ECON heavy emphasis

Law of supply and demand

States that the price of a good adjusts to bring the quantity supplied and quantity demanded into balance

Change in quantity DEMANDED

Change in price (stays on the same demand line)

Demand shifters

Consumer preferences, income, and prices of related goods

Supply shifters

Production costs, technology, and number of sellers

GDP definition

The market value of the output of all final goods and services produced within a country in a given year. Measures the size of a nation’s overall economy

What is GDP equal to?

Consumption + Investment + Government + Trade Balance

What are the components of the expenditure approach to GDP?

Consumption, investment, government spending, and net exports

Summing up Expenditures calculation

GDP(E) = C+I+G+(X-M)

Can you compute a percentage change in GDP?

x100

Nominal GDP

The total value of goods and services produced in a given period using current prices

Real GDP

The total value adjusted for inflation

What do we do to calculate Real GDP

Real GDP = nominal GDP/price index/100

Shortcomings of GDP calculation

The exclusion of non-market transactions, income inequality, failure to account rate of growth is sustainable or not, costs composed on human health

What is the Consumer Price Index?

Measures the typical consumer’s cost of living

How is CPI connected to inflation?

It is a measure of inflation

What are the other terms related to inflation for describing changes in the CPI

Core inflation, deflation, disinflation, GDP deflator, median PCE inflation, substitution bias, and producer price index

How is CPI measured?

CPI = CPI this year - CPI last year / cost of basket in base year x 100

What is the connection between inflation and a change in the price level?

Inflation directly refers to the rate of change in the price level, meaning that when the price level of goods and services in an economy rises over time, it is considered inflation; essentially, inflation is a measure of how much the overall price level is increasing

What is a “Base Year”? How do you determine it?

A specific year chosen as a reference point in economic analysis, typically set at a value of 100, against which other years are compared to measure changes in a particular variable like price levels or economic activity

How do you calculate an inflation rate?

Inflation rate = CPI this year - CPI last year/CPI last year x 100

What are the shortcomings of using the CPI to measure inflation?

It may not accurately reflect the actual spending patterns and experiences of different consumer groups across the country

How are CPI and the GDP Deflator different?

The CPI focuses on consumer perspective while the GDP Deflator looks at the broader economy's production level

What is a “Real” interest rate?

The lending interest rate adjusted for inflation as measured by the GDP deflator

What is the “Nominal” interest rate

The stated interest rate on a loan or investment without any adjustments for inflation, compounding, or other factors

How are real and nominal interest rates related to inflation?

Shows the true return on an investment after accounting for how much money is worth in the future

How does inflation transfer wealth?

By transferring purchasing power from lenders to borrowers

What is unemployment?

When an individual is unemployed and looking for work/can’t find work

Unemployment rate

The percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

How is the unemployment rate calculated?

unemployment rate = unemployed people/total labor force x 100

What is the labor force?

The number of employed people plus the unemployed

What is a discouraged worker?

Those who have stopped looking for employment due to the lack of suitable positions available

What are the shortcomings of unemployment calculations?

Excludes discouraged workers, does not distinguish between full-time and part-time work, mis reports of work status in the BLS survey

U1

Person unemployed 15 weeks or longer

U3

Unemployed and looking for work

U6

Total unemployed, plus discouraged workers, plus all marginally attached workers (part time)

What is the “Natural Rate” of Unemployment?

The lowest level of unemployment that a stable and growing economy can sustain

Cyclical Unemployment

Type of unemployment that rises and falls along with the business cycle

Structural Unemployment

Happens when there are more people looking for jobs than there are jobs available

Frictional Unemployment

Exists in any economy due to people being in the process of moving from one job to another

How does unemployment impact different people differently?

Based on factors like race, ethnicity, age, education level, gender, and geographic location

Who measures the unemployment rate?

The U.S. Bureau of Labor Statistics (BLS)

What are the various reasons why structural unemployment exists?

Technological advancements, industry shifts, globalization, lack of education or training, geographic limitations, and government policies

How is productivity calculated?

Productivity = output(gdp)/input

What are productivity determinants?

Human capital, technological change, economies of scale

Why is productivity important?

Allows for more production of goods and services which leads to increased profit, higher wages, economic growth, and better standard of living

What is Real GDP per capita?

A measure of a country's economic output per person, adjusted for inflation

How do you calculate Real GDP per capita?

Real GDP per capita = Real GDP/population

What is money?

Whatever serves society in four functions

Medium of Exchange

Whatever is widely accepted as a method of payment

Store of Value

Something that serves as a way of preserving economic value that one can spend or consume in the future (i.e., an asset)

Unit of Account

The common way in which we measure market values in an economy (i.e., price tag)

Standard of Deferred Payment

Money must also be acceptable to make purchases today that will be paid in the future

What are the two types of money?

Commodity and Fiat

Commodity Money

An item is used as money, but which also has value from its use as something other than money

Fiat Money

Has no intrinsic value, but is declared by a government to be the country’s legal tender

What is liquidity and what type of money is more liquid?

M1 Money 

What is the Federal Reserve System?

The central banking system of the United States, responsible for monetary policy and regulating banks

What is the federal Reserve System’s purpose?

To maintain a stable and healthy financial system and economy, setting interest rates, managing the money supply, and regulating financial markets

What are the three tools of the Fed?

Open market operations, the discount rate, and reserve requirements

How do banks create money?

Accepting deposits and making loans

What are fractional reserves?

A system where banks are legally allowed to hold only a fraction of their deposits as reserves, and they can then lend out the remaining portion

Actual reserves

Total amount of cash a bank holds

Required reserves

The minimum amount of cash a bank is legally required to hold, determined by a reserve requirement set by the Federal Reserve

Excess reserves

The amount of cash a bank holds above the required amount

What is Aggregate Demand?

The amount of total spending on domestic goods and services in an economy

What does aggregate demand look like on a graph?

Downward sloping

What is Aggregate Supply?

The total quantity of output (i.e., real GDP) firms will produce

AS Curve

Shows the total quantity of output that firms will produce and sell at each price level

What is Potential GDP?

The maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions

What causes shifts in AD? What are the results on P and Y?

Caused by changes in any of the components of AD: consumption, investment, government spending, and net exports

What causes shifts in AS? What are the results on P and Y?

Caused by changes in factors that affect the cost of production or the economy's potential output

What can reduce the effectiveness of Fiscal Policy?

Time lags in implementation, political considerations, crowding out of private investment, and a lack of coordination with monetary policy

What does Fiscal Policy influence in the short-run

Fiscal policy primarily influences aggregate demand, impacting output and employment through government spending and taxation changes

What does Fiscal Policy influence in the long-run

Fiscal policy can affect the economy's potential for growth and overall level of output by influencing factors like savings, investment, and productivity

What do changes in the money supply impact in the long-run?

Primarily affect the overall price level

What are the shortcomings of stabilization policies?

Potential destabilization, long lags in implementation and impact, and the difficulty of predicting how the economy will respond to specific policies