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USC ECON 205 - Final Exam Study Guide

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The foreign trade involves imports, which are goods produced abroad and consumed domestically, and exports, which are goods produced domestically and consumed abroad. Net exports are exports minus imports. Net foreign investment denotes the net U.S. savings abroad and is approximately equal to net exportsGovernment annual budget: The fiscal year is from September to the following September. A budget surplus for the year means that tax revenues are greater than expenditure, while deficit means expenditures are greater than tax revenues. The fiscal cliff is the ongoing problem with the US debt. Even though most plans call for tax decrease and expenditure increase, macroeconomic theory supports the opposite.Deficit refers to one fiscal year while debt refers to the total account that is permanent.ECON 205 2nd EditionFinal Exam Study Guide: Lectures 19-23 Lecture 19A closed economy is a model that only includes consumption, investment, and government expenditures. An open economy, however, includes net exports as well. The foreign trade involves imports, which are goods produced abroad and consumed domestically, and exports, which are goods produced domestically and consumed abroad. Net exports are exports minus imports. Net foreign investment denotes the net U.S. savings abroad and is approximately equal to net exportsGovernment annual budget: The fiscal year is from September to the following September. A budget surplus for the year means that tax revenues are greater than expenditure, while deficit means expenditures are greater than tax revenues. The fiscal clif is the ongoing problem with the US debt. Even though most plans call for tax decrease and expenditure increase, macroeconomic theory supports the opposite.- Deficit refers to one fiscal year while debt refers to the total account that is permanent. An internal debt is when the American government borrows from its citizens, while external is from abroad. Government debt displaces private investment. The actual budget records revenues, public expenditures, deficit, or surplus in a given period. Structural budget however records what the revenues, expenditures, deficit or surplus would be if the economy was operating at its potential output. Lastly, cyclical budget is the difference between actual and structural budget.Income is a dynamic concept that deals with the amount of money per unit of time (i.e. month).Wealth is the total amount of money a unit has, and is static. Lecture 20The savings-investment relation in an open economy is It = I + X = S + (T-G), where total national investment (It) consists of investment in domestic capital (I) plus net exports (X). This must equal total private saving (S) plus total public saving (T-G).Net exports are determined by the difference between national saving and national investment,which is determined by domestic factors and the world interest rate. Moreover, changes in exchange rates are the mechanism by which savings and investment adjust. How net exports adjust to provide necessary investment during budget deficit: if the government suddenly runs abudget deficit, this will lead to an imbalance in the savings-investment market, which would push up domestic interest rates relative to world rates. This rise will attract international fundsand appreciate the foreign exchange rate, causing a decrease in net exports. This will continue until the savings-investment gap is closed.In 1999, eleven European nations linked their currencies and joined the European Monetary Union (EMU). They created one currency, the Euro, as their unit of account and medium of exchange. The European Central Bank (ECB) conducts the European monetary policy, and defines its main goal as price stability, inflation rates of below 2 percent per year. - Inflation occurs when the general level of prices is rising. We calculate it using prices indexes, most commonly the consumer price index (CPI). The GDP deflatoris the price of all of the different components of the GDP.- Rate of inflation in year t = 100 x (Pt – Pt-1)/Pt-1Some economists are more pessimistic about the Euro, believing that Europe is not an optimal currency area, a region with high labor mobility and common aggregate supply and demand shocks. Lecture 21The Lafer curve relates tax rate and revenues. If the tax rate is zero, the revenue of the government will be zero. Furthermore, if the tax rate is one hundred percent, the revenue will be zero also. When you get to the point of inflection, you reach the maximum amount of revenue and optimal rate of taxation.A lack of aggregate demand is when the government has to interfere. Keynes believed the government has to be the manager of the economy. Aggregate demand is equal to consumption part of the GDP. Aggregate supply is an abstract concept relating to the total production of the economy.Social overhead means hospitals, schools, streets, parks, etc. We have plenty of opportunities tospend money, but if we don’t we can create capital to stimulate employment. Life cycle model of consumption: consumption decisions are influenced by concern for future generation welfare. Intangible capital refers to education and other forms of human capital.Lecture 22Aggregate supply describes the behavior of the production side of the economy. The aggregate supply curve (AS curve) shows the level of total national output that will be produced at each price level.The short-run aggregate supply schedule is inflexible for prices and wages, leading to an upward-sloping AS curve (higher prices mean more production). Over the long-term however, most elements of the business cycle are perfectly flexible, and output is determined by potential output only. Potential output is the maximum sustainable output that can be produced without causing rising inflation. The long-term AS curve is determined by the samefactors that cause economic growth, namely quantity and quality of labor, supply of capital and resources, and technology level. We measure the potential GDP at the unemployment rate NAIRU (nonaccelerating inflation rate of unemployment).- An upward shift of the AS curve is caused by increases in costs of production, while an outward shift is caused by increases in potential output.Keynesian macroeconomics is associated with an upward-sloping, short-run aggregate supply. Init, changes in aggregate demand have significant effects on output. If aggregate demand falls due to monetary tightening or a falloff in


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