Econ201 Final Study Guide 05 12 2014 GDP gross domestic product the total value of all goods and services produced for the market place during a given period within the nations borders Y C consumer spending I investment G government spending X M exports imports Business cycle fluctuations in real GDP economic activity around its long term growth trend Types of unemployment Frictional unemployment people who are between jobs or who are just entering re entering the labor market Structural unemployment mismatches between workers skills and employers requirements or between workers location and employers locations Cyclical unemployment joblessness arising from changes in production over the business cycle Seasonal unemployment changes in weather tourist patterns seasonal factors Unemployed people who are able to work have actively looked for work in the past four weeks Never zero U 3 is official rate Employment rate of employed labor force x 100 Labor force people who have a job or are looking for one CPI Consumer Price Index an index of the cost through time of a market basket of goods purchased by a typical household changes in the price level of all goods and services bought by the US households Calculate cost of market basket in current period cost of market basket in base period X 100 GDP Deflator measure of the level of prices of all new domestically produced final goods and services in an economy Calculate Nominal GDP Real GDP x 100 Consumption Function A positively sloped relationship between real consumption spending and real disposable income Determinants consumer s propensity to spend interest rates wealth expectations of changes in price MPC marginal propensity to consume Delta Y Delta G Multiplier 1 1 MPC Banking system All institutions that take deposits and are regulated by government agencies includes saves loan associations credit unions etc Share four characteristics Short term liabilities Long term assets Liabilities include government insured deposits Close regulation by government Balance sheet A financial statement showing assets liabilities and shareholders equity at a point in time How do banks create money By making loans CD s and other financial products Bonds a promise to pay back borrowed funds issued by a corporation or government agency When interest rates go up bond prices go down Interest rate Interest rate in the long run determined in the market for loanable funds Interest rate in the short run determined in the money market the Fed can change the money supply When interest rates go down bond prices go up Money Demand Money demand curve total quantity of money demanded at each nominal interest rate Change in interest rate move along the money demand curve if interest rate goes up move leftward along curve Increase in real GDP or in the price level will shift the money demand curve rightward Money Supply Money supply curve total quantity of money in the economy at each interest rate straight vertical line determined by the Fed Decrease money supply will increase interest rate spending on plant and equipment new housing and consumer durables will fall Increase in money supply interest rate falls Aggregate demand curve total volume of aggregate expenditure in the economy at different price levels Relate Change in AD to change in Md Tools of Monetary policy RR reserve requirement the minimum amount of reserves a bank must hold depending on the amount of its deposit liabilities OMO open market operations purchases or sales of government bonds by the federal reserve system Discount rate rate that financially sound banks must pay for this primary credit Interest on reserves interest rates sets a floor for the federal funds rate interest rate spreads o Interest Rate Spreads difference between any particular interest rate benchmark interest rate interest rate for risk free bond Based on risk AD aggregate demand total demand for final goods and services at a given time and price level Increase in the price level shifts the money demand curve rightward o Raises the equilibrium interest rate the aggregate expenditure line shifts downward resulting in a lower equilibrium level of GDP A curve indicating equilibrium GDP at each price level with a constant money supply Shift the demand curve government purchases planned investment spending autonomous consumption spending taxes net exports money supply AS aggregate supply the total supply of goods and services that firms in a national economy plan on selling during a specific period of time As total GDP increases greater amounts of inputs are needed to produce the greater output the prices for non labor inputs rise nominal wage rate can also increase Upward sloping price level on the vertical axis and total output on the horizontal axis Macro equilibrium AE model Macro equilibrium AD AS model Short run relationship between total spending and real GDP Explains price level and output through the relationship of aggregate demand and aggregate supply Based on the theory of John Maynard Keynes classical supply and demand model Movement along the curve vs shift in the curve When a change in the price level causes equilibrium GDP to change we move along the AD curve Whenever anything other than the price level causes equilibrium GDP to change the AD curve itself shifts The AD curve shifts rightward when government purchases investment spending autonomous consumption spending or net exports increase or when net taxes decrease When a change in real GDP causes the price level to change we move along the AS curve When anything other than a change in real GDP causes the price level to change the AS curve shifts Slope of the short run AS curve Short run price level at each output level curve Resembles a microeconomic market supply curve AS curve is upward sloping and it has a price variable on the vertical axis and a quantity variable on the horizontal axis Slope of the LRAS curve A vertical line indicating all possible output and price level combinations at which the economy could end up in the long run Only capital labor and technology affect the aggregate supply curve in the long run Shifts the slowest of the three ranges of the AS curve In the long run there is exactly one quantity that will be supplied Demand shock any even that causes the AD curve to shift Supply shock any event that causes the AS curve shift Fiscal Policy change in government purchases or net taxes designed to change total output The effect of the
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