Principles of Macroeconomics
Principles of Macroeconomics ECO 2013
University of Central Florida
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Chapter 11 Calculate Inflation Rate Why is CPI an Fix the basket determine which prices in the economy are most important ie hotdogs and hamburgers Find the prices determine the prices of each basket good at each point in time Compute the baskets cost use the data on the prices to calculate the cost of the basket of goods at each particular time Choose the base year and compute the index CPI CPI price of baskets of goods and services in current year price of basket in base year all times 100 Compute the in ation rate percentage change in the price index from the preceding period the CPI an imperfect measure of the cost of living Substitution bias consumers will substitute cheap er goods for more expensive goods so the CPI will overstate the increase ofliving costs from one year to another Introduction ofnew goods an increased set of choices increases the dollar value Decreased quality of goods when quality of good deteriorates from year to year ie a car quality is very hard to measure 0 GDP deflator compared GDP re ects all things produced domestically while the CPI re ects all things bought by the consumer GDP shows things that consumers don t buy such as jets but the GDP does not show things consumers do buy such as foreign cars Largest problem with GDP OIL 1965 salary as compared to a 1990 salary Today s value Year T s value x Price level todayprice level in year T Real vs Nominal Interest Nominal interest is purely the percentage of dollars gained while real interest is the purchasing power of the dollars gained Real interest rate nominal interest rate in ation rate Using CPI to convert nominal to real values Value in year 2 dollars value in year 1 dollarsCPI in year 1 x CPI in year 2 Chapter 12 Why production limits consumption in the long run Not sure but I would assume that you can only consume as much as you can produce quintessentially Factors of Production Physical Capital toolsie more tools allow for more workers to produce more goods ie not enough tools so people have to wait to produce Human Capital knowledge and skills that workers aquire through education and training ie college Natural Resources inputs into production that are provided by nature such as land rivers and mineral deposits ie without coal there can be no steam trains Technological Knowledge understanding the most efficient ways to produce goods and services ie less people have to workin farms because technology allows less people to do the work of many Chapter 13 Four important types of financial institutions Financial markets are institutions through which a person who wants to save can directly supply funds to a person who wants to borrow The Bond Market a bond is a certificate ofindebtedness that specifies the obligations of the borrower to the holder of the bond ie an IOU Bonds differ according to three different things 0 term the length of time until the bond matures 0 credit risk the probability that the borrower will fail to pay some of the interestprincipal ie ifa company was to declare bankruptcy then they would default all of their bonds 0 Tax treatment the way the tax laws treat the interest earned on the bond most is taxable excluding municipal bonds The Stock Market represents partial ownership in a firm 0 The sale ofa stock to raise finances is called an equity finance while the sale ofa bond is called a debt finance see IOU Banks take deposits of those who want to save to loan out to people who want to spend Mutual Funds an institution that sells shares to the public and uses the proceeds to buy a selection or portfolio ofvarious stocks bonds or stocks and bonds Allows people with small amounts ofmoney to diversl l Chapter 15 How to calculate unemployment rate and labor force participation rate Labor force Number of employed Number of unemployed Employed work as paid employees worked in their own business worked as unpaid workers in a family members business full and part time Unemployed not employed available for work and tried to find a job within the past 4 weeks also waiting to be recalled from a job ofwhich theyd be laid off Not in the labor force not in the above to category home maker retired student Unemployment rate Number of unemployedlabor force x100 Labor force participation rate labor force adult population x100 Natural Unemployment Etc The normal rate of unemployment is called the natural rate of unemployment and deviation from this natural rate is called cyclical unemployment Job search is the process of matching workers with appropriate jobs always unemployment Types of Unemployment Frictional Unemployment results from the process of matching workers and jobs Structural Unemployment when the quantity of labor supplied exceeds the quantity demanded tends to happen when wages are set above the level that brings equilibrium