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Economics (Macro (Recession and Responses (Responses (Monetary Policy: the…

- - - - Gross Domestic Product: the total market value of all goods and services produced in a country over the period of one year
      - GDP = C + I + G + NX
        
        C= consumer spending (consumption): 70% of GDP
        
        I= business investment
        
        G= government: non transfer payments
        
        NX= Net Exports: total value of exported products - value of imported products
        
        Not included: illegal activities, non-market activities, secondary sales, financial transactions on the stock market, intermediate goods and services
    - - Frictional unemployment: people between 2 things (college and job, finding a new job)
      - Structural unemployment: jobs become obsolete, economy restructures
      - Cyclical unemployment: caused by recession/depression, bad type of unemployment, happen in a cycle every few years
    - - Sectors of the Economy
        
        The Primary Sector: harvesting raw materials from the Earth
        
        The Secondary Sector: manufacturing raw materials into finished products of greater value
        
        The Tertiary Sector: moving, selling, trading products: everything else
        
        The Underground Economy: illegal production of goods & services (informal, not taxed or official)
        
        EX: drug dealing, sports begging, babysitting
  - - - 2009 recession
        
        mortgage backed security: sell housing mortgages in bundles to larger banks, who sell them to companies on the stock market
        
        pros: banks make a lot more money, easier for people to get a loan
        
        cons: banks accept high risk clients because "it's not their problem", caused the housing bubble of people believing in the housing market when they shouldn't that led to the collapse of the economy and 2009 crash
        
        credit default swap: insurance against a certain market on the stock market, betting that it will fail
    - - Fiscal Policy: changing the way government taxes and spends money (done by congress and president)
        
        Marginal Propensity to Consume: how much is spent out of an extra dollar of income
        
        young people: 1 (spent it all)
        
        middle aged: maybe about .85, spend most and save some
        
        Fiscal policy multipliers: government changes to taxes and spending will have a magnified effect on overall economy
        
        multiplier: 1/(1-MPC)
        
        change in real GDP: initial change in spending X multiplier
        
        Expansionary fiscal policy: lower taxes, spend lots: to get out of a recession
        
        Contractionary fiscal policy: raise taxes, spend less (save to pay off debt): to cool off the economy when it does well and avoid recession
      - Monetary Policy: the Federal Reserve using its tools to prevent or stop recession
        
        Fiat money: currency with nothing of value backing it
        
        Gold standard: every amount of money is backed by a certain amount of physical gold
        
        Money: currency, checking accounts, savings accounts
        
        Functions of money
        
        spending as a "unit of exchange"
        
        to measure or compare the value of something as a "unit of account"
        
        accumulate value as a "store of value"
        
        The Federal Reserve: independent of politics, not controlled by anyone, America's "central bank", supervises all banks; people on board of governors with 14 year terms; banks can borrow money or store excess money in the Fed
        
        Dual Mandate: maximize sustainable employment and maintain stable prices (limit inflation)
        
        Tools of the Fed
        
        change the discount rate: interest rate that banks have to pay to borrow money from the Fed
        
        change the reserve requirements: how much money must be locked up, not loaned
        
        open market operations: the Fed buying and selling securities
        
        Treasury bonds: how the government borrows money, very safe
        
        pay banks interest on excess reserves: Fed pays banks for not loaning out as much as they could
        
        Expansionary: lower interest rates, lower the reserve requirements, buy bonds, lower the interest paid on excess reserves
        
        Contractionary: raise interest rates, raise the reserve requirements, sell bonds, raise interest paid on excess reserves
        
        Fractional reserve banking: loaning out money that isn't physically there, but there is a % that has to stay in the bank and not be loaned out again
    - - Animal spirits: the fear and confidence fairies of human emotions that drive the boom and bust
      - paradox of thrift: people hold on to their cash and don't take risks when they are scared the economy is headed for recession, the opposite of what would help
    - - sugar high: government spending money it doesn't have during recession causes artificial booms, or sugar highs, that make it worse and aren't a long term solution, saving is the solution
- - - - Law of Demand: people choose to buy more at lower prices
      - Demand Shifters
        
        Change in Population of Available Consumers (market)
        
        Ex: demand decreases with fewer consumers
        
        Change in Income
        
        Normal Good: you would buy more if you were rich (ex. movies)
        
        Inferior Good: you would buy less of if you were rich (ex. Walmart)
        
        Change in Price of Related Goods
        
        Compliment: price increases for good's compliment, demand for good decreases (PB&J)
        
        Substitute: price for good's substitute increases, demand for good increases (ex. beer and wine)
        
        Change in Expectations about Future Prices
        
        Ex: waiting to buy a couch until the sale on the weekend
        
        Change in Consumer Information
        
        Ex: not buying Chipotle because you know about E-coli
        
        Change in Tastes and Preferences
        
        Ex: demand for a good increases when it becomes a trend
    - - Law of Supply: people choose to produce more at higher prices
      - Supply Shifters
        
        Number of Sellers in an Area
        
        Ex: number of sellers increases, supply increases
        
        Costs of Production
        
        Ex: price of ingredients increases, supply decreases
        
        Ingredients: factors of production: land, labor, capital
        
        Technological Change
        
        Ex: improved technology makes production easier and faster, increases supply
        
        Future Expectations about Prices
        
        Ex: price expected to rise, stockpile supply today and reap profits
    - - Surplus: when there is more supplied than demanded
        
        Price floor
      - Shortage: when there is more demanded than supplied
      - Price Controls
        
        Price Ceiling: price isn't allowed to rise over a certain limit, results in a shortage
        
        EX: housing in SF, price set too low
        
        Price Floor: price has to be above a certain minimum, results in a surplus
        
        EX: labor: minimum wage is too high, more workers willing to work than can be paid for
    - - PED: % change in quantity demanded / % change in price
        
        PED>1: elastic
        
        PED<1: inelastic
        
        PED=1: unit elasticity
      - Factors Affecting Elasticity
        
        Close substitues available?
        
        EX: lose McDonalds, still have Wendy's
        
        Necessity or Luxury?
        
        EX: addiction vs. things you don't need
        
        How much of the budget is spent on the good?
        
        EX: price of paper clip vs. house
        
        Time horizon when change is considered?
        
        EX: gas prices rising for 1 week vs. 5 years
  - - - we continue with a behavior as long as the benefit outweighs the cost
      - marginal utility diminishes with each additional unit
      - Opportunity Cost: the next best option that is sacrificed when we make a decision
    - - Positive: rewards
      - Negative:punishments
      - perverse: accidentally encouraging bad behavior
    - - curve of using more of one resource than the other
      - inside the curve: inefficiency
      - outside the curve: impossible
      - opportunity cost: less wine products, benefit: more cotton produced
      - Factors of Production
        
        Land: natural resources before they are changed by humans
        
        Labor: human effort used in production
        
        Capital: tools of production
        
        Entrepeneur: person who brings factors of production together
  - - - Federal tax: military, etc.
        
        marginal taxation: different tax rates on different parts of your income, not much at the highest rate
      - FICA Taxes: medicare and social security
        
        FICO Score: different, your credit score
      - State Taxes: 4.63% for CO: low taxes but high fees
      - Voluntary taxes: takes you choose to have for vision, unions, insurance, etc.