Econ 203 1nd EditionExam # 3 Study Guide Lectures: 25,26,28-37Lecture 25 (October 24)Introduction to Gross Domestic Product (GDP)(nominal) GDP is the dollar value of new, domestically produced, market transacted goods and services purchased during a given year. Dollar value states that the good mustbe sold in a market. Newly produced means that the good cannot be a used product thatis being re-sold. Domestically produced goods are LEGALLY produced within national borders. Final goods are those that are the final transaction to the consumer that will use the product. GDP is calculated as the sum of price times quantity. GDP= P1*Q1 + P2*Q2…+Pn*QnP2012Q2012P2013Q2013G110 50 12 50G25 100 8 100G32 600 2 500GDP2012=10(50)+5(100)+2(600)= $2200GDP2013=12(50)+8(100)+2(500)= $2400Differences in GDP from year to year can be the result of price changes, output changes, or both. The problem with nominal GDP is that it doesn’t specific what changes. Lecture 26 (October 27)GDP continued.Nominal GDP= (real GDP)(price level)= Q*PReal GDP- new, domestically produced, final market transacted goods and services purchased in a particular year that is measured using standardized prices from previous years. It tries to adjust for price change, inflation, or deflation. Comparing real GDPs from years tells us whether a society is doing better, worse, or the sameWith 2012 as the base yearReal GDP2012 = nominal GDP2012= $2200Real GDP2013= 12(50)+8(100)+2(600)= $2600Price level (P)= nominal GDP/ real GDPP2012= 2200/2200= 1 P2013= 2400/2600= 0.923P2013-P2012= 0.923-1= -0.07. On average, prices have fallen by 7% from 2012 to 2013.Lecture 28 (November 3)Price Level EvaluationPc—current price Pb—base pricePc – Pb = (+) positive-implies inflation (a dollar has decreased purchasing power) which is considered a tax on holding money(-) negative- implies deflation (a dollar has increased purchasing power) which is considered a reward for holding moneysociety prefers inflation over deflation. Consumer patience is bad!Lecture 29 (November 5)Aggregate Demand and supplyA society’s production is constrained by population, physical capital (tangible items that can be added to improve productivity), human capital(intangible factors that can increase production), and level of technologyThe general usage is that society uses everything it produces in any given year.Lecture 30 (November 7)MoneyBenefits are that it provides a medium of exchange( eliminates the need to barter), storage of value ( value remains the same through time), and unit of account ( common language of value)America operates with a fiat money system in that the government states money is worth value, therefore it has value. Lecture 31 (November 10)Money cont. An increase in money available will increase spending habits. Overall changes in money cause behavioral changes in the short run. If the amount of money in society doubles, it will just lead to double the prices of goods. Some prices just adjust at faster or slower rates.Lecture 32 (November 12)Long Run Aggregate Supply ShiftsThe LRAS is constrained by population, human capital, physical capital, technology levelWhen the LRAS shifts left, productivity increases, quantity increases, and price decreases. (deflation)When LRAS shifts right, productivity decreases, quantity decreases, and price increases. (inflation)When LRAS increases, we increase money(M) to keep prices stable. When LRAS decreases, we decrease M in order to keep prices stable. Lecture 33 (November 14)Federal ReserveThe Fed is the entity in charge of M. Banks run on a partial-reserve banking system in that banks don’t keep the money deposited. They loan it out to make a profit.A bank run is when too many people come back to get their money, but banks don’t have enough cash to give it all backTools of the Fed:Discount rate-the interest rate the Fed charges banks that borrow reserves. The Fed is considered the lender of last resort. Increases in DR lower M. Decreases in DR raise M.Open market operations- open market purchase of bonds increases M. open market sales of bonds decreases M. Lecture 34 (November 17)Tools of the Fed cont.Reserve requirements- a fraction of each dollar deposited is required for banks tokeep around, or not lend. Banks ‘create’ money though the act of lending out money that they realistically do not have. lowering RR raises M. Increasing RR lowers M. RR is considered the most powerful tool. Money supply (M)= currency (C) + deposits (D)Lecture 35 (November 19)Comparative AdvantageThe act of doing something precludes you from doing something else. Having a comparative advantage means that you can produce a specific good with the least amount of effortSelf-sufficient (autarky)- production bundle is equal to consumption bundleSpecialization- producing a bundle of goods that is different from your consumption bundle.Lecture 37 (November 24)Present ValuationDifferently dated dollars are different economic goodsReal interest rate is the premium willing to pay in order to accept money now vs. laterPresent Value (PV), future value (FV), interest rate(r), number of years until maturity (n)PV= FV/(1+r)n As r increases, PV decreasesPerpetuityThe option to be paid a set amount of money every set amount of time foreverPV=(annual CF)/r CF=cash