary gap aggregate output in this new shortrun equilibrium is above potential output and unemployment is low in order to produce this higher level of aggregate output Output gap Actua aggregate output potential output Potential Output 100
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'