Input/Output

Absolute advantage:
-individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time
-national: exists when a country can produce more of a good/service than another country can in the same time period

Comparative advantage:
-individual/national: exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation

Input problems: the country/individual that uses the least amount of resources, land or time, has the absolute advantage

Output problems: country/individual that can produce the most has the absolute advantage
The country/individual that has the lowest opportunity cost has the comparative advantage in that product
(in some format it deals with production)

Absolute advantage: faster, more, more efficient

Comparative advantage: lower opportunity cost

Heres a practice problem.

Foreign Exchange Market

Foreign exchange (FOREX): the buying and selling of currency
-the exchange rate (e) is determined in the foreign currency markets
-simply put. The exchange rate is the price of a currency

Tips

• always change the D line on one currency graph, the S like on the other currency's graph
• move the lines of the two currency graphs in the same directions (right or left) and you will have the correct answer 
• If D on one graph increases, S on the other will also increase
• If D moves to the left, S will move to the left on the other graph

Changes in exchange rate

-exchange rates (e) are a fiction of the supply and demand for currency

• an increase in the supply of a currency will make it cheaper to buy one unit of that currency
• a decrease in supply of a currency will make it more expensive to buy one unit of that currency
• an increase in demand for currency will make it more expensive to buy one unit of that currency
• a decrease in demand for a currency will make it cheaper to buy one unit of that currency

Appreciation: appreciation of a currency occurs when the exchange rate of that currency increases 

-hypothetical: 100 yen used to buy $1

Depreciation: depreciation of a currency occurs when the exchange rate of that currency decrease

-one hundred ten used to buy now dollar. Now 50 yen buys one dollar

-the dollar is weaker because it takes fewer yen to buy one dollar

Exchange rate determinants

• consumer tastes
• relative income
• relative price level
• speculation

Purchasing power parity: when the current rates are set by international markets changes will be based on the actual purchasing power of the currencies

• For ex: if US dollar to European euro is $1.50 to 1 than each S1.50 will buy one euro however if an item in the U.S. cost $1.50, and then cost more or less than one euro, the parity is lost, markets will adjust quickly in floating rates or pressure for change will occur in fixed rates 

Why do we exchange currencies?

1. To invest in other countries stocks and bonds
2. Sell exports and buy imports
3. To build factories or stores in other markets
4. To hold currencies in ban accounts for future imports, exports, or business loans
5. Tp speculate on currency values
6. To control excessive imbalances and the imbalance will come from the balance of payment

Formulas

Balance of trade:

• goods and services exports - goods and services imports
• (if imports > exports) trade deficit or trade surplus (if exports > imports)
• goods exports + good imports

Current account:

Balance of trade + net investment + net transfer

Capital account:

Foreign purchases of U.S. assets + U.S. purchases of assets abroad

Official reserves:

Current account + capital account

How to calculate goods and services:

Good imports + service imports 

Balance of Payments

4/9/15

Balance of payments: measure of money inflows and outflows between the united stated and the rest of the world (ROW)
-inflows are referred to as credits
-outflows are referred to as debits
-balance of payments is divided into 3 accounts
1. Current account
2. Capital/financial account
3. Official reserves

Double entry bookkeeping: every transaction in the balance of payments is recorded twice in accordance with standard accounting practice
Ex: us manufacturer, john Deere, exports $50 million worth if farm equipment to Ireland
-$50 million worth of farm equipment or physical assets
-a debit of $50 million to the capital/financial account (+$50 million worth of euros or financial assets)


Balance of trade or net exports
-exports of goods/services-import of goods/services
-exports create a credit to the balance of payment
-imports create a debut to the balance of payments

Net foreign income
-income earned by us owned foreign assets - income paid to foreign held us assets
-ex. Interest payments on is owned Brazilian bonds - interest payments on German owner us treasury bonds

Net transfers (unilateral)
-foreign aid ->a debut to the current account
-ex: mexican migrant workers send money to family in Mexico

Capital/financial account
-the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the United States is a credit to the capital account
-purchases of stocks and bonds by foreigners
-purchase of foreign financial assets represents a debit to the capital account
-ex. Warren buffet buys stock in petrochina

-purchase of domestic financial assets by foreigners represents a credit to the capital account
-united arab emirates sovereign wealth find purchases a large stake in the Nasdaq

Relationship between current and capital account
-the current account and the capital account should zero each other out
-if the current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus)

4/13/15
Official reserves:
-the foreign currency holdings of the us federal reserve system
-when there is a balance of payments surplus the fed accumulated foreign currency and debits the balance of payments
-when there is a balance of payments deficit the fed depletes it's reserves of foreign currency and credits the balance of payments
-the official reserves zero out the balance of payments

Active v. Passive official reserves
-the United States is passive in it's use of official reserves. It does not seek to manipulate the dollar exchange rate
-the peoples republic of china is active in it's use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the United States

Phillips Curve

Short run
Time too short for wages to adjust to the price level

Workers may not be aware of changes in their real wages due to inflation and have adjusted their labor supply decisions and wage demands accordingly

Nominal wages: amount of money received per day per hour or per year

Sticky wages: nominal wage level is set according to an initial price level and it does not vary

Long run aggregate supply
Time long enough for wages to adjust to the price level
-flexible wage and price level
-both offset each other

Phillips curve: Represents relationship between unemployment and inflation
-the trade off between inflation and unemployment only occurs in the short run
-long run Phillips curve: occurs at the natural rate of unemployment , if the natural rate of unemployment change, the lspc change
▪️represented by a vertical line
▪️no trade off between unemployment and inflation in the long run this means the economy produces at. A full employment level
▪️lrpc will only shift if the LRAS curve shifts otherwise it is assumed to be stable
▪️major lrpc assumption is that more worker benefits create higher natural rates and fewer worker benefits creates lower natural rates

Short run Phillips curve
-there is an inverse relationship between inflation and unemployment
-has a relevance to Okun's law
-since wages are sticky inflation changes on the srpc
-if inflation persists an expected rate of inflation rise then the entire srpc moves upward which causes stagflation
-if inflation expectations drop, due to new technology or economic growth then the srpc will move downward
-aggregate supply shocks can create both higher rates of inflation and higher rates of unemployment
-supply shocks: rapid and significant increase in resource cost

Misery index: a combination of unemployment and inflation in any given year
- single digit misery is good


The long run Phillips curve (lrpc)
-because the long run Phillips curve exists at the natural rate of unemployment (Un), structural changes in the economy that affect Un wil also cause the lrpc to shift
-increases in Un will shift lrpc ➡️
-decreases in Un will shift lrpc ⬅️

Stagflation: period where we have high inflation and high unemployment occurring at the same time
-after vietnam war
-baby boom
-civil rights movement
-women's movement


Disinflation: reduction in inflation rate from year to year

Deflation: it is a situation in which there is an actual drop in the price level

4/715

It is the belief that the as curve will determine levels of inflation, unemployment and economic growth

-to increase the economy the as curve should shift to the right which will always benefit the company first

Amount paid on the last dollar earned or on each additional dollar earned so by reducing the marginal tax rate, supply siders believe that you will encourage more people to work longer and forego leisure time for extra income

Support policies that promote GDP growth that arguing that the high marginal tax rate along with the current system of transfer payments, they provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures

Reaganomics : lower marginal tax rate to get the us out of a recession ➡️Results in deficit

Laffer curve: It is a trade off between tax rates and government revenue
-it is used to support the supply side argument

3 criticisms of the laffer curve
1. Research suggest that the impact of tax rates on incentives to work, save, and invest are small
2. Tax cuts increase demand which can fuel inflation and causes demand to exceed supply
3. Where the economy is actually located on the curve is difficult to determine

Monetary Policy Video

https://plus.google.com/u/0/108977178788146850382/posts/FdDdDfiyW97?pid=6133152310955551186&oid=108977178788146850382

Unit 4-Monetary Policy Video Notes

Link 1: http://www.youtube.com/watch?v=YLsrkvHo_HA&feature=results_video&playnext=1&list=PL2CB281D126F65E26

• There are three types of money which is: commodity money, representative money, and fiat money. Commodity money is commodities that also function as money, so goods with some other purpose. Representative money means that a represents a quantity of a precious metal. Fiat money does not represent anything except it has value because the government says so. 

Link 2: https://www.youtube.com/watch?v=gzFdeM6lUno&feature=bf_prev&list=PL2CB281D126F65E26&lf=results_video

• To label a Money Market graph, the y-axis is labeled "i" which stands for interest rate and the x-axis is labeled "Qm" which stands for the quantity of money. Demand for money is always going to slope downward. It slopes downward because when the price is high, the quantity of demand is low; when the price is low, the quantity for demand is high. The supply of money is vertical is because it does not vary based on the interest rate and is fixed by the Fed, unless the Fed moves it. An increase for the demand for money will shift to the right and a decrease will be a shift to the left. If the Fed increase the money supply, it will bring the interest rate down and stabilize it. 

Link 3: https://www.youtube.com/watch?v=XJFrPI8lLzQ&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• The tools of monetary policy can be divided into two categories: expansionary (easy money) and contractionary (tight money). For expansionary policy, the Fed lowers the reserve requirement and discount rate and buys bonds to increase money supply. For contractionary policy, The Fed will raise their required reserves and discount rate an sells bonds to decrease money supply. The discount rate is the rate at which banks can borrow money from the Fed. The Federal Funds Rate is the rate at which banks borrow money from each other. 

Link 4: https://www.youtube.com/watch?v=rdM44CC0ELY&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• To label the Loanable Funds graph, the y-axis is labeled, "i" which stands for interest rate or price. The x-acis is labeled "Qlf" which stands for quantity of loanable funds. Demand for loanable funds is downward sloping. Supply for loanable funds is upward sloping. Supply of loanable funds comes from the amount of money that people have in banks, which means that people are dependent on savings. An increase in demand for money also increases the demand for loanable funds, because both changes increase the interest rate. More demand for money reduces the supply of money, because the government is demanding more, which causes them to buy more which leaves less in terms of supply. 

Link 5: https://www.youtube.com/watch?v=1tUC59pz95I&feature=bf_next&list=PL2CB281D126F65E26&lf=results_video

• Banks create money by making loans. The reserve requirement is the percentage of the banks total deposits that they have to keep in reserves. The money multiplier is 1 divided by the reserve ratio. Then you take this multiplier and multiply it by the amount of the initial deposit in order to find out how much money the bank can loan. Its due to the process of multiple deposit expansion. It is not guaranteed that this amount of money will be created because we would assume that none of the banks hold excess reserves. 

Link 6: http://http//www.youtube.com/watch?v=YLsrkvHo_HA&feature=results_video&playnext=1&list=PL2CB281D126F65E26%20%20http://

• The relationship between the money market, loanable funds market, and the AD/AS model is integral to macroeconomics. For example, government deficit spending; there will be an increase in the demand for money in the money market, which shifts to the right. This will also cause the demand for loanable funds to increase and the supply of loanable funds to decrease, and then an increase in AD. An increase in the interest rate will also be an increase in the price level, and this is known as the "Fisher Effect". 

Banks

How do Banks "create" money?

• By lending out deposits that are used multiple times

Where do the  loans come from?

• From depositors  who take cash and place it in their banks

How are amounts of potential loans calculated? 

• using their bank balance sheet, or T-accounts that consist of assets and liabilities for banks

Bank Assets (left side of T-account sheet)

1. Required Reserves (RR)

• These are the percentages of DD that must be held in the vault so that some depositors have access to their money.

2. Excess Reserves (ER)

• Sources of new loans. These amounts are applied  to the Monetary Multiplier/Reserve Multiplier (DD = RR + ER)

3. Bank Property Holdings (buildings and fixtures)

4. Securities (Federal Bonds)

• Bonds purchased by the bank, or new bonds sold to the bank by the Federal Reserve. These bonds can be purchased from the bank, turned into cash that immediately become available as ER.

5. Customer Loans

• Amount held by banks from previous transactions, owed to the bank by prior customers

Bank Liabilities (right side of the T-account sheet)

1. Demand deposits (DD) or checkable deposits

• Cash deposits from the public
• They are liabilities because they belong to depositors

2. Owner's Equity (stock shares)

• There are values of stock held by public ownership of bank shares

Key concepts for AP concerning Liabilities:

• If demand deposits come from someone's cash holdings, then the DD is already part of money supply
• If  DD comes in from purchase of bonds (by the FED), this creates new cash and therefore creates M1 (new money supply)

Money Creation (using excess reserves)

-Banks want to create profit, they generate it by lending the excess reserves and collecting interest. Since each loan will go out into customer's and business accounts, more loans are created in decreasing amounts (because of reserve requirement). Rough estimate of # of loan amounts created by any first loan is the money multiplier.

The Monetary Multiplier (AKA)

• Checkable Deposits Multiplier
• Reserve Multiplier
• Loan Multiplier
• Multiplier = 1/RR
• Excess reserves are multiplied by the monetary multiplier to create new loans for the entire banking system and this creates new money supply

Loanable funds

Loanable funds market:
-the market where savers and borrowers exchange funds (Qlf) at the real rate of interest (r%)
-the demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds
-the supply of loanable funds, or savings comes from households, firms, government and the foreign sector. The supply of loanable funds is also the demand for bonds

Changes in demand for loanable funds
-remember that demand for loanable funds=borrowing (I.e. Supplying bonds)
-more borrowing = more demand for loanable funds (➡️)
-less borrowing = less demand for loanable funds (⬅️)
-ex: goverbment deficit spending = more borrowing = more demand for loanable funds .:Dlf ➡️ r%⬆️
-less investment demand = less borrowing = less demand for loanable finds .:Dlf⬅️r%⬇️

Changes in supply of loanable funds
-remember that supply of loanable funds = saving (I.e. Demand for bonds)
-more saving = more supply of loanable funds (➡️)
-less saving = less supply of loanable funds (⬅️)
-ex: government budget surplus = more saving = more supply of loanable finds .:Slf ➡️.:r%⬇️
-decrease in consumers' MPS = less saving = less supply of loanable funds .:Slf ⬅️ .:r%⬆️

Final thoughts on loanable funds
-when government does fiscal policy it will affect the loanable funds market
-changes in the real interest rate (r%) will affect Gross Private Investment

LINK FOR MORE INFO:
https://www.youtube.com/watch?v=hucfTz4sPfU&spfreload=10 

Reserves

Type 1: calculate the initial change in excess reserves

-aka the amount a single bank cab loan from the initial deposit

Type 2: calculate the change in loans in the banking system

Type 3: calculate the change in the money supply

-sometimes type 2 and type 3 will have the same result (i.e. no FED involvement)

Type 4: calculate the change in demand deposits

Vault Cash: Cash held by the bank

Reserve ratio=commericial bank's required reserves/commercial bank's checkable deposit liabilities

Excess reserves: actual reserves-required reserves

Required reserves: checkable deposits x reserve ratio

Factors that weaken the effectiveness of the deposit  multiplier

1. If banks fail to loan out all of their excess reserves
2. if bank customers take their loans in cash rather than in new checking account deposits, it creates a cash or currency drain

Demand for money has an inverse relationship between nominal interest rate and the quality of money demanded

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Money

Money: any asset that can be used to purchase goods and services

3 uses of money:

1. as a medium of exchange (used to determine value)
2. unit of account (used to compare prices)
3. store of value (some people choose to hide their money vs the bank

3 types of money:

1. commodity money: has value within itself
2. representative money: represent something of value
3. Fiat money: is money because the government says so (paper currency, coins)

6 characteristics of money:

1. Durability (how long it lasts)
2. Portability (put it anywhere)
3. Divisibility (broken down)
4. Uniformity (money is the same)
5. Limited supply
6. Acceptability

Money supply: total value of financial assets available in the us economy 

M1 money:

-liquid assets (easily to convert to cash)

• coins
• currency (paper)
• checkable deposits or demand deposits (checks)
• traveler's checks

M2 money:

-M1 money + savings account + money market account

3 purposes of financial institutions:

1. Store money
2. Save money
3. Loan money (credit cards, mortgages)

4 ways to save money

1. savings account
2. checking account
3. money market account (higher interest rate)
4. certificate of deposit (CD) (get you a higher interest rate)

Loans: banks operate on a fractional reserve system which means they keep a fraction of the funds and they loan out the rest

Interest rates:
-Principal
-actual interest
  ▪️simple interest : paid on the principal
  ▫️formula: I = P x R x T/100
      ▫️I: simple interest
      ▫️P: principal
      ▫️R: interest rate
      ▫️T: time
▫️P= I x100/ R x T
▫️T=I x 100/ P x R
▫️R=I x 100/ P x T
  ▪️compound interest: paid on the principal + the accumulated interest
Interest: price paid for the use of borrowed money

Types of financial institutions
1. Commercial bank
2. Savings and loans institutions
3. Mutual savings banks
4. Credit unions
5. Finance companies

Investment: redirecting resources you would consume now for the future

Financial assets: claims on property and income of borrower

Financial intermediaries: institution that channel funds from savers to borrowers
3 purposes:
1. To share risk (diversification) spreading out investments to reduce risks
2. To provide information
3. Liquidity (returns) money an investor receives above and beyond the sum of money that was initially invested

Bonds you loan
Stocks you own

Bonds: are loans, Ious, that represent debt that the government or a corporation must repay to an investor
-generally long risk investment

3 components of a bond
1. Coupon rate (interest rate that a bond insured will be repaid to a bond
2. Maturity (time at which payment to a bond holder is due
3. Par value: amount that an investor pays to

Yield: annual rate of return on a bond if the bond were held to maturity

Time value of money: is a dollar today worth more than a dollar tomorrow?
Yes
Why?
-inflation and opportunity cost
-this is the reason for charging and paying interest

Time value of mont
V=future value of $
p=present value of $
r=real interest rate (nominal rate-inflation rate) expressed as a decimal
n=years
k=number of times interest is credited per year

Simple interest formula
V=(1+r)^n x p

Compound interest formula
V=(1 + r/k)^nk x p

Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest savings is 1% calculate the future value of $1 after 1 year.
Step 1: calculate the real interest rate
Step 2: use the simple interest formula to calculate the future value of $1
=98 cents

Monetary equation of exchange
Formula: MV=PQ
M-money supply (m1/m2)
V-velocity of money (m1/m2)
P-price level (pl on the as/AD diagram)
Q-real GDP (sometimes labeled y on the as/AD graph


Functions of the FED
1. It issues paper currency
2. Sets reserve requirements and holds reserves of banks
3. It lends money to banks and charges them interest
4. They are a check clearing service for banks
5. It acts as personal bank for the government
6. Supervised member banks
7. Controls the money supply in the economy 

Fiscal Policy

Fiscal policy: changes in the expenditures or tax revenues of the federal government
-2 tools of fiscal policy:

1. Taxes: government can increase or decrease
2. Spending: government can increase or decreasing

Balanced budget:

revenues = expenditures

Budget deficit

revenues < expenditures

Budget surplus:

revenues > expenditures

Government debt:

sum of all deficits - sum of all surpluses

Government must borrow money when it runs a budget deficit

Government borrows from:

• individuals
• corporations
• financial institutions
• foreign entities or foreign governments

Fiscal policy two options:

-discretionary fiscal policy (action)

Expansionary fiscal policy- think deficit

Contractionary fiscal policy- think surplus

-non discretionary fiscal policy (no action)

Discretionary fiscal policy: increasing or decreasing government spending and/or taxes in order to return the economy to full employment.  Discretionary policy involves policy makers doing fiscal policy in response to an economic problem

Automatic fiscal policy: Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation
-Automatic fiscal policy takes place without policy makers having to respond to current economic problems

Contractionary fiscal policy: policy designed to decrease aggregate demand
-strategy for controlling inflation
-decrease government spending
-increase taxes

Expansionary fiscal policy: policy designed to increase aggregate demand
-strategy for increasing GDP,  combatting a recession and reducing unemployment
-increase government spending
-decreases taxes

Automatic or built in stabilizers: anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
-taxes reduce spending and aggregate demand
-reductions in spending are desirable when the economy is moving toward inflation

Progressive tax system: avg tax rate (tax revenue/GDP) rises with GDP

Proportional tax system: avg tax rate remains constant as GDP changes

Regressive tax system: avg tax rate falls with GDP

Disposable Income (DI)

Disposable income (DI): income after taxes or net income
-DI = gross income - taxes

2 choices
with disposable income, households can either
-consume (spend money on goods and services)
-save (not spend money on goods and services)

Consumption:
-household spending
-ability to consumer is constrained by

• the amount of disposable income
• the propensity to save

-do households consumer if DI=0?

-autonomous consumption

-did saving

-APC = C/DI = % DI that is spent 

Savings
Household NOT spending
The ability to save is constrained by 

• the amount of disposable income
• the propensity to consume

-do households consumer if DI=0? No

-APS = S/DI = DI that is not spent 

Formulas

• APC + APS = 1
• 1 - APC + APS
• 1 - APS + APC
• APC > 1 .: dissaving 

MPC: Marginal propensity to consume

-🔼C/🔼DI
-% of every extra dollar earned that is spent

Marginal propensity to save
-🔼S/🔼DI
-% of every extra dollar earned that is saved
-MPC + MPS = 1
-1 - MPC = MPS
-1 - MPS = MPC

The spending multiplier effect: an initial change in spending (c, ig, g, Xn) causes a larger change in aggregate spending or aggregate demand (AD)
-multiplier = change in AD/change in spending
-multiplier = 🔼AD/🔼 c, I, g, or x

Why does this happen?
Expenditures and income flow continuously which sets off a spending increase in the economy

Calculating the Spending multiplier
-formula: multiplier = 1/1- MPC or 1/MPS
-multipliers are + when there is an increase in spending and -when there is a decrease

Calculating the tax multiplier
When the government taxes the multiplier works in reverse why?
-because now money is leaving the circular glow

Tax multiplier (not it's negative)
=-MPC/1-MPC or -MPC/MPS
- if there is a tax cut then the multiplier is +, because there is now more money in the circular flow 

Investment Demand (ID)

Investment demand curve (ID)
What is the shape of the investment demand curve?
downward sloping

Why?

-when interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable

Shifts in investment demand (ID)

1. Cost of production

-lower costs shift right

-higher costs shift left

2. Business taxes

-lower business taxes shift right

-higher business taxes shift left

3. Technological change

-new technology shifts right

-lack of technological change shifts left

4. Stock of capital

-if an economy has much capital, then shift left

5. Expectations

-positive expectations shift right

-negative expectations shift left

LRAS: represents a point on a economy's production possibilities curve

-vertical line at an output level that represents the quantity of goods and services a nation can produce over a sustained period using all of it's productive resources as efficiently as possible 

-always at full employment

-it does not change as the price level changes

-shifts outward if there's a change in technology, change in resource, or if there is some economic growth

Full Employment

Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point

A recessionary gap exists when equilibrium occurs below full employment output
-any time you are in a recession AD will shift left which is decreasing

Inflationary gap: exists when equilibrium occurs beyond full employment output
-shifts to the right which increase

Investment?
Money spent or expenditures on:
-new plants (factories)
-capital equipment (machinery)
-technology (hardware and software)
-new homes
-inventories (goods sold by producers)

Expected rates of return
How does business make investment decisions?
-cost/benefit analysis

How does business determine the benefits?
-expected rate of return

How does business count the cost?
-interest costs

How does business determine the amount of investment they undertake?
-compare expected rate of return to interest cost
-if expected return > interest cost, then invest
-if expected return < interest cost, then do not invest

Real (r%) v Nominal (i%)
What's the difference?
-nominal is the observable rate of interest. Real subtracts inflation (pi%) and is only known ex post facto

How do you compute the real interest rate (r%)?
r% = i% - pi%

What then, determines the cost of an investment decision?
the real interest rate (r%)

Aggregate Supply (AS)

Aggregate Supply (AS): the level of real GDP (GDPr) that firms will produce at each price level (PL)

Long Run:
-a period of time where input prices are completely flexible and adjust to changes in the price level
- in the long run, the level of real GDP supplied is independent of the price level

Short run:
-period of time where input prices are sticky and do not adjust to changes in the price level
-in the short run,  the level of real GDP supplied us directly related to the price level

Long run aggregate supply (LRAS): marks the level  of full employment in the economy (analogous to PPC)
-because input prices are completely flexible in the long run, changes in price level do not change firms' real profits and therefore do not change firms' level of output. This means that the LRAS is vertical at the economy's level of full employment

Short run aggregate supply (SRAS): Because input prices are sticky in the short run, the SRAS is upward sloping

Changes in SRAS
-an increase is seen as a shift to the right
-an decrease is seen as a shift to the left
-the key to understanding shifts in SRAS is per unit cost of production
-per unit production cost = total input cost/total output

Determinants of SRAS (all of the following affect unit production cost)
1. Input prices
-domestic resource prices

• wages (75% of all business costs)
• cost of capital
• raw materials (commodity prices)

-foreign resource prices

• strong $ = lower foreign resource prices
• weak $ = higher foreign resource prices

-market power

• monopolies and cartels that control resources control the price of those resources

-increase in resource prices = shift left

-decrease in resource prices = shift right

2. Productivity: total output/total input

-more productivity = lower unit production cost = shift right

-lower productivity = higher unit production cost = shift left

3. Legal insitutional environment 

-taxes and subsidies

• taxes ($ to govt) on business increase per unit production cost = shift left
• subsidies ($ from govt) to business reduce per unit production cost = shift right

-government regulation 

• government regulation created a cost of compliance = shift left 
• deregulation reduces complainants costs = shift right 

Aggregate Demand (AD)

Aggregate demand (AD): shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase in each possible price level
-the relationship between the price level and the level of real GDP is inverse

3 reasons AD is downward sloping

1. Real balanced effect

-when the price level is high, households and businesses cannot afford to purchase as much output

-when the price level is low, households and businesses can afford to purchase more output

2. Interest rate effect

-a higher price level increased the interest rate which tends to discourage investment

-a lower price level decreased the interest rate which tends to encourage investment

3. Foreign purchases effect

-a higher price level increased the demand for relatively cheaper imports

-a lower price level increases the foreign demand got relatively cheaper U.S exports

Shifts in aggregate demand (AD)

There are two parts to a shift in AD:

1. a change in C, Ig, G, and/or Xn

2.a multiplier effect that produces a greater change than the original change in the 4 components

-increase in AD, AD shifts right

-decrease in AD, AD shifts left

Determinants of AD:

1. Consumption

household spending is affected by:

-Consumer wealth

  -more wealth = more spending (AD shifts right)

  -less wealth = less spending (AD shifts left)

-Consumer expectations 

  -positive expectations = more spending (AD shifts right)

  -negative expectations = less spending (AD shifts left)

-Household indebtedness

  -less debt = more spending (AD shifts right)

  -more debt = less spending (AD shifts left)

  -less taxes = more spending (AD shifts right)

  -more taxes = less spending (AD shifts left)

2. Gross private investment 

investment spending is sensitive to:

-The real interest rate

  -lower real interest rate = more investment (AD shifts right)

  -higher real interest rate = less investment (AD shifts left)

-expected returns

  -higher expected returns = more investment (AD shifts right)

  -lower expected returns = less investment (AD shifts left)

-expected returns are influenced by 

  -expectations of future profitability

  -technology

  -degree of excess capacity (existing stock of capital)

  -business taxes

3. Government spending 

-more government spending (AD shifts right)

-less government spending (AD shifts left)

4. Net exports

net exports are sensitive to:

-exchange rate (int'l value of $1)

  -strong $- more imports and fewer exports (AD goes left)

  -weak $- fewer imports and more exports (AD goes right)

-relative income 

  -strong foreign economies = more exports (AD shifts right)

  -weak foreign economies - less exports (AD shifts left)

Employment

Unemployment: percentage of people who do not have jobs but are in the labor force

Labor force: # of people in a country that are classified as either employed or unemployed

Formula for unemployment rate:

Ideal unemployment rate: 4-5%

Not in the labor force:

1. Kids
2. Military Personnel
3. Mentally insane
4. Incarcerated or in prison
5. Retired
6. Stay at home parents
7. Full time student
8. Discouraged workers (look for a job but can't find one)

Types of employment

1. Frictional

-used the words between jobs

-because they choose new opportunities, new choices, new lifestyles, or new educational levels

2. Structural

-technology changing

-associated with lack of skills or declining industry

3. Seasonal

-waiting for the right season to go to work

-ex: Santa Calus, lifeguard, Easter bunny, construction worker

4. Cyclical

-this is unemployment that occurs due to a swing in the economy

-deal with the business cycle 

Full employment: occurs when there's no cyclical employment

Why is unemployment bad?

1. Not enough consumption (GDP)
2. Too much poverty
3. Too much government assistance

Why is unemployment good?

1. There is less pressure to raise wages
2. There's more workers available for future expansions

Okun's law: for every 1% of unemployment above the NRU causes a 2% decline in real GDP

-So if unemployment is 3.5% we're giving up 7%

-3.5 x 2 = 7

Inflation

Inflation: a rise in the general level of prices
-formula: new GDP deflator-old GDP deflator/old GDP deflator x 100

Inflation rate: measures the percentage increase in the price level over time; offers a key indicator of the economy's help

Deflation: decline in the general price level

Disinflation: occurs when the inflation rate declines

Consumer price index (CPI): measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
-indicates changes in the price level and cost of living

Find inflation rate using market basket data:
-formula: current year market basket value - base year market basket value/base year market basket value x 100

Find inflation rate using price indexes:
-formula: current year price index-base year price index/base year price index x 100

Estimating inflation using the rule of 70:
formula: years needed to double inflation = 70/annual inflation rate

Rule of 70 is used to calculate the # of years it will take for the price level to double at any given rate of inflation

Determining real wages:
formula: real wages=nominal wages/price level x 100

Finding real interest rate:
formula: nominal interest rate-inflation premium

Standard inflation: 2-3%

Real interest rate: cost of borrowing or lending money that is adjusted for inflation

Nominal interest rate: unadjusted cost of borrowing or pending money


Causes of inflation:
A. Demand pull inflation: it is caused by an excess of demand over output that pull prices upward
B. Cost push inflation: caused by a rise in per unit production cost due to increasing resource cost

Effects of inflation:
-Anticipated inflation
-Unanticipated inflation

What is hurt by inflation?
-Fixed income (social security, scholarship, etc.)
-Savers
-Lenders/creditors

What is helped by inflation?
-Borrowers (debt will be repaid)

Nominal GDP and Real GDP

Nominal GDP: Value of output produced in current prices
-can increase from year to year if either output or price increase
-formula: pxq

Real GDP: value of output produced in base year or constant prices
-adjusted for inflation
-can increase from year to year only if output increases
-formula: base year price  x current year quantity

Price index: is a measure of inflation by tracking changes in a market basket of goods compared with the base year
-formula: price of market basket of goods in current year/price of market basket of goods in base years x 100

GDP deflator: price index used to adjust from nominal GDP to real GDP
-in the base year, GDP deflator =100
-for years after the base year, GDP deflator >100
-for year before the base year, GDP deflator <100
-formula: nominal GDP/real GDP x100




Link for more info about nominal and real GDP:
https://www.youtube.com/watch?v=lBDT2w5Wl84&spfreload=10

Expenditure Approach and Income Approach

Expenditure approach: adding up the market value of all domestic expenditures made on all final goods and services in a single year
Formula: GDP = C + Ig + G + Xn

Income Approach: adding up all the income earned by households and firms in a single year
Formula: GDP = W + R + I + P + Statistical Adjustments
-W: wages, salaries, compensation of employees
-R: rents, tenants to landlords, lease payments that corporations pay for the use of space
-I: interest, money paid by private businesses to the suppliers of loans used to purchase capital
-P: profit, corporate income taxes, dividends, undistributed corporate profits


*FORMULAS*
Budget: 
government purchases of goods and services + government transfer payments - government tax and fee collections
-if it is negative it is a budget surplus, if it is positive, it is a budget deficit

Trade:
 exports - imports
-if it is negative it is a trade deficit, if it is positive, it is a trade surplus

National Income: 

• GDP - indirect business taxes - depreciation - net foreign factor payment
• Compensation of employees + rental income + interest income + proprietor's income + corporate profits

Disposable Personal Income: 

National income - personal household taxes + government transfer payments

Gross National Product (GNP): 
GDP + net foreign factor income

National Net Product (NNP):
GNP - depreciation

National Domestic Product (NDP):
GDP - depreciation

Gross Domestic Product (GDP)

Gross Domestic Product (GDP): total dollar value of all final goods and services produced within a country's borders within a given

• Whats included in GDP?

 C + Ig + G +Xn
-C: Consumption: takes 67% of the economy; final goods and services
-Ig: Gross private domestic investment; factory equipment maintenance, new factory equipment, construction of housing, unsold inventory of products built in a year
-G: Government spending Ex: buying new weapons, fort bend buying a new school
-Xn: Net exports; basically exports-imports

• What's not included in GDP?

1. Used or secondhand goods
2. Intermediate goods: goods and services that are purchased for resale or for further processing or manufacturing
3. Non-market activities: volunteer work, babysit, illegal drug sales, trading, underground activities
4. Financial transactions: stocks, bonds, real estate
5. Gifts or transfer payments: scholarship, Christmas gift, social security, welfare payments 
6. Foreign

Gross National Product (GNP): measure of hat its citizens produce and whether they produce these items within its borders

National income accounting: Economists collect statistics on production, income, investments, and savings

Circular Flow Model

• Circular flow model: represents transactions in a economy. All goods and services flow in a clockwise direction

• Product Market: this is the place where goods and services are produced by businesses and are bought and sold to households                                                                                                         -firms sell, households buy

• Resource or factor market: the place where households sell resources and businesses by resources                                                                                                                                           -firms buy, households sell

• Households: person or a group of people that share their income                                                   -sell resources, buy products

• Firms: is an organization that produces goods and services for sale                                               -buy resources, sell products

Unit 1

• Macroeconomics: Study of the major components of the economy; covers the ups and downs of the economy                                                                                        Ex: inflation, GDP, international trade
• Microeconomics: Study of how households and firms make decisions and how they interact                                                                                                             Ex: supply and demand, market structures

•  Positive Economics: claims that attempts to describe the world as is. It is very descriptive. Basically claims the way the economy actually works Ex: minimum wage laws causes unemployment
• Normative Economics:  claims that attempts to prescribe how the world should be. It is very prescriptive in nature and is opinion based. Basically claims the way the economy should work. Ex: Government should raise the minimum wage

•  Needs: basic requirements for survival                                                                    Ex: food, water, shelter
• Wants:desires of citizens & are broader than your needs

•  Scarcity: is the most fundamental economic problem facing all society.
  It is satisfying unlimited wants with limited resources. -Permanent Ex: water, gold, oil
• Shortage:  Where the quantity demanded is greater than the quantity supplied                     -Temporary
• Goods: Tangible commodities you can buy 

•  Consumer goods: goods that are intended for final use by the consumer
• Capital goods: items used in the creation of other goods                                       ex: factory, machinery, trucks 
• Services: work that is performed for someone else 

                Factors of Production 

1. Land (natural resources)
2. Labor (work force)
3. Capital (human capital, physical capital)

• Human capital: Knowledge and skills: (what you gain through education and experiences)
• Physical Capital: human made objects used to create other goods and services

     4. Entrepreneurship (have to be an innovator and risk taker)

• Tradeoffs: alternatives that we give up when ever we choose one course of action over another
• Opportunity cost: the most desirable alternative given up by making a decision
• Production possibility graphs(PPC or PPF): shows alternative ways to use resources
• Points of the curve:
• -A: is underutilization, is attainable but unefficient; could be because of a decrease in population, recession, war, famine, underemployment, unemployment
• -B: efficient, but producing more guns than butter
• -C: efficient, but producing more butter than guns
• -D: efficient and attainable

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• -X: unattainable; could be because of economic growth, technology, and new resources

• Productive efficiency: producing at the lowest cost and we're allocating resources efficiently and have full employment of resources
• Allocative efficiency: where to produce on the curve

• Production possibilities graphs key assumptions: 

1. Two goods are produced
2. Full employment
3. Fixed resources (land, labor, capital)
4. Fixed state of technology
5. No international trade

• elasticity demand: tells how drastically buyers will cut back or increase their demand for a good when the price rises or falls

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-elastic demand: demand will change greatly given a small change in price

-"wants"

-ex: movie tickets

- E>1

-inelastic demand: your demand for a product will not change regardless of price

-"needs"

-ex: milk, gasoline, medicine (insulin)

- E<1

-unit elastic:

- E=1

• How to find % change in quantity: new quantity-old quantity/old quantity
• How to find % change in price: new price-old price/old price
• How to find PED or price elasticity in demand:  abs(%Change in Quantity/%Change in Price) 
• How to find total revenue: Price x Quantity

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• Equilibrium: the point at which the supply curve and the demand curve intersect; at the point at which they intersect it means the economy is using it efficiently 

• Shortage: QD>QS
• Surplus: QS>QD

• Price ceiling: below equilibrium point on graph; a government imposed minimum on how high you can be charged for a product or service                                                                                Ex: rent control
• Price floor: above equilibrium point on graph; a government imposed minimum on how low a price can be charged for a product or service                                                                              Ex: minimum wage

• Margin: additional income of selling an additional good
• Fixed cost: a cost that does not charge no matter how much is produced 
• Variable cost: cost that does change that fluctuates                                                                    Ex: gas, electricity
• Marginal cost: the cost of producing one more unit of a good 
• Whats the difference between cost and revenue? revenue is what you bring in and cost is what you bring out

• Expansionary (growth): real output in the economy is increasing and the unemployment rate is decreasing
• Peak: where real GDP is at its highest point
• Contractionary (recession): where real output in the economy is decreasing and the unemployment rate is increasing

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• Trough: the lowest point of real GDP