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Macroeconomic Concepts Review

Goods and Services

• Scarcity of Resources: Goods and services are scarce due to the scarcity of resources required for their production.

Marginal Utility

• Utility Increase: Total utility can increase, although at a decreasing rate, as long as marginal utility remains positive.

Consumer Price Index (CPI)

• CPI vs. Inflation Rate: The Consumer Price Index (CPI) and the rate of inflation are not the same. The CPI is an index measuring the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Economic Choices

• Necessity of Choices: Choices must be made because everything valued has a degree of scarcity.

Autarky

• Consumption vs. Production Possibilities: A nation under autarky will have a consumption possibilities curve that does not exceed its production possibilities curve.

Aggregate Demand and Supply

• Inflation and Output: Increasing aggregate demand in the upward sloping portion of the aggregate supply curve may lead to inflation as well as an increase in output.

Economic Systems

• Three Fundamental Questions: All economic systems (market-based, command-based, mixed) must address: What to produce? How to produce? For whom to produce?

Inflation Types

• Cost-Push vs. Demand-Pull: Cost-push inflation is often considered more severe than demand-pull inflation because it may lead to stagflation.

Externalities

• Negative Externalities: Companies producing goods with negative externalities (e.g., pollution) are likely to overproduce these goods.

GDP and Expenditures

• Expenditures Approach to GDP: This measures GDP by capturing four primary expenses: rent, wages, interest, and profit through the circular flow of the economy.

Tax Multipliers

• Tax vs. Spending Multiplier: The tax multiplier generally has a smaller impact compared to the spending multiplier, whereas a $1 million tax decrease results in different economic impacts than a $1 million increase in spending.

Recessionary Gap

• Marginal Propensity to Consume: A recessionary gap filled by government spending indicates a marginal propensity to consume of 50% if $100 billion increases spending to fill a $500 billion gap.

Goals of Macroeconomics

• Macro Goals: The three goals of macroeconomics are: full employment, price stability, and economic growth.

Price Controls

• Efficiency Loss: Imposition of price ceilings or floors usually leads to reduced efficiency in markets.

Tax Incidence

• Burden of Tax: Tax incidence refers to the determination of who ultimately bears the burden of a tax.

Circular Flow Model

• Government Involvement: In the circular flow, government acts as a buyer in the factor market, competing with firms for household resources.

Property Ownership

• Command Economy: Private property ownership is crucial for the functioning of any economic system, including command economies.

Public Goods

• Characteristics of Public Goods: Public goods, provided by the government, are non-rival and non-excludable.

Gains from Trade

• Specialization: To benefit from trade, a partner with the lower opportunity cost should specialize in the production of that good or service.

Supply and Demand Changes

• Effect of Supply Changes: Changes in supply can lead to shifts in demand, but this relationship can be complex.

Unemployment Insurance

• Automatic Stabilizer: Unemployment insurance acts as an automatic stabilizer, helping to stabilize the business cycle's peaks and troughs.

Federal Reserve Actions

• Open Market Transactions: When the Federal Reserve buys bonds, it actually increases liquidity, which typically lowers interest rates.

Nominal GDP Growth

• Income and Output Relationship: An increase in nominal GDP does not automatically confirm that national income and output have risen simultaneously.

Money Supply and Interest Rates

• Impact on Investment: An increase in the money supply generally results in lower interest rates, prompting more business investment and increasing real GDP.

GDP Definition

• GDP Composition: GDP represents the currency or market value of all final goods and services produced within a specific time frame, usually annually.

Liquidity of Money Supply

• M3 Money Supply: M3 represents the least liquid form of money compared to others, hence has a different relation to consumer spending behavior.

Reasons for Increased Money Demand

• Reasons: Individuals desire more money mainly due to inflationary pressures or a need for greater output.

Spending Multiplier Calculation

• Multiplier Definition: If individuals spend 90% of income changes, it leads to a spending multiplier significantly greater than -10 (the multiplier calculation is typically positive).

Tax Structure

• Progressive Tax: A progressive income tax system is based on the ability to pay, not merely on benefits received.

Lorenz Curve

• Income Inequality Representation: The Lorenz Curve visually represents deviations in income inequality across population quintiles.

Gini Coefficient

• Inequality Measurement: A Gini coefficient of .66 indicates a higher degree of income inequality compared to a coefficient of .33.

Okun's Law

• Unemployment-GDP Relationship: Okun's Law infers that a 1% increase in unemployment over the natural rate correlates with a 2-4% decrease in GDP.

Fiscal Policy

• Nature of Fiscal Policy: Government fiscal policy can be contractionary or expansionary, classified as ‘tax and spend.’

Types of Unemployment

• Unemployment Increase: All unemployment types (structural, cyclical, frictional, seasonal) generally rise during economic recessions.

Demand Determinants

• RINTE Variables: RINTE variables (i.e., relevant non-price factors) shift demand curves right (increase) or left (decrease).

Household vs. Firms Goals

• Utility vs. Profit Maximization: Households aim for utility maximization while firms pursue profit maximization in the economic system.

Economic Surplus

• Calculating Total Economic Surplus: Total economic surplus can be derived from the triangular area formed by the demand and supply curves around the equilibrium point.

Price Floor Effects

• Market Impact of Price Floors: Mandated price floors below equilibrium price can lead to chronic shortages in marketplaces.

Technology Impact on Markets

• Technological Advancements: Improvements in technology tend to lower equilibrium prices while increasing equilibrium quantities.

Cross-Price Elasticity

• Relationship Between Goods: A negative cross-price elasticity indicates that two goods are complements rather than substitutes.

Specialization in Production

• Efficient Production: Trading partners who can produce a good more efficiently should focus on that good’s production for trade benefits.

Price Elasticity Measurement

• Measuring Elasticity: Price elasticity of demand can be assessed in various ways, with a straightforward method involving the change in price relative to the change in quantity demanded.

Decision Making in Economics

• Cost-Benefit Analysis: Economic decisions are made based on average and total costs and benefits, with careful consideration of sunk costs.

Government Incentives

• Encouraging Production of Positive Externalities: The government can utilize subsidies to promote the production and consumption of goods with positive externalities.

Demand Inelasticity Implications

• Sales Tax Implications: Inelastic demand suggests that any sales tax will predominantly affect sellers instead of being passed to consumers.

Simultaneous Demand and Supply Changes

• Effects of Changes: With simultaneous increases in both demand and supply, the equilibrium price is likely to rise, although the equilibrium quantity remains uncertain.

Substitute Goods Example

• Impact of Natural Disasters: When a crop is damaged (e.g., a storm affecting coffee beans), the price of substitutes, like tea, tends to increase due to higher demand.

Diminishing Marginal Utility

• Marginal Utility Principle: The law of diminishing marginal utility suggests each additional unit of the same product provides less satisfaction than the previous unit.

Rational Decision Making

• Marginal Costs and Benefits: Rational decision-makers engage in actions where marginal benefits outweigh marginal costs.

Production Possibilities Curve

• Efficiency in Production: Nations on their production possibilities curve can enhance output by improving efficiency.