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Course: 12th Grade Economics, Independent Study Instructor: Mrs. Vega Phone: 212-289-7593 Office Hours: Tues-Thurs, 8:10am-8:45am and by appointment Wikipage: http://tywlsecon.wikispaces.com/ Email: [email protected] Course Description: Economics is the study of how people seek to satisfy their needs and wants by making incentive-based choices. You will learn the fundamental factors used by economists to analyze the economy and then use those factors to research, discuss, and predict how these changing variables will impact the world around us. Assignments All assignments should be typed, double-spaced, with 12-point black font. Reread all papers to correct spelling and grammar. 8 News Article Analyses: Complete one article per the following 4 macroeconomic topics: Wars in Iraq and Afghanistan, the various U.S. fiscal stimulus packages, universal healthcare, education. Microeconomic topics: find two articles where supply shifts; find two articles where demand shifts. For all articles: Print out or make a copy of the article, staple it to the back of your written analysis. Underline the relevant economic factors you will discuss in your paper. Your paper must: o Summarize your article; o State the economic factors being discussed; o Explain the cause of these factors on the economy; o Draw a graph showing the economic impact of these factors. Macroeconomics worksheet (see attached): Use the following sources to find the answers to these questions: Bureau of Economic Analysis, www.bea.gov Bureau of Labor Statistics, www.bls.gov Organisation for Economic Cooperation and Development, www.oecd.org Federal Reserve Bank, www.federalreserve.gov Readings with discussion questions (see attached copies): Robert Heilbroner, “The Worldly Philosophers” a. Introduction & The Economic Revolution b. The Wonderful World of Adam Smith c. The Heresies of John Maynard Keynes d. The Contradictions of Joseph Schumpeter Steven Levitt and Stephen Dubner, “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything” a. Introduction: The Hidden Side of Everything b. What do Schoolteachers and Sumo Wrestlers Have in Common? (attached to Intro) c. How is the Ku Klux Klan Like a Group of Real Estate Agents? d. Where Have all the Criminals Gone? Glossary: Aggregate Demand: the amount of goods and services in the economy that will be purchased at all possible price levels. Aggregate Supply: the total amount of goods and services in the economy available at all possible price levels. Capital Deepening: the process of increasing the amount of capital per worker; this typically results in increased productivity. Consumer Price Index (CPI): a price index determined by measuring the price of a standard group of goods meant to represent the market basket of a typical urban consumer. Contractionary fiscal policy: fiscal policy used to reduce economic growth, often through decreased spending or higher taxes, (often used to reduce inflation or reduce its severity). Cyclical Unemployment: Unemployment that rises during economic downturns and falls when the economy improves. Discouraged Workers: someone who wants a job but has given up looking. Disequilibrium: Any point where the quantity supplied does not equal the quantity demanded. Demand: The desire to own something and the ability to pay for it. Demand Curve: A graph of the quantity demanded of a good by a consumer(s) at various prices. Demand, Law of: Consumers will buy more of a good when its prices are lower and less of a good when prices are higher. Discount Rate: The interest rate that the Federal Reserve charges banks for loans Durable Goods: Those goods that last for a relatively long time, such as refrigerators, cars, and DVD players. Economics: the study of how people seek to satisfy their needs and wants by making incentive-based choices. Equilibrium: The point where supply of a product is equal to demand. Excise Tax: A tax on the production or sale of a good (ex: cigarettes) Expansionary fiscal policy: fiscal policy used to encourage economic growth, often through increased spending or tax cuts. Federal Funds Rate: The interest rate that banks charge one another for loans Fiscal policy: the use of government spending and revenue collection to influence the economy Full Employment: level of employment reached when there is no cyclical unemployment. (NOTE: Zero unemployment is not an achievable goal). Gross Domestic Product: The dollar value of all final goods and services produced within a country’s borders in a given year. (An alternate method of calculating GDP is to add up all the incomes in the economy.) Inflation: general increase in prices across an economy Inflation rate: the percentage rate of change in price level over time. Intermediate goods: Products used in the production of final goods. Macroeconomics: The study of economic behavior and decision-making in a nation’s whole economy. Market Basket: A representative collection of goods and services. Market Supply Curve: A graph of the quantity supplied of a good by all suppliers at various prices. Microeconomics: The study of the economic behavior and decision-making in small units, such as households and firms. Nominal GDP: GDP measured in current prices. Nondurable Goods: those goods that last a short period of time, such as food, light bulbs and sneakers. Price Ceiling: A maximum price for a good or service. Price floor: A minimum price for a good or service. Price index: a measurement that shows how the average price of a standard group of goods changes over time. Price Level: the average of all prices in the economy Purchasing power: The ability to purchase a certain amount of goods and services for a specific price. Quantity Demanded: The quantity of goods a consumer is willing to buy at a given price point. Quantity Supplied: The amount that a supplier is willing and able to supply at a specific price. Real GDP: GDP expressed in constant, or unchanging prices, (i.e., adjusted for inflation, using a baseline year for prices.) Regulation: A government intervention in a market that affects the production of a good. Shortage: When quantity supplied is less than quantity demanded. Surplus: When quantity supplied is more than quantity demanded. Subsidy: A government payment that supports a business or market Supply: the amount of goods supplied Supply, Law of: Producres offer more of a good as its price increases and less when prices fall. Supply Curve: A graph of the quantity supplied of a good by all suppliers at various prices. Underemployment: working at a job for which one is over-qualified or working part time when full time work is desired. Unemployment Rate: the percentage of a nation’s labor force that is unemployed. Microeconomics Economic behavior of a household or specific market is quantified and analyzed graphically through the use of Supply and Demand curves. Factors that shift the supply curve: Cost of production will increase or decrease supply. Below are the most common factors that shift supply. When supply increases, the supply curve shifts forward When supply decreases, the supply curve shifts backward. Wages (Labor): If wages increase, supply decreases If wages decrease, supply increases Cost of Capital: If the cost of capital increases, supply decreases If the cost of capital decreases, supply increases Advances in technology: these typically lower production costs, thereby increasing supply Productivity: If productivity increases, supply increases If productivity decreases, supply decreases Government Influence: Subsidies: this will lower production costs, thereby increasing supply Excise Tax: this will increase the cost of production, thereby decreasing supply. Regulation: typically raises costs of production, thereby decreasing supply. Factors that shift the demand curve: The demand curve represents the various quantities of a good a person will buy at a various market prices. If a consumer’s preferences change, their demand curve will shift. Below are some common factors that shift demand. An increase in demand shifts the demand curve forward. A decrease in demand shifts the demand curve backward. Income: Increase in income increases demand. A decrease in income decreases demand. Population: Increase in population increases demand. A decrease in population decreases demand. Demographics (Composition of popualation): Increase in a specific demographic will increase demand for products related to that demographic. A decrease in a specific demographic will decrease demand for products related to that demographic. Prices: Prices do not shift the supply or demand curve. Supply and demand curves will not move because of a change in price. Changes in price will change the quantity demanded and the quantity supplied. An increase in price will decrease quantity demanded and increase quantity supplied. A decrease in price will increase quantity demanded and decrease quantity supplied. Equilibrium: When equilibrium is reached, the market for a good is stable and both consumers and producers benefit. The market always tends toward a state of equilibrium. When building your graphs, always start at equilibrium, and when demand and/or supply shifts, move your next point to equilibrium. Disequilibrium: This occurs whenever quantity supplied does not equal quantity demanded. Disequilibrium can produce one of two outcomes: shortage or surplus. Shortage: When quantity demanded is greater than quantity supplied. This occurs when the actual price in a market is below equilibrium. In this case, prices will typically rise and some factor(s) of demand and/or supply may shift until the market reaches a state of equilibrium. o Price ceilings are maximum prices on a good/service imposed by the government. (Ex: rent control), in this case the market will be in a constant state of disequilibrium. Surplus: When quantity demanded is less than quantity supplied. This occurs when the actual price in a market is above equilibrium. In this case, prices will typically lower or the producer will decrease quantity supplied, and some factor(s) of demand and/or supply may shift until the market reaches a state of equilibrium. o Price Floors are minimum prices set by the government for a good/services. (Ex: minimum wage.) In this case the market will be in a constant state of disequilbirum. Insert Supply and Demand Graph here. Macroeconomics Economic behavior of the whole economy is quantified and analyzed graphically through the use of aggregate supply and aggregate demand curves. Read the attached sheet on the limitations of GDP: Nonmarket activities, underground economy, negative externalities, quality of life. GDP is measured by the following equation: GDP = C + I + G + NX where C = consumption I = savings and investment G = Government spending NX = exports – imports The same factors that shift supply and demand in microeconomics will shift aggregate supply and aggregate demand in macroeconomics, with a few clarifications: Increased population will not increase GDP unless capital deepening also increases. (Think of countries like India who have a large population but a lower GDP per capita.) Increased human capital (skills and knowledge) will increase aggregate supply. Increased savings and investment will increase aggregate demand, increasing GDP. Increased consumption will increase aggregate demand, increasing GDP. Increased net exports will increase aggregate demand, increasing GDP. Increase in taxes will increase GDP if the additional taxes are used for capital deepening (i.e., investment in infrastructure or public goods). Consumption may decrease as consumers spend less so they can pay their taxes, but investment will also increase, off setting the decrease in consumption. However, if taxes are increased to finance war or pay for noncapital deepening services, than GDP will decrease because consumption will decrease and that decrease will not be off set by investment. Net Exports (NX): in general, GDP increases when exports are greater than imports. The only reason GDP would increase when imports are greater than exports is if those imports are used for capital deepening. (Ex: when the US financed the transcontinental railroad in the mid 1800s, net exports were negative, but this was off set by the investment in the railroad which expandd businesses and promoted new industries, etc). Inflation: If inflation increases than purchasing power decreases. I Effect on income: if wages increase at the same rate of inflation, than purchasing power remains the same. If wages do not than as inflation rises, purchasing power will decrease. Social security payments increase with the rate of inflation. Monetary policy: policies enacted by the Federal Reserve (aka the Fed) to help stabilize and regulate the economy. The Fed can change the federal funds rate and discount rate, which in turn impact interest rates to businesses and consumers. When interest rates decrease, savings and investments increase When interest rates increase, savings and investments decrease Fiscal policy: policies enacted by congress and the president which impact the economy. Expansionary fiscal policy typically increases GDP Contractionary fiscal policy typically decreases GDP Macroeconomics worksheet Activity: Internet Scavenger Hunt for economic data. Task: Use the following websites to answer the questions below. Bureau of Economic Analysis, www.bea.gov Bureau of Labor Statistics, www.bls.gov Organisation for Economic Cooperation and Development, www.oecd.org Federal Reserve Bank, www.federalreserve.gov 1. Unemployment rate for the nation as of October 2009? 2. Average U.S. unemployment rate for the year 2008? 3. What is the consumer price index (CPI)? 4. What was the seasonally adjusted (SA) U.S. city average change in the CPI for the month of September? 5. Why would economists and government officials prefer to look at CPI averages that have been seasonally adjusted instead of at the non-seasonally adjusted index? Fill in the chart below for the Seasonally Adjusted CPI, then answer the question below. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct CPI +.3 6. What can you say about inflation based on the trend in the CPI for 2009 so far? 7. Is the trend in the CPI much different than past years? How do you know? 8. What was the increase of Real GDP for the third quarter of 2009? 9. What is Real GDP? 10. What is nominal GDP? 11. Why would economists and government officials prefer to look at real GDP instead of nominal GDP? 12. Find the National Income and Product Accounts (NIPA) Tables on the bea.gov website. Then, find the Percent Change From Preceding Period in Real Gross Domestic Product table. Fill in the chart below, than answer the following questions. Yr/qtr GDP 2008 I 2008 II 2008 III 2008 IV 2009 I 2009 II 2009 III -.07 13. What does the data say the trend in GDP has been over the last 7 quarters? 14. Find a chart detailing savings as a percentage of disposable personal income for the United States for at least the last 50 years. (Hint: google it.) Describe the recent trend of the savings rate for American citizens. 15. Do you think the savings rate has contributed in any way to our current recession? Explain.