Econ Quiz 3

It takes time for an expenditure to register as income

C (Household Exp) (68%), I (Business Exp.) (18%), G (18%) (Gov Exp.), Xn (Net exports) (-4%)

(Nominal GDP/Real GDP) x 100

(Deflator GDP2 - Deflator GDPB)/ Deflator GDPB x 100

1. Risk Aversion, a decrease in GDP will inflict substantially more pain than the utility gained from an increase in GDP 2. GDP does not represent quality of life

Price of basket of goods and services current year / Price of basket of goods and services base year x 100

CPI in year 2 - CPI in year 1 / CPI in year 1 x 100

1. Substitution bias (People can go for cheaper- overstating inflation) 2. Introduction of new goods 3. Unmeasured quality changes 4. Basket changes due to trends 5. There is no "typical" consumer

Compares prices of currently produced goods and services, up to date with current consumption patterns

Doesn't account for internationally produced goods, large changes in consumption patterns may result in meaningless comparisons

Accounts for foreign goods and services, accurately reflects consumption patterns of US households

Measures prices of a pre-determined basket of goods that might not be up-to-date

1. Physical capital per worker (machinery), 2. Human capital per worker (knowledge, skills), 3. Natural Resources per worker (inputs provided by nature), 4, Technological knowledge (Society's understanding of the best way to produce)

When the economy has a high level of capital per worker, output increases only slightly with an increase in capital

Y (Output) = A (technology) F(L, K (Capital), H (Human capital), N (Natural resources)

Put (1/L) before every variable except for A

Y (income) - C (household ex.) - T (taxes)

T (taxes) - G (gov. exp.)

Private saving + public saving

Same as national saving

Ensures that the supply of funds from those who want to save balances the demand from those who want to invest

Financial markets (stocks + bonds), Financial intermediaries (banks), Government (federal, local, state)

Acts like a competitive market where federal, state, and sometimes local governments execute policy which influences the supply of savings and demand for loans

Deficits increase demand, surpluses decrease demand since the government gets in line to borrow money during a deficit

Deficits decrease the supply, surpluses increase the supply since anything that makes T-G smalleror bigger willl shift the demand as national savings are the source of loanable funds

Since we would be in a trade deficit with another country due to net exports in the GDP expenditure method, the countries with a surplus would accumulate money and loan it to US investors

S = (Y-T-C) + (T-G) + trade deficit (trade surplus is negative)

Okay when government expenditures produce a return on investment or in a short-term crisis, not okay when it causes loss of confidence in the USA/ breeds undisciplined culture that encourages adding to the debt

72 divided by rate of growth is approximately years to double

People pay money to reduce risk through insurance, diversification, people demand compensation for accepting risk

Markets have informational efficiency and a balance of buyers and sellers. Thus, there are no arbitratge opportunities (buying/selling securities at a price difference)

Employed + unemployed (ages 16-64)

Structural unemployment (mismatch between labor capability and labor needed), Frictional unemployment (time required to move from job to job), Cyclical unemployment (lost jobs due to economic contraction)

# of unemployed / labor force x 100

Labor force / adult population x 100

Non-accelerating inflationary rate of unemployment (lowest level of unemployment that can occur in an economy before inflation starts to inch higher)

Maximum employment, stable prices

Open Market Operations (buy securities from banks and pay by crediting their reserve acct), Discount rate (interest fed charges to banks), Reserve requirement (unlikely to use bc risky)

Buying/selling corporate bonds in the private sector, pay in cash which increases M1

A set of assets in an economy that people use to buy G/S from each other

Medium of Exchange, Unit of Account, Store of Value

1.Fiat money (by declaration, like today's dollar), 2. Commodity money (inherently valuable), 3. Representative money (backed by something)

Currency + travelers checks

M0 + demand deposits (checking accounts)

M1 + savings deposits, money market accounts which one can write checks + time deposits of <$100k

M2 + time deposits of >$100k

1.7 trillion (half is held by foreigners, some by criminalnderground economy)

Federal Reserve board in Washington D.C., 12 Regional Banks, Federal Open Market Committee

[Deposits x (money multiplier)] = Deposits x (1/R)], where R is the reserve requirement

Price Level of goods and services is directly proportional to money supply

After an increase in money supply, the new money chases the unchanged supply of Goods and Services, increasing price levels

M x V (Expenditures/Transactions) = P x Y (Nominal Output)

V (velocity of money)

Prescence of increased quantities of money does not alter real variables like Y (output). Thus, P is the only variable that increases (what classical economists believe)

Increased money supply can be a motivation – igniting the animal spirits in
would be entrepreneurs who, stimulated by the desire to capture a portion of that money, build
capital and innovate with it – which has the effect of increasing Aggregate Equilibrium Demand
in the near-term

Wages are flexible, so they will adjust perfectly to the price level as the aggregate equilibrium demand for labor and other factors of production increase or decrease

Supply creates demand since by producing, producers are paid income, which is used to buy more things and save. Others will use those savings to buy other things. During times of low demand, no income made from producing would be lost to the economy since interest rates will fall until all savings are borrowed.

Savings can be lost to the economy when prospects for future sales are so bad that nobody borrows savings, no matter how inexpensive they may become.

1. Money and fiscal stimulus can move Aggregate Equilibrium Demand along with Aggregate Supply Curve 2. Economies can not be counted to self-adjust wages in times of shock 3. Say's law is wrong because of vicious cycle. Production does not auto-create demand

Dynamic Interactive Effects: 1. Wealth Effect: As PL falls, people feel more wealthy and consume more 2. International Effect: As US PL falls, US exports more 3. Multiplier Effect: As expenditures increase, incomes rise leading to even more expenditures

Shifts to the right

Shifts it to the right since people will feel more comfortable spending more, and businesses will produce more in anticipation of higher demand

Could shift either way, people could either buy when they still can or hunker down and save

Shifts leftward

Shows how changes in AED will be split between real output changes and price level changes

Depends how close the economy is to its potential income level (full employment, only structural and frictional unemployment)

Exogenous shock (oil/exhcange rate)

A reduction/increase in productivity

We don't know with certainty the shape, shift, or intersection point of the AS path

It will be vertical (classical) and changes in AED will affect only price level