ECON 200 FINAL

CUMULATIVE CONTENT:

1. Define each phase:

   1. Peak: High point  of economic activity

   2. Contraction: Decrease in economic activity

   3. Trough: Low point of economic activity

   4. Expansion: Growth in economic activity

2. Demand-Pull Inflation occurs when _____?

   1. When demand for g/s is higher than supply

      1. “Too much money chasing too few goods”

3. Cost-Push Inflation occurs when _____?

   1. When cost of production increases due to increase in prices of input

      1. Gas and oil prices (It costs more for gas so productivity with trucks getting things to and from factories slows down.)

4. What is the difference between Deflation and Disinflation?

   1. DISinflation: Inflation occurs, but at a slower rate

   2. DEflation: When prices fall (can cause consumers to delay consumption)

5. Loose/Expansionary Policy:

   1. Government tries to BOOST the economy; encourages spending at lower prices

6. Tight/Contractionary Policy: 

   1. Government tries to SLOW down the economy; to reduce inflation

                                                            Product market ^^

                                                         ← firms provide g/s

                                                    Households labour, land, capital →

                                                          ← Firms pay for labour

8. Monetary Exchange:

-Households pay for g/s (product market; pays for product)

-Firms pay wages, rent (factor market; pays for labour (FOP))

9.  Physical Exchange

-Firms provide g/s

-Households provide factors of production

10. Taco Bell just hired you to assemble tacos:

Market: Factor

Flow: Households provide FOP

11. Taco Bell gives you a paycheck

Market: Factor

Flow: Firms pay for labour

12. You buy two tickets for a concert:

Market: Product

Flow: Households pay for g/s

13. Your tickets arrive:

Market: Product

Flow: Firms provide g/s

14. What is positive output?

1. High demand, not enough capital

      15. What is negative output?

2. Too much capital, low demand

      16. If Output is Negative the Fed will use _____?

3. Loose/Expansionary Policy

      17. If Output is Positive the Fed will use _____?

4. Tight/Contractionary Policy

     18. Output Formula: ((Actual Output - Potential Output) / Potential Output) x 100

Production Possibilities Frontier: 

1. Inefficient Production

2. Emphasis on guns

3. Emphasis on butter

4. Equal mix  dddddd    

                                                                                                    x. Cannot be produced

given existing resources 

(increase in technology)

1. Four Key determinants of productivity 

(what do you need to be productive?):

• Physical capital: tools, equipment

• Human capital: knowledge/skills/

experience

• Natural Resources: wood/minerals

/rivers

• Technological Knowledge: societies’ 

understanding of best way to produce g/s

BIG MULTIPLIER IS TECHNOLOGY

Aggregate Production Function       →

NEW CONTENT:

1. Closed Economies:

   1. DO NOT interacted with other economies around the world 

      1. (closed themselves off from others)

2. Open Economies:

   1. Interact freely with other economies

      1. Firms and individuals buy and sell in world product market

      2. ^ AND buy and sell stocks and bonds in world financial market

3. Imports are made abroad but sold domestically

   1. (import come IN)

4. Exports produced domestically but sold abroad

   1. (export made at home but sent away (EXile))

5. If domestic price is less than world price

← Domestic Producers are better off

-WE EXPORT

    -Producer Surplus: B,C,D

      Exports = Gains from trade

  At this new price QD from dom b buyers DECREASE

6. Domestic price is higher than WP →

-Dom. Consumers are better off

-Dom. Producers are worse off

-WE import (buy from outside our country)

-Cons. Surplus: A, B, D

At this new P, QD by dom buyers INCREASE

7. Dom. Price Higher than WP (w/ tariffs)

• Domestic Consumers worse off

• Domestic Producers better off

• Tariffs raise domestic price

^^ This will reduce domestic quan. 

demanded and increase dom. 

quan. supplied.

8. Net Exports: Trade Balance

   1. Value of a nation’s exports minus the value of its imports

      1. (X-M)

9. Positive Net Exports= EXPORTS are greater than imports

   1. We sell more g/s to other countries than we buy

10. Negative Net Exports= IMPORTS are greater than exports

    1. We buy more from other countries than we sell 

11. Shifters of Imports and Exports:

    1. Tastes of consumers for goods

    2. Price of goods

    3. Exchange Rates (at which people can use dom. currency on foreign goods)

    4. Income of consumers

    5. Cost of transporting goods (from country to country)

    6. Gov. policy toward international trade (tariffs type shit)

12. Benefits of International Trade:

    1. Increase in variety of goods

    2. Lowered costs (prod. at low cost due to large quan. of output {mass production})

    3. Increased competition

    4. Increased productivity 

    5. Enhanced flow of jobs

13. Arguments AGAINST International Trade:

    1. Jobs (can be threatened if we don’t have comp. advantage)

    2. National Security

    3. Unfair Competition

    4. Infant Industries (new industries need temp relief to them compete)

    5. Trade restrictions hurt citizens (higher prices, limited product choice, jobs…)

14. Commonly wrong belief about trade deficits:

    1. They are bad because our money leaves to greedy foreigners and doesn’t come back. 

15. Why beliefs about trade deficits are wrong:

    1. Money doesn’t disappear, it comes back in forms reinvestments (real estate or businesses) 

    2. Or they use their earnings from our imports to buy OUR g/s 

16. NET CAPITAL OUTFLOW (NCO)

    1. Is the money going out to invest in other countries minus the money coming in from other countries (to invest in your country)

       1. Money out - Money In

17. More money out than in = Positive NCO | More money in than out = Negative NCO

18. NCO GRAPHS

19. Its more attractive to send your money where interest rates are higher

    1. There are less risks sending your money where interest rates are higher because you see more return without the other challenges that come with high interest 

20. NCO ALWAYS EQUALS NX (equals out!!)

INTERNATIONAL FINANCE

21. If Savings is GREATER than investments

    1. You can lend the money to another country where s<i. (with interest on returns)

22. Appreciation: Strengthens its value 

    1. Dollar goes from 120 yen to 140 yen; the dollar has appreciated 

       1. It costs more yen to equal a dollar

23. Depreciation: Weakens its value

    1. Dollar goes from 120 yen to 100 yen; dollar = depreciated, yen = appreciated

       1. It costs less yen to equal a dollar

24. Dollar Store Example: 

    1. $1 = 10 quetzals (foreign buyer has to use 10 Q to get ONE dollar)

    2. Then, the dollar appreciated and now $1 = 5 quetzals (Q depreciated)

       1. The dollar appreciating is “worth more” in reference to the foreign buyer since they have to use less of their currency to match the dollar!

       2. (think of it like: FOREIGNERS APPRECIATE that the dollar has gone down and now it costs less to match. THEY CAN BUY MORE!!

25. Nominal exchange rate equation: 

    1. Amount of foreign currency / amount of domestic currency 

       1. 10/1 = 10 Q per dollar

       2. Reverse to find how many dollars per quetzals

       3. ^ 1/10 = 0.1 USD per 1 quetzals

26. REAL EXCHANGE RATE:

Nominal Exchange Rate x Price Level in Domestic Country

        Price Level in Foreign Country

Example:

  10 quetzales x 100 usd                     Where: Nominal exchange rate is 1 USD = 10 Q

—-------------------------------- = 20                       Price level in Dom Country = 100

50 quetzales   Price level in Foreign Country = 50

^ this means 1 US dollar can buy 20 times the amount of g/s in Guatemala compared to what it can in the US

27. The difference between Nominal and Real exchange rates is

    1. Nominal is expressing PRICE

    2. Real is expressing GOODS

28. Purchasing Power Parity (PPP)

    1. Is about ensuring that the same goods or services should have the same price in different countries when you adjust fo the exchange rate

       1. Basically enforcing the exchange rate 

29. How it holds mostly true:

    1. Because market forces push prices toward equilibrium BUT

-Some goods are not easily traded (haircut in paris vs harrisonburg; local wages, cost of living)

-Often times tradable goods are not perfect substitutes for each other (german chocolates vs hershey chocolates; both chocolate but german higher quality and more consumer tastes)

30. AGGREGATE DEMAND:

    1. Shows how much total spending is in the economy

Aggregate Demand Equation: 

AD= Consumption+Investment+Government Spending+(EXports-iMports)

31. Reasons why it’s downward sloping

    1. As the overall price level decreases the quan of g/s demanded increased

32. Three Key Effects

    1. The Wealth Effect (C): the increase in asset values (ex: real estate) leads people to feel richer and therefore spend more (even though they didn’t gain money)

    2. Interest Rate Effect (I): when interest goes up, people borrow and spend less money because it costs more to borrow. 

    3. Exchange-Rate Effect (NX): changes in a country’s money value make its goods cheaper or more expensive for people in other countries, affecting how much is bought and sold. 

33. Each effect moves down the curve; as the price level decreases, people have more purchasing power, borrowing becomes cheaper, and exports rise 

When the price level goes down, people technically feel like they have more money because their money can now buy more goods and services. 

34. Aggregate Demand Shifters:

ANYTHING that changes C, I, G, NX

1. Consumption: Any event that changes how much people want to consume at a given price level. 

   1. Change in: taxes, wealth, expected future income

2. Investment: events that change how firms want to invest at a given price level

   1. Examples: Better technology, tax policy, money supply, interest rates

3. Government Spending: Policy makers change gov spending at a given price level

   1. Examples: build new roads, weapons contract, entering new military effort

4. Net Exports: Events that change net exports for a given price level

   1. Recession in Europe → can’t buy exports → change in exchange rate

If ANY of these see an increase then the AD curve will shift right → (IRDL)

If ANY of these see a decrease, then the AD curve will shift left → (IRDL)

35. Short Run Aggregate Supply Shifters:

    1. Primary shifter: anything that affects production of g/s OR changes in input or resources (gas, silicon, wages, raw material prices)

36. If Input prices fall, SRAS increases. (vice versa)

37. Long-Run Aggregate Supply Shifters:

Any change in the economy that alters the national level of output shifts the LRAS

1. Change in Labour: If quan of labour increases, LRAS shifts right →

2. Change in Capital: If physical capital increases, LRAS shifts right →

3. Change in Natural Resources: New discovery of natural resources, shift right →

4. Change in Technological Knowledge: New Technology, LRAS shift right →

38. Why is Long-Run Aggregate Supply Vertical?

    1. Because in the long run, the economy's ability to produce g/s doesn’t rely on the price level, but Resources, (labour, capital, tech, and productivity) 

39. Shift in AD: People lose confidence in the economy; AD shifts to the left ←

In the short-run, output falls, this

Shift also causes a movement 

along the SRAS Curve. 

^Price level falls

In the Long-Run:
SRAS shifts RIGHT. 

Firms respond to lower sales and 

Production by reducing wages which

Shifts SRAS. 

Output returns to the natural level

And price level falls. 

40. Shift in AS: Firms see a sudden increase in

Production costs. This causes SRAS to shift to

To the left ←

• In the Short-Run: Output falls, we move

Along the AD curve. This will cause the price

Level to increase.

• In the Long-Run: If AD is held constant, 

Policymakers will most likely attempt to increase

AD to account for the reduction in SRAS.

41. Monetary Policy:

    1. The Fed controls the money supply and interest rates

42. Fiscal Policy: 

    1. Congress controls government spending and taxes

43. If Interest Rates are Above equilibrium:

    1. The quan of money people want is less than the quan supplied

       1. There's more than people actually want

44. If Interest Rates are Below equilibrium:

    1. The quan of money people want is more than the quan supplied 

       1. People want more than there is

45. A higher price level raises money demanded

    1. Higher money demanded = higher interest rate

       1. Higher Interest rates reduces the quan of g/s demanded

46. Lower price level lowers the money demanded

    1. Lower interest rates

       1. Lower interest rates increase quan demanded

47. When the MS is increased, it lowers the interest rate and increases the quan of g/s demanded (AD) at any given price level 

48. Crowding out effect:

    1. When the gov spends more to boost the economy (expansionary fiscal policy), 

       1. → this leads to higher interest rates → which makes borrowing more expensive. (Decreases AGGREGATE DEMAND)

49. Multiplier effect:

    1. When one person’s spending becomes another person’s income

       1. Chain reaction that boosts the economy more than the original amount spent

50. How they work together!

    1. The multiplier effect encourages lots of spending and the crowding out effect regulates that by increasing interest rates so there won’t be inflation. 

51. Tax cuts increase household income → They will spend some → Because of this increase in consumer spending, the tax cuts will shift AD to the right

52.  According to Keynes, irrational waves of pessimism and optimism cause the AD to fluctuate.

    1. When pessimism reigns, households reduce consumption and and firms reduce investment spending

       1. AD will decrease; lower production and higher unemployment 

53. Lags: 

    1. Fiscal policy operates with long lag (it takes Congress a while to act)

    2. Monetary policy takes around 6 months to have impact

54.  By the time the policy takes effect, the issue may be over, changed, or gotten worse.