final 2.0 Flashcards
opportunity cost
what you give up to gain something. the highest benefit obtained from opportunities forgone.
law of demand
as prices increase, QD decreases.
as prices decrease, QD increases.
demand curve slope
slopes downward; as prices increase, QD decreases
events that shift the demand curve
- income
- prices of related goods
- taste
- expectations
- number of buyers
how income affects demand curve
normal goods & inferior goods
how prices of related goods affects demand curve
substitutes & compliments
law of supply
as prices increase, QS increases. (b/c it makes production more profitable)
as prices decrease, QS decreases.
supply curve slope
slopes upward; as prices increase, QS increases
events that shift supply curves
- input prices
- technology
- expectations
- number of sellers
how input affects supply curve
decreases in input prices, increases QS
how technology affects supply curve
new technology lowers costs so QS increases
GDP
the MARKET VALUE of all FINAL GOODS produced IN A COUNTRY in a PERIOD OF TIME
what is included in GDP
final goods, produced in a country, in a given period of time
what is not included in GDP
intermediate goods, used goods, financial transactions (stocks and bonds), illegal activities, unpaid household chores
market value
price x quantity (P x Q)
nominal GDP
CURRENT PRICES, reflects DOLLAR VALUE of all goods/services
real GDP
CONSTANT PRICES (base yr.), reflects PHYSICAL QUANTITY of all goods/services
real GDP calculation
price (base yr.) x quantity (current)
total spending components
consumption, investment, government spending, net exports
(C+I+G+NX)
consumption
total spending my household (excludes new housing)
investment
business spending on equipment, investments, and structures (includes new housing)
government spending
EXCLUDES social security, medicare, and national debt interest payments
net exports
exports minus imports
CPI
measures overall price level for goods/services bought by a typical consumer (baskets)
CPI calculation
current expenditure / base expenditure
expenditure calculation
price x FIXED quantity
measurement biases
- substitution
- new goods
- quality improvement/changes
substitution bias
ignores consumer switching to cheaper alternativies
new goods
increases choices
inflation calculation given CPI
(new CPI - old CPI) / old CPI x 100
delflating
converting nominal values to real values to account for inflation
real rate caluclation
nominal value - inflation rate
indexing
adjusting payments according to CPI to maintain purchasing power
bonds
debt instrument where the issuer (borrower) promises to pay interest and princial
stocks
ownership of a company, enlisting the holder to a share of profits (dividends)
saving
income not spent on constumption
saving calculation
current income - spending for current need
two types of saving
private and public
private saving
- personal/household (life cycle, precautionary, bequest)
- corporate (profit, retained earnings, for future investment)
private saving calculation
(production - tax) - consumption
(Y - T) - C
public saving calculation
(tax revenue - gov’t spending)
(T - G)
tax revenue > gov’t spending
surplus
tax revenue < gov’t spending
defecit
factors affecting bond interest rate
- credit risk
- term to maturity
- tax treatment
- inflation protection
credit risk
higher the risk, higher the interest rate
term to maturity
longer-term bonds, higher the interest rate
tax treatment
tax-exempt (municipals), lower interest rate
inflation protection
prices increase, payments increase proportionally
measure of standard of living
real GDP per capita (per person)
drivers of economic growth
- increase in working population
- improvement of worker productivity
factors that enhance productivity
- physical capital
- human capital
- technology
- natural resources
physical capital
equipment, tools, machines, materials
human capital
training, skills, education
technology
converts inputs to outputs (research, development)
decomposition of population 16+
- employed
- unemployed
- not in labor force
employed
employee, self employed, non paid in family business, part and full time
unemployed
no current job but has actively searched in the last 4 weeks
not in labor force
no job and has not searched in last 4 weeks (student, disabled, retired)
unemployment rate calculation
(unemployed/labor force) x 100
labor force
total number of employed and unemployed
labor participation rate calulcation
(labor force/population 16+) x 100
types of unemployment
- structural
- frictional
- cyclical
cyclical unemployment
deviation of unemployment from its natural rate, associated with short-run fluctuations in the economy
structural unemployment
results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one, usually long-term
frictional unemployment
results because it takes time for workers to search for the jobs that best suit their tastes and skills, short-term for most workers (transition b/w jobs)
functions of money
- medium of exchange
- unit of account
- store of value
medium of exchange
item that buyers give to sellers when they want to purchase goods and services (e.g., cash at a store)
unit of account
yardstick people use to post prices and record debt (e.g., price tags in dollars)
store of value
item that people can use to transfer purchasing power from the present to the future (e.g., saving money in a bank)
M1
currency, demand deposits, checking and saving accounts (most liquid assets)
M2
M1 + time deposits, money market funds
what controls the money supply
the federal reserve
federal reserve
board of governors + 12 regional banks
open market purchase
increases money supply, fed buys government bonds
open market sell
decreases money supply, fed sells government bonds to the public
money supply =
(cash + reserve) / reserve-deposit ratio
100% reserve banking
holds 100% of deposits as reserves, does not influence money supply
fractional reserve banking
banks hold a fraction of deposits as reserves (reserve ratio)
reserve ratio
fraction of deposits banks hold as reserves
discount rate
interest rate on loans that the fed makes out to banks
as discount rate increases, what happens to money supply
money supply decreases
price of money
1/P
what happens to the price of money when price level increases
price of money decreases (inverse relationship)
classical dichotomy
separation of nominal variables and real variables
nominal variables
given in dollar amounts, aka monetary units
real variables
adjusted for inflation, in terms of goods and services
do changes in the money supply affect output?
no because money supply is nominal and output is real
monetary neutrality
long-run, nominal variables are influenced by developments in the economy’s monetary system, but real variables are not
quantity theory of money
(money stock x velocity) = (price x real GDP)
MV = PY
what variable is constant in the quantity theory of money
velocity
what variable changes if money stock changes
price (and vice versa)
what typically happens during a recession
- irregular (can’t predict it)
- real GDP decreases, unemployment increases
- investment spending decreases
aggregate supply
total production
aggregate demand
total spending (C+I+G+NX)
what happens when aggregate demand decreases (AD shock)
a recession,
when AD decreases, production is LOWER than its potential, and prices decrease
what happens when aggregate supply decreases (AS shock)
when AS decreases, production is lower than its potential, and prices increase
