Please enable JavaScript.

Coggle requires JavaScript to display documents.

Economics Final Review (Prices (Price Elasticity of Demand: measures how…

- - - - Primary Sector: the part of the economy in which activities revolve around getting raw materials from the earth
      - Secondary Sector: processing raw materials aquired through primary activities into finished products of greater value
        
        factories and manufacturing
      - Tertiary Sector: focus on moving, selling, and trading the products made in primary and secondary activities
      - Underground Economy: all the illegal production of goods and services (drug dealing, prostitution, sports betting, etc.)
        
        anything that doesn't pass through markets (babysitting, house sitting, etc.)
    - - Nominal GDP: raw number at that period of time
      - GDP = C + I + G + NX
        
        NX = net exports (X - imports)
        
        G = government ( no transfer payments)
        
        I = business investment
        
        C = consumption
      - GDP (real): takes inflation into consideration
      - GDP does not include illegal activities, purely financial transactions, secondary sales, or intermediate goods and services (used in the process of production
    - - goal inflation is 2%
    - - Frictional Unemployment: in transition
      - Structural Unemployment: no need for some jobs anymore
      - Cyclical Unemployment: a ton of people lose jobs at the same time
  - - - Expansionary Phase: economy grows faster than average
      - Contractionary Phase: real GDP in decline (two consecutive quarters = recession)
      - Recession: two consecutive quarters of declining GDP (6 months)
        
        Paradox of Thrift: people are too fearful to spend money and take financial risks
    - - Marginal Propensity to Consume (MPC): how much is spent out of an extra dollar of income
        
        young people MPC = 1
        
        middle-aged people = .85? (save .15 and spend .85)
      - Fiscal Policy Multiplier: 1 / (1-MPC)
      - Expansionary Fiscal Policy: used to fight recession, high unemployment by INCREASING SPENDING AND LOWERING TAXES
      - Contractionary Fiscal Policy: used to fight inflation and prevent the economy from overheating by DECREASING SPENDING AND RAISING TAXES TO LOWER DEFICIT AND REDUCE GOVERNMENT DEBT
      - Debt: the result of the federal government borrowing money to cover years and years of budget deficits
      - Defecit: the difference between what the federal government spends and what it takes in
    - - Contractionary Monetary Policy: Used during expansionary times
        
        increase interest paid for exess reserves
        
        sell treasury bonds
        
        increase reserve requirements
        
        raise interest rates
      - Expansionary Monetary Policy: Used during contractionary times
        
        lower interest rates
        
        lower reserve requirements
        
        buy treasury bonds
        
        lower interest paid for excess reserves
      - Fiat Money: currency with nothing of value backing it up, except for the fact that it's legal tender
      - The Gold Standard: a system in which the value of currency is determined in terms of gold
      - Functions of Money
        
        spending
        
        measure or compare the value of something
        
        store of value/accumulate value
      - The Federal Reserve (The Fed): America's central bank
        
        controls the money supply
        
        supervises all banks
        
        independent from politics
        
        seven members of the board of governors (each serve 14 year terms)
        
        The Dual Mandate
        
        1. maximize sustainable employment
        
        2. maintain stable prices (limit inflation)
        
        Tools of the Federal Reserve
        
        Change the Discount Rate
        
        Discount Rate: the interest rate that banks have to pay to borrow money from the Fed
        
        setting the discount rate low is expansionary
        
        lower rates = more borrowing = more consumption = higher GDP
        
        raising interest rates is contractionary and fights inflation
        
        Change the reverse requirements
        
        The Fed determines how much banks must keep in reserves
        
        setting a low reserve requirement is expansionary
        
        higher reserve requirements is contractionary
        
        Open Market Operations
        
        involves the fed buying and selling treasury bonds
        
        Treasury Bonds: how the government borrows money
        
        when the fed buys treasury bonds they increase money in circulation it is expansionary
        
        when the fed sells treasury bonds it is contractionary
        
        Pays Banks Interest On "Excess Reserves"
        
        banks required to hold certain amount in reserves but often hold more, this is called excess reserves
        
        the fed can pay banks interest for money in excess reserves
        
        high interest rate = contractionary
        
        lower interest rate = expansionary
      - Fractional Reserve Banking: all banks store 10% of their money, issued by The Fed
      - Currency Requirements
        
        durable
        
        portable
        
        standardized (units)
        
        highly valued
    - - Mortgage-Backed Security: mortgages that are bundled together by the banks that make the loans and then are sold to bigger banks which sell them to bigger banks that bundle them and sell them on the stock market
      - Credit Default Swap: betting against the stock market, buying basically insurance on MBS's, you get paid if the bonds fail
    - - John Maynard Kaynes
        
        recession is caused by the animal spirits (fear fairy) and the logic of the paradox thrift
        
        don't take risks when afraid
        
        markets must be steered by governments
        
        government's job is recession is to boost aggregate demand
        
        aggregate demand: the total demand for final goods and services in an economy at a given time
        
        aggressive fiscal and monetary policy should be used even if it causes debt, called economic "stimulus"
      - Friedrich Hayek
        
        government actions make recessions worse
        
        markets need to be free of government to work
        
        when government spends money it doesn't have (fiscal) and makes borrowing money cheap (monetary) it causes artificial booms in the economy
        
        has to be from real savings
        
        no credit or debt
- - - - Incentives: things that motivate people to do something
        
        negative= punishments
        
        perverse= accidentally encourages bad behavior
        
        positive= rewards
      - Law of Diminishing Marginal Utility: with each individual unit the utility (satisfaction) decreases
    - - Basic Economic Problem: wants are unlimited but the resources needed to produce goods and services are limited
      - scarcity forces choices
    - - Land: natural resources before they are changed by human effort
      - Labor: human effort used to produce goods and services
      - Capital: tools of production, goods used to produce other goods and services
      - Entrepreneur: pulls it all together
    - - Production Possibility Curve
- - - - change in population
      - change in income
        
        Normal Good: if demand shifts right as consumers' income increases
        
        Inferior Good: if you buy less of the good when you have more money
      - change in the price of related goods
        
        Compliments: if one increases so will the other and vice versa
        
        Substitutes: As one increases the other decreases and vice versa
      - change in expectations about future prices
      - change in consumer information
      - change in tastes and preferences
  - - - number of producers/sellers in the area
      - cost of production
        
        resources used in production and land, labor, capital
        
        Cost of Production (labor): government policy, minimum wage, where goods are produced, shortage of ingredients
      - technological change
      - future expectations about prices
  - - - whether close substitutes are available
      - whether the good is a necessity of a luxury
      - how much of the consumer's budget is spent on the goods
      - the time horizon on which the change is considered
  - - - set when price is too low, creates a surplus ex: minimum wage
    - - set when price is too high, creates a shortage ex: high rent in San Francisco
- - - - Marginal Taxation: used to equalize the burden of taxes by putting people in tax brackets
        
        everybody is in multiple tax brackets and you're taxed for whatever part of your income falls in each bracket only
    - - Social Security: old people income
      - Medicare: old people health care