VCU ECON 203 - Exam 3 Study Guide (4 pages)

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Exam 3 Study Guide

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Exam 3 Study Guide


An overview of GDP, interest rate, present valuation, money supply, aggregate demand and supply

Study Guide
Virginia Commonwealth University
Econ 203 - Introduction to Economics
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Econ 203 1nd Edition Exam 3 Study Guide Lectures 25 26 28 37 Lecture 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 must be sold in a market Newly produced means that the good cannot be a used product that is 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 Qn P2012 Q2012 P2013 Q2013 G1 10 50 12 50 G2 5 100 8 100 G3 2 600 2 500 GDP2012 10 50 5 100 2 600 2200 GDP2013 12 50 8 100 2 500 2400 Differences 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 P Real 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 same With 2012 as the base year Real GDP2012 nominal GDP2012 2200 Real GDP2013 12 50 8 100 2 600 2600 Price level P nominal GDP real GDP P2012 2200 2200 1 P2013 2400 2600 0 923 P2013 P2012 0 923 1 0 07 On average prices have fallen by 7 from 2012 to 2013 Lecture 28 November 3 Price Level Evaluation Pc current price Pb base price Pc 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 money society prefers inflation over deflation Consumer patience is bad Lecture 29 November 5 Aggregate Demand and supply A 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 technology The general usage is that society uses everything it produces in any given year Lecture 30 November 7 Money Benefits 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 Shifts The LRAS is constrained by population human capital physical capital technology level When 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 Reserve The 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 back Tools 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 to keep 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 Advantage The 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 effort Self sufficient autarky production bundle is equal to consumption bundle Specialization producing a bundle of goods that is different from your consumption bundle Lecture 37 November 24 Present Valuation Differently dated dollars are different economic goods Real interest rate is the premium willing to pay in order to accept money now vs later Present Value PV future value FV interest rate r number of years until maturity n PV FV 1 r n As r increases PV decreases Perpetuity The option to be paid a set amount of money every set amount of time forever PV annual CF r CF cash flow

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