AP Macro Review PP

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Opportunity cost The value of what is given up when you make a choice is the
opportunity cost of your decision
Positive Economics Economic analysis that have a definite right or wrong answer
- Laws of economics
Normative Economics Economic analysis involving how the world should work
- Is it better to impose a certain economic policy or not
Unemployment Rate Percentage of the Labor Force that is unemployed
Number of people unemployed
7 million
divided by total workforce
150 million
X 100
= .046 x 100 = 4.6%
Opportunity cost The value of what is given up when you make a choice is the
opportunity cost of your decision
Positive Economics Economic analysis that have a definite right or wrong answer
- Laws of economics
Normative Economics Economic analysis involving how the world should work
- Is it better to impose a certain economic policy or not
Unemployment Rate Percentage of the Labor Force that is unemployed
Number of people unemployed
7 million
divided by total workforce
150 million
X 100
= .046 x 100 = 4.6%
Opportunity Cost - Opportunity cost of Fish to Coconuts - from pt. A to pt. B
OC of 8 fish = 6 coconuts / OC of 1 fish = 6/8 or 3/4 of a coconut
OC of 6 coconuts = 8 fish / OC of 1 coconut = 8/6 or 1&1/3 fish
Economic Growth Expansion of an economies production possibilities
- ability to produce at a point outside original PPC
4
Absolute Advantage Can produce more of a good with given resources
Comparative Advantage -
Having a lower opportunity cost for producing a good
5
Tom has a comparative advantage (lower opp. cost) in producing
fish
Hank has a comparative advantage (lower opp. cost) in
producing coconuts
6
Tom produces only fish (lower opp. cost)
Hank produces only coconuts (lower opp. cost)
They trade for what the other produces
7
Tom and Hank each increase their consumption of both goods
by specializing and trading with each other
8
Pamland
Wheat
DVDs
150
300
2
1
Lillytonia
1
=
2
200
600
=1
3
= 2
600
200
= 3
Decrease in Quantity
Demanded for Butter
Increase in Demand
for Margarine
5
5
4
4
3
Price $
Price $
B
2
3
2
A
1
1
0
1
2
3
Quantity
4
0
1
2
3
Quantity
4
Decrease in Quantity
Demanded for Hotdogs
Decrease in Demand
for Buns
5
5
4
4
3
Price $
Price $
B
2
3
2
A
1
1
0
1
2
3
Quantity
4
0
1
2
3
Quantity
4
Quick Check:
If the price of a good increases, the demand for a
increase
substitute good will _____________?
If the price of a good decreases, the demand for a
increase
compliment good will _____________?
12
Quick Check:
If your income increases, your demand for inferior
decrease
goods will _____________?
If your income decreases, your demand for normal
decrease
goods will _____________?
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GDP as Spending Total of all domestic spending on final goods and services
GDP = C + I + G + X - IM
(Consumer + Investments + Government + Net Exports)
GDP as Factor Income Total income earned by factors of production
= Labor + Interest + Rent + Profit of shareholders
24
Basketballs
Year
Price
Gallons of Milk
Number
sold
+
Price
2000
$56.00 x 70
2004
$59.00
100
$3.30
2008
$64.00
110
$4.10
Haircuts
Number
sold
$3.10 x 600
+
Price
Number
sold
$10
x 220
850
$11
270
900
$15
300
$7980 2004 _______
$11,675 2008 _______
$15,230
Nominal GDP: 2000 _______
$7980 2004 _______
$10,935 2008 _______
$11,950
Real GDP: 2000 _______
Unemployment Rate % of the Labor Force that is unemployed
- good indicator of job market condition
increases during recession - decreases during expansion
7 million
150 million
= .046 x 100 = 4.6%
Number of unemployed
X 100
Labor force (Empl. + Unempl.)
Labor Force Participation Rate % of working age population that is in the labor force
Labor Force
X 100
Population over 16
150 million
200 million
= .75 x 100 = 75%
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Quick Check:
Frictional Unemployment - B
Structural Unemployment - C
Cyclical Unemployment - A
A) Unemployment that follows phases of “business cycle”
B) Unemployment that occurs when people are looking for work
C) When workers’ skills do not match those needed as the job
market changes
Inflation Rate The percent increase in the level of prices per year
Inflation Rate = Difference in Price Level X 100
Original Price level
- Avg. U.S. inflation is around 3 - 4% per year
Real Interest Rate -
Nominal interest rate adjusted for inflation
- Nominal Interest Rate minus Inflation Rate
Ex: NIR of 8% - Inflation Rate of 5% = Real Interest of 3%
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Calculating CPI Current cost of “market basket” X 100
base period cost
- Current base period is 1982-1984 (CPI = 100)
Example:
2014 - $360 = 1.80 x 100 = 180
Base - $200
Inflation Rate Inflation rate is percent change from year to year
difference in CPI
original CPI
x 100
Example: 80 divided by 100 = .80 X 100 = 80%
Avg. annual Inflation rate = 80% divided by 30 yrs. = 2.6%
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Sect. 4 - National Income & Price Determination
Module 16 - Income & Expenditure
Marginal Propensity to Consume (MPC) What is the increase in consumer spending when disposable
income rises by $1
MPC = Change in Consumer Spending
Change in Disposable income
Ex: If consumer spending goes up by $6 billion when disposable
income goes up by $10 billion
MPC = $6B = 0.6 ($.60 of every dollar of disp. income)
$10B
Marginal Propensity to Save (MPS) The fraction of additional $1 of disposable income that is saved
MPS = (1 - MPC) EX: 1 - .6 = .4 ($.40 of every dollar)
Autonomous Change in Aggregate Spending An initial rise or fall in aggregate spending that is the cause of a
series of income and spending changes
Multiplier The ratio of of total change in GDP caused by Autonomous
Change in Consumer Spending
Multiplier =
Ex:
1
= 1
(1 - .6)
.4
1
(1- MPC)
=
1
MPS
= 2.5 X $100 billion = $250 billion
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Consumption Function Equation showing how a consumer household’s spending varies
with disposable income
c = a + MPC x Yd
c - consumer spending
a - autonomous consumer spending
MPC - Marginal Propensity to Consume
Yd - current household disposable income
32
The Long-Run Aggregate Supply Curve Shows relationship between price level and aggregate output
supplied if all prices were fully flexible (wages, inputs, sale price)
- shows potential aggregate output
Short Run to Long Run Short-run aggregate supply can be above or below potential
output but over time it will equal long-run potential output
Recessionary Gap When aggregate output is below potential output
- initiated by a negative demand shock
Inflationary Gap When aggregate output is above potential output
- initiated by a positive demand shock
Output Gap The difference between actual aggregate output and potential
output
Current Output - Potential Output
Output Gap =
x 100
Potential Output
If positive = Inflationary Gap
If negative = Recessionary Gap
Measuring the Money Supply Two monetary aggregates calculated by The Federal Reserve
M1 = Only cash, travelers checks, and checkable bank deposits
- $1,676.4 trillion ( 51% cash, 48% checking, 1% trav. checks)
M2 = M1 + Near Moneys
(liquid - savings accounts, CDs, money market)
- $8,462.9 trillion
39
Module 24 - The Time Value of Money
Borrowing, Lending, and Interest The cost for borrowed money is interest
- a percentage of the money we borrow paid over time
$X x (1+r )
Ex: $500 x (1 + 0.08) = $500 x 1.08 = $540
Present Value -
What is the value of a dollar today as compared to the value of
that dollar in the future
$X / (1+r )
Ex: $540 / (1 + 0.08) = $540 / 1.08 = $500
40
Money Multiplier The total number of dollars created in the banking system for
each additional dollar added to the monetary base
Multiplier = 1/ rr
Ex #1: If rr = .10 then
1/ .10 = 10 x $1000 = $10,000 addition to the Money Supply
Ex #2: If rr = .05 then
1/ .05 = 20 x $1000 = $20,000 addition to the Money Supply
Module 31 - Monetary Policy & the Interest Rate
Target Federal Funds Rate The interest rate the Fed sets to achieve the desired monetary
policy goal - uses open market operations to shift money supply
Expansionary Monetary Policy Policy that increases demand which increases Real GDP
Increase in money supply
lowers interest rate
more
investment and consumer spending
increase in AG demand
increase in Real GDP
47
Contractionary Monetary Policy Policy that decreases demand which decreases Real GDP
Decrease in money supply
raises interest rate
less
investment and consumer spending
decrease in AG demand
decrease in Real GDP
Taylor Rule for Monetary Policy Rule for setting the federal funds rate that includes the inflation
rate and output gap
Target Federal Funds Rate =
1+ (1.5 x inflation rate) + (0.5 x output gap)
Ex: Infl. Rate = 3% x 1.5 = 4.5
Output Gap = - 4% x 0.5 = - 2
1 + 4.5 + - 2 = 3.5%
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Module 34 - Inflation and Unemployment: The Phillips Curve
Short-run Phillips Curve (SRPC) Negative relationship between the unemployment rate & the
inflation rate
Nonaccelerating Inflation Rate of Unemployment (NAIRU) The unemployment rate at which inflation does not change over time
Long-Run Phillips Curve Shows relationship between unemployment and inflation including
expectations of inflation
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