# Shared Flashcard Set

## Details

ECON Final
All Chapters
99
Economics
05/03/2010

Term
 Standard of Living =
Definition
 GDP/Pop (Y/Pop) or [Y/L * L/Pop]
Term
 % Δ SOL =
Definition
 %Δ Y - %Δ Pop or %Δ Y/L + %Δ L/Pop
Term
 Rule of 72
Definition
 72/%Δ S of L
Term
 Unemployed =
Definition
 not working + actively seeking + special circumstance
Term
 Labor Force =
Definition
 Working + unemployed
Term
 Discouraged Workers:
Definition
 not working, given up/no interest
Term
 Labor Force Participation Rate:
Definition
 LF / Pop >= 16
Term
 Official Unemployment Rate:
Definition
 U / LF
Term
 Frictional U:
Definition
 Temp (quit, fired, new to job market)
Term
 Structural U:
Definition
 Excess supply of workers
Term
 Cyclical U:
Definition
 Lost job due to economy is recession
Term
 Consumer Price Index:
Definition
 Today’s Goods * Today’s PricesToday’s Goods * Base Year Prices *Cumulative CPI = CPI - 1001) CPI Now - CPI Last Period CPI Last Period 2) Inflation Rate = [w1 x %ΔP1] + [w2 x % ΔP2] ….a. w1 + w2 +… = 100% or 1b. % ΔP: whole number (20% = 20)
Term
 GDP Deflator:
Definition
 Nominal GDP \$ Value of current output at current prices Real GDP \$ Value of current output at base year prices
Term
 GDP #1
Definition
 Net Exports (Export - Import) + Investment (Adding to K stock) + Gov Purchase + Consumption
Term
 GDP #2
Definition
 Indirect Business Tax + Capital Consumption Allowance (Depreciation) + K Income + Labor Income*National Income = K income + labor income
Term
 GNP
Definition
 GDP - (output of Foreigners in USA) + (Output of Americans and Firms in other countries)
Term
 GDP Deflator
Definition
 Nominal GDP (Current output * current \$) / Real GDP (Current output * base \$) * 100Cum inflation = GDP Deflator - 100
Term
 Gross "" --> Net ""
Definition
 Gross - Depreciation
Term
 Stock Concept
Definition
 measured at one specific time, quantity existing at any point in time Ex. GDP, Wealth, Saving
Term
 Flow Concept
Definition
 measured over a period of time, measured at "unit per time"Ex. Check Account Balance, K stock, Investment
Term
 What does GDP measure?
Definition
 Current output of final products and exportsHousehold output (Non market activity) and output that takes place in Underground Economy not in GDP
Term
 How is I financed?
Definition
 1. Retained earnings2. Borrow: from banks (small businesses) selling bonds (large businesses)3. Issuing common stock
Term
 Government Budget
Definition
 1. Gross Tax - Transfer Payments - Gov. Purchases2. Net Tax - Gov Purchases2.
Term
 Net Taxes
Definition
 Gross Tax - Transfer Payments
Term
 Government Outlays
Definition
 Gov Purchases + Transfer Payments
Term
 Current Gov. Budget?
Definition
 Deficit = \$1.6 Trillion
Term
 Nominal Interest Rate
Definition
 i = money earned / for every \$100 saved in bondsi = 5% on 30 year gov bonds
Term
 Real Interest Rate
Definition
 r = i - inflation rateInflation rate may = ΔCPI* Rational people think only about r when making decisions about Sv or I
Term
 Demand for Loanable Funds (DLF)
Definition
 DLF is IDLF has a negative slope, because lest costly to borrow when r is low
Term
 Supply of Loanable Funds
Definition
 SLF = Private Sv + Gov Budget + Net International BorrowingSLF has a positive slope, because it pays greatly to save if r is high, much less incentive to Sv if r is low
Term
 Credit Crunch
Definition
 Banks are afraid to lend all that they are legally allowed to lendLast credit crunch is now!SLF shifts left
Term
 People are afraid what happens to Graph
Definition
 Sv --> more, SLF shifts right
Term
 Businesses are afraid what happens to Graph
Definition
 Borrow less --> DLF shifts left
Term
 Net International Borrowing
Definition
 Net Capital Flows (Net KF)- if we lend+ if we borrow
Term
 Graph equilibrium questions
Definition
 Sv + (Net Tax - G) + Net KF = I
Term
 Financial Intermediaries duties
Definition
 Find borrowers for SvAsses riskReduce risk by making many loans
Term
 M1
Definition
 Currency in Circulation + Check Accounts + Travelers Checks
Term
 M2
Definition
 M1 + Saving Accounts + Small Time Deposits + MMMF's
Term
 The Fed's functions
Definition
 1. Monitor the economy2. Clear checks3. Lend to banks
Term
 Fed's Main Tools
Definition
 1. Change discount rate2. Change required reserve ratio, rrr3. Open Market operations
Term
 Fed changes interest rates
Definition
 Lower "i" to stimulate borrowing and spendingRaise "i" to discourage borrowing and spendingFeb 2010 Fed increased rate by .5%
Term
 Open Market operations
Definition
 Fed buys gov't bonds to increase money supply and spending
Term
 Money Supply Equation "Mo"
Definition
 Mo = Coins/currency in circulation + (1/ rrr + er)*[total bank reserve]Total Bank Reserve = Vault Cash + Bank reserves with the Fed er = excess reserve ratio
Term
 Real Md
Definition
 Nominal / P
Term
 Mo =
Definition
 P x Md
Term
 Equation of Exchange
Definition
 Mo*(V) = P * YMo - Nominal \$ supplyV - velocity of \$P - GDP deflatorY - Real GDPP*Y - Nominal GDP
Term
 % Equation of Exchange
Definition
 %ΔMo + %ΔV = %ΔP + %ΔY%ΔP - inflation rate&ΔV - may be constant = 0
Term
Definition
 12
Term
 Upswings
Definition
 Avg 4-5 yearsGetting longer 1980's: 8-9 years1990's 10 years
Term
 Downswings
Definition
 12-18 months Getting shorter
Term
 Misery Index
Definition
 Unemployment Rate + Inflation Rate
Term
 Demand Pull Inflation
Definition
Term
 Cost-Push Inflation
Definition
 Inflation due to increase in costs- Increase money wage rate - Increase money prices of raw materials
Term
 Inflation in the USA
Definition
 WWII - 1960: high inflation 6%1960's: Low inflation 2.5%1970's: Highest inflation (P doubled) 1980-present: low 2-3%
Term
 When AD is moved to SR Equilibrium, Inflation type?
Definition
 Demand Pull Inflation
Term
 When AD is moved from SR Equi. back to LR Equi, Inflation type?
Definition
 D-pull inflation
Term
 Negative Supply Shock
Definition
 Moves SRAS curve up and leftOil \$ ↑
Term
 Negative Demand Shocks
Definition
 Moves the AD down leftFed ↑ interest rates
Term
Definition
 Business cycles caused mostly by (-)Demand ShockRecession caused by (-)Supply ShocksEconomy always on LRAS therefore no recessions when AD shifts downOfficial P never falls but actual P doesY↓ only if Yp↓ --> LRAS Shifts leftLabor Productivity ↓ causing Yp↓
Term
 Labor Hoarding
Definition
 Firms keep valuable workers and utilize them less intensively output↓ > labor↓ therefore Y/L↓
Term
 Equation of Exchange
Definition
 %ΔMo + %Δ Velocity = %Δ Inflation + %Δ Gdp
Term
 Keynesion Theorists
Definition
 Recessions caused by Labor HoardingY↓ > L↓Y/L↓
Term
 Long Run Equilibrium
Definition
 Y=Yp U=Un Real wage remains constant (W/P) P and W vary proportionately
Term
 Short Run Equilibrium
Definition
 Y↑P↑U↓
Term
 Long Run Aggregate Supply (LRAS) Shifts
Definition
 Right(K↑, Labor↑, Tech↑) Left(War, Famine, Opposite right shifts)
Term
 Agg Demand Curve:
Definition
 AD = C + G + I + NX (-)Slope due to increase in price level resulting in a decrease in real wealth and consumption
Term
 Short Run Agg Supply (SRAS):
Definition
 Fastened to LRAS (shifts with it)P↑ -> Profit↑ -> Produce More; (+)Slope Shift Up/Left (Wages↑, Production↑)Shifts Up Left due to Wages↑
Term
 Natural Rate Hypothesis:
Definition
 Developed by Friedman Reducing U below Un by keeping AD high -Only works in SR. Eventually P↑ --SRAS shifts bringing us back to LR: ---P↑ U↑, Y↓
Term
 Keynes Law:
Definition
 Demand creates supply When AD shifts right and firms believe it's permanent, Yp↑ as LRAS shifts right because firms expandCriticizes NRH
Term
 Natural Unemployment
Definition
 Un = Frictional + Structural
Term
 Okun's Law: Yp-Y/Yp = ?
Definition
 2[U-Un]
Term
 Appropriate Gov Policy when at recessionary gap:
Definition
 Monetary Policy : Lower interest ratesFiscal Policy : Purchase more goods and services
Term
 Marginal Propensity to Consume (MPC) =
Definition
 Δy /(Y-Tx).XX or X/X
Term
 Multiplier =
Definition
 1 / (1 - MPC)Provides insight to the magnitude of cyclical ups and downs The required change in G to close an output gap
Term
 How much AD curve shifts and Direction =
Definition
 Multiplier X Increase/Decrease in (G,I,Co)Increase = Right ShiftDecrease = Left Shift
Term
 Close (Yp and Y) Gap:
Definition
 Gap = Multiplier X Δ(G,NX,I,Co)
Term
 2nd Way To Determine Multiplier
Definition
 ΔY / Δ(G,NX,Io,I) = Multiplier
Term
 Marginal Propensity to Save =
Definition
 ΔSv / Δ(Y - Tx)1 - MPC
Term
 Budget Deficit
Definition
 (Tx - G) = +/-Deficit
Term
 If Y changes, how much will people spend and save
Definition
 MPC X ΔY = ConsumptionMPS X ΔY = SavedConsumption + Saved = ΔY
Term
 Federal Funds Rate
Definition
 Interest rate banks charge each other
Term
 Treasury Bill (T-Bill)
Definition
 interest rate on short term
Term
 Discount Rate
Definition
 interest rate the Fed charges banks
Term
 Prime Rate
Definition
 interest rate that banks charge their least risky borrowers
Term
 High inflation –
Definition
 I ↓ and Econ growth ↓
Term
 Low Inflation
Definition
 I ↑ and Econ growth ↑
Term
 M ↑ -
Definition
 lower r+i
Term
 M ↓ -
Definition
 increase r+i
Term
 R = I when ?
Definition
 inflation is 0
Term
 M =
Definition
 P X MD
Term
 To calculate r (r = m)
Definition
 P(# + #(Y) - #(I)) Y = actual
Term
 To calculate r (r = m) to close gap
Definition
 P(# +#(Y) - #(I)) Y = Yp
Term
 To get required Δr: Given ΔI = (# - # Δr)
Definition
 1st We need to calculate ΔI (k ΔI = Gap)2nd solve ΔI = - #Δr from given info
Term
 To get required ΔMo:
Definition
 1st calculate ΔMo with actual y and i 2nd calculate ΔMo with Yp and [i + Δi] ΔMo = 2nd ΔMo - 1st ΔMo
Term
 Taylor’s Rule
Definition
 r = .02 - .05(Okun Gap %) + .05(inflation rate)
Term
 Pushing on a String -
Definition
 The Fed can’t make people borrow and spend; it can only make money available and keep interest rates low
Term
 Official Policy Objectives of Fed-
Definition
 1. Keep inflation low 2. Reverse or prevent downswings
Term
 I↓ causing Econ growth ↓ only if?
Definition
 Inflation > 8%
Term
 Fed is independent because :
Definition
 it has its own source of revenue (earn interest on gov bonds)
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