Principles of Macroeconomics
Principles of Macroeconomics ECO 2013
University of Central Florida
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This 18 page Class Notes was uploaded by Toy Kertzmann on Thursday October 22, 2015. The Class Notes belongs to ECO 2013 at University of Central Florida taught by Edward Wolpert in Fall. Since its upload, it has received 65 views. For similar materials see /class/227631/eco-2013-university-of-central-florida in Economcs at University of Central Florida.
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Date Created: 10/22/15
ECOl iOlTl lCS study of scarcity and the choices people have to make because of it Less things are available to satisfy everyones wants RGSOUFCGS used to make goods and services 3types 1 Humanabor 2 Naturaand 3 Physicaman made 8 guide posts fOpportunity cost Ex Friday night 1st choice go out 2nd choice sleep 00 3 study 2 Economizing behavior when faced with two alternatives person will choose with one with more benefit and less cost 3 Incentive matter as incentive evolves choices change 4 Marginal additional cooler5 ice 3 beern2 10 marginal cost for 1st beer Marginal cost for 2nd beer is 2 5 Information costly but helps make a better decisionbigger investmentmore info ppl gather 6 Secondary effects unintentional consequence of a choice 7Vaue of a good is subjectivegum diff for everyone 8Abiity to predict Positive vs Normative Normative untestableopinion Positive scientific can testexamine EX If government cuts taxes consumption will rise Pitfalls to avoid 1Ceteris Paribus all other things are equal You cant assumeyou have to include all variables 2Good intention does NOT mean good choice don t et wrapped up in ethics 3Association is not causation just because two thing happen at the same time does not mean one caused the other 4 Fallacy of composition good for one may not be good forthe group Value trade creates value Both parties in transaction are winners transaction cost cost that keeps trade from taking place middle man arranges trade bring buyer and sellertogether Property Rights In order to have property rights you need 1 Right to exclude 2 Legal protection 3 Right to exchange ppl take care of their stuff if not property value decreases Production Possibility CurvePPC The max amount of any two goods that can be produced from a fixed sex of resources and the possible trade offin producing them A all kibbles no bits B no kibbles all bits C some of both D With in PPC not max E above capability Way to increase PPC Better technology More time Law of Comparative Advantage all about specializing in production produce the good you have the low opportunity cost and trade for the good with high opportunity cost Absolute Advantage 4 just seeing who is more productive Kibs Bits mat 3 1 3 Questions for every economy 2 what to make 3 How will it be produced 4 For whom is it being made for Markets capitalism Socialismcoective decision Law of Demand An inverse relationship When price is going up quantity demand goes down 5 When price goes down demand goes up Demand curve a collection of points that show price and the corresponding amount of quantity demand Consumer surplus If you value the service for greater than the market price you receive consumer surplus If you value the service at exactly market price transaction takes place but NO consumer surplus ex willing to pay 250 and actual price 100consumer surplus 150 Elasticity of demand Inelastic no response When there is not many alternatives or substitute goods you tend to have an inelastic response Elastic responsive Has a lot ofalternative Shift of Demand Vs Shift of Quality Demand Change onD movement along the demand curve a to b Causes 9 Change in price of the good Price of coke goes up QD of coke goes down Change in demand any time move toward or away from origin Causes 1Change in income Change in number of consumers Change in price of related good Pepsi price goes updemand of coke goes up Compliment good good bought together Hot dogs Beer Priceup demanddown QDdown 2 Change in expectations of future prices gas 3 Demographic change make up of consumersheathcare of baby boomers 4 Change in taste and preference organic food Law of supply Direct relationship Price up quality supply up Pro ts Price X Quantity Tota revenue Total revenue Total cost Pro ts Producer Surplus Vaue time for less then market price surplus Value time for exactly market price no surplus but transaction Value time more then market price no transaction Elasticity of Supply How responsive supply is from a change in price lnelastic medical time Over time supply becomes more elastic Xbox Change supply vs Quality supply Price is the only thing that is able to change quality supply Factors that change Supply change in resources prices change in technology weather rules and regulation War Taxes Equilibrium Price control Price ceiling legally establish max price below equilibrium secondary effects 5 quality goes down 6 quantity goes down 7 secondary markets emerge 8 encourages wasteful behavior Price floor legay established minimum price above equilibrium GDP made in boundaries ofthe US but only includes final user goods and goods produced in a certain year and excludes wealth transfers EX1 buy flourto make cake then sell cakecake GDP but if you buy flour at Publix to make your own cake flour GDP EX2produced in 2008 but sold in 2009 2008 GDP EX3stock not included GNP produced by Americans anywhere in the world EX ford made in Mexico 2ways to measure GDP Resource cost income approach Output on supply side 2 Expenditure approach Demand side 5 Even if not sold put in inventory and GDP forthat year GDPconsumptionlnvestmentgovernmentspendingnet exports Net exports exportsimports can be negative Problems wnth GDP as measuring rod 1 Fails to measure household production housewife vs cleaning lady 2 Doesn t measure underground economy 15 yr old cutting grass 3 Doesn39t measure leisure time technology advantage to have shorter day 4 Fails to measure quality improvements computers used to be 2500 now 800 Nominal GDP problem GDP1 gallon of gas is the same in1975030 2010250 According to nominal GDP out put went from 30 to 250 Need to adjust for inflation Real GDP set up so pick point of comparison 1975 gt 2005 lt 2010 Real GDPnomina x deflator or comparisondeflator of other year Nominal realinflation Price index is the measure of inflation 2000 2001 2002 2003 2004 2005 2006 84 87 91 94 97 100 103 Base Saying what cost you 103 in 2006 and 94 in 2003 is going to cost you a dollar in 2005 CPI measures consumers goods groceries clothing cars PPl closely watched by investor this is the whole sale price GDP de ator broadest measure of inflation GDP deflatornominallrealx 100 Base year is always100 Inflation rate this yrs PIIast yrs PIIast yrs PX 100 Business Cycle 1 Expansionary phase unemployment down output up inflation up 2 Peak output levels off unemployment bottoms out inflation is an issue 3 Contractionary phase unemployment up output down inflation drops 4 Recession output bottoms out unemployment peaks no inflation pressure Recession 2 consecutive quarters of negative GDP Labor force participation rate labor force population Unemployment rate unemployed labor force Employment popratio employed population Discouraged worker effect when ppl give up looking for work changes 4 8 3types of unemployment 1Frictionaldue to constant economic change 2Structural due to structure 3Cyclical recessionary business conditions How markets will fail Economic ef ciency cost benefit analysis If something adds to the benefit more so than the cost then something you d want to under take Cost includes opportunity cost Lack of competition One company lacks competition there are very few alternatives or substitute When firm lacks competition they may pro t by rising price over the efficient level Price too high and quantity too low relative to economic efficiency Externalities spill over affects that a 3rd party participant to a transaction not buyer or seller NEGATIVE ex child kicking chair movies or painters throwing stuff in river pushing cost on others causes cost of production to go down which means more consumers cost too low and quantity too high relative to economic ef ciency When gov de nes property rights makes market more efficient POSITIVE exbuying plants at lowes and planting in the front yard Benefits selfand neighbors College instate tuition Benefits student and statethrough higher tax revenue price too high and quantity too low relative to economic ef ciency Public goods these are goods where no profit is made in producing them Freerider problem Save from the new no way to exclude nonpayers as a result no one pays then doesn39t get made Market Fails Consumption by one individual doesn39t affect consumption by another Government has to produce and be payed by tax ex I4 but not pure Information Problems Transaction wont happen because one party has A symmetric information Solving 3 Repeat customers incentive for supplierto not cheat you 4 Franchises overcome informational dif culties recozo13 Exam 2 Study Guide l homework answers as well Assignment 3 Economists use the term quotbusiness cyclequot to refer to fluctuations in economic activity measured by GDP or unemployment A firm purchases 600000 worth of raw materials and pays wages and salaries of 100000 and dividends of 200000 If the firm sells its output for 1 million the firm39s value added to GDP is 400000 An Americanowned McDonald39s opens in Russia How would the net revenue earned by this restaurant affect the GDP and GNP of the United States It would increase GNP and leave GDP unchanged Consider the following I You lose 50 playing cards with friends II You pay a doctor 200 to treat an arm that you broke in an accident III You pay 300 for this month39s rent on your apaltment II and 111 increase GDP Iexerts no impact on GDP Your grandfather tells you he earned 65 per hour at his job when he was a boy in 1929 Given that the CPI was 171 in 1929 and 1779 in 2001 how much would you have had to make in 2001 to have the same real hourly wage as your grandfather 676 The price of a gallon of gasoline was 130 in 2001 compared to 39 cents in 1973 However the Consumer Price Index was 444 in 1973 compared to 1775 in 2001 1980 84 100 In terms of the purchasing power of the dollar in 2001 the 1973 price of gasoline was 156 The recessionary phase of the business cycle is characterized by decreasing real output and increasing unemployment Which of the following transactions would be included in this year39s GDP for the United States Jennifer purchases a table over the Internet from a North Carolina furniture manufacturer Which of the following would be included in this year39s GDP Johnson rents a 5 year old house from Smith In 2001 the number of persons employed in the US was 13508 million while the number unemployed was 674 million The US unemployment rate during the year was 48 percent Use the data below to answer this question Civilian Population Age 16 and over 21186 Employed 13507 Unemployed 674 Refer to the above table The figures above in millions are for the United States in 2001 The US rates of labor force participation and unemployment were the labor force participation rate 669 percent unemployment was 48 percent Suppose that the consumer price index at yearend 2000 was 150 and by yearend 2001 had risen to 160 What was the inflation rate during 2001 67 percent The period of declining growth in real GDP between the peak of the business cycle and the trough is called the contractionary phase If the Civilian population age 16 and over is 22065 the number employed is 13802 and the number unemployed is 701 the employment population ratio is 6255 percent Assume that between 1990 and 2000 the money GDP of an economy increased from 8 trillion to 96 trillion and the appropriate index of prices increased from 100 to 120 Which of the following expresses GDP in 2000 in terms of 1990 prices 80 trillion Gross domestic product is the sum of the purchase price multiplied by the quantity of final goods and services produced domestically during the period Real GDP refers to Nominal GDP adjusted for price changes Assignment 4 0 Which of the following will most likely accompany an unanticipated increase in aggregate demand an increase in real output 0 Some unemployment will be present even when a dynamic labor market is operating efficiently 0 Which of the following will most likely increase aggregate supply in the long run a high rate of capital investment which expands the future supply of productive resources When prices rise consumers and businesses hold larger money balances This reduces the supply of loanable funds increases the interest rate and discourages both consumption and investment This process is called the interest rate effect 0 Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas an increase in the general level of prices 0 At the beginning of a year decision makers expect the general level of prices to increase at a 3 percent annual rate The CPI increases from 1500 to 1545 during the year this is an example of an increase in the general level of prices that was accurately anticipated o The four basic markets that characterize the economy as in the circular flow diagram are the goods and services market resource market foreign exchange market and loanable funds market 0 Which of the following would be classified as unemployed a twenty year old looking for her first job o Other things constant if the cost of labor goes down the profits of firms will increase and short run aggregate supply will shift to the right Actual GDP will be below potential GDP during a recession The shortrun aggregate supply curve SRAS slopes upward to the right because unexpected increases in prices will cause firms to expand output since the higher product prices will improve profitability Which of the following would be most likely to cause an increase in current aggregate demand in the United States Sharp increase in the value of stocks owned by Americans Which of the following will be true when the foreign exchange market is in equilibrium and exports exceed imports there will be a net outflow of capital In the aggregate demandaggregate supply model when the output of an economy is less than its longrun potential the economy will experience declining real wages and interest rates that will stimulate employment and real output Consider the following Long run equilibrium in the goods and services market requires that the price level during the current period is equal to the level that was anticipated by buyers and sellers when they entered into the agreements 11 When long run equilibrium is present the actual rate of unemployment will be greater than the natural rate of unemployment I is true 11 is false How will increased usage of the Internet by employers and employees influence the job search process It will make job related information less costly and therefore tend to reduce the rate of unemployment Macro Exam Review 0 00 o 00 l Marginal Thinking Di erence in the costs and bene ts between alternatives 0 Marginal means additional or incremental 0 Not average 0 We39re wondering should I have one more ex one more or less drink before I go home 0 It39s all about change Ralph wants to buy some milk anal a box ofcereal IfRalph buys 4 gallons ofmilk at 3 per gallon the box of cereal costs 2 If he buys 5 gallons of milk the box of cereal is free For Ralph the marginal cost of the fth gallon of milk is a zero b 100 c 200 d 300 1 Positive vs Normative a Positive testable quanti able s Not an opinion 0 Positive is testable Not an opinion Quanti able o How to remember Gotta be positive about it Can t be positive about an opinion b Normative ethical decision qualitative It s an opinion Can t be tested 0 Nomative is a qualitative ethical decision It39s an opinion You can t test it can t prove it true or false It39s qualitative 0 Ex everyone would be better off if we raised minimum wage What about person paying What is better off etc Which one of the following is a positive economic statement a People should be more concerned with the safety of air travel b Areas that have enacted public school vouchers have seen an improvement in the quality of schools c The sales tax on food should be repealed because it unfairly burdens those with low incomes d Something must be done to halt the rapid rise in health care costs 10 Change in Resource Prices alters SRAS a Price reduction lower production costs shift SRAS curve to right b Price increase increase production costs shift SRAS curve to left 0 Price change has to be longterm increase decrease to affect LRAS 5 Externalities spillover or side effect onto a third party recipient who is not a member of the original transaction Weren39t a buyer seller but somehow affected a Positive price too high output too low Inef cient use of resources when they over make resources Regulation not freeIs economically e icient Don t account for the bene t that others are receiving 0 Ex You go to the movies and the ppl behind you are talking But both of you bought tickets and both are consuming Their consumption is spilling over onto you That39s an extemality a negative one b Negative price too low output too high No relative externality and overusing resources Which of the following is the best example of an action that imposes an external cost a wear and tear on your car as the result of frequent use b deterioration in the average quality of a house you own as the result of poor maintenance c water pollution from an upstream factory that increases the cost of providing clean water todownstream residents d a rose garden on your property from which your neighbor gets much enjoyment 2 Middlemen reduce transaction costs Brings buyers and sellers together Takes advantage of transaction costs In economics the term for a person who reduces transaction costs by arranging traales forbuyers anal sellers is a an exchange broker b a middleman c a transactions specialist dan opportunity nder 13 Change in Money Supp 2 a Reserve requirements composed of currency held by the bank and deposits of the bank with the Federal Reserve System Aincrease in RR reduces supply of money A decrease in RR expands supply of money b Extension of loans by the Fed the interest rate that banks pay on these shortterm loans from the Federal Reserve is called the discount rate Higher discount rates reduce borrowing from the Fed restricting money supply Lower discount rates make cheaper for banks to borrow from the Fed expanding money supply c Open market operations buying selling of bonds US Securities and other nancial assets on the open market Money supply goes down when selling bonds When the Fed buys things it injects new money creating money out of nothing v 5 Lack of competition monopoly oligopoly barrier to entry Relative to a competitive situation ifa market lacks competition economic theory suggests that a output will be lower and price higher ipaal b output will be higher and price lower c both output and price will be higher d both output and price will be lower v 7 GDP gross domestic product market value of nal goods and services produced within a country over a year a Real GDP in ation adjusted b Nominal GDP nonin ation adjusted Haven t taken out the price change yet Formulas a Real GDP Nominal GDP GDP De ator in meas yr De ator in start year b GDP De ator Nominal GDP Real GDP x 100 0 O l Scarcity less of a good available than demanded Doesn39t mean poverty Classical vs Kegnes 12 Crowding Out Borrow money IOUs G gt T 9 SRASz LRASa AD 0 SRAS short run aggregate supply Total output of goods and service Some components of production have a xed cost LRAS as price goes up you want to increase supply All factors of production are variable Resource price will go up when price levvel goes up As this does pro t stays the same straight line if graph has long run over line equilibrium it s short run Even if b Macroequillibrium all four obtain this in the long run everybody happy where they are at unobtainable though because some outside force will allways bump that out Such as war 39239 4 Price Controls governmentmandated prices that are generally imposed in the form of maximum or mminimum legal prices 0 Price oor a legally established minimum price buyers must pay for a good or resource 39239 12 Expenditure Multiplier The ratio of the change in equilibrium output to the independent change in investment consumption or government spending that brings about the change or government spending that brings about the change 1 o o o 00 00 00 o l MPC 39239 Labor Force Participation Rate the number of people in the civilian labor force sixteen years of age or over who are either employed or actively seeking employment as a percentage of the total civilian population sixteen years of age and over 39239 Unemployment Rate The percentage of people in the labor force who are unemployed Mathematically it is equal to the number of people unemployed divided by the number of people in the labor force 39239 Opportunity Cost The highest valued alternative that must be sacri ced as a result of choosing an option 39239 Annual In ation Rate 39239 Business Cycle Fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes in real GDP 39239 Association is not Causation 39239 GDP math 239 AppreciationDepreciation 39239 Full Employment the level of of employment that results from the ef cient use of the labor force taking into account the normal natural rate of unemployment due to information costs 39239 Unanticipated In ation an increase in the general level of prices that was not expected by most decision makers 39239 Real vs Nominal GDP 0 Real GDP GDP adjusted for changes in the price level 0 Nominal GDP GDP expressed at current prices Money GDP 39239 Substitute Goods Types of Unemployment 39239 PFC A curve that outlines all possible combinations of total output that could be produced The slope of the curve indicates the amount of one product that must be given up to produce more of the other Elasticity of Demand Loanable Funds Market Real interest rate Comparative Advantage Fractional Reserve Banking Reserve Reguirement 12 Fiscal Policy Countercyclical scal policy in ation is the problem Expansionary Fiscal Policy 0 expand economy 0 increase output 0 decrease unemployment 39239 Absolute Advantage A situation in which a naiton as the result of its previous experience and or natural endowments can produce more of a good with the same amount of resources than any other nation 39239 D vs QD o v S vs S o o 00 o o o o 00 00 00 00 o O
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