Macroeconomics GDP Deflator Study Guide

Macroeconomics Final Study Guide Formulas ● ● ● ● ● ● ● ● GDP Deflator: nominal GDP/real GDP x 100 Inflation Rate: % change x = new-old/old x 100 Labor Force: Labor Force/Population x 100 Unemployment Rate: unemployed/labor force x 100 Money Multiplier: 1/reserve ratio Rule of 70: 70/ x years Fisher’s Equation: i = r + π Equation of Exchange: STOCK: M x V = P x Y FLOW: % change M x % change V = % change P + % change Y ● The Keynesian Multiplier: 1/ 1-MPC (marginal propensity to consume) Chapter 1 ● Scarcity: can’t have all we want, stuff is limited ● Choice: mandated by scarcity ● Opportunity Cost: the value of the BEST thing given up ● Rational Self Interest Assumption: we assume for simplicity, we assume this because it is often true for economics ● Positive Economics: the way the world IS ● Normative Economics: the way the world OUGHT to be - Voluntary exchange creates value Production Possibilities Frontier Chapter 2 Supply and Demand - The Law of Demand: as the price of goods rises, the quantity demanded falls - The Law of Supply: an increase in price results in an increase in quantity supplied, there is a direct relationship between price and quantity - Change in Demand vs. Change in Quantity Demanded - Quantity demanded = willingness to pay, decrease in price is an increase in quantity demanded - Change in Supply vs. Change in Quantity Supplied - - Demand Shifters: 1. Tastes and preferences 2. Changes in income 3. 4. 5. 6. 7. normal goods: if income increases, demand increases Inferior goods: if income increases, demand decreases (ex: ramen noodles) Natural disasters Changes in product quality/information Changes in Price of related goods Substitutes: hamburger and hotdog Complements: peanut butter and jelly Changes in expectations Demographics/Population 1. 2. 3. 4. 5. 6. Supply Shifters Changes in input prices Subsidies, taxes, regulations Entry or exit of firms Weather, war, acts of nature Changes in technology Expectations 1. 2. 3. 4. Equilibrium: It is a resting place. It is a place where 2 forces are equal. Prices converge TOWARDS equilibrium It is efficient because marginal benefit=marginal cost, total surplus is maximized - Consumer and Producer Surplus and Total Surplus Chapter 4 Efficiency: ● ● ● ● ● Price Ceiling: max price on a good Price Floor: minimum price on a good Shortage: quantity demanded > quantity supplied Surplus: quantity supplied > quantity demanded Elasticity of supply and demand (consumers: elastic demand) ● - Taxes The burden is deadweight loss The burden is not determined by the legal assignment The burden of a tax is determined by the relative elasticities of supply and demand Chapter 5 ● Market Failure: individuals pursuing own rational self-interest resulting in an inefficient/irrational outcome ● The Tragedy of the Commons: when a resource is unowned or owned it common, it is often overused (common pasture) ● The Tragedy of the Anticommons: when there are too many people with the ability to stop the use of resources (patent trolls) ● Information Problems: occur when a party to a transaction cannot easily determine the truth (used car sales) Chapter 6 The Public Choice view versus the Public Interest view ● Voters - Rational ignorance: being uninformed because its costly - Rational abstention: abstain because the cost > than the result ● Bureaucrats: managers of firms, can’t max profit ● The political process tends to work best when costs and benefits of a policy are WIDESPREAD - It works poorly because of: special interest effect, shortsightedness, rent-seeking, government inefficiency Chapter 7 ● Stock: an amount ● Flow: change in the amount, stock ● GDP: the market value of all goods and services ● Final vs. Intermediate Goods ● Circular Flow Diagram ● Income Approach vs. Expenditure ● ● ● ● ● ● ● ● ● ● Leisure and Job quality: not fully reflected in GDP Product Quality and New Goods: can make things look worse Economic “bads”: things you pay to avoid Income inequality and poverty: GDP doesn’t account for/ talk about income distribution Price level: measure of overall price Inflation: increase in price level Deflation and Disinflation: decrease in inflation; decrease in inflation RATE Nominal GDP: contemporary prices Real GDP: base year prices CPI: consumer price index, overstates inflation because 1) improvements in product quality, 2) doesn’t account for changes in consumption due to prices Chapter 8 ● - Kinds of Unemployment Frictional: caused by people and firms taking time to make a match Structural: caused by a mismatch between worker skills and needs of employers Seasonal: caused by regular, annual patterns in economic activity Cyclical: caused by business cycles ● Natural Rate of Unemployment: unemployment rate during normal/healthy economic times ● Full employment: the employment rate during normal economic times ● Potential GDP: the value of output produced during normal economic times Chapter 9 ● The Loanable Funds Market **FISHER’S EQUATION (see formula section)** ● The Foreign Exchange Market - Two ways that dollars leave the country: Americans need foreign currency to pay for these! That's where Demand for foreign currency comes from. • Imports and Capital Outflow - Two ways that dollars enter the country: Foreigners need dollars to pay for these! That's where Supply of foreign currency comes from. - • Exports and Capital Inflow Appreciation: $ buys more foreign currency Depreciation: $ buys less foreign currency Exports - Imports = Capital Outflow - Capital Inflow Trade Deficit: imports > exports Trade Surplus: exports > imports Leakages = Injections Chapter 13 ● - How money supply is measured: M0: Currency in circulation M1: M0 + demand deposits + traveler's checks M2: M1 + savings accounts + time deposits less than $100,000 and money market mutual fund accounts - Monetary Base: Currency in circulation + currency in bank vaults + reserves held on deposit at the Federal Reserve **Note: Credit cards are not money! Chapter 16 ● Economic Growth: can be defined as an increase in GDP, but what we really care about is: Per Capita GDP - Rule of 70 ● Why do economies grow? - Natural resources, physical and human capital, technological progress - BEST ANSWER: healthy economic institutions - Secure and well-defined private property rights - Rule of Law - Competitive markets - Stable money/inflation - Low trade barriers - Open capital markets - Avoidance of high marginal tax rates - Avoidance of harmful regulation Chapter 17: Economic Freedom is highly correlated with healthy institutions and economic growth Chapter 18 *Exam 3 Bonus Material: - Risk vs. return, stocks, bonds, the efficient market hypothesis, index funds and diversity ● Trade and Comparative Advantage - Videos from beginning of course: Watch all of this video, and all of this video. Then watch the first 6 minutes, 25 seconds (or so) of this video. - Other advantages of opening to trade -Gains from large scale production -More competitive markets -increased variety of goods and services -technology transfer -constraint on government ● Trade with the Supply and Demand model - Opening to trade increases total surplus, whether the world price is higher or lower than the domestic price - There are always people who gain and people who lose from trade, though the gains are greater than the losses. - Tariffs and quotas reduce total surplus ● Dynamic Aggregate Demand • Dynamic Aggregate Demand comes directly from the Equation of Exchange (in its flow version). • If you know how fast M and V are growing, you can draw Dynamic Aggregate Demand as a straight line on a graph. • The axes are flows! Inflation is on the vertical axis, and Real GDP growth is on the horizontal axis. • The Dynamic Aggregate Demand curve shifts to the right if M or V grow faster, and shifts to the left if M or grows slower. • Dynamic Aggregate Demand is about spending. The Solow Growth Curve Short Run Aggregate Supply ● % Change M - Rises: growth temp. Rises, inflation temp. rises - Falls: growth temp. Falls, inflation temp. falls ● % Change V -Rises: growth temporarily rises, inflation temporarily rises -Falls: grown temporarily falls, inflation temporarily falls Chapter 12 ● Fiscal Policy - The tools: government spending and taxes, which change velocity growth, shifting AD The Keynesian Multiplier (MPC = Marginal Propensity to Consume) Chapter 14 ● The Fed can use its tools to speed up or slow down money supply growth, shifting AD • Congress might be able to use Fiscal Policy to smooth out the ups and downs of the business cycle. The Fed (or another country's central bank) might be able to use Monetary Policy to smooth out the ups and downs of the business cycle. ● Problems with both monetary and fiscal policy: -Crowding out: increased government borrowing raises IR and discourages investment spending -Ricardian equivalence: if people realize that the government borrowing is future taxes they reduce spending now and save -Lags: recognition lag (time it takes to collect/interpret economic data), decision making lag (takes time for policy makers to make decisions), implementation lag (bureaucrats take time to enact policy), outside lag (it takes time for the policy to affect the economy) **On the other hand, automatic stabilizers help. (i.e. fiscal policy that doesn’t require ongoing action by congress, employment benefits, income taxes