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ECON 2105: FINAL
Individual choice
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the decision by an individual of what to do, which necessarily involves a decision of what not to do
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Basic principles behind the individual choices:
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1. Resources are scarce.
2. The real cost of something is what you must give up to get it.
3. “How much?” is a decision at the margin.
4. People usually take advantage of opportunities to make themselves better off.
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resource |
is anything that can be used to produce something else.
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scarce
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the quantity available isn’t large enough to satisfy all productive uses.
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opportunity cost
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what you must give up in order to get it.
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a trade-off
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when you compare the costs with the benefits of doing something
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marginal analysis.
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Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less.
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Principles that underlie the interaction of individual choices:
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1. There are gains from trade.
2. Markets move toward equilibrium.
3. Resources should be used as efficiently as possible to achieve society’s goals.
4. Markets usually lead to efficiency.
5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.
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specialization
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This increase in output is due to specialization: each person specializes in the task that he or she is good at performing
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equilibrium
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when no individual would be better off doing something different.
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An economy’s resources are used efficiently when
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they are used in a way that has fully exploited all opportunities to make everyone better off.
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economy is efficient
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if it takes all opportunities to make some people better off without making other people worse off.
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§Why do markets fail?
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§Individual actions have side effects not taken into account by the market (externalities).
§Some goods cannot be efficiently managed by markets. §Ex.: Traffic, Pollution § §Government intervention
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Principles that underlie economy-wide interactions:
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1. One person’s spending is another person’s income.
2. Overall spending sometimes gets out of line with the economy’s productive capacity.
3. Government policies can change spending.
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Long-run economic growth
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is the sustained upward trend in the economy’s output over time
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business cycle
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is the short-run alternation between economic downturns and economic upturns. Irregular and Unpredictable
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depression |
is a very deep and prolonged downturn.
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Recessions |
are periods of economic downturns when output and employment are falling.
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Expansions
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sometimes called recoveries, are periods of economic upturns when output and employment are rising.
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stabilization policy
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Policy efforts undertaken to reduce the severity of recessions are called
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monetary policy
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One type of stabilization policy. changes in the quantity of money or the interest rate.
-uses changes in the quantity of money to alter interest rates and affect overall spending.
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fiscal policy
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The second type of stabilization policy: changes in tax policy or government spending, or both.
-uses changes in government spending and taxes to affect overall spending.
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self-regulating economy (Classical economics)
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problems such as unemployment are resolved without government intervention, through the working of the invisible hand
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Keynesian economics
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economic slumps are caused by inadequate spending and they can be mitigated by government intervention
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inflation.
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A rising aggregate price level
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deflation |
A falling aggregate price level
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inflation rate
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is the annual percent change in the aggregate price level.
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price stability
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when the aggregate price level is changing only slowly.
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open economy
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an economy that trades goods and services with other countries
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trade deficit
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when the value of goods and services bought from foreigners is more than the value of goods and services it sells to them.
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trade surplus
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when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them.
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GDP
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measures the total value of all final goods and services produced in the economy during a given year.
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THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
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GDP is the Market Value
-Output is valued at market prices.
Of All Final
-It records only the value of final goods, not intermediate --goods (the value is counted only once).
Goods and Services
-It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).
Produced within a country
-includes goods and services currently produced, not produced in the past
-made within the US
In a given time period
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Real GDP
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is the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year.
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Nominal GDP
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is the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.
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GDP deflator
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deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
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aggregate price level
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level is a measure of the overall level of prices in the economy.
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price index
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is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100.
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Consumer Price Index (CPI)
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is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
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inflation rate
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is the yearly percentage change in a price index, typically based upon Consumer Price Index, or CPI, the most common measure of the aggregate price level.
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Employment
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is the number of people currently employed in the economy, either full time or part time.
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Unemployment
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is the number of people who are actively looking for work but aren’t currently employed.
.
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labor force
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is equal to the sum of employment and unemployment.
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labor force participation rate
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is the percentage of the population aged 16 or older that is in the labor force.
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unemployment rate
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is the percentage of the total number of people in the labor force who are unemployed.
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Discouraged workers
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are nonworking people who are capable of working but have given up looking for a job given the state of the job market.
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Marginally attached workers
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would like to be employed and have looked for a job in the recent past but are not currently looking for work
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Underemployment
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Underemployment is the number of people who work part time because they cannot find full-time jobs.
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Frictional unemployment
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is unemployment due to the time workers spend in job search
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Structural unemployment
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is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.
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Efficiency wages
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wages that employers set above the equilibrium wage rate as an incentive for better performance.
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Cyclical unemployment
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is a deviation in the actual rate of unemployment from the natural rate
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isreal wage
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is the wage rate divided by the price level.
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Real income
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is income divided by the price level
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Shoe-leather costs
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are the increased costs of transactions caused by inflation.
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Menu cost
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cost is the real cost of changing a listed price.
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Unit-of-account costs
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arise from the way inflation makes money a less reliable unit of measurement.
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Rule of 70
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tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate.
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aggregate production function
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function is a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology.
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Growth accounting
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estimates the contribution of each major factor in the aggregate production function to economic growth.
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aggregate demand curve shows …
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1.the relationship between the aggregate price level and the quantity of aggregate output
2.demanded by households, businesses, the government and the rest of the world.
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what effects AD curve
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Tax,
Gov spending
Investment
Consumer confidence,
Credit,
residential wealth,
financial wealth,
biz confidence,
competition,
Exchange Rate
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short run aggregate supply curve
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shows the relationship between the aggregate price level and the quantity of aggregate output in the economy.
sticky wages
sticky prices
Productivity
: Labor, Capital, Natural Resources, Technology)
Cost of Resources : Commodity prices (Nominal Wage, Oil Price etc.)
•Expected Prices (PE) |
long-run aggregate supply curve
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shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.
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long-run macroeconomic equilibrium
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when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve
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recessionary gap
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when aggregate output is below potential output.
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inflationary gap
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when aggregate output is above potential output.
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Stagflation |
Adverse shifts in aggregate supply cause stagflation (= Stagnation + inflation)—a period of recession and inflation
output falls, prices rise
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Active stabilization policy
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using fiscal or monetary policy to offset shocks
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Stabilization policy
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is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.
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expansionary fiscal policy
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-closes a recessionary gap by increasing a aggregate demand
-leads to an increase in real GDP larger than the initial rise in aggregate spending caused by the policy.
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contractionary fiscal policy
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-eliminate a inflationary gap by reducing aggregate demand
-leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by the policy.
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crowding-out effect
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An increase in government purchases causes the interest rate to rise.
Supply of bonds increases à Bond prices fall à interest rate rises à less private spending (especially I) |
limits to fiscal policy
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1.Crowding out
2.A drop in the bucket
3.A matter of timing
4.Real Shocks
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deficit
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is the difference between the amount of money a government spends and the amount it receives in taxes over a given period. |
debt |
is the sum of money a government owes at a particular point in time.
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Implicit liabilities
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are spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics.
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medium of exchange
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is an asset that individuals acquire for the purpose of trading rather than for their own consumption.
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store of value
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is a means of holding purchasing power over time.
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unit of account
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is a measure used to set prices and make economic calculations.
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Commodity money
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Intrinsic value
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Fiat Money
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Without intrinsic value
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commodity-backed money
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Without intrinsic value with guarantee of converting into valuable goods
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The most important assets that serve as money in the U.S. today are
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1.Currency: Paper bills and coins.
2.Total reserves held by banks at the Fed.
3.Checkable deposits: your checking or debit account.
4.Savings deposits, money market mutual funds, and small-time deposits.
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“liquid asset"
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An asset that can be used for payments, or, quickly and without loss of value, be converted into an asset that can be used for payments.
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The monetary base
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currency outstanding and total reserves at the Fed.
is the sum of currency in circulation and bank reserves.
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M1 |
currency outstanding and checkable deposits
Currency in circulation + Bank Deposits
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M2 |
M1 plus saving deposits, money market mutual funds, and small-time deposits.
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Open market operations
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buying and selling of U.S. government bonds on the open market.
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Discount rate
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lending and the term auction facility: Federal Reserve lending to banks and other financial institutions.
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Required reserves
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.and payment of interest on reserves: Changing the minimum RR; paying interest on any reserves held by banks at the Fed.
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money demand curve
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shows the relationship between the quantity of money demanded and the interest rate.
shifts:
-changes in aggregate price level
-changes in Real GDP
-Changes in Technology
Changes in Institutions
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money supply curve
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shows how the nominal quantity of money supplied varies with the interest rate.
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liquidity trap
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A situation in which monetary policy can’t be used because nominal interest rates cannot fall below the zero bound
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