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by: Bethany Conn


Bethany Conn
GPA 3.71

T. Wang

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T. Wang
Class Notes
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This 13 page Class Notes was uploaded by Bethany Conn on Tuesday October 13, 2015. The Class Notes belongs to ECON 2010 at Louisiana State University taught by T. Wang in Fall. Since its upload, it has received 8 views. For similar materials see /class/223019/econ-2010-louisiana-state-university in Economcs at Louisiana State University.




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Date Created: 10/13/15
Ch3 Saturday May O3 2014 1049 PM Chapter 3 Supply and demand 0 Market 0 Buyergt wants to benefit from the good I Buyers reservation price highest price an individual is willing to pay for a good I Substitution effect buyers switch to substitutes when prices go up I Income effect buyers overall purchasing power goes down Sellergt wants to make a profit 0 I Sellers reservation price lowest price willing to sell good for D 0 Demand curve and supply curve gt I Equilibrium price price at which supply and demand intersect I Equilibrium quantity quantity where supply and demand intersect Price control gt 0 I price ceiling maximum allowable price by law Causes of Supply Demand shifts I Supply of sellers weather change in input price v I Demand price of compliments and substitutes income of buyers Equilibrium principle a market in equilibrium leaves no unexploited opportunities for individuals 0 Efficient principle 0 t l wiif i um 215 0 I Efficient if sellers pay off all production costs and buyers receive all benefits of purchase I Socially optimal quantity maximize surplus for economy from producing and selling a good I Economic efficiency all goods produced at their socially optimal level FINAL Page 1 Ch4 Saturday May03 2014 1049 PM 0 Chapter 4 spending income GDP 0 GDP A I Only final goods amp services are included I Calculate GDP D Valued added approach market value of product minus costs of inputs purchased from other firms D Expenditure approach Consumption spending by households for goods and services 0 Investment spending by firms on final goods and services 0 Government purchases final goods and services bought by government ltgt Excludes transfer payments and interest paid on government debt 0 Net Exports exportsimports ll 1 D Income approach A dollar spent is a dollar earned 0 Labor income wages salaries benefits incomes of self employed 0 Capital income payment to owners of physical capital and intangible capital 0 Equation GDP labor income capital income I Nominal GDP value output in the current year using current year prices I Real GDP value output in the current year using prices from base year I Relationship between GDP and economy D Not always a good measure because it does not adequately measure quality of life i i39wl le39ii vigil ll uva libel 7 5 4 I I I V v ww H H 1 V 0 FINAL Page 2 Ch5 Saturday Male 201d 1049 PM 0 Chapter 55 0 CPI consumer price index measures the cost of living during a particular period w I39 I II I Bias39s of CPI cannot capture quality changes introduction of new goods and services or improvements to existing goods and services o Usages of CPI I Price Indexing average price of class of goods amp services relative to same goods in base year I Deflating making nominal value real value I 39 quot I w II quotIt I I o Indexing process to convert real quantities to nominal quantities prevents purchasing power of nominal quantity from being eroded by inflation 0 Differences of Price Level and Relative Price I Price level measure of the overall level of prices at a particular point in time I Relative Price specific good is a comparison of its price to prices of other goods 0 Relationship between Inflation Rate and NominalReal interest rate I Real interest rate annual percentage increase in purchasing power of financial assets D Equation 2 W a I Nominal interest rate annual percentage increase in dollar value of asset I Relationship D Unexpected inflation benefits borrowers D Expected inflation can hurt lenders if they don t adjust nominal interest rates D F39 tendency for nominal interest rates to be high when inflation is high and low when inflation is low 0 Inflation F I x 100 FINAL Page 3 Ch6 Saturday May 03 2014 1049 PM Wages and unemployment Four important trends that have characterized labor markets in US since 1970 1 Increasing real wages 2 Slower wage growth since early 197039s 3 Increased wage inequality a Income from advanced degree is three times income of high school graduate 4 Increasing Employment in US Labor Market 0 Firms are the employers that demand labor 0 People supply labor Marginal Product extra product that an added worker generates Diminishing returns to labor amount of capital and other inputs in use held constant the greater qty of labor already employed the less each additional worker adds to production 0 Demand curve for labor downward sloping the higher the wage the fewer workers employers will hire 0 Increase in price of workers output increases value of marginal product shifting demand to right 0 Supply curve for labor upward sloping because the higher the wage the more people are willing to work 0 Reservation wage lowest wage a worker would accept for a given job Unemployment Labor force employed unemployed o A person is considered to be out of the labor force if they haven39t worked in the last week and haven39t looked in the past 4 weeks Unemployment rate unemployed labor force Participation rate labor force population 16 Unemployment spell period during which an individual is continuously unemployed Duration of unemployment length of unemployment spell Types of unemployment 1 Frictional short term unemployment associated with the process of matching workers with jobs 2 Structural long term and chronic unemployment that exists even when the economy is producing at normal rate 3 Cyclical the extra unemployment that occurs during periods of recession FINAL Page 4 Saturday Marmara m 9 w Ecunumm Gmwth Campuund Were 0 PW s merest an nngma depusn and 3H prEvmusW accummated mterest Gmwt rat REa cop pEr came V M Ma 39 f N Aan matters i 7 x i VearstnydnubmJZannua mtErEslratE m N Pm REa GDPpErcapwtamcrEasEsWHENVNmrEasEsDrNPOPW K Wm Dam men mm en 1 h A N 39 39 REa GDPpErpErSDnV POP Emmy V Average abnr pmaumtyvN Whatpmmmsgmm SharEDprpu atmanrkmgNPOP o mancapuax o Savmgandmvet m o REsEarchandDEvEmment o Mamtampahtma and Ega framEWDrk CDststEchDrm WIH o FEWErE sumErgnnds o REducEd Ews Eng 0 HEa thns o CasthRampD o CastnfEducatmn m m 39 mg amuunt m capuax mm m usE the essmeadmuunax capuax adds a prudumun FINAL PageS Ch8 Saturday May 03 201d 1049 PM 0 Saving current income spending on current needs 0 Saving rate saving income Wealth the value of assets liabilities Stock and flows 0 Flow value defined in per unit of time Rate of change in stock 0 Stock value defined at a point in time National Savings GDPYCIGNX National savings S current income spending on current needs 0 Y is income spending is C G O S Y C G OR SPRIVATE SPUBLIC Private Savings 0 Total income Y 0 Net Tax Taxes Transfers Government interest payments 39 SPRIVATE Y T C Public Savings 0 Public sectors income spend on current needs 39 SPUBLIC T 39 G Government Budget Balanced budget G T Surplus T G Deficit G T Three reasons for saving 1 Life Cycle saving saving to meet long term objectives like retirement college purchase of home 2 Precautionary Saving Saving for protection against unexpected setbacks loss ofjob medical emergency 3 Bequest Saving Saving for the purpose of leaving an inheritance FINAL Page 6 Ch 9 ssbrrdar Mame mm m mm o CDmmErma banks added debbsrks rrbrn mdwwdua s and busmEssEs and rnakebans BDHdV Lega brbrnrse away a ght Prncpa amnunt and y Em Maturatmn date date wnen thE prwmpa arnbdm Wm be rebard Tern Englh bnrrnerrbrn rssdem maturatmn 0 Oman paymEntsr pErmdm meat paymEntstDthE bundhu dEr o n Stuckrpamd bwnersnrbbranrrn o neaerye m dendxwhmh are pErmdm paymems daerrmned by managEmEnt o Recewe m lpinx rr stuck pnce mcrEasEs r V Mbney 7 any assathat can be used m makmg purchasEs 3 prwmpa usz Medmm br ekanange 2y Umt br accuunt 3y Stare Er yame Mbney supp y currEncy HEM by pub am amnensm eemmrm o CurrEncy dernand debbsrts sneakabxe debbsrts travE Ers checks k 0 M1 sayrngs debbsrts smaH dennmmatmn brnenmes rnbney market mulua mnds ban vesewes med SW9 4mg Wu r Bank HEWSKE EndEstwt rant bank reseryes dryrded by tnta debbsrts Screenthwmgzakm sozbm 23w nesay Fractmna reserye bankmg sylemthMs ess bank reserye than dmsns r sthacentm bank d u Openrmarka purchasE mcrEasEs bank reseryes andthE rnbney suppw o Openrmarket sa K decreases reeryes and rnbney supp y on Emmy Nam nal GDP Mnney stock Screen rthgzaken sozum an m FINAL Fag 7 Ch 10 Smurday May 03 2014 49 PM Shortrterm economicfluctuations yryy I Business cyclesr shortterm fluctuations in GDP and othervariables our gap W X 100 o Recessionr or contraction is a period in which the economy is growing at a rate significantly below normal o or more consecutive negative GDP growth Depression is a particularly severe recession 0 Expansion period in which the economy is growing at a rate significantly above normal Vi1m X 100 72 X u in 0 Peak beginning of a recession located atthe high point of business cycle 0 Troughr is the end of a recession Boomr strongand long lasting egtltpansion mptoms of Business cyc o Cyclical unemployment rises sharply during recessions I Real wages grow more slowl I Promotions and bonuses are deferred bor market entrants have difficultyfindingwork 0 Production of durable goods are more volatile than services and nonrdurable goods 39 39 quot 39 39 quot39 economy can produce Okun s Law w lt E m p o Recessionarygap is negative output gapgt Y gt Y I Mean output and unemploymentare less than their sustainable level 0 Expansionary gap is a positive output gap gt Y lt Y Lead to inflation I m sumofmm ml I I Unemployment rate when cyclical unemployment is 0 I Occurs when Y is atY o Cyclical 39 I Recessionary gaps have u gt u I Expansionary gaps have u lt u I Okun s Law 7 relates cyclic unemployment changes to changes in output gap 0 One percentage 39 39 in cyclical 2 l39tt LULdl and u FJNAL Page 8 Ch 11 Saturday MEWUS c 17 i 4 PM 09 Spending output and scai poiicy A in consumption Spending MPC Am dzsposublemcome Keynesian Modei In the short run firms meet demand at preset prices Mummy 1 39 Menu costs costs ofchanging prices 1MPC 39 Firms change prices when the marginai bene ts exceed marginai costs Pianned Aggregate Expenditure PAE o tai pianned spending on final goods and services 0 Consumption C V PAE Consumption Functionogt c g MPCVVT 45 iine 39 Autonomous consumption Cr spending not reiated to the ievei ofdisposabie income Weaith effect and effects of interest rates are inciuded PAE 39 Marginai Propensity to consumempcr increase in consumption spending when disposabie income increases by one doiiar 39 VVT disposabie income 0 nvestment 0 Government purchases 6 Output V Net Exports NX Weaith effectr tendency of changes in asset prices to affect househoid s weaith and thus their consumption spen ing nrnmn n quotditilr 7 part Ul penuing39 p output Induced expenditure part of spendingthat depends on output V Income expenditure muitipiierr showsthe effect of a one unit increase in autonomous expenditure on shortrrun e uiiibrium out ut Stabiiization Poiicyr government poiicies that are used to affect pianned aggregate expenditure with objective of eiiminating output gaps xpansionary poiiciesr increase pianned expenditure PAE o Contractionary poiiciesr decrease pianned expenditure PAE Two Types of stabiiization poiicies o Fiscai Poiicyr uses changes in o onetar Poiicyr uses changes in the money suppiy Government defecits G VT Reduce nationai saving ieading to iess investment which means iess growth Automatic Stabiiizerso increase government spending or decrease taxes when reai output deciines quot ui FJNAL Page 9 Ch 12 Salurday May 03 2014 1049 PM Monetary Policy and the Federal Reserve PAE C IP G NX Federal Reserve Organization izzrsta rTge o 12 Federal Reserve Bank Districts 0 Lead by Board of Governors I Seven governors appointed to 14 year terms President selects one as a chairman for presidents fouryear term 0 Federal Open Market Committee Reviews economic conditions and sets monetary policy Controlling the money sup 7 governors President of Federal Reserve bank in New York and four presidents of the other regional reserve banks rotating basis 4 members that meet eight times a year nancial markets and economy I Banking panicsr occurwhen customers believe one or more banks might be bankrupt 0 Purpose I Eliminate output gaps by changing money supply a Changes in money supply change in nominal interest rate i Interest rates affect planned aggregate expenditure PAE I Federal Funds Rater rate commercial banks charge each other on shortrterm loans 0 To decrease this the Fed conducts open market purchases I Monetary policy 0 Recessionary gap gt Sueen dippingtaken 542014 145 PM o Expansionary Gap gt V U via the Screen dipping taken 542014 147 PM I Inflation and the stock mar et 0 If investors anticipate the Fed will increase interest rates I Slows down economic activity loweringfirms sales and perhaps profits I Money Supply and Demand determine the interest rate 0 The higherthe nominal interest rate the smaller dty of money demanded I Money market 0 Money demand curve downward sloping shows relationship between aggregate quantity of money demanded M and the nominal interest rate 0 Money Supply Cu rver vertical linequot at the quantity Fed chooses to supply I Discount window lendingr lending of reserves by the Federal Reserve to commercial banks at discount rate Must fulfill reserve requirements which is the minimum ratio bank reserves to deposits that commercial banks are allowed to ma39nta39n Three ways Federal reserve can change money supply FJNAL Page 10 abmad wanna purchaseat Eachm atmn ratE nnwnwam xlnping Screen Hnnmgzauen sozma 12 DE w mange m aggrEgatE dEmand ratE w ps 1 ncrEasE 71 o ncrEasEgnvEmmEntspEndmg o CuttaxEs DEcrEasE rea mterest rate a DEcrEa DEcrEasEgnvEmmEntspEndmg MM 0 Rawseta o ncrEasErEahntErEstrate AggrEgatEsuppWrshnwshnw mam prnducEd by rmsdependsDmn atmnrate o amem m atmnm ExpE Ed m atmn 7s r atmn fmm Dutput gap ThrEEmamcausEsBfchangEmAggrEgatESupp ycurvEUpwardxlnping 1 manges m r suurc25tEchangy 5m ngm 2 Owangesmr atmnExpe atmnmfanua r atmnexceedshw E 3 g n atmmngmar h n therearermExtEma shunkstnthEprmE eve gtv gt INFlAIION INCREASES M W INFlAIION IS SI 0 Recexxinnzlyprzvltvquot INFlAIION DECREASES E FINAL Page 11 Ch 14 Saturday May 03 2014 1049 PM Chapter 14 Accommodating policy policy that allows effect of shock to occur can decrease length of recession but raise inflation Central bank independence Central bankers are insulated from short term political considerations and are allowed to take long term view of economy 0 Inflation Hawk Someone who is committed to achieving and maintaining low inflation even if short term inflation rises 0 Inflation Dove Someone who is not committed to achieving and maintaining low inflation Credibility of Monetary Policy degree to which the public believes the banks promises to keep inflation low even if doing so may impose short run economic costs Anchored expectations Depend on Central banks antiinflation pronouncements are viewed as credible o Anchored inflationary expectations peoples expectations of future inflation do not change even if inflation rises temporarily Supply side policy policies that affects the potential output Ex government spending Marginal Tax Rate amount that taxes rise when beforetax income rises by one dollar Avg Tax Rate Total taxes divided by total before tax income Inside lag delay between the date a policy change is needed and the date implemented Outside lag delay between date a policy change is implemented and the date by which most of effects on economy occur FINAL Page 12 Ch 15 chapter 15 39Jldayrhlay 032014 i 9PM L A H each other 0 Appreciationr Increase inimlue ofcurrenq relative to other currencies o Depreciationr Decrease in imlue ofcurrenq relative to other currencies traded for one another demand for the currency in foreign exchange market u 6 mnre commonin smalldeveloping economies increased supply in dollars lowers demand for dollars TightMonelary policy strengthens dollar Real Exchange Rate Price ofaverage domestic good relative to the price oflhe average foreign good when prices are expressed in common terms r I be the same in all locations Purchasing Power ofPropensilvr u the law of e price to hold 0 39 39 39 39 n the most 39 39 39 lheir currencies 0 Works hestinlong run I quot period 0 Trade Surplus exports gt imports e ci im ortsgtexports international capital owsr purchases or sales ofreal and nancial assets across international borders 0 r p39t I 39 n 39 39 lirms 0 Capital out owsr Purchases offoreign assets hvdomestichouseholds and rms iln llii l c HNAL Page 13 m is 5 639 E 239 E c s Duelllllyni allarst39udel Screen clippingtaken 532n14 E 27 PM P P e Real exchan e rate 9 PM a P ScrEEncllpplngtakEn 5320148 a PM


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