MACRO FINAL Flashcards
resources are…
scarce
how do scarce resources affect society?
- how people make decisions
- how people interact
- how the economy works as a whole
social trade-off between efficiency and equality
getting the most from scarce resources vs. distributing benefits uniformly
pie analogy
when the government cuts the pie into more equal pieces, the pie gets smaller
opportunity cost
the highest benefit obtained from opportunities forgone
what would be the opportunity cost of going to college?
payment of tuition and the value of your time
rational decision-makers only proceed if…
the marginal benefit exceeds the marginal cost
incentive
induces a person to act
rational decision-makers will respond to an incentive when…
the marginal cost or benefit changes
how can trade make everyone better off?
trade allows each person to specialize in what they do best and trade their input for the output of other efficient procedures
market power
when a single person/group can influence the price of a good/service
how can the government sometimes improve market outcomes?
the government can intervene and improve economic efficiency, but well-intentioned policy intervention can have unintended consequences
fundamentally, economics deals with…
scarcity
efficiency means that…
society is getting the most it can from its scarce resources
specialization does what to total production?
increases total production available to share - total outputs rise when producers specialize in what they do best
how does trade make us interdependent?
people produce because they wish to trade and get something in return
absolute advantage
compares quantity of inputs required to produce a good
what gives someone the absolute advantage?
if it takes fewer resources to produce their good (higher productivity and efficiency)
comparative advantage
compares opportunity cost of productive
what gives someone the absolute advantage?
if the production of their good has a lower opportunity cost
should you specialize in the item in which you have the absolute or comparative advantage?
comparative advantage, it increases total production and makes the economic pie larger (everyone benefits)
4 barriers to specialization
- population density
- market connectivity
- infrastructure: legal and financial system
- culture
quantity demanded
amount of a good buyers are willing to purchase
what plays a central role in quantity demanded and quantity supplied
price
law of demand
all things equal, an increase in the price of a good reduces quantity demanded and a decrease in the price of a good increases quantity demanded
demand schedule
table that shows the relationship b/w the price of a good and the quantity demanded
which way does the demand curve slope?
downward sloping due to the law of demand; as price increases, QD decreases
what five factors shift demand curves?
- income
- prices of related goods
- taste
- expectations
- number of buyers
how does income shift a demand curve?
normal goods (income increases, QD increases) & inferior goods (income increases, QD decreases)
how do the prices of related goods shift a demand curve?
substitutes (price of one good increases and the QD of it’s substitute increases) & compliments (price of one good increases and the QD of it’s compliment increases)
substitutes
buyers choose either or
compliments
buyers buy them together
how does taste shift a demand curve?
if preferences shift, demand shifts
how do expectations shift a demand curve?
expectations about future income or prices will affect demand for a good
how do the number of buyers shift a demand curve?
if the number of buyers increases, demand increases
which way does the demand curve shift if there is an increase in demand?
curve shifts right, buyers increase the QD at each price
which way does the demand curve shift if there is a decrease in demand?
curve shifts left, buyers decrease the QD at each price
quantity supplied
amount of a good sellers are willing and able to sell
law of supply
all things equal, an increase in the price of a good increases the QS, a decrease in the price of a good decreases the QS
why does an increase in price affect the law of supply?
an increase in price of a good makes production more profitable for sellers
supply schedule
table that shows the relationship b/w the price of a good and the QS
which way does the supply curve slope?
upward sloping due to the law of supply; as the price of a good increases, the QS also increases
which way does the supply curve shift if the QS increases?
curve shifts right, increase in supply
which way does the supply curve shift if the QS decreases?
curve shifts left, decrease in supply
what four factors shift supply curves?
- input prices
- technology
- expectation
- number of sellers
how do input prices shift a supply curve?
a decrease in the price of an input makes production more profitable and increases QS
how does technology shift a supply curve?
improvements in technology reduces costs, making production more profitable and increases QS
how do expectations shift a supply curve?
expectations about the future will affect the QS of a good today (if prices are expected to increases, QS will decrease)
how do the number of sellers shift a supply curve?
an increase in the number of sellers will increase QS
market’s equilibrium
the intersection of supply and demand
equilibrium
the level at which QS equals QD
market-clearing price/equilibrium price
the price that balances the QD and the QS (people can purchase all they want and sellers sell all they are willing and able at that price)
surplus
if the price is above equilibrium price, QS exceeds QD
shortage
if the price is below equilibrium price, QD exceeds QS
what do sellers do when there is a surplus?
sellers lower prices to sell their surplus of supply, the price falls until equilibrium is reached
what do sellers do when there is a shortage?
sellers raise prices until equilibrium is reached where quantity supplied equals quantity demanded
how do you find the size of a surplus/shortage?
find the difference between quantity demanded and quantity supplied (is always a positive number)
gross domestic product (GDP)
the MARKET VALUE of all FINAL GOODS produced IN A COUNTRY in a PERIOD OF TIME
market value
production is valued at the price paid for the output (cost of production of all durable and non-durable goods/services)`
market value calculation
price x quantity (PxQ)
what is included in GDP?
final goods and services, produced within a country’s borders, produced in a measured period
what is not included in GDP?
intermediate goods, used goods (resales), financial transactions (stocks & bonds), illegal activities, unpaid household chores
final goods and services
sold to end consumers, calculated in GDP
intermediate goods
used up in production, not calculated in GDP
durable goods
last more than a year
non-durable goods
last less than one year
nominal GDP
measured in CURRENT PRICES, reflects DOLLAR VALUE of all goods and services produced (transaction value)
real GDP
measured in CONSTANT PRICES (base yr.), reflects PHYSICAL QUANTITY of goods and services produced (purchasing power)
real GDP calculation
price (base yr.) x quantity (current)
four components of total spending
consumption, investment, gov. spending, net exports
(C + I + G + NX)
consumption (C)
spending by household of final goods and services, except the purchase of new housing (which is an investment)
investment (I)
business spending on equipment, investments, and structures (includes new housing)
government purchases (G)
government spending on goods and services (defense, salaries, etc.)
what is not included in gov’t purchases?
transfer and investment payments (social security, medicare, national debt interest)
net exports (NX)
exports minus imports
consumer price index (CPI)
measures overall price level for goods/services bought by a typical consumer (baskets)
three measurement biases of CPI
- substitution bias
- new goods
- quality improvement/changes
substitution bias
ignores consumer switching to cheaper alternatives
new goods bias
increases choices, but CPI doesn’t account for them immediately
inflation calculation given CPI
(new CPI - prev CPI) / (prev CPI) x 100
expenditure calculation
price x FIXED quantity
CPI calculation
expenditure current / expenditure base
deflating
convert nominal to real values to account for inflation
calculation for deflating an interest rate
real rate = nominal - inflation rate
indexing
adjusting payments according to CPI to maintain purchasing power
bonds
debt instrument where the issuer (borrower) promises to pay interest and principal
stocks
ownership of a company, enlisting the holder to a share of profits (dividends)
saving
income NOT SPENT on consumption; provides funds for investment
S = current income (Y) - consumption (C) - gov’t spending (G)
saving calculation
current income - spending for current need
what is included in private saving?
personal/household, corporate
private saving calculation
(Y - T) - C
(production - tax) - consumption
what is included in personal/household saving?
life cycle, precautionary, bequest
what is included in corporate saving?
profit, retained earnings, for future investment
public saving calculation
T - G
tax revenue - gov’t spending
tax revenue > gov’t spending
surplus
tax revenue < gov’t spending
defecit
four 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
long-term bonds, higher interest rate
tax treatment
tax-exempt bonds (municipals), lower interest rate
inflation protection
if prices increase, payments increase proportionally
when do saving curves shift?
when household or gov’t funds change
what happens to saving when government spending decreases?
saving also decreases
when do investment curves shift?
when firms change investment plans
taxes of net transfers (T) calculation
T = taxes - transfer payments
what is the measure of the standard of living?
real GDP per capita (ability of a country to produce goods and services)
main drivers of economic growth
increase in working population and improvement of worker productivity
four factors that enhance productivity
- physical capital
- human capital
- technology
- natural recourses
examples of physical capital
equipment, tools, machines, materials
examples of human capital
training, skills, education
technology
process to convert 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
doesn’t have current job but has actively searched in the last four weeks
not in labor force
not working and has not searched in the last four weeks (student, retired, disabled)
unemployment rate calculation
(unemployed/labor force) x 100
labor force
total number of workers, including employed and unemployed
labor participation rate calculation
(labor force/population 16+) x 100
cyclical unemployment
deviation of unemployment from its natural rate, associated with short-run fluctuations in economic activity
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)
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
three functions of money
- medium of exchange
- a unit of account
- a 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 includes…
currency, demand deposits at banks, checking and saving accounts (most liquid assets)
M2 includes…
everything in M1, time deposits, money market funds
what determines money supply?
federal reserve
bank lending
private cash
reserves
deposits that banks have received but not cashed out
federal reserve
board of governors & 12 regional banks
open market operations
purchase and sale of U.S. government bonds by the fed
open market purchase
to increase money supply, the FED buys government bonds (securities)
open market sell
to decrease money supply, FED sells gov. bonds to public
100-percent-reserve banking
holds 100% of deposits as reserves, does not influence the supply of money
money supply =
currency + deposits
fractional-reserve banking
banking system in which banks hold only a fraction of deposits as reserves (has a reserve ratio)
reserve ratio
fraction of deposits that banks hold as reserves
discount rate
interest rate on loans that the fed makes out to banks
the higher the discount rate…
the smaller the money supply
price of money calculation
1/P
when price level increases what happens to the price of money?
decreases
price level and price of money has what kind of relationship (inverse or proportional?)
inverse
classical dichotomy
the separation between real and nominal values
monetary neutrality
calculation of the quantity theory of money
MV = PY
quantity theory of money
money supply (M*V) = money demand
MV = PY
what is recession?
what will typically happen during a recession?
decreased economic activity, increased unemployment, decreased business profits, decreased consumer spending
business cycle
the ups and downs of the economy
aggregate supply
total production
aggregate demand
total spending (C+I+G+NX)
what will shift aggregate supply?
changes in input prices, productivity levels, tech advancements, supply shocks
what will shift aggregate demand?
changes in consumer spending, investment spending, government spending, net exports
what are the consequences if there is a shift of aggregate demand/supply?
changes in the equilibrium price level and real GDP
