Econ 2105 Formulas/definitions

unemployment rate formula

number of unemployed/labor force x 100

labor force participation rate formula

labor force/working age population x 100

Inflation Rate Formula

(Price index in year 2 - price index in year 1)/(Price index in year 1) x 100

GDP deflator formula

Nominal GDP/Real GDP x 100

real interest rate formula

nominal interest rate - inflation rate

Real price formula

nominal price x base year/given year

Quantity Theory of Money Equation

Money Supply (M) x Velocity (V) = Price (P) x Real output (Y)

Quantity theory of money equation (dynamic form)

Growth rate of money supply + growth rate of velocity of money = inflation rate + real GDP growth rate

Real rate of return formula

Interest rate - inflation rate

Fisher effect equation

nominal interest rate = expected inflation rate + real rate of return

Equity formula

Equity= Value of asset- debt

Real return after tax formula:

Nominal return after tax- inflation rate

Nominal return after tax formula:

(1-capital tax rate) x nominal return

money multiplier formula

1/reserve requirement

money supply formula

money multiplier x bank reserves

Capital tomorrow equation

Capital tomorrow= capital today + investment (x) output - depreciation (x) capital today

Inflation Rate Formula

CPI Year 2 - CPI Year 1/ CPI Year 1 x 100

GDP formula (expenditure approach)

C+I+G+(X-M)

GDP formula (income approach)

Y=employee compensation + rent + interest+ profit

change in money supply formula

Money Multiplier x Change in Bank Reserves

Demand Shifters

income, population, price of substitutes, price of complements, expectations, tastes

Supply Shifters

-Technological innovations and changes in the price of inputs

-Taxes and subsidies

-Expectations

-Entry or exit of producers

-Changes in opportunity costs

M1

currency, demand deposits, traveler's checks, and other checkable deposits

M2

M1 plus savings accounts, certificates of deposit, money market mutual bonds , small time deposits and other liquid assets

Principle of arbitrage formula

FV=PV (1+ interest rate)

Output Questions (OOO)

Output: Other goes Over

Input Questions (IOU)

Input: Other goes Under

Interest rates and bond prices

-Inversely related

-Bond pays fixed annual interest payment

-Lower bond price will raise the interest rate

Solow growth rate + inflation =

Growth rate of spending

Depreciation ______ capital

Wears out

Aggregate demand shifters (AD shocks)

-money growth rate

-confidence/fear

-wealth (increased or decrease)

-taxes

-rate of gov spending

-imports/exports

insolvent

liabilities are greater than assets

liquidity

the ease with which an asset can be converted into cash

Investment

Purchase of capital goods

Rule of 70

Doubling time (in years) = 70/(percentage growth rate).

Consumer surplus formula

CS = WTP - P

Present value of a future payment formula

PV= FV/ (1+r)

Real shocks shifters

-weather

-high/low price of an input

-productivity / tech

-taxes/regulations

-disruption of production/smooth production

Shortage

Too little supply, too much demand

Surplus

Too much demand, too little supply

Marginal product of capital formula

MPk= change in Q/ change in K

catching-up growth

growth due to capital accumulation and adopting already existing ideas

cutting edge growth

is growth due to new ideas

Consumption spending includes

durable goods, nondurable goods, and services

Investment spending includes

-business fixed investment

-residential fixed investment

-inventory investment

Government spending includes

spending at all levels of government

Is new home production counted as investment?

Yes

GNP (Gross National Product)

total dollar value of goods & services produced by a nation at home or away

What kind of relationship do complement goods have?

Inverse

What kind of relationship do substitute goods have?

Direct

What relationship does price and quantity supplied have with the law of supply?

Direct

What relationship does price and quantity demanded have with the law of demand?

Inverse

Rational Rule of Buyers

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price.

What does changes in price prove do?

Move along the supply or demand curves; changes quantity demanded and quantity supplied

What kind of pressure does a shortage put on prices?

Upward

What kind of pressure does a surplus put on prices?

Downward