lOMoARcPSD 46016802 Scan to open on Studocu Scan to open on Studocu Econ 103 pt2 Semester 1 notes Vazquez notes Econ 103 pt2 Semester 1 notes Vazquez notes Macroeconomic Principles University of Illinois at Urbana Champaign Macroeconomic Principles University of Illinois at Urbana Champaign Studocu is not sponsored or endorsed by any college or university Studocu is not sponsored or endorsed by any college or university Downloaded by Michael Urso murso0425 gmail com lOMoARcPSD 46016802 Consumer Price Index CPI measures the average change in prices paid by consumers for a market basket of consumer goods and services CPI Cost in Current Period Cost in Base Period 100 Inflation Rate CPI this period CPI last period CPI last period 100 Unemployment the number of people who are not working but are able and willing to work or actively seeking a job Unemployment Rate Number of people unemployed Labor Force Considered Employed works full time or part time 16 works at a temporary job has a job but is on vacation leave etc is an unpaid family worker working at least 15 hrs week Exam 1 Chapter 1 3 5 6 The student center on campus has burritos bagels or burgers for lunch and they all cost the same Your opportunity cost of the burger is Your enjoyment of the bagel or the burrito Supply of coffee has increased twice as much as the demand for coffee has increased As a result we can predict a decrease in equilibrium price and an increase in equilibrium quantity NEVER say up or down when shifting a curve USE left and right Which item would be included in the GDP accounts Hiring a bodyguard Which of these is an example of gross private domestic investment A change in business inventories Butter is a substitute for margarine What is the result of a drop in the price of margarine Price and quantity of butter falls b c demand for butter falls Price for one substitute goes down demand for the other goes up What impact will a rising price level have on real GDP No impact Nominal not adjusted for inflation Real adjusted for inflation Three years ago inflation rate was 8 two years ago it was 5 last year it was 2 The nation is undergoing disinflation prices still going up but by less If expected inflation is greater than actual inflation creditors gain at the expense of debtors If expected inflation is less than actual inflation debtors gain at the expense of creditors 10 10 22 Downloaded by Michael Urso murso0425 gmail com lOMoARcPSD 46016802 The compounding effect of growth rates Country can grow faster even if gdp per capita is higher ex china and US Rule of 70 70 annual growth rate Amount of time it ll take for growth rate to double Production Function everything must have an input production and output Inputs resources materials etc Outputs object food etc Think ab Production function curve sloping upwards Conclusions about growth assuming all else equal Countries with more inputs will have greater GDP capita Countries with lower GDP capita will grow faster Productivity increases is the only source of sustained growth 10 17 22 Axis x aggregate output Q y aggregate price level P GDP and unemployment move in the same direction Short run Aggregate Supply SRAS Upwards sloping Over long term SRAS will shift toward LRAS always Long term Aggregate Supply LRAS Straight vertical line Aggregate Demand AD C I G X M Federal government can only control G only impact on the economy Downwards sloping Stimulus checks increase in government spending inflation Macroeconomic Equilibrium LRAS SRAS and AD intersect Also called potential output full employment Real wage wage price level inflation reduces the real wage Inflation erodes the money in your pocket real wage Federal government good at reducing unemployment not necessarily inflation Downloaded by Michael Urso murso0425 gmail com Pay as you go program current taxpayers fund the benefits that are currently lOMoARcPSD 46016802 10 24 22 Government Revenue 50 from individual income tax 36 social security and medicare 7 corporate income tax Government Expenditures 23 Social Security paid out 15 Defense 14 Medicare 7 2 Unemployment and welfare Government Debt Government can finance its debt by all of these measures Increase in the money supply Sale of government assets Sale of Treasury bonds 10 26 22 Employment on horizontal axis output To the right more employment To the left more unemployment Inflation on vertical axis price level Up higher prices more inflation Down lower prices less inflation Government can only impact taxes and G Reduce taxes and increase government spending AD inc Expansionary Fiscal Policy Raise taxes and decrease government spending AD dec Contractionary Fiscal Policy Which of these would have probably been the case if Congress had not passed any relief packages during the pandemic AD would have increased economy would return to potential output we would have had some inflation During recessions like COVID government spending increases 11 7 22 The Financial System The Supply of loanable funds Savings Downloaded by Michael Urso murso0425 gmail com lOMoARcPSD 46016802 Why do we save Desire to smooth consumption transition to retirement Impatience The Marshmallow Experiment Interest Rates lower interest rates disincentivizes The Demand for loanable funds Investment Interest rate low demand less loans vise versa People become pessimistic about the economy and choose to save more more money available for loans supply increases interest rates lower Congress lowers the corporate capital tax rate demand increases Increase savings due to higher r Government budget surplus increases savings government budget deficit decreases savings The Market for savings and borrowing Financial Intermediaries Differences are between the rate of return and the level of risk Bank low spread risk coordinate lenders specialize on loan evaluation can check reliability of those who they are loaning to Pay an interest to incentivize people charge an higher interest to others to make a profit Stocks high risk require an extra premium on the return to cover that risk Stock is a certificate of ownership in a corporation Two largest New York Stock Exchange NASDAQ sophisticated Bond certificate contract of i owe you Federal government is the major supplier of bonds Medium risk less than stocks more than banks Bond Price Interest Payment Bond Yield Determines if you would get the same return as putting the money in the bank 11 16 22 Money Creation and the FED Downloaded by Michael