Unit 7: 04/27/2015

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 - Exisits when a country can produce more of a good/service than the other country in the same amount of time period.

Comparative Advantage
-Individual/National - when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation.
     *Input problems - This is where the country or individual can produce a set amount of something by using the least amount of resources, land, or time has the absolute advantage.

Chosen item
Forgone item


 
    *output problem - looking at production, who can produce the best

What is given up
What is produced

Unit 7 04/15/2015

Foreign exchange market (FOREX)
-The buying and selling of currency
EX in order to purchase souvenirs in France, it is first necessary for Americans to sell (supply) their dollars and buy (demands) Euros.
-The exchange rate (e) is determined in the foreign currency markets
EX 77 Japanese yen to 1 U.S dollar
-Always change the D line on the one currency graph, the S line in the other currency graph
-Moves lines of two currency graphs in the same direction and you will have the correct answer.
-If D on one graph moves up then so will the S on the other graph. And same if D on one graph moves left then S on the other graph will also move left.

Change in exchange rates.
-Exchange rates are a function of the supply and demand for currency.
=increasing of supply in a currency will make it cheaper to buy one unit of that currency.
=decreasing in supply of a currency will make it more expensive to buy one unit of that currency.
=Increase in demand for a currency will make it more expensive to buy one unit of that currency.
=decrease in demand for a currency will make it more cheaper to buy one unit of that currency.

Appreciation
-Appreciation of a currency occurs when the exchange rate of that currency increases
Depreciation
-Depreciation of a currency occurs when the exchange rate of that currency decreases.

Exchange rate determinants
-Consumer taste
-Relative income
-Relative price level

Unit 7: 04/09/2015

Balance of payments
-Measure of money inflows and outflows between the U.S and the rest of the world (ROW)
*inflows are referred to as credits
*outflows are referred to as debits
Balance of payments are divided into three accounts
1.Current account
2. Capital/Financial account
3. Official reserves account

double entry book keeping
-every entry in the balance of payments is recorded twice in accordance with standard accounting practice.

Current account
-Balance of trade of net exports
*Exports of goods and services (-) imports of goods and services (-) exports create a credit to the balance of payments (-) imp. create a debt.
-Net foreign income
*income earned by U.S owned foreign assets (-) income paid to foreign held U.S assets.
-Net transfers
*foreign aid --> a debit to the foreign account,

Capital/financial account
the balance of capital ownership includes the purchase of both real and financial assets.
direct investments in the U.S is a credit to the capital account,

Capital/financial account
purchase of foreign financial assets represent debit to the capital account.

relationship between current and capital account
-Current and capital account should zero each other out

Official reserves
-The foreign current holdings of the U.S federal reserves system.
-When there is a ball of rice of payments surplus the fed accumulates foreign currency and debits the balance of payments.

Active Vs. Passive
-U.S is passive in its use of official reserves, doesn't seek to manipulate the dollar exchange rate.
-People republic of China is active in its use of official reserves. actively buys and sells dollars in order to maintain steady exchange rate with the U.S.

Unit 5 & 6: 04/07/2015

Inverse relationship between unemployment and inflation?
-Short run Philips curve
Graph of long run aggregate supply curve looks?
-Vertical at full employment
What type of inflation caused by adverse supply shock?
-Cost push inflation
Hypothetical economy '03-'06 inflation dec 8% ->  6% -> 3%
-Disinflation
knowledge and skills that make a worker productive
-Human capital
High inflation and high unemployment
-Stagflation

Supply side economics
-Belief that the AS curve will determine levels of inflation, unemployment, and economic gorwth
-To increase the economy the AS curve will have to shift to the right which would benefit the company first.
-Supply side economists focus on marginal tax rates.

Marginal tax rates: amount paid on the last dollar earned or the additional dollar earned.

Lower taxes are incentives for workers to invests in our economy

1.Supply side economists
-Supports policies that promote GDP growth by arguing that high marginal tax rate along with our current system of such unemployment.
-People to increase savings and therefore create lower interest rates and increase business investments.
-Provide disincentives to work, invest, innovate, and undertake entrepreneur ventures.

2. Supply side economics (Raeganomics)
-Lowered the marginal tax rate to get the U.S not in a recession ---> Deficit

Laffer curve
it is a trade off between tax rates and government
It is used to support the supply side economics.

As tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline,

The higher the tax rates you set the less money you will collect and the laffer curve id controversial and debatable.

Criticism of the laffer curve...
1. researchers suggest that the impact on tax rates on incentives to work, invest, and to save are small.
2.tax cuts also increase demands

3. where the economy is actually located on the curve is yet to be located on the curve is yet to be determined, 

Unit 5 & 6: 04/06/2015

The long run Phillips curve (LRPC)
Because long run Philips curve exists at the natural rate of unemployment. Structural changes in the economy that affect Unemployment will also cause LRAPC to shit
-Shift up in unemployment will shift LRPC  to the right
-Shift downward in unemployment will shift LRPC to the left

Stagflation
is when inflation and unemployment increases simultaneously
EX. Baby boom
       Women's movement
       Civil rights movement
       Vietnam war ends
       Oil embargo of 1973 and 1979

Disinflation
Reduction in the inflation rate from year to yea this occurs when  agregate demand declines.

Deflation
General drop in the price level.
       

Unit 5 & 6: (04/01/2015)

Short run aggregate supply
Time is too short fir wages to adjust to the price level.

-Workers may not be aware of changes in their real wages due ti inflation and have adjusted their labor supply decisions and wage demand accordingly. (if fixed contract no increase in real wages.)



Nominal wage - the amount of money received per hour, per day, or per year.

Sticky wages - this is where the nominal wage level is set according to an initial price level and does not vary.

	Price level	Wage level	Employment level	Implications
Keynesian/Horizontal	Fixed	Fixed	Flexible	Dep. On change in employment.
Intermediate	Flexible	Fixed	Flexible	Dep. On change in price level and employment.
Classical or Vertical	Flexible	Fixed	Fixed	Dep. On change in price level.

Long run aggregate supply (LRAS)
 -Flexible price level and wage
 - offset each other

Time long enough for wages to adjust to the PL
 - Growth in some format
 - Technological

Phillips curve represents th relationship between unemployment and inflation.
-Trade off between inflation and unemployment that only occurs in the short run.

Long run Phillips curve.
-occurs at the natural rate of unemployment represented by a vertical line.
-There is no trade off between unemployment and inflation in the long run which means that the economy produces at the full employment level.
-The long run phillips curve will only shift if the LRAS curve shifts.

Three tyoes that make up phillips unemployment,
1.Structual
2. seasonal
3. frictional

Major LRAS assumption is that more worker benefits create lower natural rates.
LRPC only shift if LRAS shift
Otherwise it is vertical or stable

Short run phillips curve
Inverse relationship between unemployment and inflation.
It has relevance to okuns law

-Since wages are sticky inflation changes, moves the points on the SRPC. If inflation persist and the expected rate of inflation rises tha the entire SRPC moves upwards due to stagflation.

-If inflation expectations drop due to new technology or economic growth then the SRPC moves downwards.

If you move/Shift curve its due to AS if its a determinate of AD it shifts along the curve.


      AD- Along the curve
      AS- Move along the curve

Aggregate supply shocks cause both the rate of inflation and the rate if unemployment to increase.
Supply shock --> rapid and significant increase in resource cost.

Misery index - combination of inflation and unemployment in any given year.
 single digit misery =Good

Unit 4: (3/5/2015)

Three Types of Multiple Deposit Expansion:
Type 1: Calculate the initial change in excess reserves. Also known as the amount a single bank can loan from the initial deposit.

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

Type 3: Calculate the change in money supply. (Sometimes Type 2 and 3 will have the same result)                No FED involvement

Type 4: Calculate the change in demand deposits

Unit 4: (3/23/2015)

loanable funds market - market where savers and borrowers exchange funds (Q lf) at real rate of interest (r%)

Demand for loanable funds comes from or borrowing households, firms, govs, and foreign sectors.

supply - or savings comes from h, f, govs, and fs. supply is demand for bonds

demand = borrowing

more borrowing = more demand for loanable funds
less borrowing = less demand for loanable funds

When government does fiscal policy it will affect the loanable funds market
changes in real int rate will affect gross private investment.

Unit 4: (3/19/2015)

Monetary and Fiscal policy

Fiscal policy
-Congress and president controls
-Tax on spend

Monetary policy
-FED
-OMO (open market operation)
-discount rate
-federal fund rate
-reserve requirement

Tools of monetary policy

	Expansionary (easy money)	Contractionary (tight money)
Open market operation	Buy bonds Increase money supply	Sell bonds Decrease money supply
Discount rate	Decrease	Increase
Reserve requirement	Decrease	Increase

bank reserves and money supply have a direct relationship

federal find rate - interest rate that commercial banks charge each other for over night loans. 

Prime rate - interest rates that banks charge to their most credit worthy customers. 

Unit 4: (3/17/2015)

Key principles
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.

Initial deposit	New/existing money	Bank reserves	Immediate change in M.S
Cash	Existing	Up	No; because the composition of M1 money changes cash to currency.
FED Purchase of a bond from the public	New	Up	Yes; because money coming out of the FED is new Money in circulation
Bank purchase of a bond from the public	New	Up	Yes; because money coming from bank reserves is new money in circulation.

Factors that weaken the effectiveness of the deposit multiplier:

1. if bankers fail to loan out all their excess reserves

2. if bank customers take their loans in cash rather than new checking account deposits it creates a cash currency drain.

Money market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.

Unit 4: (3/6/2015)

How banks work

Right side: Assets

Assets
-Reserves
>required reserves (rr) - percent required by the fed to keep on hand to meet demand
>excess reserves (er) - percent reserves over and above the amount needed to satisfy the minimum reserve ratio set by the fed
-Loans to firms, consumers, and other banks
-Loans to government - treasury securities
-Bank property - if bank fails you could liquidate the bank property.

Left side: liabilities

Liabilities
- Demand deposits
-CD's
-Loans from federal reserves and other banks
-Shareholders equity

Unit 4: (3/4/15)

Time value of money

Is a dollar today worth more than a dollar tomorrow?
-Yes, because inflation and opportunity cost.
- This is the reason for charging and paying interest.
Let
V = future value of money
P = resent value of money
r = real interest rate
n = years
K = number of times interest is created per year

simple interest form

V = (1 + r) ^n  multiplied by p

compound interest form

V = (1 + r/k) ^ nk multiplied by p

7 functions of the FED 
1. 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 cleaning service for banks
5. acts as a personal bank for the government
6. supervises member banks
7. controls the money supply in the government

Unit 4: (3/3/2015)

     Money is any asset that can be used to purchase any goods or services.

3 uses of money
1. The medium of exchange: used to determine value.
2. Unit of account: how do you compare prices.
3. store of value: how money can be stored.

3 types of money
1. commodity money - has value within itself.
EX: salt, gold, and olive oil
2. representative money - represent something of value
EX: I.O.U.
3. Fiat money - it is money because the government says so.
EX: paper currency and coins,




Money supply - total value of financial assets available in the U.S economy.

M1 money
-Liquid assets - easily to convert to cash

M2 money 
-M1 money plus
      *savings account
      *money market account

3 purposes of financial institutions.
1. store money
2. save money
3. loan money

4 ways to save money
1. savings account
2. checking account
3. money market accounts
4. certificate of deposit

Loans  -  Banks operate on a fractional reserve system. which is where they keep a fraction of the funds and loan out the rest.

Interests rates
- Principle - amount of money borrowed
- Interest - price paid for the use of borrowed money
     > simple interest - paid on the principle
     > compound interest - paid on the principle plus accumulative interest.













And Finance companies are part of the financial institution.

Investment - redirecting resources you would consume now for the future.

Financial assets - claims on property or income of borrower

Financial intermediaries - institution that channels funds from savors to borrowers

Savers ----> financial institution ----> investors.

Purposes of financial intermediaries
1. sharing risks
    diversification - spread out investment in order to reduce risk
2. providing information
3. liquidity
    returns - amount an investor receives above and beyond the sum of initially invested.

Bonds and stocks
Bonds you loan; stocks you own
Bonds - I.O.U.'s or loans that represent that the government/corporation must repay to an investor
   3 components
1. coupon rate: interest rate the issuer pays ti the bond holder
2. maturity: time at which payment to a bond holder is due.
3. par value: amount an investor pays to purchase a bond and that will be repaid to an investor at maturity.

Yield - annual rate of return on a bond if the bond were held at maturity.

video response

In this video i learned about the money making process. The fed makes money by making loans. I learned that the money multiplier is 1/rr (required reserve) and you need this in order to figure out how much  money is created. using this formula you multiply it by what is loaned out and you will get a huge increase in money that is created and this is because of multiple deposit expansion. But that gives you the max amount of money they can make the bank doesn't have to loan out all of the excess reserves.

Video respose

In this video i learned about the loadable funds graph, which is money that is available in the banking system for people to borrow. the Y axis is interest rat (i) and the X axis is quantity of loadable funds. Demand for loan-able funds is downwards sloping and then an upwards sloping of supply loan-able funds. Supply loan-able finds is dependent on savings. When government is running a deficit the demand of money shifts to the right in the money market graph and when you increase demand for money we increase demand for loan able funds. Does this lady ever change?

video response

In this video i learned about what the fed can actually do to manipulate the money supply.
I learned about the tools of the feds. There is Expansionary (Easy money) and Contractionary (Tight money). The fed can change Reserve requirements, Discount rate, and they can buy or sell bonds and securities. Reserve requirement is the percentage of the banks total deposit that they must hold on as vault cash or a fed branch, for expansionary the fed would decrease required reserves and for contraction they would increase. The discount rate is the rate at which banks can borrow money from the FEDs, for expansionary they would decrease the discount rate and increase it for contractionary. Then we have the buying and selling of bonds and securities for expansionary they would buy bonds to increase money supply and sell for contractionary in order to reduce money supply. Do you feel like they go off topic too much? like omg.

video response

In this video i learned about the money market graph, it is very similar to supply and demand but it just has a few things that are different, on the vertical axis we have the interest rate (i) and on the horizontal axis we put the quantity of money. The demand is curved downwards and we also have the supply of money and that is vertical, it is fixed and doesn't changed unless the FED changes it. When demand is lowered it shifts to the left and when it fluctuates it shifts to the right. Even if you shift the curve the quantity is the same because it is set by the FED. The man in the back is so annoying.

Video respnse

In this video i learned about the types of money and the functions of it. There are three types of money and there are three functions of money. The three types of money are commodity money which has been around the longest, representative money for example the gold and silver standard, and then we have fiat money which is the one we use currently. The three functions are medium of exchange which means exchanging money for goods, store of  value  which is storing money and it still having some sort of value later on, and lastly we have unit of account which means we pay th more value it has. This lady's voice is strange though.

Unit 3 (2/25/15)

     Fiscal policy
-Changes in the expenditures or tax revenues of the federal government.
-2 tools of fiscal policy:
1) Taxes - government can increase / decrease taxes.
2) Spending

     Deficits, Surplus, and Debt
Balance budget
-Revenue = Expenditure
Budged deficit
-Revenue < Expenditures
Budget surplus
-Revenue > Expenditures
Government Debt
-Sum of all deficits - Sum of all surplus

Government must borrows $ when it runs a budget deficit.
Borrows from...
- Individuals
- Corporations
- Financial Institutions
- Foreign Entities

     Discretionary fiscal policy. (action)
- Expansionary fiscal policy: Think deficit.
- Contractionary fiscal policy: Think surplus
Non-Discretionary fiscal policy. (no action)

     Discretionary Vs. Automatic 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 politics in response to an economic problem.
- Unemployment compensation and marginal tax rates are EX. 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 Vs. Expansionary fiscal policy
Contractionary
- Policy designed to decrease aggregate demand
  + Strategy for controlling inflation.
Expansionary fiscal policy
- Policy designed to increase aggregate demand
  + Strategy for increasing GDP combating the recession and reducing unemployment.
* Increase government spending G goes up
* Decrease Taxes T goes down

Contractionary fiscal policy
-Inflation is countered with contractionary policy
Decrease government spending. G goes down

Automatic built in stabilizer
-Anything that increases the government budget deficit during a recession and increases its budget surplus during an inflation without requiring explicit action by policy makers.
EX. Transfer payment, welfare, food-stamps, unemployment checks, corporate dividends, social security, and veterans ben.

Progressive tax system
-Average tax rate (Tax rev / GDP) rises with GDP.

Proportional tax system
-Average tax rate remains constant as GDP change

Regressive tax system
-Average tax rate falls with GDP

Unit 3 (2/20/15) consumption and savings

Disposable income (DI)
-Income after taxes or net income.
-DI = gross income multiplied by taxes.
     2 choices...
1. Consume (spend $ on goods and services)
2. Save (not spend money on goods and services)

      Consumption 
  Household spending: the ability to consume is constrained by...
-The amount of disposable income.
-The propensity to save.
  Do households consume if DI = 0?
-Autonomous consumption
-Dis-saving
       APC = C / DI = % DI is spent

     Saving
  Household not spending.
The ability to save is considered by...
-The amount of disposable income.
-The propensity to consume.
  Do households save if DI = 0?
-No.
          APS = S / DI = % DI is not spent


APC and APS
* APC + APS = 1
* 1 - APC = APS
* 1 - APS = APC
* APC > 1.: Dis-saving
* -APS.: Dis-saving

     Marginal propensity to consume.
* ΔC / ΔDI
* % of every dollar earned that is spent
     Marginal propensity to save.
* ΔS / ΔDI 
* % of every extra dollar earned that is saved.
      The spending Multiplier effect.
An initial change in spending ( C, Ig, G, and Xn) causes a larger change in aggregate spending, or aggregate demand (AD)

* Multiplier = Change in AD / Change in spending

* Multiplier = Change in AD / Δ C, Ig, G, or Xn

Why does this happen?
-Expenditures and income flow continuously, which sets off a spending increase in the economy.
-The spending multiplier can be calculated from the MPC or the MPS

* Mulitplier = 1 / 1 - MPC or 1 / MPS

  Multipliers are positive when there is an increase in spending and negative if there is a decrease in  spending.

     Calculating the tax multiplier
When government taxes, the multiplier works in reverse.
Why?
- Because now money is leaving the circular flow.
 
* Tax Multiplier  (negative) = -MPC / 1 - MPC or -MPC / MPS.

If there is a tax cut, then the multiplier is positive, because there is more money in the circular flow now.

Unit 3 (2/19/15) The three schools of economics

The three school of economics 
1. Classical
2. Keynesian
3. Monetary

1. Classical
-Adam Smith: Invisible hand, market will function by itself
-John B. Say: Say's law, supply creates its own demand
-David Ricardo
Alfred Marshall
-The economy is always close to or is at full employment.
-Trickle down effect: Help the rich first everyone else later.
-AS = AD at full employment equilibrium.
-In the long run the economy will balance at full employment.
-AS determines output
-Savings (Leakage) = investment (injection)
-Savings increase with interest rates
-Prices and wages are flexible downwards.
-Laisseze Faire.

2. Keynesian 
-Economy is not always close to or at full employment.
-There is government intervention.
-Fiscal policy.
-John Maynard keynes: competition is flawed, AD is AD is keyed and not AS. (AD determines its own output and demand creates its own supply.)
-Leaks cost constant recessions.
-Savings cos recession.
-Savors and investors save and invest for different reasons.
-Savings are inverse to the interest rate.
-Ratchet effect and sticky wages block say's law.
-Prices and wages are inflexible downward.
-Since there isn't a mechanism capable to determine full employment, in the long run we are all dead.
-Do add stabilizer
-Use expansionary and contractionary policy.

3. Monetary
-Allen Greenspan
-Ben Bernanke
-Fine tuning is needed
-Voters wont allow contractionaryn options.
-Congress cant time policy action
-Institute tight money/easy money
-We change required reserved of needed .
-We buy and sell bonds through open market operations.
-We use interest rates to change the discount rates and the federal fund rate.

Unit 3 (2/18/15)

     Investment demand curve (ID) 

Shape?

-Downward sloping

Why?

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

  changes in r% causes changes in Ig. Factors other than r% may shift entire ID curve. 

-Cost of production

*Lower cost shifts ID to the right. (Vice Versa)

-Business taxes

*Lower Shits ID to the right. (Vice Versa)

-Technology change

*New technology shifts ID to the right,

*Lack of technology change shifts ID to the left.

-Stock of capital 

*If economy is low on capital ID shifts to the right. 

*If economy has much capital ID shifts to the left. 

-Expectations 

*Positive expectations ID shifts to the right.  (Vice Versa)

    Long run AS

-It is always vertical at full employment 

-It represents a point on the economies production possibility curve 

-Does not change as the price level changes, only thing that changes long run AS is the same things that change PPC outwards.

*Resources

*Technology

*Economic Growth. 

Unit 3 (2/17/15)

Full employment
  Full employment equilibrium exist where AD intersects SRAS and LRAS at the same point .
Recessionary gap
  Exist when equilibrium occurs below full employment output.
Inflationary gap 
  Exist when equilibrium occurs beyond full employment output.

   Invest rates and investment demand
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 do businesses make investment returns
-Cost/Benefit analysis
-How does business determines the benefits
-Expected rate of returns
How does business count the cost?
-Interest cost
How does business determine the amount of investment thy undertake?
-Compare expected rate of return to interest cost
*If expected return > interest: Invest (Vice Versa)

Real (R%) Vs. Nominal (I%)
Whats the difference?
-Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known ex post facto.
How do you compete the real interest rate (R%)
-R% = I% - π%
What the determines the cost of an investment decision?
-The real interest rate (R%)

Unit 3 (2/12/15)

2/12/15

Aggregate supply - The level of real GDP that firms will produce at each level. (PL)

Long run Vs. Short run.

Long:
- Period of time where input prices are completely flexible and adjust to change in price level.
- Level of GDP is supplied and is independent of the price level.

Short:
- Period of time where input prices are sticky and do not adjusts to changes in the price level.
- The level of real GDP supplied is 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 LRAS
vertice at the economy's level 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
- Increase in SRAS is seen as a shift to the right. -->
- Decrease in SRAS is seen as a shift to the left. <--
-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 affect unit production cost)
- Input prices
- Productivity
- Legal institutional environment

 *Input Prices:
Domestic resource prices
-Wages
-Cost of capital
-Raw material (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 SRAS shifts to the left. <--
(Vice Versa)

*Productivity
  Total output / total inputs
     More productivity = Lower unit production cost = SRAS shifts to the right -->
(Vice Versa)

*Legal institutional environment
 - Taxes ans subsidies
   Taxes: ($ to gov't) on business' increase per unit production cost. SRAS shifts to the left <--
   Subsides: ($ from gov't) to business reduce per unit production cost SRAS shifts to the right. <--
   Government regulation creates a cost of compliance SRAS shifts to the left. <--
   Deregulation reduce compliance cost SRAS shifts to the right. -->

Unit 3 (2/11/15)

Aggregate demand - shows amount of real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level.

Relationship between price level and the level of real GDP is inverse.

Reasons why AD is downward sloping.
     - Real balance effect: 
When price level is high households and businesses cannot afford to purchase as much output. (Vice Versa)
     -Interest rate effect: 
Higher price level increase interest rule which tends to discourage investment. (Vice Versa)
     -Foreign purchase effect: 
Higher price level increases demand for relatively cheaper imports.
Lower price level increased the foreign demand for relatively cheaper U.S. exports.

Shifts in aggregate demand.
     - Change in C, Ig, G, and Xn
     - Multiple effect that produces a greater cange than the original change in 4 compounds

Increase in AD: Shifts to the right.
Decrease in AD shifts to the left.

     Consumption
Household spending is affected by...
  -Consumer wealth 
*More wealth: more spending AD shifts to the right.
*Less wealth: less spending AD shifts to the left.
  -Consumer expectation
*Positive expectations; more spending AD shifts to the Right.
*Negative expectations: less spending AD shifts to the left.
  -Household indebteners
*Less debt: more spending AD shits to the right.
*More debt: less spending AD shifts to the left.
  -Taxes
*Less tax: more spending AD shifts to the right.
*More tax: less spending AD shits to the left. r

     Gross private investment
Investment is sensitive to...
  -Real interest rate
*Lower interest rate: more investment AD shifts to the right,
*Higher interest rate: less investment AD shifts to the left.
*Higher expected returns: more investment AD shifts to the right.
*Lower expected returns: less investment AD shits to the left.
    Expected returns are influenced by
-Expectations of future profitability
-Technology
-Degree of excess capacity
-Business

     Government spending 
*More government spending AD shifts to the right.
*Less government spending AD shits to the left.

     Net exports
sensitive to...
  -Exchange rates (international vale of money)
*Strong: more imports and few exports AD shifts to the left.
*weak: Fewer imports and more imports Ad shifts to the right.
  -Relative income
*strong foreign economies: more exports AD shift to the right.
*Weak foreign economies: less exports AD shifts to the left.

Unit Two: Unemplyment

February 3, 2015

Unemployment: Percentage of people who dont have jobs but are in the labor force.

Labor Force: Number if people in a country that are classified as either employed or unemployed.

Unemployment rate:

# of unemployed 

*divided by

# of emplpoyed + # of  unemployed

*Multiplied by 100

Not in Labor Force: 

-Kids

-Retired People

- Full time student

- Military Personnel

- mentally insane

- Stay at home parent

- Discouraged Worker

- Incarcerated

Full employment - Occurs when there is no cyclical unemployment present in the economy.

Also known as Natural rate of unemployment. (NRU) 

4-5% is out desired goal. 

Why is Unemployment good?

-Because there is less pressure to raise wages and more workers are available for future expansions.

Why Is Unemployment bad? 

-Not enough consumption (GDP) 

- Too much poverty

- Too much Gov't assistant needed

Okun's Law: For every one percent of unemployment above the NRU causes a two percent decline in real GDP.

Frictional Unemployment: People between a job becasue of new opportunities, lifestyle, choices, and educational level.

Seasonal Unemployment: Waiting for the right season to conduct your trade.

Cyclical Unemployment: Downturn in the business cycle. Bad for Society and individual.

Structural Unemployment: Lack of skill, decline in an industry, and technology changes. 

Unit Two: Inflation

February 2, 2015

Inflation: Rise in general level of prices.
Standard is 2-3 years

Inflation rate: Measures the percentage increase in the price level over time. it is a key indicator of the economy's health.

Deflation: Decline in general price level.

Dis-inflation: Occurs when inflation tare itself declines.

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

5 Ways to solve inflation...

1. Finding inflation rate using market basket data

Current year market basket value

-

Base year market basket value

*Divided by

Base year market value 

*multiplied by

100

2. Find inflation rate using price index

current year price index

-

base year price index

*divided by 

base year price index

*multiplied by 100

3. Estimating inflation using 70: Rule 70 is used to calculate the number of years it will take the price level to double at any given rate of inflation.

Years needed to double inflation ... 

70

*divided by

Annual inflation rate

4. Determining real wages

Nominal wages

*divided by

Price level 

*multiplied by 100

5. Finding real interest rate

nominal interest 

-

inflation premium

Causes of inflation

1. Demand pull inflation- caused by an excess of demand over output that pulls prices upwards. 

2. Cost push inflation- caused by a rise in per unit production cost due to increasing resource casue. 

Effects of inflation

-Anticipated: already saw it coming.

-Unanticipated: Not Expecting

INFLATION

Helped by it...

-Borrowers - will be repaying with cheaper dollars than those that were loaned out.

-Fixed contract

Hurt by it...

-Fixed income

-Savors

-Lenders and Creditors

Unit Two: Nominal GDP and Real GDP

January 29, 2015

Nominal GDP- Value of output produced in current prices.

* Price multiplied by Quantity

- Can increase from year to year if either output or price increase.

Real GDP- Value of output produced in constant or base year prices. 

* Base price multiplied by quantity

-Can increase from year to year only if output increases. 

Price index:measures inflation by tracking changed in the price of a market basket of goods compared with the base years. 

Price of market basket of goods

*divided by

Base price of market baskets 

*multiplied by

100

GDP Deflator: is a price index used to adjust from nominal to real GDP. 

-For years after the base years the GDP deflator is greater than 100.

-For yeats before the base year the GDP deflator is less than 100. 

Nominal GDP

*divided by

Real GDP

*multiplied by 

100

Inflation Rate: 

New GDP deflator 

-

Old GDP deflator

*Divided by

Old GDP Deflator

*nultiplied by 

100

Unit Two: Find GDP and much more!

January 28, 2015

To find GDP add up market value on...

Expenditure Approach: (Most popular and Reliable)

C + IG + G + Xn = GDP

Income Approach: Add up all of the income earned by household and firms in a single year. (Unreliable)

GDP = W + R + I + P + Statistical Adjustments. 

W: wages

R: rents

I: interest

P: profit

SA (Statistical Adjustment): Whatever is left to equal the Expenditure approach when added up wages, rents, interest, and profits. 

Here are some formulas!

1. Budget: 

Government purchases of goods and services

+

Government transfer payments

-

Government tax and fee collection

If your number is Positive it is a deficit.

If your number is Negative it is a Surplus. 

2. Trade: 

Exports

-

Imports

If your number is Positive it is a Surplus.

If your number is Negative it is a Deficit. 

3. GNP: (Gross National Product)

GDP

-

Net foreign factor payments

4. NNP: (Net National Product)

GNP

-

Depreciation

5. NDP: (Net Domestic Product)

GDP

-

Depreciation

6. National Income:

Opt One:

GDP

-

Indirect business taxes

-

Depreciation

-

Net foreign factor payments

Opt Two:

Compensation of employees

+

Rental income

+

Interest income

+

Proprietors income

+

Corporate profit.

7. Disposable Personal Income:

Nat'l income

-

Personal household taxes

+

Gov't transfer payments

Unit Two GDP, GNP and much more!

     January 27, 2015

GDP - Gross Domestic Product

   The total dollar value of all goods and services produced within a countries borders within a given year.

GNP - Gross National Product

   The total value of all final goods and services produces by Americans in a year. 

Whats included in GDP? 

C + Ig + G + Xn = GDP

C - consumption

     67 % of the economy. 

     Final goods and Services.

Ig - Gross Private Domestic Investment

  1. Factor equipment maintenance.

  2. New factory equipment.

  3. Construction of housing.

  4. Unsold inventory of products built in a year.

G - Government spending

-Military Spending.

Xn - Net export

     Exports - Imports

Whats not included in GDP?

1. Non-market activities

-Volunteering.

-Family Work.

-Selling Cannabis. 

2. Intermediate goods

-Goods and services that are purchased for resale.

-Further processing and manufacturing.

3. Used/Second hand goods.

4. Final Transaction 

-Stocks. 

-Bonds.

-Real estate. 

5. Gifts or transfer payments.

a) Private - Produce no output, simply transfer funds. from one private individual to another. EX: Scholarships.

b) Public - Recipients contribute nothing to the net production. EX: Welfare Payments and Social Security. 

Here are some examples!

1. You buy a Christmas toy at Toys-R-Us. 

     Yes counted in GDP - Because of  "C" 

2. You spend a week painting the family home (your hours of effort)  

     Not counted in GDP - Because "non- market activity

3. The Government buys 100 new helicopters for use overseas. 

     Yes counted in GDP - Because of  "G"

Unit One: Circular flow Chart.

January 23, 2015

Mood.

I should have done my blog sooner. 

Unit One: Last post! Buiness cycles!

(1/20/15)

Expansionary: Real output in the economy is increasing and the unemplyment rate is declining. (growth) EX: construction.

Peak: Real output is at its highest point.

Contractionary (Recession): real output in economy is decreasing and the unemployment rate is rising.

Trough: This is where you reach tour lowest point of GDP.

*One cycle is from T to T. (T = trough)
*Recession lasts about 14 months.
*The bulk of the cycle is the growth stage

Unit One: this is seriously never ending...

(1/14/15)

Price elasticity of demand: tells how drastically buyers will cut back/increase their demand for a good when their price rises/falls.

- 3 types of price elasticity of demands...
1)  Elastic demand --> when a demand changes greatly due to a change in price. (wants)
     EX: Substitutes like steak to chicken.

E is greater than One. [E > 1]

2) Inelastic demand --> demand will not change for a product even if the price changes. (needs)
     EX: milk, gas, and salt.

E is less than one. [E < 1]

3) Unit Elastic -->

E is equal to one. [E = 1]

Equations... 

Step 1.  %△ in quantity:

New Quantity - Old Quantity 

Old Quantity

Step 2. %△ in price:

New Price - Old Price 

Old Price

Step 3. Price Elasticity of Demand (PED):

%△ in Quantity

%△ in Price

*Price multiplied by Quantity gives you revenue.

Unit one... continued

(1/15/15)

Terms...

Surplus: QS > QD 
(Quantity Supplied is greater than Quantity Demanded)

Shortage: QD > QS
(Quantity Demanded is greater than Quantity Supplied)

Marginal revenue: additional income from selling one more unit of good. 

Equilibrium: Point in which supply and demand intersect, at this point resources are used efficiently. 

Disequilibrium: When not used efficiently, not intersecting. 

Price ceiling: government imposed price controlled on how high a price can be charged for a product or service. (EX: Rent control) 

Price floor: government imposed price control on how low someone can charge for a product/service. (EX: Minimum wage) 

Market equilibrium graphs: 

teehee