ECON REVIEW

Households buy, firms sell

In the Product Market of the Circular Flow Model…

Households sell, firms buy

In the Factor Market of the Circular Flow Model…

Imports and Savings

Leakages of the Circular Flow Model

Increasing Opportunity Cost

When the two goods use different resources, moving from making one to the other will be inefficient (bowed-out curve)

Constant Opportunity Cost

When the two goods use similar rsources, moving from making one to the other should be consistent (linear ppc)

Quantity of Resources, Quality of Resources, Technology, and Trade

Shifters of the PPC

Absolute Advantage

Exists when a producer could make more of a good given the same resources (time).

Comparative Advantage

Exists when a producer can make a good at a lower opportunity cost.

Output

\#’s given represent the # of a thing being made

OGO to find opp. cost

Input

\#’s given are the # of resources used to make a product

OGU to find opp. cost

Specialization

Focus all (or most) of your production resources towards the production of ONE good/service.

comparative advantage

Countries can be better off by spending in what they have a ______ in and trading

Term of Trade

A possible mutually beneficial trade between two countries

Demand

Consumer’s willingness and abilities to buy a good/service at a given price.

(NOT an amount, but a BEHAVIOR (“desire”))

Quantity Demanded

Amount of a thing consumers are willing and able to buy at a price.

(determined by price changes)

Taste/Preferences, Related Goods, Income, Population, Expectations of future price changes (TRIFE)

Demand Shifters

Supply

Producer’s willingness and ability to sell a good at a given price.

(NOT an amount, but a BEHAVIOR (“desire”))

Quanitity Supplied

Amount of a good produced and sold at a given price.

(determined by price changes)

Natural/mannmade phenomenon, Input Costs, Competition (# of producers), Expectations of future price changes, Profitability of Alternatives, Profitability of Joint-Supply

Supply Shifters

Disequilibirum

When prices is not at equilibrium

Surplus (D + S Graph)

P > PE or Qs > Qd

Shortage (D + S Graph)

P < PE or Qs < Qd

Simultaneous Shifts

When shifting both S + D, either PE or QE will be indeterminate (can’t know)

PE is indeterminate

When D + S move in the same direction

QE is indeterminate

When D + S move in opposite direction

Employed + Unemployed

Labor Force =

without a job + actively be looking for a job

To be unemployed you have to be… (2 things)

retired, discouraged, homemakers, or off the grid

Those not in the Labor Force are…

Frictional Unemployment

Choosing to be unemplyed for a period of time typically due to moving to a new place or seeking new opportunities. (Typically seen as “good” unemployment)

Structural Unemployment

Unemployment due to skills becoming obsolete (mechanization)

Cyclical Unemployment

Unemployment due to changes in the business cycle (up and downs in the economy like depressions and recessions)

Seasonal Unemployment

Unemployment due to job losses due to seasonal changes (like construction jobs in the winter)

The Natural Rate of Unemployment

The rate of unemployment to which the economy naturally gravitates in the long run. (structural + frictional unemployment) (a.k.a “full-employment”)

GDP

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

intermediate goods, financial transactions, off-market activity

What is not included in GDP?

\
(\*renting counts, buying a used home does not)

Expenditures Approach

Calculate GDP by adding up all the spending (C + I + G + Xn)

Income Approach

Calculate GDP by adding up all the income

Value Added Approach

Calculate GDP by adding up all spending on all goods + services then subtract intermediate goods

Nominal GDP

GDP expressed in that year’s prices (not adjusted for inflation)

Real GDP

GDP expressed using constant/base year prices (adjusts for inflation)

Inflation

An overall increase in price level

Demand-Pull Inflation

Rising aggregate demand leads to increase pressure on prices

Cost-Push Inflation (Stagflation)

Rising cost of production (input costs) put increase pressure on prices; decrease aggregate supply

Hyperinflation

A large amount of inflation sustained over a long period of time.

benefit (they pay back less in value)

During inflation, borrowers…

suffer (they save less in value)

During inflation, savers…

lose (they get paid back less in value)

During inflation, lenders…

CPI

A measure that uses the weighted average price of a market baset to calculate inflation rate

consumer spending

CPI only looks at….

Disinflation

A reduction in inflation rate

Deflation

A decrease in price level

Recession

A period of time with declining GDP, rising unemployment, lower income. (Typically leads to a reduction in inflation rate)

inversely related

GDP and unemployment are….

consumption, investment, gov spending, net exports

AD Shifters

The Sticky-Wage Theory

Nominal wages are slow to adjust, or are “sticky” in the short-run.

labor, capital, natural resources, technology, expected price level

SRAS Shifters

Negative Ouput Gap (Recessionary Gap)

When current GDP is less than potential output. (Unemployment rate > NRU)

Positive Output Gap (Inflationary Gap)

When current GDP is greater than potential output.

(Unemployment rate < NRU)

capital stock, sustained investment, potential output

LRAS Shifters

decrease, hire more, increase

In a negative output gap, firms will (increase/decrease) wages so they can (hire more/lay-off) workers and (increase/decrease) production, a.k.a SRAS, and return the economy to long-run equlibirum.

increase, lay-off, decrease

In a positive output gap, firms will (increase/decrease) wages so they can (hire more/lay-off) workers and (increase/decrease) production, a.k.a SRAS, and return the economy to long-run equlibirum.

The Multiplier Effect

The idea that any change in spending will have a much larger impact on GDP, since every dollar is spent multiple times.

MPC

change in consumption/change in disposable income

MPS

change in savings/change in disposable income

Spending Multiplier

1/MPS

The Tax Multiplier

* Increases in taxation reduce overall spending.
* Changes in taxation are less impactful than equal changes in spending, because people save a portion of the initial change in taxes.

Fiscal Policy

Actions taken by Congress to stabilize the economy

Monetary Policy

Actions taken by the central bank (The Federal Reserve) to stabilize the economy

increase gov spending, decreases taxes

Expansionary F.P

decrease gov spending, increase taxes

Contractionary F.P

Commodity Money

Money with other practical uses

Flat Money

Money that has no alternative uses

Functions of Money

* Medium of exchange: used to buy things
* A unit of account: Money maintains value over long periods of time.
* Store of value: Money maintains value over long periods of time.

M0: Monetary Base

Currency + Bank Reserves

M1: The Money Supply

Spendable $ →Currency, Bank Deposits, Savings Accounts

M2: Near Money

Retirement Accounts, Roth IRA, Money Markket Account

increases, increases

If interest rates are high, lending (increases/decreases), saving (increases/decreases)

increases, increases

If interest rates are low, borrowing (increases/decreases), spending (increases/decreases)

The Reserve Requirment

The % of deposits banks must hold onto

Total Reserves

All $ at the bank

Excess Reserves

Usable money for the bank; what’s leftover once the RR are taken out

1. Assets = Liabilities
2. Required Reserves must match the Reserve Requirement

What are the 2 rules of balance sheets?

decrease RR, buy bonds, decrease IORB or Disc. Rate

Expansionary Monetary Policy

increase RR, sell bonds, increase IORB or Disc. Rate

Contractionary Monetary Policy

changes in price level, changes in income, very specific changes in tech

Dmoney Shifters

inversely related

Investment spending and interest rates are….

decrease

When interest rates ____, businesses spend more to expand their operations, grow, etc.

increase

When interest rates ____, businesses borrow & spend less

Dloans

Borrower’s willingness + ability to borrow $

Sloans

Banks willingness + ability to lend

consumer borrowing behavior, perceived business opportunity, gov borrowing

Dloans Shifters

profitability of loans, change in savings behavior, change in Smoney, change in foreign investment

Sloans Shifters

all monetary policies are effective

If limited reserves…

only administered interest rates work

If ample reserves…

Policy Rate (Target Rate)

Interest rate banks charge from other for overnight loans

Balanced Budget

Tax Revenue = Gov. Spending

Budget Surplus

Tax Revenue > Gov. Spending

Budget Deficit

Tax Revenue < Gov. Spending

The National Debt

Total of all budget surpluses and deficits

Crowding Out Effect

When the government, due to excessive borrowing, makes it more difficult/costly to get a loan for the public. (Caused by deficit spending)