Download Review - Leon County Schools

Review
A. Chapter 1: The Nature and Method of Economics
a. Economics
i. Efficient use of scarce resources to achieve the maximum
satisfaction of economic wants
b. Utility
i. Term used for satisfaction or personal gain
c. Ceteris Paribus
i. All things held equal
d. Macro - economy as a whole
e. Micro - specific areas of the economy
f. Positive Economics
i. What it is
g. Normative Economics
i. What it ought to be
h. Fallacy of Composition
i. What is good for one is not good for everyone (i.e. standing up at
a football game so you can see better; good if you do it, but if
everybody does it then it becomes not good)
i. Production Possibility Curve
i. Outward shift indicates growth
ii. Effect of international trade would increase
or allow growth of the production
possibilities curve, shifting it outward.
B. Chapter 2: The Economizing Problem
a. Factors of Production
i. Used to create a business
1. Land
2. Labor
3. Capital
a. physical – tools
b. human – knowledge and skills that one has
4. Entrepreneurial Ability
a. normal profit – salary for owner/entrepreneur
b. economic profit – anything above the pronounced
salary
b. Law of Increasing Opportunity Cost
i. As I make more of one thing, my opportunity cost to produce
something else increases (i.e. illustrated on a Production
Possibility Curve)
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c. Allocative efficiency
i. Create the most good or services for the smallest amount of
money
ii. Best bang for your buck
d. Economic Systems
i. Market System/Capitalism –market decides what to make
ii. Command System – government decides what to make
iii. Mixed Market Economy
1. Products are determined by government and the free
market
2. This is the one that the United States has
e. Circular Flow Model
i. See diagram
C. Chapter 3: Individual Markets: Supply and Demand
a. Demand
i. Law of Demand
1. P↑ : QD↓
ii. It is the mindset of the buyer
iii. Change in quantity demanded - based on price and is movement
on the same curve. If the price gets raised from $2 to $4 dollars
then people will have gone from demanding 8 to demanding 4
therefore creating a “change in quantity demanded”
iv. Change in demand –the entire curve shifts
1. Due to:
a. taste preferences
b. number of buyers
c. income levels
i. normal good –buy more of when you have
more money
ii. inferior good-buy less of when you have
more money
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2. prices of related goods
a. substitute goods – good that can replace one
another
i. i.e. Coke for Pepsi
ii. The price of one goes up, the demand for
the other goes up
b. complimentary goods – goods that go together
i. macaroni and cheese
ii. the price of one goes up, the demand for
both goes down
b. Supply
i. Law of Supply
1. P↑ : QS↑
ii. Mindset of the producer
iii. Change in quantity supplied is based on price level and is
movement on the same curve. If the price gets raised from $2 to
$4 dollars then the business will have gone from supplying 2 to
supplying 4 therefore creating a “change in quantity supplied”
iv. Change in supply – the entire curve shifts
1. Due to:
a. Resource prices
i. Resources prices increase, supply decreases
b. Technology
i. Increases supply
c. Taxes and subsidies
i. Taxes decrease supply
ii. Subsidies increase supply
d. Price expectations
i. Supply more when its price is higher
ii. Supply less when price is lower
e. Number of sellers
i. More companies equals more supply
ii. Shoes vs. hospitals
 More shoe stores selling shoes than
hospitals providing doctors. With
that being said, you have a larger
supply of shoes than you do doctors
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c. Equilibrium
i. Defined
1. Where supply and demand intersect you will get the
“equilibrium” price and output
ii. Shifts and Equilibrium
1. as supply and demand shift due to changes in their
respective determinants, where the two lines intersect, you
will find equilibrium price and quantity
iii. Price Ceiling
1. The maximum price a seller can charge for a good or
service
iv. Price Floor
1. The minimum price a seller can charge for a good or
service
v. Surplus
1. when the quantity supplied exceeds the quantity
demanded
a. occurs when the price level is set above
equilibrium
b. In this example: if price level is set at $6, there will
be a surplus of 4 units
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vi. Shortage
1. when the quantity demanded exceeds the quantity supplied
a. occurs when the price level is set below
equilibrium
b. In this example: if price level is set at $2, there will
be a shortage of 4 units
D. Chapter 4: The Market System
a. Specialization
i. Makes use of different abilities
ii. Fosters learning by doing
iii. Saves time
b. Economic Questions
i. What will be produced
ii. How will it be produced
iii. For whom to produce it for
iv. How will the system accommodate change
c. Creative Destruction
i. Creation of one thing destroys the market for another
ii. The dvd destroyed the market for tape players
d. Invisible Hand
i. Natural forces that are profit driven will move the factors of
production to where they will be utilized to gain the most profits
E. Chapter 5: The U.S. Economy: Private and Public Sector
a. Functional Distribution of Income
i. How all of the money in the nation is divided up (how money is
earned-rent, salary, interest etc.)
b. Personal Distribution of Income
i. How the nation’s money is divided up between households
c. Durable Goods
i. Expected life of 3 or more years
ii. i.e. car
d. Nondurable Goods
i. Expected life of less than 3 years
ii. i.e. apple
e. Businesses
i. Sole proprietorship
1. single owner
2. unlimited liability- can go after personal assets
ii. partnership
1. 2 or more owners
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2. limited liability – cannot go after the owners’ personal
assets if the company declares bankruptcy or if there is a
lawsuit filed against the firm/business
iii. Corporations
1. stock holders own it and run by boards
2. principal agent problem – owners’ and boards’ desires may
contradict one another
iv. Externalities/Spillovers
1. 3rd party affected positively or negatively by businesses
2. i.e. highway is installed behind your house
F. Chapter 6: The United States in the Global Economy
a. Flows
i. Goods and service/ trade flow
1. Goods and services internationally being bought and sold
or “traded”
2. Shoes and doctors
3. Current Account (micro section of your text: pg. 712)
a. The difference between imports and exports of
goods and services for a nation
ii. Capital and labor/ resource flow
1. Factories and workers working over seas
2. Honda and Mercedes factory in the U.S.
3. Capital Account (micro section of your text: 714)
a. The difference between the importation and
exportation of capital for a nation.
i. i.e. our number of factories in another
country versus their number of factories in
our country
b. Official Reserve Account (micro section of
your text: 713)
i. Subdivision of the capital account that is
used to balance out any trade deficits.
Meaning, if there is a -$15b trade balance
then the Official Reserve Account will
provide $15b to counter the deficit and
create a balance of trade.
iii. Information and technology flow
1. Information exchange
iv. Financial flow
1. Currency exchange
b. Comparative Advantage (pg. 97)
i. Who does it cost less for to produce
c. Absolute Advantage
i. Who can produce more regardless of cost
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d. Foreign Exchange Market (pg. 100)
i. Where currency is exchanged
ii. Exchange rate is determined through the supply and demand for
that currency in the international market
1. i.e. You want a product in Mexico
a. First you must convert the dollar into a peso
b. The demand for pesos will now increase in
relationship to the dollar
c. The supple of dollars will increase in relation to the
peso
d. Each currency will have its own graph.
G. Chapter 7: Measuring Domestic Output and National Income
a. Gross Domestic Product (G.D.P)
i. Total market value of all final goods and services produced within
a country’s borders in a given year
ii. Only final goods count, not intermediate goods (goods used to
produce the final good)
1. i.e. brakes when building a car, only count for the sale of
the car, since the sale of the car will also carry the price of
the brakes
iii. How GDP is Calculated
1. Income Approach
a. calculates g.d.p. through adding everyone’s income
2. Expenditures Approach
a. calculates g.d.p. through adding everyone’s
expenditures
b. G.D.P. = Ca + Ig + G + Xn
c. Disposable Income
i. How much money you have after your taxes
come out
iv. Nominal GDP
1. gdp that has NOT been adjusted for inflation
2. Nominal GDP = (current price)(quantity sold)
v. Real GDP
1. GDP that has been adjusted for inflation
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2. Real GDP (current output or quantity sold)(base year
price)
vi. Price Index
1. calculates inflation
2. = (nominal gdp / real gdp)100
vii. Shortcomings of G.D.P.
1. does not account for
a. nonmarket activities (fixing up the house, or
cleaning up the neighborhood
b. leisure time and recreation
c. improvements in product quality
d. the underground economy; crime rates
H. Chapter 8: Introduction to Economic Growth and Instability
a. Business Cycle
i. Peak
1. highest point
ii. Recession/Contractionary
1. decline in output, income, trade, and employment
iii. Trough
1. lowest point of a recession
iv. Recovery/Expansionary
1. Upward swing of the business cycle
b. Unemployment
i. Defined as anyone able and willing, looking for a job
ii. Unemployment Rate = (unemployed/labor force)100
iii. Labor force
1. You do not count in the labor force if you give up looking
for a job
a. Individuals who give up looking for a job are
known as “discouraged workers”
b. Discouraged workers understate the unemployment
rate since these are people who want to work but
have given up trying to find a job
iv. Types of Unemployment
1. Frictional Unemployment
a. have skills the market wants but can’t find a job (ie.
just graduated from college)
2. Structural Unemployment
a. do not have the skills the market desires (ie. vcr
repairman)
3. Cyclical Unemployment
a. a result of a recession; not enough money in the
business to keep you employed
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v. Full Employment/Natural Rate of Unemployment
1. everyone who wants a job has one (healthy unemployment
rate = 4-6%)
2. Graphically illustrated as:
3. If aggregate demand intersects aggregate supply to the
right of full employment output that is found in the middle
of the intermediate range of aggregate supply, then the
unemployment rate would be lower than 4-6% since we
would need to employ more people to create the larger
number of gdp/output
4. If aggregate demand intersects the aggregate supply curve
to the left of full employment output then the
unemployment rate would be higher than 4-6% since not
as many employees would be needed to create a smaller
number of g.d.p./output
c. Positive GDP Gap
i. Over producing in an economy
ii. Gap between what you are producing and
what you should be producing
1. may lead to inflation
d. Negative GDP Gap
i. Under producing in an economy
ii. Gap between what you are producing and
what you should be producing
1. usually a result of a recession
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e. Inflation Types
i. Demand Pull Inflation
1. Prices rise as a result of excess demand
ii. Cost Push Inflation
1. Result of a rise in production costs leading to a decrease in
supply or a negative supply shock
f. Consumer Price Index (Market Basket)
i. Used to measure inflation
ii. A theoretical basket of the average suburban household purchases
in a given year
iii. Nominal Interest Rate
1. Rate of interest charged that has the an inflation premium
included
a. Inflation Premium
i. anticipated annual inflation rate
2. Nominal Interest Rate = (Inflation Premium) + (Real
Interest Rate)
iv. Real Interest Rate
1. The fee for borrowing money
v. International Effect
1. Higher Interest Rates
a.
I. Chapter 9: Basic Macroeconomic Relationships
a. APC
i. Average propensity to consume
ii. Used to find the percentage that is spent of one’s disposable
income
iii. = C/DI (consumption divided by disposable income)
1. Disposable income is your income after taxes are taken out
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b. APS
i. Average propensity to save
ii. Used to find the percentage that is saved of one’s disposable
income
iii. =S/DI (savings divided by disposable income)
c. MPC
i. Marginal propensity to consume
ii. ∆C/∆DI
1. Change in consumption divided by the change in
disposable income
2. Used to compare the difference in spending habits when
income levels change
d. MPS
i. Marginal propensity to save
ii. ∆S/∆DI
1. Change in saving divided by the change in disposable
income
2. Used to compare the difference in saving habits when
income levels change
e. Multiplier
i. How much does an initial transaction spread throughout the
economy
1. i.e. I buy a shirt for $20, that person now has $20 to buy
what they want and the next person now has $20 to buy
what they want etc.
ii. = 1/MPS
1. Used to determine what the multiplier is
f. Investment Demand Curve
i. Illustrates the amount a firm is willing to invest based on the
interest rate
ii. Downward sloping
iii. Shifts rightward or leftward due to:
1. Expected rates of return
a. Return rate increase, curve shifts right
2. Business Taxes
a. Taxes increase, curve shifts left
3. Technological Change
a. New tech., curve shifts right
4. Stock of Capital on Hand
a. Lots of stock, curve shifts left
5. Expectations
a. Expanding industry, curve shifts right
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J. Chapter 10: The Aggregate Expenditures Model
a. Equilibrium GDP
i. When total expenditures = gdp
b. Disequilibrium
i. When total expenditures ≠ gdp
c. Multiplier
i. Works the same for AD and Aggregate expenditures as it does for
consumption from Chapter 9
ii. Meaning, if there is “disequilibrium” of $100 billion, then you
must divide the multiplier into that $100 billion to figure out how
much money must be added or taken out to acquire “equilibrium”.
To look at it from the opposite approach; If the government
“injects” $20 billion into the economy and there is a multiplier of
5, then that $20 billion will spread or “multiply” into $100 billion
(20 x 5 = 100).
d. Injections
i. Ways that money finds its way into the economy unexpectedly
1. Investments
2. Exports
3. Government spending
e. Leakages
i. Ways that money finds its way out of the economy unexpectedly
1. Savings
2. Imports
3. Taxes
f. Recessionary Gap
i. Amount that aggregate expenditures fall short of gdp at a full
employment level of output
1. Full employment level of output = the amount of gdp that
is produced when the unemployment rate is 4-6%
g. Inflationary Gap
i. Amount that aggregate expenditures are above gdp at full
employment
K. Chapter 11: Aggregate Demand and Aggregate Supply
a. Aggregate Demand
i. Aggregate demand equals the total demand in the economy
ii. Determinants
1.
2.
3.
4.
Consumption (C)
Investment (Ig)
Government Spending (G)
Net Exports (Xn)
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b. Aggregate Supply
i. The total of all of the supply of goods and services
in the economy
ii. Determinants
1. Input Prices
a. Cost of land, labor, and capital
b. Productivity
c. Government Regulations
i. More regulations produces less supply, less
regulations produce larger supply amounts
2. 3 phases of the Aggregate Supply Curve
a. Horizontal range-recession
b. Intermediate range-full employment
c. Vertical range-inflation
iii. Sticky Prices/Wages
1. prices and wages are quick to go up but slow to come back
down
L. Chapter 12: Fiscal Policy
a. Fiscal Policy
i. Fiscal policy is what the government can to do affect the economy
ii. Two Types of Policies
1. Expansionary Fiscal Policy
a. Implemented when the government is
trying to “expand” the economy or make
it grow in other words. Done through:
i. cutting taxes
ii. increasing spending
iii. known as “deficit spending”
 referred as that because the
government is spending more than
they are bringing in
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b. How to finance the “deficit spending”
i. Borrow the money
 Causes the crowding-out effect
a. Crowding-out effect: as the
government spends more and
increases aggregate demand,
the demand for money will
increase and when that
happens interest rates will
begin to rise (refer to
Chapter 13) and that will
hurt businesses or “crowd
them out”
ii. Print more money
 Causes inflation
a. Inflation: general rising in
prices
b. Weakens the currency or
decreases the purchasing
power (refer to Chapter 13)
2. Contractionary Fiscal
a. Implemented when the government is trying to
slow the economy down.
Done by:
i. raising taxes
ii. decreasing government
spending
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iii. Built-in Stability
1. Progressive Tax System-the more that you make the more
that you get taxed; the less that you make the less that you
get taxed
M. Chapter 13: Money and Banking
a. Uses of Money
i. Medium of exchange – to buy things
ii. Unit of Account – to measure how much something costs
iii. Store of Value – to save for later use
b. Purchasing Power
i. The strength of the currency to purchase goods and services
1. $1 today cannot buy as much as it did in 1920; therefore,
its purchasing power has decreased
c. Demand for Money (pg. 239)
i. Types of Demand for Money
1. Asset Demand (Da)
a. graphically an inverse relationship
b. the higher the interest rate, the less you want to
hold your money in your checking account and the
more you want it to be in an interest baring account
(ie. a c.d. or certificate of deposit)
2. Transaction Demand (Dt)
a. graphically is vertical and correlates directly with
GDP
b. As GDP increases, so does the demand for money
to purchase all those things that people are
demanding.
3. Total Demand (Dm)
a. The total of transaction demand for money and
asset demand for money (Da + Dt = Dm)
b. graphically is downward sloping
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d. Supply of Money
i. Graphically is vertical
1. Why? Because there is a set number of money in
circulation regardless of the interest rate
ii. Where this line intersects with the Total Demand for money the
interest rate is determined
e. Board of Governors
i. Central authority of the Federal Reserve Bank
N. Chapter 14: How Banks and Thrifts Create Money
a. Money Creation
i. Money is created through loaning money to people that is taken
out of customers’ checking accounts
1. Checkable deposits – the term used for money going into a
checking account
ii. Reserve Requirement
1. how much a bank must hold of checkable deposits (i.e.
10% ; I deposit $100 into my account, the bank must hold
10% of that deposit and are permitted to loan out 90% or
in this case $90)
iii. Monetary Multiplier
1. Sometimes referred to as the “velocity of money”
a. Tells us how much money is created through
someone depositing money into their account and
the bank loaning a percentage of that out to others
b. Based on the reserve requirement
2. The formula = 1/Reserve Requirement
a. Reserve Requirement = 20%
b. 1 divided by .20 = 5
c. Monetary Multiplier in this case = 5
3. $100 deposit with a 20% Reserve Requirement = $400
worth of lending potential in the banking industry
a. How so? I deposit $100 into my account. The bank
must keep 20% of it or $20 as a result of a 20%
reserve requirement that The Federal Reserve has
mandated (theoretical reserve requirement)
allowing for $80 of it to be loaned out. Let’s say
they do, $80 multiplied by the monetary multiplier
of 5 (1/.20) equals $400 
b. The initial bank that the money was deposited into
has $80 worth of new loaning potential; the
banking industry as a whole has the potential of
$400 from that initial deposit.
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4. The higher reserve requirement, the less money that will
be able to be created
a. Makes sense given the bank is holding onto more
money
5. lower reserve requirement, the more money that will be
able to be created
iv. Quantity Theory of Money
1. increasing the amount of money in the economy will
eventually lead to an equal percentage rise in the prices of
products and services.
v. Loanable Funds Market
1. This is the supply and demand for loans
a. Shifts in the curves
i. Supply
 Shifts right when people save more
 Shifts left when people save less
ii. Demand
 Shifts right when expected rates of
return increase
 Shifts left when expected rates of
return decrease
2. It is in the micro section of your text, very basic though.
(pg. 546)
O. Chapter 15: Monetary Policy
a. Monetary Policy
i. Open Market Operations
1. The buying and selling of bonds on the Open Market
2. This increases or decreases the money supply which
affects the interest rates and aggregate demand
ii. Two Types of Policies
1. Expansionary Policy or a.k.a Easy Money Policy
a. making money easy to come by
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b. implemented when the Fed wants to stimulate the
economy; usually implemented when there is a
recession.
c. Done by these Tools of Monetary Policy
i. The Fed buying securities
 this means that the Fed has
securities and the citizens have the
money; thus putting money into
circulation
 Money that the Fed holds onto that
is their own, is considered “out-ofcirculation”
ii. The Fed lowering the reserve ratio
 banks do not have to hold as much
money and can thus loan more out
creating more money in circulation
iii. The Fed lowering the discount rate
 this is the rate of interest that the
Federal Reserve charges commercial
banks for borrowing money from
them
 Lower interest rates lead to banks
being more enticed to borrowing
money from the Fed and then
loaning it out to everyday citizens
and businesses
a. Types of Interest Rates
i. discount rate:
Fed to banks
ii. federal funds rate:
banks to other banks
iii. prime interest rate:
banks to individuals
d. Net Export effect
i. More exports are sold since the currency is
not as expensive to obtain, given its being
devalued since there is more of it
2. Contractionary Policy or a.k.a Tight Money Policy
a. making money more difficult to come by
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b. implemented when the Fed wants to slow the
economy down; usually implemented when there is
demand pull inflation.
c. Done by the Tools of Monetary Policy
i. The Fed selling securities
 this means that citizens have
securities and the Fed has the
money; thus taking money out of
circulation
ii. The Fed raising the reserve ratio
 banks must hold more money
iii. The Fed raising the discount rate
d. Now more foreigners will want to invest in the U.S.
since the money will begin to be worth more
e. less exports will be sold since the dollar costs more
to convert the foreign currency into the dollar
P. Chapter 16: Extending the Analysis of Aggregate Supply
a. Long Run vs. Short Run Economics
i. In the short run
1. Wages for workers have not changed
ii. In the long run
a. Wages for workers have changed
iii. Graphically
1. Demand pull inflation
a. Short run: yields higher prices in the economy
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b. Long run: brings higher wages for the workers as a
result of higher prices in the economy, this pay
raise to allow workers to affords things out in the
economy increases per unit production cost and
will reduce aggregate supply
2. Cost push inflation
a. Short run yields higher prices and a decrease in gdp
leading to a recession (pg. 296)
i. Fiscal Policy Options:
 Government involvement would
increase AD, making things worse
a. Government does nothing
then eventually it will work
its self out
iv. Phillips Curve
1. Illustrates the relationship between inflation and
unemployment
2. Accurate when referring to Demand Pull Inflation
a. Meaning, higher levels of inflation are consistent
with lower levels of unemployment; because
people are at work making money and then going
out and spending it to cause the demand pull
inflation.
3. Stagflation
a. High unemployment and high levels of inflation
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b. The Phillips Curve does not apply to this type of
inflation
v. Supply-Side Economics
1. Concept that by cutting taxes one’s incentive to work
increases, as well as the ability for companies to grow
Q. Chapter 17: Economic Growth
a. Growth
i. On a Production Possibility Curve
1. The curve shifts outward
ii. On the Aggregate Supply Long Run Curve
1. The curve shifts right
iii. Stems from
1.
2.
3.
4.
better productivity
more hours worked
better technology
better education/training
R. Chapter 18: Deficits Surpluses and Public Debt
a. Options for a Surplus
i. Revenue > Spending
ii. 4 Main Options
1. Pay down the public debt
2. Reduce taxes
3. Increase governmental expenditures
b. Combination of policies
i. i.e. 1/3 – public debt, 1/3 – govt. exp., 1/3 – tax reductions
ii. what is best for society or nation as a whole should determine this
c. Deficits
i. Spending > Revenue
1. Causes
a. War
b. Recessions
i. When incomes fall so does tax revenue
which hurts the federal government
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c. Excessive government spending
2. Federal Funding for it
a. Refinancing
i. through selling treasury bills, notes, and
bonds – use that money to pay off old debts
and collect more revenue
b. Taxation
i. Levy more taxes
S. Chapter 19: Disputes over Macro Theory and Policy
a. Classical vs. Keynesian
i. Classical Economists
1. Believe that there should be NO government involvement
in the economy. Through natural forces (the Invisible
Hand) the economy will fix it itself.
ii. Keynesian Economists
1. Believe that the government should intervene in the
economy to provide stability and efficiency
2. This is the school of thought that we have studied the
whole semester (i.e. C +Ig+G+Xn)
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