ECON EXAM 2

what life looks like in rich vs poor countries

low income- lower gdp /capita, higher infant mortality rate, lower life expectancy, less doctors, less access to sanitation, electriity, and lower literacy rates

economic growth measured by

real gdp per capita

econ growth formula

% change nominal gdp- % change price level- % change population

economic growth caused by

resources, technology, and institutions

only good —— guarantee growth

good

good institutions have

private property rights, political stability, rule of law, competitive and open markets, stable prices, and efficient taxes

private property rights

rights of individuals to own property, use it in production, and to own the resulting output

• secure ownership gives you incentive to work hard and acquire property

political stability

pluralistic systems of government with peaceful transititions of power

rule of law

restrictions on arbitrary abuse of power and enforcement of a well defined and established system of laws

competitive markets

is an economic structure with numerous buyers and sellers, low entry barriers, and similar products, where no single entity can influence prices. These markets drive innovation, lower prices, and improve quality, as competitors vie for market share.

stable prices

High inflation harms the economy, important to remain stable

efficient taxes

too high of taxes reduces incentive to work)

economic growth is a —- process

compound

supply curve

how much sellers are willing to sell at each price

demand curve

how much buyers are willing to buy at each price

law of demand

quantity demand falls when price rises and rises when price falls

demand curve is —- sloping while supply curve is ——

downward, upward

law of supply

quantity supplied of good rises when price of good rises, and falls when price of good falls

demand shift factors

number of buyers, buyers wealth/income , and price expectations

supply shift factors

cost of inputs and changes in technology

changes in —— move along the curve

price

equilibrium occurs at

price where quantity demanded equals quantity supplied

loanable funds market

market where savers supply funds for loans to borrowers

loanable funds market applies —- and —- to market for loans

supply, demand

fisher equation

real interest rate= nominal interest rate- inflation rate

in loanable funds market, supply =

savings

in LFM, supply slope is determined by

opportunity cost of saving

in LFM, demand slope is determined by

expected return of investments

in LFM, demand is

borrowing for investment or government borrowing

LFM slope shift factors

real wealth, consumption smoothing, time preferences

real wealth

wealthier people tend to spnd more

when overall wealth is affected, consumption part of ad changes

consumption smoothing

people borrow and save to smooth consumption over lifetime

-when young we borrow (shift toleft )

-when middle age, we save ( shift out to right)

• when old, we dissave (shift to left)

time preferences

people prefer to receive goods and services sooner rather than later

• not consuiming income today is opportunity cost of saving

• more patience shifts supply out

LFM demand shift factors

business confidence, productivity of capital, and government borrowing

business confidence

measures the optimism or pessimism of firm leaders regarding future economic conditions, typically surveyed over 6–12 months.

. High confidence drives increased investment and employment, shifting the aggregate demand curve to the right, while low confidence leads to spending cuts, potentially causing a recession

productivity of capital

when capital is productive, expected return increases (right)

a firm should only invest if expected return is greater than i/r

government deficit are not direclty influenced by

interest rates

crowding out in LFM

a macroeconomic theory where increased government deficit spending and borrowing drives up interest rates, reducing private sector investment and consumption

-shifts demand curve, interest rate increases, private investment decreases

for LFM, in equilibrium every dollar borrowed requires

a dollar saved

direct vs indirect finance

Occurs when borrowers go direclty to savers for funds (bonds) vs when savers lend funds to financial intermediaries ( bank Loan)

financial intermediaries and banks

firms that help to channel funds from savers to borrowers vs private firms that accept deposits and extend loans

both are center of financial markets

bonds

security that represents a debt to paid, if you own one, it means you owe money

bond maturity date

date on which the repayment is due

bond face value

bonds value at maturity- amount due at repayment

risk and bond ratings

AAA is highest ( most stable) CC is lowest bond rating ( most risky)

interest rate formula ( used for bonds too )

face value- initial price / initial price * 100

treasury securities

bonds sold by the us government to finance the national debt

• zero defualt risk

stocks

additional sources of funds for firms that give the security holder an ownership share in the firm and ability to receive dividends

aggregate demand

total demand for final goods and services in the economy

• spending side of economy

ad formula

C + I +G+N+X

slope factors of agreggate demand focuses on response to

different price levels

real wealth efffect

change in quantity of aggregate demand that results from wealth changes due to price level changes

• inflation decreases wealth, so amount you buy decreases

• reduces quantity of ad

interest rate effect

change in price level leads to change in interest rate and therefore in ad

• at higher price levels you save less, reducing ad

international trade effect

change in price level leads to change in quantity of net exports demanded

-increses in domestic price levle make foreign goods cheaper, so consumer sbuy more foreign substitutes

• decreases ad

shift factors for AD

anything that changes C,I,NX at every price level

short run

not all prices have adjusted

long run

all prices have adjusted

long run aggregate supply

vertical line representing level of economic growth in economy

total supply of final goods and services in economy

-production side of economy

LRAS shifts due to causes of

ecnomic groqth ( changes in resources, technology, and institutions)

SRAS slope is - facing and why

upward , output prices more flexible than input prices in short run (inflexible input prices, menu costs, and money illusion)

shift factors for SRAS

increase in input costs, supply shocks, and LRAS shifts

supply shocks

surprise events that changes firms production cost

short run equilibrium when — = —-

SRAS =AD

Long run equilibrium when

SRAS =AD=LRAS

for long run equilibrium, to get short run to long run equilibrium, — will shift

SRAS

expenditures

the payment, disbursement, or incurrence of liability to acquire goods, services, or assets, representing the total outflow of money. They are categorized mainly into capital (long-term assets) and revenue (operating) expenditures

difference in government spendign and government expenditures

Government expenditures are a broader measure encompassing all money paid out by the government, including transfer payments (like Social Security) and interest on debt. Government spending (often categorized as government purchases or consumption) typically refers only to direct spending on goods and services, such as infrastructure, salaries, and military equipment

transfer payments

are payments made to groups or individuals when no good or service is received in return

mandatory vs directionary outlays

ongoing government programs (medicare) vs adjustable during budgeting

examples of mandatory and discretionary outlays

medicare , social security

defense spending, national parks

sources of revenue

Individual Income $2,656

Social Insurance $1,748

Corporate Income $452

Other

-Estate & Gift $29

-Customs $195

-Excise $106

-Miscellaneous $48

debt to gdp ratio

nominal debt/ nominal gdp *100

resources and examples

inputs used to produce goods and services

-natural resources

open markets

international trade: trade creates value by letting countries consume above ppf

flow of funds across borders: restricting flow of funds hampers functioning of loanable funds market

changes in buyers income

purchasing power: value of your income expressed in terms of how much you can afford

consumers buy more of a normal good as income rises but less demand for inferior good

price expectations

buy less today is we expect lower future price

buy more today if we expected higher future price

when inputs get —- , supply shifts out

cheaper

government borrow at every rate to

cover deficit

government borrowing increases

demand

example of indirect finance?

depost 1,000 in bank account

purchase share of stock in netflix

invest 2000 in mutual fund

purchase 5000 commonwealth of va bond

deposting 1,000 in bank account

taxes provides funds to finance

political stability, rule of law, and enforcement of privatery property rights