ECN 211 ASU Final Exam Marburger

The Circular Flow Diagram

Green arrows represent the flow of money and red represents to flow of goods/services

Production possibilities Frontier/ Curve PPF: PPC

The curve shows what is possible within an economy

D- impossible

A&B - feasible efficient

C - feasible & inefficient

PPF shifts out when...

the economy can produce more of everything

Opportunity Cost

the cost of what you give up to get something else in terms of time, money, or other goods

Absolute Advantage

Who can make most of that good

Comparative Advantage

The lowest opportunity cost for that good

What would allow Panama and Canada to trade?

They want to trade within their opportunity cost

Demand

The amount consumers are willing and able to purchase

Supply

The amount that producers are willing and able to produce

Law of demand

Demand always slopes down

Law of supply

Supply always slopes up

Equilibrium

Where the two curves meet

Demand shifters

- Price of substitute or complement

- Consumer preference

- population growth

- Income and expectation of future income

Supply shifters

- Price of input

- Technological advancement

- Number of producers

- Producer expectation

Solve for Equilibrium Price and Quantity

Make both sides equal to each other

Ex. Q = 100 - 6P & Q = 28 + 3P

100 - 6P = 28 + 3P

72 - 9P

P = 8

28 + 3(8)

28 + 24

52 = Q

Economic Growth is measured...

Growth is measured in many ways, usually GDP (the market value of all final goods and services produced in a nation's borders) Productivity (output/labor hours)

What causes productivity?

- Human Capital

- Natural Resources

- Physical Capital

- Technological Knowledge

Human Capital

Knowledge and skills of workers (education, training)

Natural Resources

Anything that comes from nature (timber, oil, coal)

Physical Capital

All the physical tools and machines used to do business

Technological Knowledge

The general knowledge of the world

GDP Equation

GDP = G + C + I + NX = ALL PRODUCTION = ALL CONSUMPTION

Consumption (C)

Things purchased for final use

Investment (I)

Things purchased to use to make more money later

Government Spending (G)

Any money the government uses

Nominal GDP

is this years' prices * this years quantities

Real GDP

is base years' prices * is years quantities

GDP Deflator

Nominal GDP/Real GDP*100

Inflation

using GDP deflator = (this years deflator - last years' deflator) last years' deflator

CPI- Consumer Price Index

Makes a basket of good to calculate the cost of living for a given year. Multiply current year prices * base year quantities

Price Index

Costs of this years basket * 100

Labor Force Participation Rate

labor force/adult population * 100

Unemployment rate

unemployed workers/labor force*100

Types of Unemployment

- Frictional

- Cyclical

- Structural

frictional unemployment

The time it takes for employees and employers to find each other

cyclical unemployment

The cycle of money

structural unemployment

The structure of the economy

Labor force

Anyone in the adult population who is able to work

Discouraged Worker

Someone who is out of work and no longer looking for a job

Employed

Person with a job

Unemployed

Someone who did not work in the last week and is actively seeking employment

People can "save" their money in numerous ways

- Corporate bonds

- Municipal bonds

- Stocks

- Deposit certificates

Corporate Bonds

Individual loans money to a company in return for interest the more risky the company the higher the interest

Municipal bond

Loan money to the government usually the lowest interest rate but also the least risk of getting paid back. Can loan to foreign governments

Stocks

Purchase ownership in company

Deposit Certificates

Depositing money in a bank

Y(GDP)

Y(GDP) = C + I + G

S(pub) = PUBLIC SAVINGS

S(pub) = PUBLIC SAVINGS = T - G

S (priv) = PRIVATE SAVINGS

S (priv) = PRIVATE SAVINGS = Y - C - T

S(tot) = PUBLIC PRIVATE SAVINGS

S(tot) = PUBLIC PRIVATE SAVINGS = I

Money can be used as a...

- Medium of exchange

- Unit of account

- Store of value

Medium of exchange

using money to pay for things

Unit of account

using money to compare values 1 dollar is like 1 inch

Store of value

Keeping money and saving it for later

Liquidity

How quickly can i use money to pay for something

Commodity money

Paying with things that have a real value trading goods not paper money

Fiat Money

Money that derives its money from a governmental decree. A dollar is only worth 100 cents because the government says so

The Federal Reserve

- 12 banks across the country

- Control Monetary Policy

- Use Open Market Operations to set money supply- they buy and sell bonds to increase or decrease the money supply

- Set required reserve ratio for how much banks must hold in reserves

Banks

Banks are required to hold a certain percentage of their deposits in cash called RESERVES. The fed sets the REQUIRED RESERVE RATIO. Banks can also choose to hold extra cash on hand called EXCESS RESERVES.

Banks (2)

Any money not held in reserves can be loaned or used to purchase securities out to other clients who spend the money where it then gets deposited into a new bank and loaned out again. This created extra money which we find by

Leverage Ratio

All assets (reserves + securities + loans)/ capital (owners equity)

Discount Rate

Interest rates for banks to borrow from the Fed when they need to increase their reserves

Federal Funds Rate

Interest rate for banks to borrow from each other for short (overnight loans)

Classical Dichotomy

The distinction between nominal (today's dollars) and real variables (the actual worth of the money based on how much you can purchase with it)

Monetary Neutrality

Changes in money supply will only affect nominal values not real ones

Inflation

Is when nominal values increase over time

Deflation

Is when nominal values decrease over time

Inflation tax

Cost of inflation cause by when the government prints money to pay off debts

Velocity of Money

The number of times units of currency is used to pay newly produced goods or services V=(P*Y)/M

V = Velocity, P= Price level, Y= GDP, M= Money supply

Menu Costs

Cost of having to constantly update prices

Shoe Leather Costs

Cost of having to run cash to the bank or use it before it becomes worthless

Unit-of-account-costs

Inflation causes people to trust money less so it becomes less useful to measure costs

Recession

A recession is 6 months or more of falling real GDP

Aggregate

Aggregate is just a fancy way of saying all of. Aggregate Demand is everything being demanded in a country AD=GDP

Shifters in Aggregate Demand

- Any of the components of GDP (C,I,G,NX)

- Wealth of consumers

- Interest rates

- Taxes

- Exchange rates

Aggregate Supply

Changes in money supply will change nominal values like income or inflation but not real values like the factors of production (monetary neutrality) which determine Long Run Aggregate Supply (LRAS)

Long Run Aggregate Supply (LRAS)

LRAS is tied to the rate of unemployment (0 cyclical unemployment) so if the natural rate decreased LRAS will increase

Short Run Aggregate Supply (SRAS)

Short Run Aggregate Supply (SRAS) cruve slopes upward because prices are sticky (sticky price theory) which means that when money supply changes and prices need to change it takes time for suppliers to adjust their prices from what they expected to the actual nominal variables

Shifters in Aggregate Supply

- Input prices

- Human capital

- Government regulations

- Anything that will cause a change in overall productivity

- If one curve shifts the other will need to shift to return the long run aggregate supply curve

Fiscal Policy

Fiscal policy = government spending and taxation whereas Monetary Policy = fed changing money supply and interest rates

Government Policy

In a hypothetical closed economy if the government spends money it get a multiplier just like the fed increasing money supply. The spending multiplier = 1/(1-MPC) where MPC is the percentage at which people spend their money

Government Policy (2)

While government spending will increase public spending, it will also cause crowding out and raise the interest rate slightly lowering the increase in public spending