Exam I Term Competitive market ID market with large number of independently acting buyers and sellers who cannot individually influence price Entrepreneurship Human resource that brings together other resources and is motivated by profit selfinterest Legal price floor imposed in the labor market Minimum wage law Real GDP Explicit and implicit economic costs Legal price floor Opportunity cost Capital Parity price ratio Price elasticity of demand The value of all domestically produced goods and services evaluated at constant prices Explicit out of pocket costs costs paid in money Implicit value of alternatives foregone when a decision is made no direct money payment Prices set by law below which legal transactions cannot occur Alternatives foregone when a choice is made Human made aids to production goods used to produce other goods plant equipment machinery etc Index of farm prices index of non farm prices x 100 QP d E D absolute value of percentage change in quantity demanded over percentage change in price measure of how responsive buyers are to changes in price of a good service ceteris paribus MPC APC C YD the marginal propensity to consume which is the proportion of additional current disposable income that is spent on consumption C YD the average propensity to consume or the proportion of current disposable income spent on consumption Significance Competitive markets come to rest with a price and quantity mutually satisfactory to the buyers and sellers as if by and invisible hand they reach market clearing prices and quantities Entrepreneurs bear risk are innovators If set above equilibrium wage creates unemployment or surplus of labor concentrated on least skilled workers unions support higher minimum wages Indicator of the real level of economic activity the quantities of goods and services produced domestically Both costs must be taken into consideration if economic decisions are to be rational even when explicit costs are not made implicit costs are real and often quite sizeable If set above the equilibrium prices can result in excess supply or surpluses Both explicit and implicit opportunity costs are necessary for rational decision making More capital ceteris paribus implies higher economic growth Often cited in agricultural policy discussion about raising farm prices indicator of how the farm sector is doing economically when the ratio fell below 100 in the 30s there was political pressure to establish price supports floors which resulted in surpluses Relationship with TR TR PxQ If ED 1 elastic P and TR change in opposite direction if ED 1 inelastic P and TR change in same direction relationship with economic tax incidence It is the slope of the consumption function According to Keynes 0 MPC 1 At the break even level APC 1 implies zero saving APC 1 dissaving APC 1 saving According to Keynes as disposable income increase APC decreases YD APC Exam II How inflation affects creditors and debtors Quantity Theory of Money Unanticipated inflation reduces creditors real income while benefit debtors who repay their loans with dollars of lower purchasing power MS V P Q Three functions of money Medium of exchange Unit of account Store of value Unemployment Percentage of the labor force without jobs 3 types of unemployment Structural workers lack marketable skills Frictional workers voluntarily changing jobs and new entrants into the labor force Cyclical joblessness associated with the ups and downs of the business cycle Economic costs of unemployment GDP gap dollar value of all goods and services not produced domestically due to involuntary joblessness Three policies to combat inflation Higher legal reserve requirements Higher discount rate Sell bonds in open market operations Inventory adjustment mechanism If planned TE does not equal ASK line showing planned and actual expenditure then the economy is not in equilibrium GDP gap Difference between actual equilibrium Y e and noninflationary full employment Y where Y Ye dollar value of all goods and services not produced due to involuntary joblessness Total reserves legally required reserves excess reserves Excess reserves Different interest rates a Differences in default risk b Differences in term to maturity c Differences in tax treatment If inflation is anticipated they will increase nominal interest rates in an effort to preserve real rates With V 0 P inflation or deflation depends on MS compared to Q MS Q P 0 inflation and MS Q P 0 deflation Facilitates exchanges of material goods and services Facilitates estimates of comparative values common denominator valuing goods and services Allows purchasing power to be stored over time how well money performs over time depends on changes in the price level Economy produces less than it could GDP gap non economic costs such as political and family instability higher crime rates health problems among the chronically unemployed Economy produces less than it could GDP gap non economic costs such as political and family instability higher crime rates health problems among the chronically unemployed Frictional unemployment is desirable when it increases worker productivity or efficiency and improves job matches it is assumed to be 5 Involuntary unemployment means that we are not producing as many material goods services as we could non economic costs may also be mentioned Commercial banks hold larger reserves so less money in the economy MS Commercial banks and public have more difficulty more expensive borrowing MS Fed gives out bonds and takes in cash MS Inventory adjustments presumably bring the economy to rest If for example planned TE ASK there will be an unintended drop or decumulation of inventories and vice versa The gap indicates unemployment as the problem measure of the economic costs of unemployment Only legal source of funds that commercial banks can lend if banks hold positive excess reserves money supply changes are not as large as they could be a Risk that a lender may not be paid back i e the borrower will default on their promise to repay the loan US gov t Treasury bonds have zero default risk b How long until the IOU must be repaid higher Consumer wealth Three motives for holding money cash Wizard of Oz Tax multiplier Money expansion multiplier Value of assets minus value of liabilities financial assets stocks bonds etc and durable goods owned by consumers a transactions demand b speculative demand c precautionary demand Political allegory reflecting movements during