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UW-Madison ECON 102 - Short Review before Midterm 1

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Econ 102 1st Edition Lecture 9 Outline of Last Lecture I. Exam InformationII. 7.5 Using the Full Employment ModelIII.Application 3IV.Important to understand- but not until second examV. Chapter 8Outline of Current LectureI. Review for Exam on WednesdayCurrent LectureI. Review for Exam on Wednesdaya. Chapters 7 and 8 have a balanced growth assumptioni. that technology equally affects both the K and L and that all forms of labor are equally affectedii. They GROW togetheriii. in recent data returns to K are rising faster than Wr (real wages)iv. We also see a widening of the skill distribution1. It matters a lot what your major is! It matters what your skills area. EX: engineer vs french literatureb. Challenges the model, raises policy questionsc. Rich workers are able to save more so they not only earn more as workers but as capitalists widening the income distributions (if you're richenough to save you earn double) (think These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.capitalists are able to get returns like 10%-12% per year on investments)i. Top 1% of wage earnersv. Recent data show that L-force participation rates are fallingas Wr have been falling1. Ls is not vertical2. Taxes distort GDP3. Surprising there is so much slopea. GDP is not as good of an indicator nowi. some people gain with rising GDP others do notii. not the best measure of welfareb. Old exam questioni. 2013: 2 cars are produced1. one sold to households2. one is not soldii. 2014: 3 cars are produced1. one is exported2. 3 sold to householdsiii. 2013: GDP= 2 cars = C(+1) + I (+1)1. Inventories increase and are part of the investment2. 2014: GDP= 3 cars = C (+3) + NX (+1)a. - I(-1)3. one must have come out of inventoriesc. Why does CPI over-estimate inflation?i. Main reason: substitution biasii. CPI assumes you buy the same proportion of goods now that you did in the base yeariii.weighted by share of your total spendingiv. In reality we substitute out of goods whose prices have risen since the base year (and in to good whose prices have fallen)1. the CPI puts too much weight on the expensive goodsand makes the cost of livings measured by the CPI look too highd. Why do we use the CPI rather than PCE deflator (also called the chained index)i. Chain index= ( nominal C today / real (e-w) C today) x


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UW-Madison ECON 102 - Short Review before Midterm 1

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