cruel existence is exam week

the four factor ls of production

land (raw materials)

labor (people doing the work)

capital (physical capital is human-made resources; human capital is skills or knowledge)

entrepreneurship (ambitious leaders that combine the other factors of production to create goods and services)

shifters of ppc

change in resource quantity or quality

change in technology

change in trade

shifters of demand

MERIT

market size (number of consumers)

expectations of future price

related goods (price) - substitutes and complements

income (normal and inferior)

taste/popularity/preference

shifters of supply

TRICES

technology

related goods

inputs (prices/availability of resources)

competition (number of sellers)

expectations (of future profit)

subsidies and taxes (government action)

law of supply

there is a direct relationship between price and quantity supplied

law of demand

there is an inverse relationship between price and quantity demanded

gdp

is the dollar value of all final goods and services produced within a country’s borders in one year

what’s not included in gdp

intermediate goods (goods inside the final goods)

non production transactions (financial transactions like stock and used goods)

non-market and illegal activity (things made at home—household production)

four components of gdp

consumer spending, investment, government spending, net exports (exports - imports)

percent change in gdp formula

(year 2 - year 1)/year 1 × 100

nominal gdp

is GDP measured in current prices. It

does not account for inflation from year to year.

(Current Year Price * Current Year Qty)

real gdp

adjusts for inflation

GDP expressed in constant, or unchanging,

dollars.

(Base Year Price*Current year Qty)

gdp deflator

nominal gdp / real gdp x100

Real GDP “deflates” nominal GDP by adjusting for inflation in terms of base year prices

T

who’s in the labor force

•16 years old and older

•Able and willing to work

•Not institutionalized (in jails or hospitals)

•Not in military, in school full time, or retired

labor force formula

labor force = unemployed + employed

unemployment rate formula

UR = # unemployed / # in labor force x 100

labor force participation rate

number in labor force / adult population x 100

natural rate of unemployment formula

frictional + structural

full employment output is the real GDP created when there is no cyclical unemployment

CPI formula

price of base year market basket in a particular year / price of base year market basket x 100

quantity theory of money

M x V = P x Y

shifters of aggregate demand

change in consumer spending

change in investment spending

change in government spending

change in net exports (exports - imports)

shifters of aggregate supply

change in resource prices

change in actions of the government (not government spending)

change in productivity

inflationary gap

actual gdp > potential gdp

positive output gap

actual UR < NRU

what does phillips curve show the trade off between?

inflation and unemployment

discretionary fiscal policy

• Definition: Deliberate changes in government spending or taxation to influence the economy.

• Requires: Action by Congress (e.g., passing a new law or stimulus package)

• Examples:
  

  • A new infrastructure spending bill

  • Temporary tax cuts or rebates

  • COVID stimulus checks

• Goal: Actively close recessionary or inflationary gaps

non-discretionary fiscal policy

• Definition: Policies that automatically adjust with the business cycle without new government action.

• Built into the system

• Examples:
  

  • Unemployment insurance

  • Progressive income taxes (people pay less when incomes fall)

  • Welfare programs

• Goal: Soften the impact of recessions and booms automatically

contractionary fiscal policy

Laws that reduce inflation, decrease GDP (Close a

Inflationary Gap)

• Decrease Government Spending

• Increase Taxes (Decreasing disposable income)

• Combinations of the Two

expansionary fiscal policy

Laws that reduce unemployment and increase GDP (Close

a Recessionary Gap)

• Increase Government Spending

• Decrease Taxes (Increasing disposable income)

combinations of the two

MPC

marginal propensity to consume

•How much people consume rather than save when there is

an change in income.

•It is always expressed as a fraction (decimal).

MPC = change in consumption / change in income

MPS

marginal propensity to save

Marginal Propensity to Save (MPS)

•How much people save rather than consume when there is

an change in income.

•It is also always expressed as a fraction (decimal)

change in savings / change in income

what is the spending multiplier

1 / mps or 1 / 1 - mpc

total change in gdp = multiplier x initial change in spending

what is the simple tax multiplier

1 - 1/MPS

problems w fiscal policy

•When there is a recessionary gap what two options does Congress have

to fix it?

•What’s wrong with combining both?

1. Deficit Spending!!!!

•A Budget Deficit is when the government’s expenditures exceeds its

revenue.

•The National Debt is the accumulation of all the budget deficits over time.

•If the Government increases spending without increasing taxes they will

increase the annual deficit and the national debt.

Most economists agree that budget deficits are a necessary evil because

forcing a balanced budget would not allow Congress to stimulate the

economy.5 Problems with Fiscal Policy

2. Problems of Timing

• Recognition Lag- Congress must react to economic

indicators before it’s too late

• Administrative Lag- Congress takes time to pass legislation

• Operational Lag- Spending/planning takes time to organize

and execute ( changing taxing is quicker)

3. Politically Motivated Policies

• Politicians may use economically inappropriate policies to

get reelected.

• Ex: A senator promises more welfare and public works

programs when there is already an inflationary gap.5 Problems with Fiscal Policy

4. Crowding-Out Effect

• In basketball, what is “Boxing Out”?

• Government spending might cause unintended effects that

weaken the impact of the policy.

Example:

• We have a recessionary gap

• Government creates new public library. (AD increases)

• Now but consumer spend less on books (AD decreases)

Another Example:

• The government increases spending but must borrow the money (AD

increases)

• This increases the price for money (the interest rate).

• Interest rates rise so Investment to fall. (AD decrease)

The government “crowds out” consumers and/or investors5 Problems with Fiscal Policy

5. Net Export Effect

International trade reduces the effectiveness of

fiscal policies.

Example:

• We have a recessionary gap so the government spends to

increase AD.

• The increase in AD causes an increase in price level and interest

rates.

• U.S. goods are now more expensive and the US dollar

appreciates…

• Foreign countries buy less. (Exports fall)

• Net Exports (Exports-Imports) falls, decreasing AD

commodity money

something that performs the function of money and has intristic value. this is like gold, silver, cigarettes , etc

fiat money

something that serves as money as it’s backed by a government but has no other value

what makes money effective

1. Generally Accepted - Buyers and sellers have confidence that

it IS legal tender.

2. 3. Scarce - Money must not be easily reproduced.

Portable, Divisible and Durable - Money must be easily

transported, divisible into different denominations and able

to withstand weather, etc.

liquidity - M0

1. Currency in circulation

2. Bank reserves

monetary base

liquidity - M1

currency in circulation plus:

1. Checkable bank deposits (checking accounts) (Demand Deposits)

2. Savings deposits

3. Traveler’s checks

liquidity M2

M1 plus

1.Time deposits (CDs = certificates of deposit)

2.Money market funds

money demand increases if there is

1. Increase in price level

2. Increase in income

3. Decrease in technology

money demand decreases if there js

1. Decrease in price level

2. Decrease in income

3. Increase in technology

what happens if the FED increases money supply?

monetary policy

increase money supply > decreases IR > increases investment > increase aggregate demand

reserve requirement

If you have a bank account, where is your money?

Only a small percent of your money is held in reserve.

The rest of your money has been loaned out.

This is called “Fractional Reserve Banking”

The FED sets the amount that banks must hold

The reserve requirement (reserve ratio) is the percent

of deposits that banks must hold in reserve (the

percent they can NOT loan out)

discount rate

The Discount Rate is the interest rate that the FED charges

commercial banks. Acts as a ceiling interest rate.

Example:

•If Banks of America needs $10 million, they borrow it from the

U.S. Treasury (which the FED controls) but they must pay it back

with 3% interest.

DECREASE

To increase the Money supply, the FED should _________ the

Discount Rate (Easy Money Policy).

INCREASE

To decrease the Money supply, the FED should _________ the

Discount Rate (Tight Money Policy).

federal fund rate

The federal funds rate is the interest rate that

banks charge one another for one-day loans of

reserves.

The FED can’t simply tell banks what interest rate to

use. Banks decide on their own.

The FED influences them by setting a target rate and

using open market operation to hit the target

The federal funds rate fluctuates due to market

conditions but it is heavily influenced by monetary

policy (buying and selling of bonds

open market operations

• Open Market Operations is when the FED buys

or sells government bonds (securities).

• This is the most important and widely used

monetary policy

To increase the Money supply, the FED should

BUY

_________ government securities.

To decrease the Money supply, the FED should

SELL

_________ government securities.

money multiplier

1/ reserve requirement/ratio

What is IOR (Interest on Reserves) ?

- The interest rate that the Federal

Reserve pays commercial banks to

hold reserves