EC 202: FINAL EXAM
109 Cards in this Set
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Increase in Demand
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Demand curve shifts right
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Decrease in Demand
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Demand curve shifts left
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Law of Demand
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When price goes up, quantity demanded goes down.
When price goes down, quantity demanded goes up.
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Law of Supply
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When price goes up, quantity supplied goes up.
When price goes down, quantity supplied goes down.
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Increase in Supply
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Supply curve shifts right
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Decrease in Supply
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Supply curve shifts left
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Consumer Surplus
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Difference between consumer's willingness to pay and price (Area below the demand curve and above the price producer pays)
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Producer Surplus
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Difference between price and willingness to sell (or cost of production). (Area between horizontal line at price and supply curve)
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Free Market
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Maximizes total surplus (producer and consumer surplus)
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After the imposition of tax:
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-Equilibrium quantity decreases
-Price paid by the buyer increases
-Price received by the seller decreases
-Consumer surplus decreases; producer surplus decreases
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Externality
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The uncompensated impact of one person's actions on the well being of the by-stander
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Negative externalities
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Social cost > private cost
Optimum quantity < market equilibrium quantity
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Positive externalities
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Social Value > private value
Optimum quantity > market equilibrium quantity
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Private goods
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Excludable, rival
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Public goods
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Non-excludable, non-rival
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Common Resources
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Non-excludable, rival
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Club goods
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Excludable, non-rival
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Examples of public goods
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National defense, basic research, fighting poverty, etc.
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Examples of common resources
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Clean air and water, congested roads, wildlife
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GDP
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All market value final within a country
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Components of GDP
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Y = C + I + G + NX (NX = export - import)
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Y
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GDP
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C
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Consumption
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I
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Investment
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G
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Government purchases
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NX
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Net exports
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Nominal GDP
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Valued at current year prices
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Real GDP
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Valued at constant prices (base year prices)
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GDP Deflator
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(Nominal GDP / Real GDP) x 100 (a measure of price level)
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Inflation rate
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Percentage change in price level
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IR in year 2
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= (GDP deflator in year 2 - GDP deflator in year 1) / GDP deflator in year 1
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Real GDP can be used to:
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Measure economic well-being
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GDP per person:
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Is a measure of standard of living
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If GDP per person increases:
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Then the standard of living is increasing
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CPI
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(Cost in current year / cost in the base year) x 100
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Another way to calculate IR in year 2
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= (CPI in year 2 - CPI in year 1) / CPI in year 1
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Important Equation (consider year X and year Y):
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Amount measured in year X dollars / year X price level = Amount measured in year Y dollars / year Y price level
(in most cases price level = CPI)
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Real interest rate =
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Nominal interest rate - inflation rate
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Lower real interest rate:
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Benefit borrowers but hurts lenders
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Higher real interest rate:
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Benefits lenders but hurts borrowers
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S = I
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Savings = investments
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T
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Total tax revenue
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(Y - T - C)
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Private saving
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(T - G)
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Public saving
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When T > G
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The government runs a budget surplus
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When T < G
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The government runs a budget deficit
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When T = G
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The government runs a balanced budget
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Loanable funds
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The flow of resources available to fund private investment
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In the market of loanable funds:
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There is one interest rate, which is the price of a loan
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Supply side:
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Saving is the source of the supply of loanable funds
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Demand side:
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Investment is the source of the demand for loanable funds
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Equilibrium:
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Intersection of supply curve and demand curve
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Saving incentives:
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A supply shifter (example: a change in the tax laws to encourage Americans to save more would increase the supply of loanable funds)
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Investment incentives:
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A demand shifter (example: if the passage of an investment tax credit encouraged firms to invest more, the demand for loanable funds would increase)
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Government budgets deficits and surpluses:
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A supply shifter (example: when the government spends more than it receives in tax revenue, the resulting budget deficit lowers national saving. The supply of loanable funds decreases, and the equilibrium interest rate rises)
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Crowding out
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The fall in investment because of government borrowing
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Financial markets
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Institutions through which a person who wants to save can directly supply funds to a person who wants to borrow (i.e. the bond and stock market)
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Financial intermediaries
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Institutions through which savers can indirectly provide funds to borrowers. They stand between savers and borrowers (i.e. banks and mutual funds)
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Coupon payment
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The periodic interest payment on a bond
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Interest rate
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The periodic cost of borrowing funds, usually expressed as a percentage of amount borrowed
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Coupon payment equation:
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Interest rate x face value of a bond
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Yield
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= coupon payment / price
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Prices and yields move
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inversely
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Price is a function of two important variables:
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Credit or default risk (think Greece) and inflation risk
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Present value formula
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PV = [coupon 1 / (1 + i)] + [coupon 2 / (1 + i)^2] + [coupon 3 / (1 + i)^3] + [coupon N / (1 + i)^N] + [face value / (1 + i)^N] ( i is the discount rate)
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Yield decreases when
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price increases
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Per capita GDP
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= (GDP / Pop) x (LF / LF) = (GDP / LF) x (LF / Pop) = APL x LFPR
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If we want to increase the standard of living (real GDP)
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we must increase either labor productivity (APL) or the labor force participation rate (LFPR)
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How to increase labor productivity:
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education, investment in capital, and technological change
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Unemployment rate (UR):
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UR = unemployed / Labor force
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Labor force (LF):
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LF = employed + unemployed ( but seeking work actively)
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Labor force participation rate
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= labor force / working age population
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U-3
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official unemployment rate
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U-4
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Plus "discouraged workers"
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U-6
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Plus the employed part-time for "economic reasons" and "others"
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Frictional unemployment
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Results from employees leaving jobs they are unsuited for and people entering/re-entering the work force
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Structural unemployment
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Joblessness arising from mismatches between workers skills and employers requirements or between workers' locations and employers' locations
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Cyclical unemployment
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Results from changes in production over the business cycle
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Natural rate of unemployment (Structural + Frictional)
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Rate consistent with the long-run, average annual rate of growth for the economy overall
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Functions of money:
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Medium of exchange, unit of account, store of value
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Federal reserve system:
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an example of central bank; oversees the banking system and regulates the quantity of money in the economy
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Reserves:
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deposits that banks have received but have not loaned out
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Total reserve
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= required reserve + excess reserve
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Required reserve
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= deposit x required reserve ratio
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Assets include:
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reserves and loans
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Liabilities include:
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deposits
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Money multiplier (1/R)
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The amount of money the banking system generates with each dollar of reserves
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The money multiplier is the:
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reciprocal of the reserve ratio
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The higher the reserve ratio,
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the less of each deposit banks loan out, and the smaller the money multiplier
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In the special case of the 100% reserve banking,
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the reserve ratio is 1, and banks do not make loans or create money
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Leverage ratio
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the ratio of the banks total assets to bank capital
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Open - market operations
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-Buy bonds: increases money supply, decreases interest rate
-Sell bonds: decreases money supply, increases interest rate
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Discount rate
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the interest rate at which banks borrow money from the Fed
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Increase in discount rate:
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decrease money supply, increase in interest rate
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Decrease in discount rate:
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increase money supply, decrease in interest rate
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Increase in reserve requirements:
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increase in required reserve ratio, decrease money supply, and increase interest rate
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Decrease in reserve requirements:
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decrease in required reserve ratio, increase money supply, and decrease in interest rate
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Increase in interest rate on reserve held at Fed:
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decrease in money supply, increase in interest rate
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Decrease in interest rate on reserve held at Fed:
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increase in money supply, decrease in interest rate
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Nominal variables
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variables measured in monetary units
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Real variables
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variables measured in physical units
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Monetary neutrality
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the quantity of money does not affect the real variables (in the long run), but will affect price level (more money, higher price, inflation)
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Quantity equation
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MV = PY
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M
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money supply
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V
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velocity of money
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P
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price level
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Y (PY)
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quantity of output (real GDP)
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PY
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nominal GDP
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Percentage change equation
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Percent change in M + percent change in V = Percent change in P + percent change in Y
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Study Guide: Terms and Definitions