Unit VII

Supply of dollar

• Comes from U.S citizens, banks, and industries wanting to purchase foreign goods, investments, assets, and to make transfer payments to foreigners.

Demand of dollar

• Comes from foreigners, banks, and industries wanting to purchase our goods, investments, assets, and make transfer payments to us.
• Anytime you have a dollar appreciate= Demand increases and supply goes down
• Dollar depreciates= demand down and supply up
• 5 determinants of supply and demand of the foreign exchange market
• Change in buyers taste
• Change in relative income
• Change in relative prices
• Change in interest rates
• Change in expectations
• Fixed rate exchange Is determined by the government.
• Flexible or floating exchange rate are determined by market forces such as supply or demand, and there is little or no government intervention.

Formulas:
Official reserves= capital account + current account
Capital account = Assets + Debits
Current account = balance of trade + net investment + net  transfers
Balance of trade= good and service exports- goods and service imports

Unit V

Short run

• timed to short for wages to adjust to the price level.
• workers may not be aware of changes in their real wages into inflation, and having adjusted their labor supply decisions wage demands accordingly.

Nominal wages

• amount of money received per hour, per day, per year.

Long run AS

•  Time long enough for wages to adjust to the price level.

KEY ASSUMPTIONS

• Represented by a vertical line
• Wages in price are flexible
• Changes in wages and price offset each other.
• Technology and economic growth shift the graph.

Phillips Curve

•  Represents the relationship between inflation and unemployment
• There is a short run trade off between the rate of inflation and the rate of unemployment.
• Aggregate supply shocks can cause both higher rates of inflation and higher rate of unemployment.(srpc shifts to the right or outward)
• There is no significant trade off between inflation and unemployment in the long run.
• If inflation persist and the expected rate if inflation rises then the entire SRPC moves upward.( stagflation is possible or probable)
• If inflation expectations drop due to new technology then the SRPC moves downward.
• Increase in AD = up/left movement along SRPC.
• Decrease in AD = down/right along SRPC
• SRAS increase = SRPC decrease
•  Disinflation
•  when unemployment and inflation both go down.
•  Long Run
• Is represent is represented by a vertical line.
• Only shifts if LRAS shifts
• LRAS shifts with technology and economic growth
• When all the way up top it's called Natural rate of unemployment.
• If rate of unemployment changes then the LRPC can change
• Increases in Un will shift LRPC to right
• Decreases in Un will shift LRPC to the left
• Misery index
• Combination of inflation and unemployment in any given year.
• Single digit is good
• Supply shock
• Rapid and significant increases in resource cost which causes SRAS curve to shift and will produce a corresponding shift in the SRPC curve.
• Increase in wages
• Oil embargo
• Increase in input prices
• Stagflation
• Consistent increase in inflation and unemployment.
• Disinflation
• Decrease in inflation from year to year, and can be seen in the LRPC.
• Prices go down and profits go down.
• Supply side economics Or Reagonomics
• Believe that AS curve will determine levels of inflation, unemployment, and economic growth.
• Supports policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payments. ( Welfare, social security, and unemployment compensation)
• Provide disincentives to work, invest,  and undertake  enterpenour ventures.
• Marginal tax
• Amount of tax paid on a additional income.  ( Being taxed when you get a bonus check)
• Laffer curve relationship
• Higher taxes you have to pay, most likely not to spend)
• Relationship between Tax revenues and government revenue.
• As tax rates increase from 0, tax revenues increase from 0 to some maximum level and then decline.
•  Lower tax rates could lead to an expansion of output and income by increasing AS and enlarging the tax base.

Unit IV- Money

Uses

- medium of exchange (barter or trade)

-unit of account, hives money its economic worth

-store of value

Types of Money

-Representative Money- paper money backed by a tangible product

-Commodity Money- gold and silver coins, gets its value form materials made

-Fiat Money- money because the government said it was

Characteristics of Money 

-Durability - how long is money good for 

-Portability - can carry it anywhere

-Divisibility - can be broken into smaller units

-Scarcity

-Acceptability

M1 Money

- consists of currency in circulation (paper and coins) 

- Checkable deposits- checking accounts, demand deposits (DD)

- Account for 75% of $ in circulation

M2 Money 

- 25 % of money

- Includes savings accounts

- money market accounts

- accounts held by banks outside the U.S

- adding M1 money as well

Formulas

-Assets= Liabilities + Net worth
-Reserve Ratio = (commercial banks required reserves/ commercial banks checkable deposit liabilities)

-Monetary Multiplier = 1 / (required reserve ratio)

- Maximum checkable deposit creation = excess reserves x monetary multiplier

-Single Bank

amount of money single bank cant create (loan out) = ER

AR-RR=ER

-Banking System

Can create money by a multiple of its initial ER

Deposit Multiplier = 1/RR

-System New $

Deposit Multiplier x Initial ER

Total change in the money supply as a result of the deposit

3 Important Issues

- Excess Reserves = actual reserves - required reserves
 -control of lending ability

-asset or liability to which bank

 

Options of Monetary Policy

 - Reserve Requirement- the % that is set by the FED of the minimum reserves that a bank must keep; decrease - expansionary monetary policy; increase - contractionary monetary policy'
- Discount Rate- the rate of interest that the FED charges for overnight loans to banks; decrease    - expansionary monetary policy; increase - contractionary monetary policy

- Federal Fund Rate- the rate that FDIC members charge each other for overnight loans; decrease    -  expansionary monetary policy; increase - contractionary monetary policy
- OMO (Open Market Operation):

Buy or sell securities (bonds) – “FED”

FED buys bonds - expand money supply (expansionary)
FED sells bonds - decreases money supply (contractionary)

Prime Rate- the interest rate that banks charge their most credit worthy borrowers

Unit 4 video question

http://youtu.be/QA9xaPcEi2E

Video Notes

Video One

There are three types of money in the money market. These three types of money are the commodity, representative, and the fiat money. In commodity money (cosidered the most primitive type of money), people are able to their trade goods with other goods. With representative money, the currency represents a specific quantity of metal (gold and silver). Finally fiat money is money that is only backed by the government's word.

Video Two

When you label a money market graph, you must have the acis correctly labeled. The y-axis is should always be labled "Interst rate", while the x-axis is labled "Price Quantity". Like always demand is downward sloping. The money supply should be vertical since it does not vary baed on the interest rate. Shifting the demand or supply will change the interest rate and price quantity accordingly. 

Video Three

THere are two main optionsfor the FED when it come to money supply, which is expansionary and contractionary. Expansionary is typically used during a recession while the later is enforced during an inflationary period. Th percent of cash that a bank need to store in "reserve" is known as the reserve requirement. In order for the FED to raise the money supply, they would need to lower the reserve requiremtent. Another tool the FED may use is the discount rate, which is the rate in which banks may borrow money from other banks. The final method used by the FED is the buying and selling of bonds. To increse the money supply the FED would buy bonds, but if they which to lower the money supply they would have to sell bonds.

Video Four

On the y-axis of the loanable funds markey graph is interest while the x-axis is quantity. Again the demanad is downward sloping, and the supply is upward sloping. The supply in a loanable funds market graph is dependent on savings. The more money saved by the banks, the more they can giveout as loans. 

Video Five

In order to determine the total cash created in a certain loan amount, you must determine the money multiplier (1/rrr). You then multiply the money multiplier with the loan amount which gives the total money created. This process is called the money creation process and states that banks create money by making loans. THis process assums that there is no excess reserve

Video Six 

The loanable funds, money market, and AD-AS mdel graphs all have a direct relationship with one another. This means a change in one will graph will affect the remaining two. An increase in interest rate will also increse the price leve This relationship is known as the Fisher effect. 

Fiscal Policy

• Changes in the expenditure or tax revenues of the federal government
• 2 tools of fiscal policy
•  taxes: gov't can increase or decrease
•  spending: gov't can increase or decrease
• Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Defecits, Surpluses, & Debt

• Balanced Budget: revenue = expenditures
• Budget Deficit: revenue < expenditures
• Budget surplus: revenue > expenditures
• Gov't Debt: sum if all deficit - sum of all surpluses
• Gov't must borrow money when in a budget deficit from:
• Individuals
• Corporations
• Financial institutions
• Foreign Entities

2 policies

• DISCRETIONARY FISCAL POLICY: (action)
• Expansionary: think deficit
• Contractionary: think surplus
• NONDISCRETIONARY: (Nonaction)
• Discretionary: Increase or decrease in gov't spending and/or taxes in order to return the economy to full employment
•  Automatic: unemployment compensation & marginal tax rates are examples that help miligate the effects of recession & inflation
• Contractionary: decrease AD (control inflation)
• Expansionary: increase AD
• Expansionary:
• Recession is countered with this policy
•   (Increase gov't spending, decrease taxes)
• Contractionary: inflation is countered (decrease gov't spending, increase taxes)
• Automatic or built in stabilizers
• anything that increases the gov't budget deficit during a recession & increase budget surplus
• doesnt requiring action from policymakers

Tax Systems:

• Progressive: avg tax rate (tax revenues/GDP) rises with GDP
• Proportional: avg tax rate remains constant as GDP changes
• Regressive: avg tax rate that falls with GDP

Consumption & Saving

•  Disposable Income
• Income after Taxes or net income
• DI = Gross income - taxes
• 1. Consume (spend money on goods & services)
• 2. Save

Consumption

• Household spending
• Ability to consume is constrained by
• the amount of disposable income
• the propensity to save
• Do households consume if DI = 0
• Autonomous consumption
• Dissaving
• APC = C/DI = percent DI that is spent
• (Avg propensity to consume)

Saving

• Household not spending
• The ability to save is constrained by
• the amount of disposable income
• the propensity to consume
• Do households save if DI = 0
• NO
• APS = S/DI = percent DI that is not spent
• (Avg propensity to save)
• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 .:Dissaving
• -APS = .: Dissaving

MPC & MPS

• Marginal Propensity to consume
• change in C/change in DI
• Percent of every extra dollar earned that is spent
• Marginal Propensity to Save
• change in S/change in DI
• percent of every extra dollar earned that is saved

Determinants of Consumption and Savings 

• WEALTH
• EXPECTATION
• HOUSEHOLD DEBTS
• TAXES

Spending Multiplier Effect

• An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or in aggregate demand
• Multiplier = change in AD / change in spending
• Why does this happen?
• Expenditures & income flow continuously which sets off a spending increase in the economy

Calculating the Spending Multiplier

• The Spending multiplier can be calculated from the MPC or MPS
• 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

• money is now leaving the circular flow
• Tax Multiplier = -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

Aggregate Supply and Demand Graph

Macro 3.2- Aggregate Supply Practice

Aggregate Supply

Long run vs. Short run

• Long run: period of time where imput prices are flexible and adjust to changes in price level
• The level of real GDP supplied is independent of the price level
• (Vertical at full employment)
• SHORT RUN: (goes to the sky)
• period of time where input prices are sticky and do not adjust to changes in price level
• level of real GDP supplied is directly related to price level

Changes in Short Run Aggregate Supply

• An inc in SRS is seen as a shift rk the right. SRAS →
• A Decrease in SRAS is seen as a shift to the left. SRAS ←
• The key to understanding shifts SRAS is per unit cost of production
• Per unit cost of production=total input cost/total output

Determinants of SRS

Input Prices:

• deals with wages (75 percent) & raw materials, foreign resource prices (ex: strong $ = lower foreign resource price), and marker power (ex: monopoly)
•  increase in resource Prices=SRAS decrease ←
•  decrease in resources prices = SRAS inc →

Productivity

• Productivity=total output/total input
• more productivity = lower unit production cost = SRAS →
• Lower productivity = higher unit production cost = SRAS ←

Legal-Institutional Environment

• Taxes & Subsidies
• Taxes ($ to gov't) on business increase per unit production cost = SRAS ←
• Subsidies ($ from Gov't) to business reduce per unit production cost=SRAS →
• Gov't Regulations
• Gov't Regulations creates a cost of compliance = SRAS ←
• Deregulation reduces compliance cost = SRAS →

Full Employment

• Full employment equilibrium exists where the AD intersects SRAS and LRAS at the same point
• Recessionary Gap
• Exists when equilibrium occurs below full employment output
• Inflationary Gap
• Exists when equilibrium occurs beyond full employment output
• AD increase = real GDP, inflation , price level increases (unemployment decreases) 
•  Increase in SRAS ←: real gDP increase; inflation, price level

Macro Aggregate Demand Practice

Aggregate Demand

Aggregate Demand

• Shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price range.
• - The relationship b/w the price kevel and the level of real GDP is inverse.
• (X axis): PL for price level
• (Y axis): GDPr for Real GDP

 Reasons AD is Downward Sloping

• Real balances effects
•  when the price level is high, households and businesses cannot afford to purchase as much output
• When the prices level is low households and businesses can afford to purchase more outputs
• Interest Rate effect
• A higher price level increases the interest rate which tends to discourage investment
• A lower price level decreases the interest rate which tends to encourage investment
• Foreign Purchases effect
• A higher price level increases the demand for relatively cheaper imports
• A lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts in Aggregate Demand (AD)

• There are two parts to a shift in AD
• a change in C, Ig, G and /or Xn
• A multiplier effect that the produces a greater change than the original change in the 4 components
• Increase in AD=AD →
• Decrease in AD = AD ←

Determinants of AD

CONSUMPTION

• House spending is affected by
• Consumer Wealth
•     More wealth = more spending (AD shifts →)
•     Less Wealth = less spending (AD shifts ←)
• Consumer Expectations
•      Positive expectations = more spending (AD shifts →)
•      Negative expectations= less spending (AD shifts ←)
• Household Indebtedness
•      Less debt = more spending (AD shifts →)
•      More debt = less spending (AD shifts ←)
• Taxes
•      Less taxes = more spending (AD shifts →)
•      More taxes = less spending (AD shifts ←)

GROSS PRIVATE INTEREST RATE

• Interest Spending Is Sensitive to:
• The Real Interest Rate
•    Lower interest rate = more investment (AD→)
•    Higher int. Rate = less investment (AD ←)
•    Expected Returns
•      Higher expected returns = more investment (AD→)
•     .Lower exp. Returns = less investment (AD ←)
• . Weak foreign economic = less exports = (AD ←) Returns are Influenced by:
• Expectation of future profitability
• Technology
• Degree of excess Capacity (existing stock of capital)
• Business Taxes

GOVERNMENT SPENDING

• ·More gov't spending (AD →)
• ·Less gov't spending (AD←)

NET EXPORTS

• Net exports are sensitive to:
• Exchange rates (international value of $)
•   Strong $ = more imports and fewer exports = (AD ←)
•   Weak $ = fewer imports and more exports = (AD→)
• -Relative income
• . Strong foreign economic = more exports = (AD→)

GDP and Inflation

GDP

• Market value of all final goods and services produced within a nation in a given year
• Whats not included?
• Intermediate Goods
• Goods that require further processing before final 
• Used (or Second Hand) Goods
• Purely financial Transactions (Stocks and Bonds)
• Unreported business activity
• Illegal Activites
• Nonmarket Activity (Volunteering or Babysitting)
• Transfer Payments. (Scholarships, Welfare etc)
• Whats included?
• C- Personal Consumption Expenditures
• IG- Gross Private Domestic Investments
• New Factory epuipments, Factory Equipment Maintenance etc.
• G- Government Spending (20% of the Economy)
• XN- Net Exports (Exports-Imports)
• Ways to Calculate GDP
• Expenditure Approach
• Add up  all spending on Final Goods and Services produced in a given year
• Formula: GDP=C+IG+G+XN
• Income Approach
• Add up all income that resulted from selling all final goods and services in a given year
• Formula:
  GDP=Wages+Rents+Interest+Corporate Profits+Indirect  Business Tax+Depreciation
• Net Domestic Product: (NDP)
• GDP-Depreciation
• Net National Product: (NNP)
• GNP-Depreciation
• GNP=GDP+Net Foreign Factor Payment
• Budget:
• Gov't purchase of Goods and Services+Tansfer Payments-Gov't Tax and Fee Collection
• If you recieve a number less than zero there is a surplus
• If you recieve a number greater than zero there is a deficit
• Trade:
• Exports-Imports
• If you recieve a figure less than zero there is a Deficit
• If you revieve a figure less than zero there is a Surplus
• National Income
• Comp. of Employee+Rents+Interest+Proprietors income+Corporate Profits
• or, GDP-Indirect Business Taxes-Depreciation-Net foreign factor pay
• Disposable Personal Income
• National Income-Personal Household Taxes+Government Transfer Rights
• Nominal GDP (Inflation)
• Value of output produced in current crisis
• Can increase from year to year if output or price increase
• Real GDP
• Value of output produced in constant or base year crisis
• Adjusted for Inflation
• Can increase from uear to uear only if output increases
• Used to measure real Economic Growth
• GDP deflator





• Price index used to adjust from Nominal to Real GDP
• Nominal GDP/Real GDP x 100
• In base year GDP deflator aleays equals 100
• For years after base year GDP deflator is greater than 100
• For years prior to base year, GDP deflator is less than 100
• Ex:

• Consumer Price Index (CPI)
• Most commonly used measurement for iinflation
• Measures cost of market basket of goods for a typical Urban American Family
• Cost of Market Masket of Goods in given year/Cost of Market basket of Goods in Base year x 100
• Inflation
• Price index in year 2-Price Index in year 1/Price index in year 1 x 100
• Interest Rate 
• Nominal Rate
• % of increase in money the borrower must pay lender for loan
• Not adjusted for Inflation
• Fisher Method: Nominal Interest rates= Expected Interest+Inflation pay
• Real Interest Rate
• % increase in Purchasing power borrower must pay lender for loan
• Adjusted for Inflation
• Nominal Interest Rate-Inflation=Real Interest Rate
• Cost of Living Adjustment (Cola)
• Gives automatic wage increase when inflation occurs
• Unemployment 
• Failure to use available resources, particularly labor, to produce desired goods and services
• Labor force
• 16 years of age
• Able and Willing to Work
• Employed and Unemployed
• Not in Labor Force
• Military
• Students
• Retirees
• Disabled
• Jailed People
• Mental Institutionalized people
• Homemakes
• Those Not looking for work
• Unemployment Rate
• Ideal= 4-5% (Full Employment)
• number of unemployed/number of employed and unemployed
• Type of Unemployment
• Frictional Unemplloyment (Temporarily Unemployed)
• Have transferable skills
• Searching for better opportunity ex: students
• Structural
• Changes in structure of labor force making skill/jobs obsolete
• Don't have transferable skills
• Seasonal Unemploymeny
• Work depends on time of year and nature of job
• ex: school bus drivers 
• Cyclical Unemployments
• Results from economic downturns or recession
• As demand for goods and services fall, demand for labor falls as well
• Frictional + Structural = Natural Rate of unemployement
• Totally unavoidable
• Full employment means there are no Cyclical unemployment 
• GDP Gap
• The amount vy which actual GDP  falls short of Potential GDP
• Okons Law
• For every 1% in which actual unemployement rate exceeds the Natural rate of unemployment a GDP gap of 2% exists
• Rule of 70
• Used to determine the years it takes for a valur to double, given a particular anneal growth rate by deviding 70 by the percentage given.

Circular Flow Video Explanation

http://study.com/academy/lesson/circular-flow-of-economic-activity-the-flow-of-goods-services-resources.html

Circular Flow of the Macroeconomy

Circular flow represents transactions within an economy.

• Product Market
• The place where goods and services are produced by businesses
• Factor Market
• The place where households sell resources, and businesses buy resources
• Ex: Rent/Land and Higher workers
• Firms
• Organizations that produce goods and services for sale.
• Household
• Person, or group of people that share their income
• Money and Goods and Services flows are clockwise

Price Elasticity of Demand

Quiz

Supply and Demand Quizlet

https://quizlet.com/10979793/learn

Supply and Demand

Demand

• Demand is the quantities people are willing and able to buy at various prices.
• The Law of Demand:
• There is an inverse relationship between price and quantity demands
• As price increases, Quantity Decreases
• Change in price causes a "change in quantity demanded"
• What Causes Change in Demand??
• Change in Buyres Taste (Advertisements)
• Change in number of buyers (Population)
• Change in Income (Normal/Inferior Goods)
• Normal Goods: An increase in income, leads to increase in demand
• Inferior Goods: In increase in income, leads to decrease in demand
• Change in Price of Related Goods (Complementary/Substitute)
• Complementary: Oftenn associated with the product (Peanut Butter and Jelly)
• Substitute: Can be used instead of product (Coke and Pepsi)
• Change in Expectation (Future)

Supply

• Supply is the qualities producers or sellers are willing and able to produce at various supply
• There is a direct relationship between price and quantity supply
• Change in price also causes a "change in quantity supplied"
• What Causes change in supply??
• Change in technology
• Change in weather
• Change in cost of production
• Change in number of sellers 
• Change in taxes or subsidies
• Change in expectation

Supply and Demand Graph

Price Ceiling and Floor

(Production Possibility Frontier/Curve, PPF, PPC) Why can't things be free?

Trade Offs and PPC's

Trade Off

• Alternatives we give up whenever we choose one course of action over another.
• Opportunity costs
• Next Best Alternatives 
• Fixed Costs
• Costs that don't change no matter how is produced
• Ex: Rent, Mortgage
• Variable Cost
• Cost that rises or falls depending upon how much is produced 
• Ex: Electricity
• Marginal Cost
• Cost of producing one more 
• Unit of good

PPC

Macroeconomics Unit 1 Intro: Basic Economic Concepts (AP Macro)

Intro to Macro

Macro-economics                       V.                    Micro-economics

• The Study of the economy as a whole                          The study of individual or specific units                                                                                          of economy
• Looking at the "big Picture"                                         Supply and Demand
• Inflation                                                                        Market Sructure
• Wage low                                                                     Business organization    
• International Trade

Positive Economics (facts)                        V.           Normative Economics (Opinion)

• Attempts to describe the world "as is"                   Attempts to describe the world as it should be
• Very descriptive in nature                                      "Aught to be"
• Collects and presents facts                                     "should be"

Needs                                                         V.                                                         Wants

• Basic Requirements for survival                                      Desires of Citizens

Goods                                                        V.                                                      Service

• Tangible Commodities                                                    Work Performed by someone else
• something you can touch
• Capital Goods: Item used in creation                                                                                            of other goods         

• Consumer goods: Intended for final                                                                                 consumer

Scarcity                                                     V.                                                     Shortage

• Fundamental problem all societies face                   Quantity Demanded Greater than that                                                                                             supplied 
• Trying to satisfy unlimited wants w/                                                                                       limited resources                                            

                           Factors of Production

• Land
• Labor
• Capital
• Human:Knowledge, skills, Abilities, Talents aquired through education or experience.
• Physical: Tools, Machines, Factories, Robots, Trucks
• Entreprenuership