ECON 205 1st EditionFinal Exam Study GuideChapter 7:Welfare economics explains the allocation of resources by answering how much is produced, who is the producer, and who is the consumerLook up Willingness to pay, Consumer Surplus, and Producer Surplus on Terms listAllocation in a market is determined by the interactions between self-interested buyers and sellersTotal surplus is a measure of society’s well-being (since its like an “everyone wins” situation)Efficiency maximizes total surplusGoods purchase by consumers who value them most highlyGoods produced by producers with the lowest costAdam Smith said that when individuals act in their own self-interest, they end up benefiting all of society and are, therefore, led by an invisible handChapter 8:Costs of taxation causes market inefficienciesChapter 9:If PD < PW, then a country has a comparative advantageExport goodConsumer surplus fallsProducer surplus risesTotal Surplus risesIf PD > PW, then a country does not have a comparative advantageShould import the goodConsumer suplus risesProducer surplus fallsTotal surplus risesA small economy is a price taker in world markets because its actionshave so impact of PWForeign competition decreases the market power of domestic firmsand increase total welfareTrade increases the flow of ideas and facilitates the spread oftechnology worldwideLosses in trade often highly concentrated among small group ofpeople whereas gains are often spread thinly over a large groupTariffs and Import quotas have the same basic effects on the marketChapter 10:Refer to GDP on terms listDiagram omits the government, financialsystem, and international sectorGDP only considers FINAL goods intendedfor the end userRefer to GNIY= C + I + G + NX (consumption + investment+ government + net exports)Refer to Inflation, nominal GDP, and realGDPGDP deflator is a measure of the overalllevel of prices= 100 X (nominal GDP) / (real GDP)Real GDP per capita is the main indication ofthe average person’s standard of livingChapter 11: Refer to CPISteps to calculate CPIFix the basket (decide what the average consumer buys in a given period of time)Find the prices of items in the basketCompute the basket’s total costChoose a base year and compute the index100 x (cost of basket in current year) / (cost of basket in base year)Compute the inflation rate100 x [(CPI of current year) – (CPI of comparison year)] / (CPI of comparison year)CPI does not have the flexibility to account for switches made to cheaper substitute goods, the introduction of new goods, or unmeasured quality changeGDP and CPI graphs are typically very similarGDP and CPI do not account for the underground marketTo find out how much a dollar amount in T years would equal now…Amount in today’s dollar = (Amount in year T dollars) x (price level today) / (price level in year T)Used to convert nominal dollars to real dollarsRefer to indexationRefer to nominal and real interest ratesChapter 12:High productivity means real GDP is large and incomes are highDeterminants of Productivity and its growth are…Physical Capital (K)Human Capital (H)Natural Resources (N)Technological knowledgeAn increase in any of these increases productivity and growthY/L measures productivity (L is labor)Government implementation K-increasing policies only creates temporary growth because of Diminishing returnsRefer to the catch-up effectInward oriented trade policies aim to raise living standards by avoiding interaction with other countriesOutward oriented policies promote integration with the world economyTechnological progress is the main reason why living standards rise over the long runChapter 15:Labor Force statistics are produced by the Bureau of Labor Statistics (BLS)Divide population into the employed, unemployed, and people not in the labor forceRefer to unemployed, unemployed, and not in labor forceUnemployment rate (U-rate) = 100 x (# of unemployed) / (labor force)Labor Force participation rate = 100 x (labor force) / (adult population)U-rate does not include the discouraged worker and does not distinguish between part-time and full-time workersMost unemployment is short-term and well under 14 weeksRefer to cyclical unemployment, natural rate unemployment, frictional unemployment, and structural unemploymentGovernment employment agencies provide information about job vacancies to speed up job searchGovernment also has Public training programs to train workers for certain jobsUnemployment insurance partially protects workers’ incomes when they become unemployedIncreases frictional unemployment because it decreases the motivation to find a new jobRefer to minimum wage laws and unionsUnions increase wages, which decreases the demand for labor  increase in unemploymentRefer to Efficiency wagesSet for worker health, turnover, quality, and effortChapter 16:Refer to Double Coincidence of wants 3 functions of money: -Medium of exchange-unit of account-Store of value2 types of money:-Commodity money- takes the form of a commodity with intrinsic value-Fiat Money- used as money because of government decree; no intrinsic valueMoney Supply- quantity of money available in the economyAssets are considered part of the money supplyCentral Bank- an institution that oversees the banking system and regulates the money supplyMonetary Policy- setting of the money supply by the policymakers in the central bankFederal Reserve (Fed)- the central bank of the USFederal Open Market Committee (FOMC) decides monetary policyFractional reserve banking system- banks keep a fraction of deposits as reserves and use the rest to make loansReserve requirements- regulations established by the Fed on the minimum amount of reserves that banks must hold against deposits Reserve Ratio ®- fraction of deposit that banks gold as reservesA T-account is a simplified accounting statement that shows a bank’s assets and liabilitiesLiabilities include depositsAssets include loans and reservesThe banking system creates money, but not wealthMoney Multiplier- amount of money the banking system generates with each dollar of reserves1/RA more realistic balance sheet would include…Bank capital- resources a bank obtains by issuing equity to its ownersLeverage- use of borrowed funds to supplement existing funds for investment purposesAssets must always equal liabilitiesLeverage ratio- ratio of assets to bank capitalCapital requirement- a government regulation that specifies a minimum amount of capital, intended to