Product Market

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Conceptual Framework

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Inflation- general rise of prices

nominal interest rate

% increase in purchasing power that a borrower pays the lender

% increase in money that a borrower pays the lender

cost-pull

rising prices in terms of per- unit cost

hyperinflation

rapid inflation

unanticipated

core

demand-pull

demand bids up prices of limited output

real income

amount of goods and services nominal income can actually buy

nominal income/price index

nominal income

amount of money received as wages, rent, interest, or profit

Shifts of investment demand curve

acquisition

business taxes

stock of capital goods

planned inventory changes

technological changes

Non-income determinates

real interest rate

wealth

Consumption and Saving

International trade

types of goods

capital intensive goods

land intensive goods

labor intensive goods

restrictions

export subsidy

voluntary export restriction

nontariff barrier

import quotas

tariffs

Trade Deficit: Imports> exports

multinational trade agreements

WTO, EU, NAFTA

reasons for trade

products are differentiated

efficient production

distribution of resources

gains

greater output

improved alternatives

Trade Surplus: imports < exports

shortcomings of GDP

environment

nonmarket activities

underground economy

non economic sources of well being

improved product quality

distribution of output

leisure activities

intersection of AD/AS = equilibrium price level and real output

changing reserve ratio

changes amount of excess reserve

restrictive monetary policy

changes size of monetary supply

expansionary monetary policy

isolation from political pressure

speed and flexibility

Money Creation

fractional reserve system

excess reserve 9actual reserve - required reserve)

reserve ratio (>20%)

required reserve

monetary policy

transactions demand for money

Asset Demand for Money

bank transactions to create money

7. buying government security

6. granting a loan

5. clearing a check drawn against the bank

4. depositing reserves in a Fed Reserve bank

3. accepting deoposits

2. acquiring property and equipment

1. create a bank

tools of monetary supply

Selling securities

open market operations

Monetary multiplier

interest yield

bond/interest rate

interest

Money

Purchasing power

$V- 1/P

Money M2

M1 + savings deposits, including MMDA + small denominated time deposits +MMF held by individuals

Federal Reserve Banks

Liabilities

federal reserve notes outstanding

treasury deposits

reserves to commercial banks

Assets

loans to commercial banks

securities

Fed Functions

controlling the money supply

acting as a fiscal agent

supervising banks

lending to financial solutions

proving for check collections

setting reserve requirements

issuing currency

Financial Services industry

investment banks

mutual fund companies

security funds

thrifts

insurance companies

commercial banks

Money M1

currency + all checkable deposits

Problems with Fiscal Policy

political consideration (using policies to boost votes)

offsetting local/state finances

Timing

operational lag (seeing effects)

administrative lag (getting policy)

recognition lag 9seeing what's happening)

Future policies/ reversals

Contractionary FP

- gov't spending, + taxes

decrease aggregate demand

when demand-pull inflation occurs

Expansionary FP

+ gov't spending, - taxes

raise real gdp

when recession occurs

increased taxes

less government spending

Budget Surplus

Budget Deficit

less taxes

increased government spedning

Fiscal Policy

built in stabilizers

tax systems

Regressive: rate falls as GDP falls

Proportional: rate stays the same as GDP rises

progressive: avg rate= tax revenue/ GDP

Public Goods

Quasai- Public Goods

nonrivalry

nonexcludability

"Free Rider Problem"

externality

Government

time horizons

short run

input is fixed and output may vary

long run

input and output are variable

immediate short run

input and output prices are fixed

Factors that shift the AS curve

price of imported goods

Legal- Institutional environment

productivity

input prices

expected returns

personal taxes

consumer wealth

expectations

borrowing

Factors that shift the AD curve

net export spending

investment spending

consumer spending

government spending

Downward sloping because:

foreign purchases effect

interest rate effect

real balance effect

Supply- side shocks (changes in resource prices, political events, natural disasters, new technology)

Demand- side shocks (taxes, unemployment, financial instability)

Phases

Expansion

Trough

Recession

peak

=Unemployed/Work Force

Work Force= 16+, not in jail, not in active service, not retired, actively searching for a job

Types of Unemployment

Cyclical: Unemployed because of less spending

Frictional: Those looking for a new job

Structural: difficult to find new jobs without retrain, relocate, etc

Phillip's Curve

inverse relationship between unemployment and inflation

Multiplier effect= change in GDP/ initial change in spending

GDP per capita= GDP/population

Economic Growth

approx # of years to double real GDP

modern economic growth

increase GDP over time

increasing returns

economic scale

determinates of growth

supply factors

demand factors

efficiency factors

Calculating GDP

Expenditures approach. COGS

Income Approach

Nominal GDP

In Current U.S. $'s

Real GDP

Inflexible "sticky prices." Causes fluctuations in GDP

Nominal GDP/ price index

Adjusts for inflation

GDP (Gross Domestic Product)

Types of Markets

Traditional: Relies on customs, religion, etc.

Market: Consumers choose what they buy (invisible hand)

Mixed: Mix of Command and Market

Command: Government determines how things are made/sold

Equilibrium- Where supply and demand intersect. Where the price is right

change in technology

change in resource costs

change in price of other goods

change in taxes

Change in number of sellers

change in producer expectations

Supply failures

Producer Surplus

what producers are willing to get paid vs what they actually get paid

Law of Supply

As price falls, quantity supplied falls

As price rises, quantity supplied rises

Demand Failure

Consumer surplus

what consumers are willing to pay vs what they actually pay

Determinates

change in # of consumers

change in consumer tastes

change in price of related goods

change in income

change in consumer expectations

Law of Demand

As price falls, quantity demanded rises

as price rises, quantity demanded falls

Demand: amount consumers are able/willing to buy at given price

Supply: amount producers are able/willing to sell at given price

money income 9wayes, rent, interest, profit, etc)

resources- factors of production (land, labor, capital, entrepreneurial)

costs (labor, PPE, etc)

resources

goods and services

revenue (cash, credit, crytocurrency, etc)

consumption expenditure

Resource Market

Income

Unemployment

business/firm/producer

Partnership

2+ people

Corporation

Independent Legal entity

buy resources, sell products

Goal: Maximize profit

individual/household/consumer

sell resources, buy products

Goal: Maximize utility

Product Market

Aggregate Supply

Aggregate Demand

The Business Cycle

households buy/ business sell

scarcity

"No free lunch

Opporutnity costs

trade offs

Supply and Demand

Markets: Where buyers and sellers come together to exchange goods and services