Economic Performance Indicators - Unemployment, CPI, GDP

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1 Supply and Demand law of demand income effect substitution effect change in quantity demanded vs. change in demand determinants of demand (TRIBE) normal vs. inferior goods supplied vs. change in supply determinants of supply (TIGERS) equilibrium surplus/shortage effects of double shifts price controls: ceiling and floors law of supply change in quantity

2 Economic Performance Indicators - Unemployment, CPI, GDP Labor Force and Unemployment who is in/excluded in the labor force LFPR and UR formulas types of unemployment -frictional, structural, cyclical underemployment discouraged workers full employment/natural rate of unemployment CPI and Inflation consumer price index and the inflation rate formulas demand-pull, cost-push, quantity theory the costs of inflation -menu, shoe leather, unit of account costs. winners and losers of unanticipated inflation nominal v s. real interest rates producer price index deflation Gross Domestic Product goods/services in/excluded in GDP nominal vs. real GDP real gdp per capita calculating GDP: income vs. expenditure approach expenditure components -consumption, investment gov ernment spending, net exports gdp deflator

3 Aggregate Supply and Demand Model, Business Cycles, Philips Curve, Classical vs. Keynesian Theory and Fiscal Policy Fluctuations in Economy Business Cycle 4 Phases: expansionary, peak, contractionary, trough Slope of AD wealth, interest-rate, netex port effects Determinants of AD changes in C, I, G, Nx Slope of SRAS sticky wages Determinants of SRAS input costs, productivity, government influence and ex pectations of inflation Slope of LRAS quantity and quality of factors of production Recessionary gap Inflationary gap Stagflation Philips Curve Slope of SR and LR Philips curve Relationship between shifts of AD/SRAS and the SR Philips curve Relationship between shifts of LRAS and LRPC Role of Government: Classical vs. Keynesian LR equilibrium according to Classical Theory For ALL LR problems, apply classical theory. Output will return to the initial level and only PL will change. Say s Law Rational Ex pectations Theory Keynesian Theory prices, wages, interest rates Three ranges of AS Automatic/Discretionary Stabilizers Expansionary/Contractionary Fiscal Policy Marginal Propensity to Consume/Save Multiplier Effect Spending and tax multiplier formulas Supply-side economics recognition, administrative, implementation lags crowding out other problems associated with fiscal policy

4 AD/AS, Fiscal Policy Practice MCQ KEY 1. D or E (if you view III as the net-export effect) 2. A 3. E 4. D 5. E 6. D 7. B 8. B 9. C 10.A 11.E 12.B 13.E 14.B 15.B 16.D 17.B 18.E 19.C 20.B 21.C 22.B 23.A

5 Money and Monetary Policy Types and Functions of Money Money supply M1 and M2 Monetary base Time value of money present and future Bond prices and interest rates (inv ersely related) The Fed and Monetary Policy Structure of the Fed Federal Open Market Com mittee Contractionary vs. Expansionary MP Tools: RRR, Discount Rate, Federal Funds Rate (Open Market Operations) Banks and Money Creation Money Multiplier Money Creation Calculate maximum amount of New loans Loans over time Dem and deposits over time T-accounts Assets and liabilities Net worth and owner s equity Money Market Graph Money demand and money supply Axis and slope Shifters Loanable Funds Demand for and Supply of Axis and slope Shifters Crowding-out effect Equat ion of Exchange Classical vs. Monetarist vs. Keynesian view of government involvement Quantity Theory of Money Money Neutrality Monetary Rule Rational Expectations Theory

6 Production Possibilities Curve/Frontier Slope and shifters Allocative/Productive Efficiency Increasing/Constant Opportunity Costs Absolute/Comparative Advantage Specialization and Terms of Trade Capital vs Consumer Goods Int ernational Trade International Trade and Forex Market Protectionism Policies and their effects Balance of Trade vs. Balance of Payments Current vs. Capital Account Current Account + Capital Account = 0 FOREX Graph Slopes and Shifters Capital Inflow/Outflow and the Loanable Funds Market Appreciation vs. Depreciation Effect of Appreciation/Deprecation on Export and Imports and AD (PL and Q) Fixed/Pegged Exchange Rates Gov t Intervention buy/sell currency, adjust interest rates, trade controls Nominal vs. Real Exchange Rates Theory of Purchasing Power Parity Economic Systems 3 Basic Economic Questions Factors of Production Market vs. Com mand Econom ies Economic Growth PPC and LRAS shifters Real GDP/capita