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Introductory Economics

by: Breana Kuhn

Introductory Economics ECON 104

Marketplace > Kansas > Economcs > ECON 104 > Introductory Economics
Breana Kuhn
GPA 3.77

Brian Staihr

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Brian Staihr
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This 8 page Class Notes was uploaded by Breana Kuhn on Monday September 7, 2015. The Class Notes belongs to ECON 104 at Kansas taught by Brian Staihr in Fall. Since its upload, it has received 31 views. For similar materials see /class/182463/econ-104-kansas in Economcs at Kansas.


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Date Created: 09/07/15
Chapte O Chapte 0 000 000 O o Chapte 0 00000000000 r 1 Economics definition Three economic ideas Opportunity cost Microeconomics vs Macroeconomics Positive vs Normative Market vs Centrally Planned vs Mixed Economy Allocative vs Productive r 3 Law of Supply Law of Demand Substitution Effect Income Effect Factors that Shift Demand Income Prices of related goods Tastes population and demographics Expected future prices Factors that shift Supply Price ofinputs Technological change Price of Substitutes Number of Firms Expected future prices Know which way each factor shifts the curves ie if population increases demand shifts right Substitutes Complements Know the difference between shifts in a curve and movement along a curve Normal vs inferior good r 12 Definition of GDP GDP from 4th Quarter 2012 Final vs intermediate good Individual Components of GDP CIGexportsimports Know subsection of each component of GDP Consumer Goods Value Investment Value Exports and Imports Value The value of Government spending in GDP Methods ofmeasuring GDP Services I Passenger Fares 00000 I Travel I Other Transportation I Royalties and Licensing Fees Other private services Real vs Nominal Current Trends of the US GDP Shortcomings of GDP GDP De ator ECON 104 EXAM 3 STUDY GUIDE aggregate means total used by the Federal Resene Calculated by the National Bureau of Economic Research Aggregate demand the collective behavior of all buyersin the marketplace AD shifts due to CGNX Remember that C is the largest number then G l and Ngtlt is last VS Aggregete supply there are TWO lines cunes one is for what we coudmake and the other is what we do make The following things effect whet we can make labor technology natural resources human capital access to capital savingsinvestment LongRun Aggregete Supply LRAS it is NOT a curved line it is a vertical straight up and down line it shows the relationship in the longrun between the price and quantity of Real GDP supplied If things that affect what we make the LRAS Changes too Full Employment GDP de nition the level of GDP in the longrun this line shifts right almeslevery year if it shifts left we are BELOW Full Employment FE is the ideal amount of unemployment if it shifts right we ARE in full employment which is a good thing ShortRun Aggregate Supply what we do make sticky wagesprices means that they do not respond quickly sticky wages happen for 3 reasons 1 contracts can sometimes make wages m39ces sticky 2 rms are often slow to adjust wages 3 menu costs the cost to rms of changing prices which can make some prices sticky The SRAS Curve Slopes Up BECAUSE in the shortrun as pricelevel increases the quantity of goodssenices that rms are willing to supply increases also firms may be slow to adjust their prices note some economists think this is because rmsworkers fail to accurately predict changes in price Macro Equilibriumwhen AD aggregate demand A8 aggregate supply Factors that Affect AD Shifting 1 Consumer Demand Changesif people spend less AD shifts left amp if people spend more it shifts right 2 Governnan Polbias Change mere are we Iypes of policies Fiscal Policy changes in federal taxespurchases with the intent to achieve macroeconomic policy objectives if taxes decrease AD increases and if taxes increases AD decreases if G government spending goes up so does AD and if it goes down AD goes down too Monetary Policy the actions that the FR Federal Resene takes to manage money supply and interest rates to pursue macroeconomic objectives 3 Foreign Variable Changes lf foreign income increases then the rest of the world is richer they buy more of OUR stuff x exports goes up AD shifts right If the exchange rate increases then dolar gets weaker other countries buy more from us with OUR money the dollar x shifts right AD is increased Our Money commodity money money you can use as something else such as gold silver etc fiat money its only value is that we say it is money Money vs Credit deb1 cardsgive you access to money they are part of the money supply credi1 cards give you access to a prearranged loan not part of money supply Money in Bank when money is deposited into an account it doesn t sit there it is loaned out Required Resene RR the amount a bank is required to keep IN the bank it s a percentage assume 10 unless told othenNise the smaller the RR the more the bank can loan out and the more supply increases M1 The Nerrowest De nition of Money Supply which Includes currency the value of all checking account deposits the value of traveler s checks M2 Breeder De nition of Money which Includes All efM1 PLUS savings account balances smal denomination deposits baances in money market deposits in banks noninstitutional fund shares Excess Reserves money that hasn t been loaned out yet Simple Deposit Multiplier de nition ratio of the number of bank deposits created to the amount of new resenes formula 11RRx original deposit NOTE the original deposit is always equal to the simple multiplier because it is an excess reserve the answer is the total amount of money crossed 3 Constraints of Money Creation money has to be there people have to be willing to borrow banks have to be willing to loan Monetary Policy the actions the Federal Resene takes to pursue macroeconomic goals along with conducting the monetary policy the FR also regulates commercial banks controls money supply and keeps the economy strong 3 Parts of the Federal Reserve board of governors theirjob monetary policy and banking supenision 12 regional locations Federal Open Market Committee FOMC board of government that regulates banks and the president of the committee decides the interest rate Bonds A bond is sort of an IOU you can buy a government bond for 1000 which means you are loaning the government 1000 every year for 10 years they pay you a portion of the loan let s say 5 or 50 at the end of the 10 years they pay you back the original loan of 1000 plus the 5 If you sold that band someone pays you 1200 for the 1000 bond you purchased from the govt then they start receiving the 50 dollars per year they are not earning 5 like you did SO when the price of a bond goes UP the rate it pays goes down When the price of a bond goes DOWN the rate it pays goes up if the rate people are receiving on bonds goes down the rate they pay on things like cars houses etc go down too in a weird way increasing the price of bonds shouldlower interest rates people pay on other loans such as car loans or house loans Federal Reserve LongRun Issues the FR usually lowers the SRAS as it is always below 1 but has problems with lowering the LRAS Solution for the FR sell a lot of shortterm bonds this will lower the prices and raise rates that money can be used to buy longerterm bonds BECAUSE buying bonds INCREASES their price which lowers longterm rates Federal Funds vs Discount Rate current federal funds rate 025 current discount rate 25 to 75 prior to 2003 the FR set the discount rate lower than the Fed Funds rate the federal resene aims for the Federal Funds Rate by buying and selling bonds to banks nterest Rates whether paid or received both go up or down together 3 ways Fed can increase the Money Supply 1buying bonds Open Market Operations 2 reducing the Reserve Requirement 3 lowering the targetfor the Federal Funds Rate THE POINT IS TO SHIFT AD RIGHT Fiscal Policy use of G government spending ANDOR taxes to adjust AD ADCIGNgtlt Automatic Stabilizers NOT part of Fiscal policy govt spending and taxes that automatically increase or decrease with the business cycle indirect income taxes are the BIGGEST part of government revenue and social security is 2nd biggest Government Spends THE MOST on Iransferpaymenls social security unemployment etc 2ndon defense 3 don grants 4mon other things and S Hon debt interest Stimulus Bill is part of Fiscal Policy spending money to get peoples working cut taxes and push AD right not like the bailout that was to keep big banks in business the stimulus bi made the recession better than it would ve been it is still being paid out Iook atJunderstand the chart on page 608 but don t memorize Fu Employment is ALSO known as POEI39ENTIAL GDP which is what the Federal Reserve strives for the 4 r quot 39 quotin 39 quot reserve Multiplier Effect series of increase in consumption spending caused by an initial increase in autonomous expenditures a fancy way of saying ripples through the economy use the same formula as the simple multiplier but plug in MP0 defined next where the required resenes would go 11MPCY to find the multiplier to get to this formula begin with YC x change in Y change in sove for Y which stands for the real GDP further details on this equation below MPCMerginel Propensity of Consumption this number is the fraction of each dollar that is spent as opposed to saved we need this number to calculate the multiplier MULTPLER11MPC some economists believe this number is 2 or 3 but most think it is less than 1 Equilibrium GDP when ADAS must nd when aggregate expenditure is the same as income Y slaps 10 solve first nd AD ADCGNgtlt here 0 is MPC x YT Ttax revenue substitute the numbers provided into the equation and simplify until the equation looks like ADC x Y AD sove for Y to find equilibrium real GDP Government Purchases Multiplier Change in YChange in G 11MPC Plug in numbers that are given to solve Solve the denominator on the right side and then cross multiply for the amount needed to close the gap and obtain equilibrium the government purchases multiplier change in equilibrium real GDP divided by change in government purchases Tax multiplier same as the government purchases multiplier but the change in taxes is the denominator of the problem Debt vs De cit deficit any YEAR that the government spends more than it takes in we always run a de cit in 2012 itwas 11 trillion dollars a de cit in one year can be caused by something years before debt add up all of the budget deficits to get the total debt our current debt is 167 trillion our debt is made out of US saving bonds People We Owe 5 to from most to least we owe other countries 53 trillion one part of the govt owes the other part of the govt 48 trillion we owe private investors savings banks 38 trillion we owe part to the Federal Resene smalest amount we owe to statelocal govt Crowding Out the decline of private expenditures due to government purchases In the shortrun decline in consumption investment and net exports causing AD t shift right Creates a decline in private expenditures but also creates a new shortrun equilibrium in the longrun expenditures stop being affected after a period of time and remain unchanged Debt as a tool can be used to help nance things paying a lower percentage on borrowing compared to what you get back the amount of debt is not dependent on how much money you bring in Debt to GDP Retio 105 GDP157 trillion and Debt167 trillion Supply Side Economics policy actions primarily affect AS instead of AD so some economists call them supply side economics cutting taxes on ANY activity will INCREASE the level of the activity and consumption tax cuts on income will increase labor supply tax cuts on investment will increase investment Individual Income cutting these taxes increases quantity of labor opening of businesses and savings Tying to Debt lower taxes increased GDP lower taxes on higher income can theoretically produce higher tax revenue tax cuts don t pay for themselves Supply Side Argument reducing taxes increases the incentive to earn BUT that does not necessarily work


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