Macroeconomics Final

Incentives

Reward or encouragement to motivate an actions

• Could be a positive OR a negative (aka dissincentives)

Institutions

A set of rules or frameworks that impact individuals behavior or actions

• Socially, if people cannot lie, cheat, or steal, it benefits everyone because we are all held to that standard

Trade-offs/ Opportunity Cost

The value forgone or given up as a result of making a choice

Scarcity

Limitation of a resource to satisfy all wants

• As long as supplies are scarce, there will always be options

Barf point

When the consumption of the person outweighs the benefit

• We always want to get the most out of our product, so we sometimes ignore something called sunk costs

Sunk costs

These are costs that have already occurred and should be ignored from marginal analysis

Inflation

An increase in the general or average level of prices as a result of increasing the money supply

What is the Production Possibilities Curve (PPC)?

A way of illustrating how one good produced leads to a trade off with another good because scarcity exists

• Always a curved line on a graph, anything above the curve is considered not-feasible, anything below is not-efficient

In economics, a point is efficient if…

We use all of our resources AND it lands on the production line

Absolute advantage

An economic condition where an individual is able to produce more of something than another individual

What is the equation for opportunity cost?

The other thing produced / what you’re looking for in 1 production

Comparative advantage

An economic condition where an individual is able to produce something more efficiently than another individual

Specialization

Producing only what one is good at

Law of Demand

For an increase in the price of a good, there is a decrease in the quantity demanded, ceteris paribis

Consumer surplus

The difference between what you are willing to pay and what the actual price is

What are the 5 factors of DEMAND?

1. Tastes and preferences

2. Population or number of consumers

3. Expectations

4. Income

   1. Normal goods - a good that is purchased more of with an increase in income

   2. Inferior goods - a good that is purchased less with an increase in income

5. Price of related goods

   1. Substitutes - a good that is purchased instead of another

   2. Complements - a good that one buys more of with another good

Normal goods

A good that is purchased more of with an increase in income

Inferior goods

A good that is purchased less with an increase in income

Substitute

A good that is purchased instead of another (ex. Nike vs. Adidas)

Complements

A good that one buys more of with another good (ex. socks and shoes)

Law of supply

For an increase in the price of a good, there is an increase in the quantity supplied

What are the 5 factors of SUPPLY?

1. Number of producers

2. Price of inputs/resources

3. Expectations

4. Technology/productivity

5. Environment or weather

Equilibrium

An economic condition where the quantity demanded is equal to the quantity supplied for a good

Consumer surplus

The benefit received by consumers by paying a price lower than one’s willingness to pay

Producer surplus

The benefit received by producers by receiving higher price than one’s willingness to sell

Total surplus

Consumer surplus + producer surplus

If there is a demand increase…

BOTH consumer AND producer surplus will go up

Price floor

Legally imposed minimum price on a good or service

When minimum wage increases…

Unemployment also increases

Binding policy

Producing an effect on equilibrium

Non-binding policy

“Useless policy” because there is no effect

Price-ceiling

Legally imposed maximum price on a good or service

Externality

A situation in which others positively or negatively are affected as a result of ones actions

• negative externalities are going to influence others

PMC

Private marginal cost

SMC

Social marginal cost

How are negative externalities corrected?

Through fees, taxes, and fines

How are positive externalities corrected?

Through subsidies or incentives

Gross Domestic Product (GDP)

Total value of all final goods and services produced in a country’s borders in a given year

Final good

A good that does not undergo transformation and is being produced

• A car’s final product

Intermediate good

A good used to make a final good

• Tires, windows, steering wheels, etc

Value added

The value gained from each intermediate stage of production

Gross National Product (GNP)

Total value of all final goods and services produced by a country’s businesses or forms in a given year

Real GDP

GDP accounting for inflation

The BEA

Bureau of economic analysis

Expenditure approach

What is done after the BEA collects all of the data

GDP equation

Y = C + I + G + Ex - Im

• y = GDP (aggregate output)

• c = consumption

• i = investment

• g = government spending/ expenditures

• ex-im = nx or net exports

Depreciation

The wearing down of a good over time that will eventually require its replacement

Durable goods

A good with a life exceeding 3 years

Non-durable good

Less than 3 years shelf life

GDP deflator equation

(nominal GDP/ real GDP) * 100

Growth rate equation

((GDP new - GDP old)/ GDP old) * 100

GDP per capita equation

GDP/population

Labor force

All those aged 15+ yeasr who are both willing and able to work

Labor force equation

Employed + unemployed

Unemployment rate equation

Unemployed/ labor force

Labor force participation rate equation

Labor force / population

What are the five types of workers?

1. A job loser

2. Job leavers

3. New entrants

4. Re-entrants

5. Discouraged workers

Job loser

People who are laid off, not working involuntarily

Job leavers

Those are not working voluntarily

New entrants

Someone who has never worked a job before

Re-entrants

Someone who was in the labor force, took some time off, and entered back in again

Discouraged worker

Someone that is choosing to leave the labor force, and are no longer looking for work

What are the four types of unemployment?

1. Frictional

2. Structural

3. Cyclical

4. Seasonal

Frictional unemployment

Results from tension with coworkers, changing industries, or relocating

Structural unemployment

Results from a mis-match of skills, or change in technology

Cyclical unemployment

Results from business cycles (ex. recessions)

Seasonal unemployment

Resulting from changes in the season or time of year

What is the (percentage) of the natural rate of unemployment?

About 4%

Inflation

The devaluing of a currency as a result of increasing its supply

Deflation

The relative increase in a currency’s value (the opposite of inflation

• A recession leads to deflation

Disinflation

A reduction in the rate of inflation

Quantity theory of money equation

M*V=P*Y

• m = money supply

• v = velocity (see how quickly money is changing hands)

• p = price level (inflation)

• y = aggregated output (GDP)

Consumer Price Index (CPI)

A measurement of a budgets value over time

When was the federal reserve (FED) established?

1913

Money

Anything accepted as payment in a transaction

Currancy

Money in the form of bills and coins

How many regions are there for the regional banks?

12

• Our closest is Boston

• Largest is New York

What are the three functions of the FED?

1. Collect all economic data

2. Clear checks

3. Print and regulate currancy

How many people are on the Board of Governors?

7 people; the leader being the chair: Jerome Powell

• They are appointed by the President, confirmed by the Senate

What are the three functions of the board?

1. Control the money supply

2. Setting bank regulations

3. Setting interest rates

Discounted rate

The interest rate charged by the federal reserve to a bank for borrowing or taking out a loan

Federal funds rate

The interest rate charged on loans between banks

Federal Open Market Committee (FOMC)

12 people; 7 are the Board of Governors, 1 is the head of the Regional Bank, 4 others in financial/banking/econ

Open Market Operation

Buying/selling government securities (bonds)

Monetary policy

Policy done by the federal reserve by changing the money supply, adjusting interest rates, changing bank regulations, and open market operations

Expansionary monetary policy

Monetary policy to grow or stimulate the economy

Contractratory monetary policy

Monetary policy to slow the economy

Four techniques of expansion monetary policy

1. Increasing the money supply

2. Dropping interest rates (discount rates + federal funds rate!)

3. Loosen banking regulations

4. Buying government bonds

Four techniques of contractionary monetary policy

1. Decrease the money supply

2. Raising interest rates

3. Tighten banking regulation

4. Sell governmental bonds

Change in money supply equation

Change in money supply = 1/RR (reserve ratio) * change in securities

Fisher equation

i = r + π

i = nominal interest rate

r = real interst rate

π = inflation

Fiscal Policy

Policy done by the government in the form of adjusting taxation and spending

Government Budget Constraint

A setup for a government in which the amount it can spend is determined by the amount it taxes

Balanced budget

Spending = Tax revenue

Budget surplus

Spending < Tax revenue

Budget deficit

Spending > Tax revenue

Fiscal policy

Policy that is done by the government by taxes and government spending

Expansionary fiscal policy

To boost or stimulate the economy

• Lowering taxes

• Increasing spending on various things

The Payroll Protection Plan (PPP)

A business could apply to get compensation in order to pay its workers

• While it was helpful, it did produce public debt

Contractionary fiscal policy

To slow down the economy

• Increasing taxes and decreasing government spending