Unit 4

3/6 Uses of Money 

•  Medium of Exchange- using money to barter or trade
• Unit of account- what gives money its economic worth
•  Store of value- dollar does not fluctuate, meaning its value never changes

-Types of Money

• Representative money- paper money that is backed by a tangible product (a certificate)
• Commodity money- gold and silver coins; gets its value from the material from which it is made
•  Fiat money- it is money because the government says so

-Characteristics of Money

•  Durability- coins last a long time; paper money lasts not as long, but still a long time
•  Portability- you can carry it anywhere on you
•  Divisibility- can be broken down into smaller units
•  Uniformity- all money is pretty much identical
•  Scarcity
•  Acceptability- accepted everywhere in the country

-M1 Money

•  Consists of currency in circulation (paper money and coins)
•  Travelers checks
•  Called checkable deposits (checking accounts, demand deposits)
•  accounts for 75% of all money used

-M2 Money

•  Savings accounts
•  Money market accounts- earning interest on checking accounts
• Accounts held by banks outside of the US
•  Accounts for 25% of all money used
•  Consists of M1 money

-Difference between M1 and M2 money

• - M1 is more liquid (available for immediate use)
• M2 is not as available for immediate use from savings accounts

-How banks and thrifts make money

•  When you deposit money into the bank, the bank uses your money to give out loans to make themselves money
•  Assets = Liabilities + Net worth
• Assets are what you earn
• Liabilities are what you owe

• Our money is backed by faith
•  Reserve ratio = Commercial bank's required reserves / commercial bank's checkable deposits
•  Banks create money by lending out excess reserves and destroy it by loan repayment
•  Purchasing bonds from the public also creates money

3/17 Monetary Policy

- Influencing the economy throughout changes in reserves, which influences the money supply, and available credit

-4 Options of Monetary Policy

1. Reserve requirement- % that is set by the Federal Reserve Bank (Fed) of the minimum reserves that a commercial bank must keep

2. Discount Rate- the rate of interest that the Fed charges for overnight loans to banks

3. Federal fund rate- the rate that FDIC members (commercial banks) charge each other for loans

• commercial banks can either borrow from each other or from the Fed
• they choose whichever has the lower interest rate
• if the reserve requirement, the discount rate, and the federal fund rate decrease, it is expansionary monetary policy
• if the reserve requirement, the discount rate, and the federal fund rate decrease, it is expansionary monetary policy

4. OMO (Open Market Operations)

• either buy or sell securities (bonds)
• only done by the FED
• if the Fed buys bonds, money supply expands
• if the Fed sells bonds, money supply contracts

- The prime rate- the interest rate that banks charge their most credit worthy borrowers

• good creditors get better rates
• bad creditors get worse rates

Equations

- For a single commercial bank

• The amount of money a single bank can create (loan out)
• AR - RR = ER

- For the entire banking system

•  How much money an entire banking system can create
• system new money = deposit multiplier (1/RR) x initial ER
• Total change in the money supply
• system new money + initial deposit

Recession (Expansionary/Easy money)

• Open Market Operation: Buy bonds

• Discount Rate: Goes down

• Federal fund rate: Goes down

• Required reserve ratio: Goes down

Inflation (Contracting/tight money)

• Open market operation: sell bonds

• Discount rate: Goes up

• Federal fund rate: Goes up

• Required reserve ratio: Goes up        

Unit 3

2/19 Aggregate Demand

- Aggregate demand (AD) -shows the amount of real GDP that the private, public & foreign sector collectively desire to purchase at each possible price level -the relationship between the price level & the level of real GDP is inverse 

Three reasons AD is downward sloping: 
1. Real-balance effect     

• high price-level: households & firms can't afford to purchase as much output    
•  low price-level: households & firms can afford to purchase more output 

2. Interest-rate effect    

•  higher price-level increases the interest rate (discourages investment)    
•  lower price-level decreases the interest rate (encourages investment) 

3. 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 us exports 

Government Regulation

-Government regulation creates a cost of compliance = SRAS shifts left

-Government deregulation reduces compliance costs = SRAS shifts right

• The equilibrium of AD and AS determines current output (Real GDP) and price level (PL)
• Full employment equilibrium exists where AD intersects SRAR and LRAS (long run aggregate supply) at the same point
• Recessionary gap exists when equilibrium occurs below full employment output
• Inflationary gap exists when equilibrium occurs beyond full employment output
• LRAS represents full employment output

Shifts in Aggregate Demand (AD) 
-there are two parts to a shift in AD:     
1. change in consumption, investment, government purchases & net exports    
 2. a multiplier effect that produces a greater change then the original change in 4 components -increases in AD = AD → -decreases in AD = AD ← Determinants of AD: 1. Consumption:     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 ←)

 2. Gross Private Domestic Investment:     
-Real Interest Rate:         

• lower real interest rate: more investment (AD shifts →)         
• higher real interest rate: less investment (AD shifts ←)  

-  Expected Returns:        

•  higher expected returns: more investment (AD shifts →)         
• lower expected returns: less investment (AD shifts ←)               
•  Expected returns are influenced by: expectations of future propensity, technology, dgree of excess capability, business tax

- Government Spending:

• more government spending (AD shifts →)
• less government spending (AD shifts ←)    

-Net exports
Net exports are sensitive to 
-Exchange Rates(international value of money)

• strong money : more import, few export (AD shifts →)
• weak money : fewer imports, more exports(AD shifts ←) 

-Relative Income 

• Strong foreign economies : (AD shifts →)
• Weak foreign economies: (AD shifts ←) 

2/24 Consumption

-Disposable Income : income after taxes or net income
DI = gross income- taxes
1. Consume(Spend money on goods/ services)
2. Save(Not save money on goods/services)

-Consumption
1. Household Spending
2. The ability to consume is constrained by

• amount of disposable income
• propensity to save

3. Do households consume if DI=0?

• autonomous consumption
• dissavings

-Savings
1. Household not spending 
2. Ability to save is constrained by

• amount of disposable income
• propensity to consume

3. Do households save if DI = 0?
*NO
-APS= S/DI = %DI

-Average propensity to consume/save 

• APC+APS=1
• 1-APC=APS
• 1-APS=APC
• APC>1= Not saving
• -APS = Not saving

-Marginal Propensity to consume

• Change in consumption/change in disposable income
• % of every extra dollar earned that is spent

-Marginal propensity to save

• Change in savings/ change in disposable income
• % of every extra dollar earned that is saved

Formulas

• MPC+MPS = 1
• 1-MPC= MPS
• 1-MPS=MPC

-Determinants of C/S

• wealth
• expectation
• taxes
• household debt

-The spending multiplier effect: an initial change in spending causes a large change in aggregate spending or demand.

*multiplier = change in AD/ change in spending
*multiplier = change in AD/change in expenditure

-Calculating the spending multiplier

• MPS/MPC
• 1/1-MPC
• 1/MPS

Multipliers are positive when there is an increase in spending and negative when there's decrease.
-Calculating the tax multiplier

• When the government taxes, multiplier work in reverse
• Because money is leaving circular flow
• always negative
• -MPC/1-MPC
• -MPC/MPS

If there is a tax cut, then multiplier is positive because there is more money in the circular flow.

2/24 Investment

-Investment is money spent on expenditures on:

• new parts (factories)
• capital equipment (machinery)
• technology (hardware and software)
• new homes
• inventories (goods sold by producers)

Expected rate of Returns

-How does business make investment decisions?

• cost/benefit analysis

-How does business determine the benefits?

• expected rate of return

-How does business determine the cost?

• interest costs

-How does business determine the amount of investment they undertake?

• compare expected rate of return to interest cost
• if expected rate of return is greater than the interest cost, then invest
• if expected rate of return is less than the interest cost, then don't invest

Real (r%) v. Nominal(i%0

-What's the difference?

• nominal is the observable rate of interest
• real subtracts out inflation and is only known ex post facto

-How do you compute real?

• real = nominal - inflation

-Real interest rate determines the cost of an investment decision
Investment Curve ID

-What is the shape?

• downward sloping

-Why?

• when interest rates are higher, fewer investments are profitable
• when interest rates are lower, more investments are profitable

-Shifts in ID

• cost of production
• business taxes
• technological change 
• stock of capital
• expectations

2/27 Fiscal Policy

-Fiscal Policy- changes in the expenditure or tax revenues of the federal government-2 tools of fiscal policy:

• taxes- government can increase or decrease taxes

• spending-  government can increase or decrease spending

*when one increases, the other decreases-Fiscal policy is enacted to promote our nation's economic goals which are:

• full employment

• price stability

• economic growth

Deficits, Surpluses, and Debts-Balanced Budget

• revenues = expenditures

-Budget Deficit

• revenues < expenditures

-Budget Surplus

• revenues > expenditures

-Government debt = sum of all deficits - sum of all expenditures-Government must borrow money when it runs a budget deficit

• government borrows from:

• individuals (through taxes)

• corporations (through taxes)

• financial institutions

• foreign entities/foreign governments

Discretionary Fiscal Policy-Discretionary FP (government takes action)- increase or decrease in taxes or government spending-Consists of:

• expansionary fiscal policy (think deficit)

• designed to increase AD

• strategy for increasing GDP, combating recession, and reducing unemployment

• recession is countered with expansionary FP

• increase in government spending

• decrease taxes

• if PL increased, this means expansionary FP creates some inflation

• contractionary fiscal policy (think surplus)

• inflation is countered with contractionary policy

• decrease in government spending

• increase taxes

• unemployment rate increased, this means it is contractionary

Non-Discretionary Fiscal Policy-Non-Discretionary FP (government takes no action)

• automatic FP

• unemployment compensation

• social security

-Automatic or Built-in stabilizer- anything that increases its budget surplus during inflation without requiring action from policy makers

• example: transferred payments, social security, unemployment compensation
• 
  

Tax Systems

-Progressive tax rate:average tax rate rises with GDP

- Proportional tax rate: remains constant as GDP changes

- Regressive tax system : Average tax rates fall with GDP

Unit 2

1/31
-Circular flow model : Represents the transactions in an economy by flows around a circle.

-Factor market: Resources such as factors of production are bought and sold.
- Product market: Where goods and services are bought and sold.
- Economic Actors:

1. Household: Personal or group of people who share their income.
2. Firm: Organization that produces goods and services for sale.

2/3
-GDP(Gross Domestic Product) : Total value of all total final goods and services produced within a country's borders within a given year.
GDP includes:

1. Final goods and services (Finished product)
2. Income earned 
3. Interest payed on corporate bonds
4. Current production of final goods
5. Unsold output business inventories

GDP excludes:

1. Intermediate goods (To avoid multiple counting)
2. Transferred payments(public or private) ex: Social Security, scholarships, compensation
3. Purchases of stocks or bonds
4. Nonmarket transactions ex: babysitting, selling drugs, prostitution, volunteer work, (DIY)

-GNP(Gross National Product) : Total value of all final goods and services produced by Americans in a given year.

2/4

Formulas

-Expenditure Approach
GDP = C + Ig + G + Xn
Budget = Transfer payments + GPGS( government purchases of good / services) - GTFC(government tax/fee collections) 

• (+ : deficit) (- : surplus)

Trade = Exports - Imports 

• (- : deficit) (+ : surplus)

- Income Approach
GDP = W + R + I + P + Statistical adjustments

• W = Wages ( Salaries/ Compensation of employees)
• R = Rents ( Rental Income)
• I = Interest ( Interest Income)
• P = Proprietors Income 

-National Income

1. Compensation of employees + Rental Income + Interest Income + Proprietors Income + Corporate Profits
2. GDP - Indirect business taxes - Depreciation - Net Foriegn Factor Payment

- Disposable Personal Income 
National Income - Personal household taxes + Government Transfer Payments
- Net Domestic Product
GDP- Depreciation
-GNP 
GDP + Net Foreign Factor Payments
- Net National Product
GNP - Depreciation
- Gross Private Domestic Investment 
Net private domestic investment + Depreciation
2/5 
-Nominal GDP : The value of output produced in current prices, can increase from year to year. If the output of price increases it is inflation.

• Formula: PxQ

- Real GDP : The value of output produced in constant or base year prices, can only increase if output(quantity) increases. 

• Formula: PxQ

-GDP Deflator
Nominal GDP / Real GDP x 100

• In the base year the GDP deflator remains at 100
• For years after the base year the GDP deflator is greater than 100
• For years before the base year, GDP deflator is less than 100

2/6
- Consumer Price Index (CPI) : Measures the cost of the market basket of a typical American family 

• Cost of market basket in a given year/ cost of market basket in base year x 100

Inflation: General rise of the price level 
- Rate of Inflation 
CPI 2- CPI 1/ CPI 1 x 100]
Deflation : Fall of price level

2/10
- Types of Inflation

• Cost Push : Higher production cost increase prices, usually yje result of a supply shock
• Demand-pull : Too many dollars chasing too few goods, shortage driving up the prices

-Political Panic : Recession/ depression
- How does inflation hurt/ help?

• Hurt : Lender(loan money at fixed rate), people with fixed incomes, savers, people with fixed wages
• Help : Debtors

2/11
- Unemployment : Percent of people who don't have a job, but are in the labor force
- Labor force 

• made up of those that are employed and those that are unemployed

-Not in labor force

• Kids, military personnel, mentally disables, prisoners, stay at home moms/dads, full time students, retired people, the discouraged

Employed: 16 + working part time/ full time
Unemployed: 16 + who don't have a job but have actively searched for a job for a job in the last two weeks
- Unemployment rate 
(4-5%)
# of unemployed / labor force x 100
- Types of Unemployment

1. Seasonal: Waiting on correct season to conduct business 
2. Frictional Unemployment : In between jobs, because of new opportunities/ change in lifestyle
3. Structural: Change in skills, change in technology
4. Cyclical : Associated with downturns in the business cycle, bad for society as well as individuals

- Full Employment 
Natural rate of Unemployment = 4- 5 %
- Okun's law : For every one percent of unemployment that is above the NRU causes a 2 % decline in real GDP
- Rule of 70 : Length of time it takes to double the price levels.

Unit 1

Introduction to economics

- Macroeconomics : The study of economics is concerned with large scale or general economic factors

• Examples: Inflation, GDP v GWP, supply and demand, business cycle

- Microeconomics : Study of how households and firms make decisions and how they may interact with the market

•  Examples : supply and demand, market structure

- Positive Economics : Attempts to describe the world as it is.

• Example : Minimum wage laws cause unemployment

- Normative Economics : Attempts to describe how the world should be.

• Example : Government should raise the minimum wage

- Wants vs. Needs

• Wants : Desires of citizens much broader than our needs 
• Needs : Basic for our survival

- Scarcity vs. Shortage

• Scarcity : Fundamental problem facing all society, how to satisfy a limited want with a limited resource
• Shortage : Quantity demanded greater than quantity supply

- Goods vs. Services

• Goods : tangible commodities 

1. Consumer goods : goods intended for final use by consumer 
2. Capital goods : Items used in the creation of other goods 

• Services : work that is performed for someone else

Factors of production

1. Land ( Natural resources)
2. Labor (work exerted)
3. Capital 

     - Human : knowledge and skills a worker gains through education and experience
     - Physical : human made objects used to create other goods
    4. Entrepreneurship : In venture/ risk taken

- Opportunity costs : Most desirable alternative given up by making a decision
- Production possibilities graph (PPG)

• Shows alternate ways to use resources

1. Only 2 goods can be produced 
2.  Full employment of resources
3. Fixed resources
4. Fixed technology

- Production Efficiency vs. Allocative efficiency

• Productive : Producing at the lowest cost 

       - Full employment of resources allocating resources efficiency

• Allocative : Combination most desired by society ( where to produce on curve)

- Law of increasing opportunity cost : When switching production from one item to another as you increase a higher rate of cost will be necessary to continue increasing.

Production Possibility Graph 
- Law of increasing opportunity : When resources are shifted from making one good or service to another, the cost of productivity, the second term increases.
       This occurs because not all resources are equally suited for the production of all goods and services.

 - Point "A" : Attainable but inefficient (Inside the curve)
Causes: war, famine, unemployment
- Point "B" "C" "D" : Attainable and efficient (On the curve)
- Point "X" : Inefficient (Outside of curve)
Causes : technology, economic growth


- Law of supply: direct relationship between price and quantity supplied
 * price increase = quantity increase

"Supply to the sky demand to the sand"
Supply 
 - The quantities that producers or sellers are willing and able to produce and sell at various prices.
Causes supply graph might shift

1. change in resource prices
2. change in technology or technique
3. change in tax or subsides
4. change in price of other goods
5. change in expectations
6. change in number of supplies
7. change in weather

Demand 
- The quantities that people are willing and able to buy at various prices
Causes that would change the shift in demand graph

1. Change in buyers taste
2. Change in number of buyers
3. Change in income
4. Change in price of related goods
5. Change in expectations

Shifting supply and demand

- Why graph would shift outward ?

1. Newly discovered land sources
2. Better education for employees

- Why graph would shift inwards?

1. Exhaustion of resources
2.  Famine, unemployment, war

Elasticity of demands 
Elastic :Substitute, luxury goods, always greater than one
Inelastic : Few substitutes, necessity, always less than one
Unitary elastic : Exactly one

The formula which determines whether the information is elastic or inelastic

1. Change in quantity and price : new - old / old
2. PEP : Change in quantity/ change in price

Price Ceiling and Price Floor
- Price ceiling : Minimum price for good/ service
   Example: Minimum wage
- Price floor : Maximum price that can legally be charged for good/ service
   Example: Rent control

Business Cycles

- Peak: Output is at it's highest point

- Trough: lowest point of real GDP

- Contraction: When the real output is decreasing

- Unemployment rate is rising

- One cycle is about six years long

-Recessions last about 14 months, if recession loses more than 10% of real GDP that is depression