ECON 102 1st Edition Exam 3 Study Guide Lectures 22 35 Lecture 22 October 16 Income and Expenditure Part I Key Terms Marginal Propensity to Consume Marginal Propensity to Save Multiplier Consumption Function Aggregate Consumption Function The marginal propensity to consume or MPC is the increase in consumer spending when disposable income rises by 1 The marginal propensity to save or MPS is the increase in household savings when disposable income rises by 1 An autonomous change in aggregate spending is an initial change in the desired level of spending by firms households or government at a given level of real GDP The multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change The consumption function is an equation showing how an individual household s consumer spending varies with the household s current disposable income Deriving the slope of the consumption function The aggregate consumption function is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending Lecture 23 October 18 Income and Expenditure Part II Key Terms Planned Investment Spending Accelerator Principle Inventories Inventory Investment Interest Rates influence o Investment spending by households on homes Lower interest rates means more spending on home construction o Investment spending by businesses on projects Higher interest rate means projects with higher rate of return will be implemented Existing Production Capacity o Firms undertake investment spending only if capacity is inadequate to meet future sales Unplanned inventory investment occurs when actual sales are more or less than businesses expected leading to unplanned changes in inventories o Rising inventories indicate slowing economy o Falling inventories indicate growing economy Actual investment spending The sum of planned investment spending and unplanned inventory investment Lecture 24 October 21 The Aggregate Demand Curve Key Terms Aggregate Demand Curve The aggregate demand curve shifts because of o Changes in expectations o Wealth o The stock of physical capital o Government policies Fiscal Policy Monetary Policy Lecture 25 October 23 The Aggregate Supply Curve Key Terms Aggregate Supply Curve Nominal Wage Sticky Wages Profit per unit of output Price per unit of output Production cost per unit of output Changes in commodity prices nominal wages productivity leads to changes in producers profits and shift the short run aggregate supply curve Changes in Commodity Prices o If commodity prices fall short run aggregate supply increases o If commodity prices rise short run aggregate supply decreases Changes in Nominal Wages o If nominal wages fall short run aggregate supply increases o If nominal wages rise short run aggregate supply decreases Changes in Productivity o If workers become more productive short run aggregate supply increases o If workers become less productive short run aggregate supply decreases Lecture 26 October 25 Short Run Macroeconomic Equilibrium Shocks Key Terms Short Run Macroeconomic Equilibrium Short Run Equilibrium Aggregate Price Level Recessionary Gap Inflationary Gap Output Gap Negative Supply Shocks Policy Dilemma Demand Side Shocks o Movement of AD demand curve o Caused by changes in wealth expectations stock of physical capital gov t policies o RESULT Aggregate price level and aggregate output move in the same direction Supply Side Shocks o Movement of AS curve o Caused by changes in commodity prices productivity and nominal wages o RESULT Aggregate price level and aggregate output move in the opposite direction Output Gap Lecture 27 October 28 Fiscal Policy Key Terms Debt Crowd Out Default Implicit Liabilities Role of Fiscal Policy in Economic Management o Government Policy on G Government T Taxes TR Transfers o Expansionary Influence Direct influence through G Indirect influence through DI o Contractionary Influence Direct influence through G Indirect influence through DI Lecture 28 October 30 Monies and the Monetary Role of Banks Key Terms Money Currency in Circulation Checkable Bank Deposits Money Supply Medium of Exchange Store of Value Unit of Account Commodity Money Commodity Backed Money Fiat Money Financial Intermediary T Account Bank Reserves Reserve Ratio Bank Run Two types of measuring money o Narrow Measure Assets used to buy groceries Currency Traveler s Checks Checkable Bank Accounts o Broad Measure Includes things like savings accounts that can easily and quickly be converted into Narrow Measure o Broad Narrow o Stocks bonds etc are excluded as they re not liquid enough A T account summarizes a bank s financial position o EX The bank s assets 900 000 in outstanding loans to borrowers and reserves of 100 000 are entered on the left side Its liabilities 1 000 000 in bank deposits held for depositors are entered on the right side Lecture 29 November 4 The Federal Reserve System Open Market Operations Key Terms Monetary Base Money Multiplier Central Bank Federal Funds Market Federal Funds Rate Discount Rate Money Multiplier Open Market Operations o Open market operations by the fed are the principal tool of monetary policy the Fed can increase or reduce the monetary base by buying government debt from banks or selling government debt to banks o Monetary System is supposed to be separate from the government Shifts in the demand curve Changes in the aggregate price level Changes in real GDP Changes in technology Changes in institutions o A fall in money demand shifts the money demand curve to the left o A rise in money demand shifts the money demand curve to the right Lecture 30 November 6 Money and Interest Rates Key Terms Liquidity Preference Model Expansionary Monetary Policy Contractionary Monetary Policy Inflation Targeting Money Demand Curve Shifts Changes in aggregate price level o Rise in aggregate price level Higher money demand o Fall in aggregate price level Lower money demand Changes in real GDP o Rise in basket of goods and services purchased Larger demand for money o Fall in basket of goods and services purchased Fall in demand for money Changes in Technology o i e Credit Cards Changes in Institutions Lecture 31 November 8 Inflation and Money Key Terms Classical Model of the Price Level Inflation Tax Real Inflation Tax Seignorage Causes vary demanding on level of inflation o High inflation is always associated with rapid increase in MS o