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the problem of limited resources and unlimited wants ● Land-resources are natural gifts; things like oil, soil, gas, wood etc. however, although these are desired they are also scarce resources in nature ● Labor-resources can be scarce depending on the occupation you have like factory workers are desirable and in places like China and India, although they are limited they are not scarce because of the large population they have. However, occupations like doctors are incredibly desirable however they are limited and scarce • Capital- resources are tools and technology necessary in order to produce desirable goods and or resources. An example of this would be clippers; barbers use clippers (technology) in order to give good haircuts (desirable goods or resources) • Entrepreneurship: the technical means for the production of goods and services 8/16 Notes Communism - a political theory derived from Karl Marx, advocating class war and leading to a society in which all property is publicly owned and each person works and is paid according to their abilities and needs. • Planned economy determined where money went as well as employment • Bulgaria stopped being a losed market and started an open one (FREE TRADE) ● Informal Economy - Diverse jobs or business that isn't watched over by the government ● Adam Smith stopped mercantilism and was an Enlightenment economist. • Tertiary economy - is an economic system that distributes goods and provided services ● o Supermarkets, hairdressing, etc Quaternary services: information based services o Education, journalism, etc ● The Invisible Hand - Attempting to guide or mandate production or certain economic behavior will inevitably fail. As economic activity is best guided by an "invisible hand" of cumulative self interest of humanity as opposed to fat or the goals of a statesman. (Determines the price of whatever product is in sale. If something is being sold out too fast it's too cheap, if something isn't being purchased it's too expensive) • Laissez-Faire economics - A key part of free market capitalism. This system is based on the premise that there is no need for centralized decision making. By allowing resources and property to be privately owned. PLACE - PROPERTY, LAND, ACCESS, CONNECTION, EMPOWERMENT 8/18 Notes ● Capital Factor of Production - Machinery, tools and buildings humans use to produce goods and services ● Capital - Money used to start / fund businesses ● Allocation - The division of things into shares or portions ● Command Economy - Government Controlled (ALLOCATING RESOURCES) ● Market economy - An economic system where two forces, known as supply and demand, direct the production of goods and services Ceteris Paribus - If the price of milk increases, ceteris paribus, people will purchase less milk. If the United States drilled for oil off of its own shores, ceteris paribus, the price of gasoline would drop. • Opportunity Cost - The next best alternative to what you choose to do. You are missing out on this opportunity because of what you choose to do instead. ● Opportunity Cost Formulas: 1. OC=Loss/Gain 2. OC of Good X= (Units of Y) / (Units of X)= # of Y 3. OC of Good X = (Time to make X) / (Time to make Y)= # of Y 8/25 Absolute Advantage - Absolute advantage describes a scenario in which one entity can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish. Comparative Advantage - Comparative advantage, on the other hand, takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources. Whoever has LESS impact from OC has the CA. Trade - When whatever side is trading they are trading their best product (Whatever gives them an absolute advantage) for whatever they don't produce). PPC - The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.SHOWS MAXIMUM. (Increasing EFFICIENCY can shift the graph outwords) Consumer Good - Consumer Goods are used by consumers and have no future productive use. Capital Good - Capital Goods are tangible assets used by a business to produce goods or services, usually as an input for other businesses to produce consumer goods (Machine buildings). Demand Curve - As the price increases the quantity demanded decreases. As the Price drops we demand more as it rises we demand Less. Shows the relationship between quantity demanded and price. It represents the sum of individual demand curves of allsonsumers in the Market. Supply Curve - As the price of a good goes up, the quantity supplied increases Competitive Markets - Are where Buyers and sellers of the same product or service interact. Markets vary in size and specificity. Buyers Demand, Sellers Supply. The Supply and Demand Models - Demonstrates how a competitive Market behaves Supply and Demand Model Competitive Markets are where buyers and sellers of the same good or service interact. Markets vary in size and specificity. • Buyers Demand, Sellers Supply The Supply and Demand Model demonstrates how a competitive market behaves. Equilibrium is the point at which the supply and demand curve meet. Price has moved to a level that exactly matches the quantity demanded by consumers to the quantity supplied by sellers Price D Market Z Quantity Equilibrium The Demand Curve A demand curve shows the relationship between quantity demanded (QD) and price. It represents the sum of the individual demand curves of all consumers in the market. The quantity demanded is the actual amount of a good or service consumers are willing to buy at a given price The law of demand says that ceteris paribus, a higher price for a good or service decreases the quantity demanded of that good or service. Price 8/26 Notes P Market 2 This precise point. at Price A, is the Quantity Demanded of good Z. It would be A incorrect to say "demand." Quantity The Demand Curve: Movement vers Movement along the demand curve would be a change in the quantity demanded, arising from a change in the good's price. Price P P P Q₂ Quantity Q₂ A shift in the demand curve in the quantity demanded at any given price, resulting in a new demand curve. • Substitute Goods when the price of one substitute increases, the demand for the other substitute will increase, and vice versa • Preferences - Consumer tastes can change, increasing or decreasing preference will result in increasing or decreasing overall demand • Population: Bigger markets result in bigger overall demand • Income: More income will result in higher demand for normal goods but, can also result in a decrease in demand for inferior goods • Complementary Goods:Separate goods that are used together will have a relationship: a price increase in one will result in a demand decrease in another. • Expectations - Expectations boost up demand due to the fact that people will buy the product mainly to satisfy their expectations. • Spiece - • Cost of Inputs - If the cost of producing a good increases, the supply will decrease, and vice versa. • Equilibrium Point - Where the price and quantity intersect • Determinants - Anything that would impact the demand or supply Curve. (The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service.) Determinants of Demand (SPICE): • Substitute Goods: When the price of one substitute increases, the demand for the other substitute will increase, and vice versa. • Preferences: Consumer tastes can change-increasing or decreasing preference will result in increasing or decreasing overall demand. ● Population: Bigger markets result in bigger overall demand, and vice versa. • Income: More income will result in higher demand for normal goods but can also result in a decrease in demand for inferior goods. • Complementary Goods: Separate goods that are used together will have a relationship: a price an increase in one will result in a demand decrease in another. ● Expectations: The expectation that prices will increase in the future will change overall demand today before the price increase actually takes place. Determinants of Supply (COTTEN): • Cost of Inputs - If the cost of producing a good increases, the supply will decrease, and vice versa • Other Goods' Prices - If the price of a complementary good decreases, firms will increase supply and vice versa. If the price of a substitute good decreases, firms will decrease supply and vice versa. • Technology -Technology advancements decrease production costs and increase productivity, increasing supply. • Taxes and Subsidies - The government can increase or decrease the effective cost of production of a good through taxes and/or subsidies, impacting the supply. • Expectations - Suppliers will limit supply in expectation of future higher prices, and vice versa. • Number of Sellers - An increase in the number of firms supplying a good will result in higher supply, and vice versa. 09/1/22 Notes Quantity Demand • How many of a specific good is being purchased at a specific price Law of supply If all else equal then when the price goes up the quantity supplied will go up as well Input costs If the cost of producing a good increases, the supply will decrease, and vice versa, the price of producing a certain good. o Physical capital consists of tangible, human-made objects that a company ys or invests in and uses to produce O Consist of direct materials, direct labor, and factory overhead Market Equilibrium When supply curve meets the demand curve Comparative Advantage . Comparative advantage, on the other hand, takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources. Whoever has LESS impact from OC has the CA. (Must Produce the exact same products to be able to compare) Price Ceiling BELOW THE EQUILIBRIUM POINT Maximum price sellers are allowed to charge for a good or service If price is set Below equilibrium, quantity demanded will be greater then the quantity supplied, leading to a SHORTAGE ● Price Floor ABOVE THE EQUILIBRIUM POINT Minimum price buyers required to pay for a good or service Self Correction Markets will self correct and return to equilibrium. If there is a natural shortage in the market, prices will rise and the quantity demanded will meet the quantity supplied. In the case of a surplus, prices would fall. If price is set ABOVE equilibrium, quantity demanded will be less than the quantity supplied, leading to a SURPLUS Market will self correct and return to the equilibrium Quantity demanded would decrease and meet the quantity supplied would meet the equilibrium price ce Analysis: Agriculture Price Market B Quantity ● FRQ: 09/06/22 Notes Price Floor: Minimum price buyers are required to pay for a good or service. If price is set ABOVE equilibrium, quantity demanded will be less than the quantity supplied, leading to a SURPLUS. Assume QD 32, QS = 45. What is the market surplus? - How much wheat will be exchanged? ce Analysis: Rent Control Housing Market Calling Quantity QD Price Ceiling: Maximum price sellers are allowed to charge for a good or service. If price is set BELOW equilibrium, quantity demanded will be greater the quantity supplied, leading to a SHORTAGE. Assume QO= 40, QS = 15 What is the market shortage? How many houses will actually be sold? ● Full sentences are needed for frq answers • Explain where you are asked to explain. Do not if you are not (wasting your time You must fully label all graphs • You must show calculations if arithmetic ● For trade must start with OC for certain item, then pick any number between both of the sides' OCb Unit 2 - In this Unit we will look at economic indicators GDP (Gross Domestic Product) • The market value of goods and services produced in a nation's borders over a given period of time Unemployment • The unemployment rate is the percentage of those individuals looking for work and can not find it Interest Rates ● Interest rates are the prices at which money can be borrowed. Inflation The rate of change in the overall price level of an economy. Factors of Production • Land, Labor, Capital, Entrepreneurship, Skill, Circle of production ● Two markets that they work in product market and factor market ● Households buy things and that goes in as rev When you sell something that is factor of production This is just the way how money moves around going through business and people who spend the money making the cycle go around ● ● Labor/Payments O Income/ Households Taxes/Labor Goods Services/Income and Services Business Taxes/Goods and Servi Government Services/Payments GDP (Gross Domestic Product) The total market value of goods and services produced within a country's border. It's the way we measure economic activity and economic growth. If GDP goes up, the economy grows. If GDP goes down, then it shrinks. O Goods are things that people make, grow, or extract from the land (car, apple) ● O O O O O GDP statistics inform decisions about taxes and Spending (fiscal Policy) hiring and investing interest rates (monetary policy) and trade policy and more The rate of economic growth or decline affects jobs, businesses and investments O Services Are action that people do for someone else (haircut, computer repair, oil change, etc) Market value is how much something cost in the marketplace it is a what you pay for that video game GDP was first developed in the U.S in 1932 to understand the full extent of the Great Depression. President Roosevelt's government used the statistics to justify policies and budgets aimed at bringing the US out of the Depression GDP estimates were also used to show that the U.S. could provide sufficient supplies for fighting WWII while maintaining a strong economic state O GDP is calculated by economist at the Bureau of economic analysis using thousands of data points gathered by other federal agencies and some private data collectors All have the same net value o Expenditure Approach: Counts the total spending and final new goods and services in a given year (Primary Method) O Income Approach: Measures GDP by recording the income of households in the resource market side of the circular flow of income. GDP National Income (GDP="National Income") O Value-Added Approach: Mesies the total value of all final goods and services produced by a country in a year Expenditure Approach= Income Approach= Value-Added Approach o GDP = C + X = Exports - Imports +G + X (Expenditure Approach) o Consumption Expenditure: The goods and services people buy O Private Investment: Business spending on capital such as land buildings and equipment, plus investment in unsold inventories; also included purchases from consumers O Government Expenditures: Spending by federal, state, and local governments to provide goods and services O Net Exports: The value of exports to other countries minus imports into a country (X-M) o Consumption: Anything that a consumer purchases Income Approach • GDP=W+1+R+ P (Income Approach) o Wage: Money paid to employee from employers for FOP O Interest: The amount earned by an investor money that the investor places in an investment or project ( leading money) Rent: The money a business earns from leasing real estate or another type of asset Profit: Revenue generated from a business activity minus the expenses, costs, and taxes in sustaining the activity 9/9/22 O O What is not included in GDP?( not an all encompassing indicator) Intermediate Goods (tires that go on a new car ) Used goods/ second hand sales (used clothing, Used cars) Household production (services parents provide for children), volunteer work) Certain financial payment transactions (trading Stocks ) Transfer payments (social security, unemployment benefits, allowance for children from parents) Illegal activities (people who do not repeat their earnings, illegal sales) Depreciation (a reduction in the value of an asset with the passage of time, due in particular to wear and tear.) ● GDP Per Capita ● O shows a country's GDP divided by its total population Gross Nation Income (GNI) O The total market value of all final goods and services produced during a year by resources owned within a certain country, regardless of where the resources are located. O EXAMPLE: If there was a British owned store within india. India would have a higher GDP however, the U.K would have a higher GNI ● The Human Development Index (HDI): An index of life expectancy, education and per capita income indicators, which are used to rank countries into four tiers of human development. ● The Genuine Progress Indicator (GPI): A metric used to measure the economic growth of a country, taking into account the cost of the negative effects related to economic activity (such as the cost of crime, cost of ● • Employment ozone depletion and the cost of resource depletion, among others). The Happy Planet Index (HPI): Index tells us how well nations are doing at achieving long, happy, sustainable lives, by analyzing wellbeing, life expectancy, inequality of outcomes, and ecological footprints. The Social Progress Index (SPI): Index measures country performance on aspects of social and environmental performance at all levels of economic development. O O O People with jobs are employed O People who are jobless, looking for one, and available for work unemployed O The labor force is made up of the employed and unemployed o Ages 16-65 are working age population O Unemployment = Frictional + Structural + Seasonal + Cyclical o Frictional unemployment: Occurs when someone new enters the labor market or is "in between jobs" but has employable skills and will likely gain employment in a short period of time O Seasonal unemployment: Emerges as the periodic and periodic and predictable job loss that follows the calendar O Structural unemployment: Caused by fundamental, underlying changes in the economy that can create job loss for skill that are no longer in demand "improvements in new technology; globalization of industry" • Shortcomings of the Unemployment Rate o Data does not include discouraged workers, a worker who has been unemployed for a period of time and has given up the search for a new job. They are NOT in the labor force. o Cyclical Unemployment: Jobs are gained and lost as business cycle improves and worsens when the economy is expanding or cont ing (like the Great Depression like when people couldn't get their money out of banks and company lost money and had to lay of workers) o Unemployment Rate(UR) = #Unemployed/Labor Force x 100 UR counts a person working part-time as employed, even if that person is seeking full-time work (underemployed). UR counts a person who has multiple jobs (maybe because they need additional money) the same as someone with one job. ● o Unemployment data may understate actual unemployment. Pew Research found this to be true particularly among women, Asian Americans, and immigrants. O Incarcerated workers are not included in employment statistics, even though prison labor is a multi-billion dollar industry producing for companies like Walmart and Whole Foods. Many young, Black men who haven't finished high school are invisible in federal data sources because they are overrepresented in prison or jail. Labor Force Participation Rate (LFPR) measures the percentage of the adult O o population in a country that is either employed or unemployed. This is the o percentage of the population that are in the labor force. O O LFPR = (# people employed or unemployed) / ( # people ages 16-64)kuh The more LFPR declines, the more the unemployment rate understates the O true levels of unemployment. O The Natural Rate of Unemployment O NRU includes only frictional and structural unemployment O Structural Unemployment will still happen in a healthy environment Recession: Fall in GDP for 2 successive quarters 9/13/22 ● Inflation: A rise in the general or average price level of all the goods and services produced in an economy O Cost-Push: Inflation occurs when the cost of producer goods rise (cost of inputs). (Supply Curve shifts Left) O Demand-Pull: Inflation occurs when the production of goods and services cannot keep pace with consumer demand for those goods and services. (Demand Curve shifts Right) o Increase in the Money Supply: Inflation occurs when the central bank prints money. • Impacts: It reduces the purchasing power of the consumer as the dollars in their pockets are worth less. ● Inflation Rate is the rate at which inflation occurs. Disinflation is a slowing of the rate of inflation. ● Deflation is a decrease in the economy's overall price level. • Hyperinflation is a high persistence of inflation. ● CPI( consumer price index): The average price level of a basket of consumer goods and services paid by urban consumers. This is meant to reflect changes in the cost of living for a typical urban household. (If CPI rises, inflation increases) o CPI = x 100 ● O 9/15/22 ● Credit Markets With unanticipated inflation, borrowers are helped in that they repay in dollars which have less purchasing power than the dollars they borrowed. Creditors are hurt because they receive payment which has less purchasing power. Total Basket Cost This Period Total Basket Cost Base Period 9/16/22 Labor Market: Employers benefit if output prices rise faster than labor cost (wages). The unanticipated inflation hurts employees if their REAL wages have decreased. Product Markets: If producers can raise prices faster then the cost, they are helped. If producers have long term contracts on prices, then they are hurt because cost could rise faster than prices. Consumers are hurt because real income falling • Hyperinflation Gov decides to print more money • Shortage and Surpluses are the result of the price being unequal from the equilibrium price and quantity. A movement of the curves will not cause a shortage or surplus bit it will change the equilibrium (Pe and Qe) ● Nominal GDP Measures the value of a nation's output ● Real GDP: Measures the actual value of nation's output O A car is manufactured and sold for $20,000 in Y1. In Y2, the same car is manufactured and sold for $25,000 because of inflation. O A nominal measure of GDP for Y2 would count this 25% increase in price as a contribution to GDP, when really it is only an increase in the price of a good and notan increase in the actual output of a country: Y2 nGDP = $25,000A real measure of GDP for Y2 would adjust for inflation as to measure the actual change in output of a country: Y2 rGDP = $20,000 ● To determine if an economy has grown, prices must be held constant over time A nominal Measure of GDP for Y2 would count this 25% increase in price as a contribution to to GDP, when really it is only an increase in the price of a good\ .t and not an increase in the actual output of a country ● ● Nominal GDP: Measures the value of a nation's output expressed in the value of the prices charged for that year Nominal GDP does not adjust for inflation ● Real GDP: Measures the actual value of a nation's output expressed in the value of prices charged at base year Real GDP adjusts for inflation. 9/19/2022 Consumers Substitute - The market basket uses consumption patterns from the base year, which could be several years ago. As the price of goods begins to rise, we know that consumers seek substitutes. (This substitution might make the base year basket poor representation of current consumption patterns.) Goods evolve- Imagine if the CPI market basket were using 1912 as a base year. The basket would include goods no longer used. The emergence of new products and extinction of others is understood by firms and consumers, but not necessarily by the market basket. Quality differences - Some price increases are the result of improvements in quality. Prices that increase because the product is fundamentally better are not an indication of overall inflation. The BLS has a difficult time with this distinction, and thus, CPI can be overstated. GDP Deflator: A complementary measure of inflation, the GDP Deflator measures price changes in goods and services purchased by consumers, businesses, government, and foreigners, but not importers. It includes all domestically produced goods and services in a country. The indicator compares the nominal GDP to the real GDP in a given year. Nominal GDP (GDP Deflator = x 100) Real GDP Inflation equation: New Index # - Old Index # / Old Index 9/22/22 FRQ Reminders: • Fully labeled graph • Include Units • Calculate (show work) • Explain ● Make sure the question you are answering is clear. 9/26/22 The AD-AS Model is one of the fundamental tools in economics because it provides an overall framework for bringing economic factors together in one diagram. The model provides an aggregate picture of the macroeconomy and allows economists to predict how GDP, inflation, and unemployment are affected by external factors and government policies. Aggregate - "Added all together." Aggregate Demand is all the goods and services (REAL GDP) that buyers are willing and able to purchase at different price levels. It shows the relationship between aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of world. Short-run Macroeconomic Equilibrium: The point where the quantity of aggregate output supplied is equal to the quantity demanded Price | Level AD Aggregate Supply is all the goods and services (REAL GDP) that firms will produce in an economy at different price levels. The supply for everything by all firms. PL Short-Run Aggregate Supply (SRAS) shows the positive relationship between PL and the quantity of aggregate output (rGDP) supplied that exists in the SR, the time period when production costs are fixed. Long-Run Aggregate Supply (LRAS) shows the relationship between PL and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible 9/27/22 Price Level AD SRAS PL Real domestic output (GDP) Price Level AD PL Price Level AD PL Price Level AD PL LRAS Real domestic output (GDP) LRAS Long-Run Macroeconomic Equilibrium: The point where SRAS, AD and LRAS meet LRAS SRAS Real domestic output (rGDP) €. SRAS SRAS Real domestic output (GDP) SRAS The Wealth Effect: Higher price levels reduce the purchasing power of money. This reduces the quantity of expenditures. Interest Rate Effect: When the price level increases, lenders need to charge higher interest rates to get a real return on their loans. Higher interest rates discourage consumer spending and business investment. Foreign Trade Effect: When US Price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods AD: The quantity of domestically produced final goods and services demanded during a given period by individuals, firms, government and the World. Expenditure Approach! AD = GDP=C+I+G+ X Consumer Spending • Income Levels • Propensities to consume and save • Wealth (Assets) • Interest Rates • Expectations Investments Spending . Interest rates Expectations • Technology ● Government regulation and business taxes Government Spending Fiscal Policy: actions done by congress to stabilize the economy Monetary Policy: Actions by the Federal Reserve Bank to stabilize the economy. Tool 1: Increase or Decrease Spending (Expenditures) Spending will impact AD through G Tool 2: Increase or Decrease Taxes Taxes will impact AD through C and/or I 9/29/22 Expansionary Fiscal Policy: Increases aggregate demand . An increase in government spending A cut in taxes An increase in government transfers Contractionary Fiscal Policy: Reduces aggregate demand ● A decrease in government spending An increase in taxes ● A reduction in government transfers Discretionary Fiscal Policy: • Congress creates a new bill that is designed to change AD through government spending or taxation ● ● Ex. Military budget, education Nondiscretionary (Mandatory) Fiscal Policy: Permanent spending or taxation ● Automatic stabilizers are features of the tax and transfer systems that temper the economy when it overheats and stimulate the economy when it slumps, without direct intervention by policymakers. Ex. Social security, social service programs, unemployment benefits Interest on Debt: • Usually <10 percent of all funding If the government decreases taxes or government spending the AD moves rightward but if the government increases tax or government spending AD moves leftward Government Transfer: when the government gives you money and they don't expect nothing back in return 9/30/22 Marginal Propensity to Consume: The increase in consumer spending when your disposable income rises by $1. It tell us how much more spending happens when a household or individuals gets more income or wealth. This statistic helps economists understand the consumption behaviors of families, MPC = Change in Consumer Spending Change in Disposable Income • Marginal Propensity to Consume (MPC): The increase in consumer spending when disposable income rises by $1 • Marginal Propensity to Save (MPS): The additional disposable income that consumers don't spend is saved O 1 = MPC +MPS O MPS= 1-MPC o 1/1-mpc-1/mps O We will now calculate the total effect of the $500m stimulus on aggregate output. Inverse Relationship This final value will equal the sum of all these rounds of spending. 1-mpc Increased Spending Expenditure Multiplier = 1/1-MPC = 1/.2 = 5 Tax multiplier<Expenditure multiplier 10/06/22 More People Are Hired Additional Dollar Spent The Steps of the Economic Multiplier Demand in Economy Increases To find the total increase in rGDP from some initial expenditure, you will use the expenditure multiplier and multiply it by the injection x 500million Dollar Enters Local Economy Tax Multiplier = MPC/ MPS (decrease in taxes, increase in disposable income) -MPC /MPS (increase in taxes Sticky wages: Nominal wages are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages In the LR, nominal wages and resource prices become flexible, as formal contracts and informal agreements are renegotiated 1. Changes in Commodity Prices (Grains, Oil, Gold, Silver, Rice) 2. Changes in Input prices (Nominal Wages) PRICE LEVELS Left shift to SRAS₂ Capital Factors of Production - Increases how much stuff is produced SRAS₂ 3. Changes in Supply-Side Policy (Subsidies, Corporate Taxes) 4. Changes in Productivity 5. Changes in Inflation Expectations Stagflation: Negative Supply shock If Expansionary Fiscal Policy happens on the Graph, AD goes to the right. What shifts PPC? SRAS Right shift to SRAS SRAS REAL GDP Graph Shifts Inflationary gap - LARS goes LEFT Short-Run Inflationary Gap Price Level Pl LRAS Yp YI SRAS ● Inflationary gap=Y₁ - Y AD Real GDP Per Year Recessionary gap - LARS goes RIGHT Short-Run Recessionary Gap Price Level P1 Aggregate Demand RIGHT: Left: LRAS YI Yp SRAS Recessionary gap = Y - Y₁ AD Real GDP Per Year Aggregate Supply Right: Left: stagflation Self adjustment causes AS to Shift 11/3 Morgate: A loan that a bank gives to a buyer to buy a house; which they pay monthly (includes interest) when they finish paying n their loan they officially own the house Subprime mortgage: A loan that is given to a person that has bad credit Mortgaged backed security: every month that the buyer pays the mortgage off the bank no longer has the paper but the securitizer does and now they get the interest payments Foreclosure: The bank repossess your house A mortgage lender is a bank or financial institution that issues mortgages (loan). They pool their mortgages and sell them to mortgage investors for money. Mortgage investors can be government entities (FHA), government-sponsored enterprises (Fannie Mac), or investment banks. These agencies, whether public, quasi-public, or private, will create mortgage-backed securities (MBS) with these mortgage pools and sell them to other investors, who will profit off this financial product. • You must keep in mind that MBS (and other related assets) were making people RICH! The economy was strong!! So... the more demand there was for MBS, the more lenders issued subprime mortgages, prioritizing "volume over quality." Further, once lenders sold the mortgages, they didn't hold any of the risk! So they really didn't care if the loans were "bad." Predatory Loan: When loaners take advantage of borrowers in order to repossess their item so they can keep making profit off the interest payments Teaser Rate: low interest payments that keep the initial payments low so it looks more appealing to buyers and allow more of them to qualify Floating Rate: When after the initial year of a predatory loan the loaner adds rates of interest making essentially impossible to pay back. Predatory Loan- A loan with hidden intent that causes the borrower to be placed in a bad predicament that will result in the investor to be the only one benefiting 11/08 Large financial institutions or quasi-government agencies create securitized mortgages, or mortgage backed securities, pooled mortgages. Investors will invest in these securitized products and will receive monthly cash flows from the households whose mortgages are in that securitized product. Whereas, mortgage backed securities are only made up of mortgages, CDOs can be made up of a diverse set of assets-from corporate bonds to mortgage bonds to bank loans to car loans to credit card loans. These loans, from different sources, are then bundled together and then sent back out into the marketplace as new investment products. And like some mortgage backed securities, investors in CDOs can buy into different tiers, ranging from low-risk to high-risk. Leading up to the crisis, certain investment banks started creating CDOs that included just the lowest rated tiers of mortgage-backed securities. Ratings agencies, nonetheless, rated those CDOs Triple-A (the very, very best rating). The thought was that while one high risk mortgage may be a bad gamble, thousands of high risk mortgages are a good bet because there's safety in numbers. They can't all go south at once, right? Wrong. CDO Problem Would give out predatory loans because they know they could sell that back to bonds . They could do this because there is no regulation in the market (the government doesn't get involved) and you could work by yourself ● Bank is talking all of the commission even if they are not provide good services 11/14 Tom ● 100 lines 20 reports 5 lines: 1 report ● Comparative advantage Charlotte ● 120 lines • 20 reports ● Acceptable trade ● 5.5 lines per report or 110 lines for 20 reports 6 lines; 1 report 1/5 Notes Suppliers of Capital - refer to the people, businesses, and governments that have extra income and choose to put that money (capital) into the financial system so that they can earn a rate of return on their capital. (ur seeking a return on the money you have). (In other words, suppliers of capital put their money in the financial system so that their money can GROW.... money doesn't grow if its kept under your pillowcase!) Financial Intermediaries (Institutions) - act to process transactions between suppliers of capital and demanders of capital when it is not optimal/efficient for financial markets. Financial Markets (Stock Markets, Bond Markets, Currency Markets, etc) - bring together the suppliers of capital and the demanders of capital. In these markets, financial securities/assets are traded. Humans invented money as well as DEBT IOU. Went from whales teeth to coins to Paper money. All based on efficiency however all work the same Banking was born from Rainstones Too much money chasing too few goods causes inflation Money- Any asset that can be easily be used to purchase goods and services 1/12 Notes Contractionary Monetary Policy: Slows economic growth / decrease money supply. (if inflation is high) (decrease gdp increase unemployment) Expansionary Monetary Policy: Promotes economic growth / increase money supply ● If the money supply decreases, Nominal interest rates will increase GDP falls then unemployment increases i% i% ↓ I/C* ↑_1/C* ↑ Saving Saving i interest rate I/C = Interest-sensitive consumption ↓ ↑ AD AD ↓ ↑ GDP ● To stimulate the economy, the Fed will buy securities GDP - ↑ PL Remember Dual Mandate... GDP affects EMPLOYMENT PL affects INFLATION PL 1/13/23 Federal Funds Rate: The interest rate that financial institutions change each other for loans in the overnight market for reserves ● To stimulate the economy, the Fed will lower its Federal Fund Rate target ● To slow the economy, the Fed will raise its Federal Funds Rate Open Market Operations: The purchase and sale of U.S. Treasury securities in the open market by the central bank in order to regulate the supply of money that is on reserve in the U.S. o Buying securities increase bank reserves increase bank loans increases MS→Lower IR→increases consumer/Business spending increases AD-Increases inflationary pressure →→→→ ● Discount rate - The interest rate the Fed charges commercial banks to borrow funds on a short term basis. The level of the discount rate is set above the federal funds rate target, and thus serves as a backup source of funding for depository institutions. ● ● ● O To stimulate the economy and increase the money supply, the Fed should lower the discount rate Required Reserves Rate: Sets the percentage of deposits that are required as reserves, to be held either as cash on hand or as account balances. Interest on Required and Excess Reserves: The interest rate paid on excess reserves. This acts like a floor beneath the federal funds rate. ● Before 2008 were limited reserve after 2008 ample reserves Reserve rate model - The Reserve Market Model demonstrates the effect of changes in the supply of reserves caused by the Fed engaging in Open Market Operations. Systems with limited reserves have a downward sloping demand curve for reserves, because as the interest rate decreases (Cost of holding money falls), banks will demand a greater quantity of reserves. The supply curve is vertical, because it is controlled by the Fed. What is M1. M2. And M3 M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks. 1/24 M1 consists of the most liquid forms of money, namely currency, demand deposits, and other liquid deposits. Other liquid deposits includes ATS and NOW accounts, share draft accounts, and savings deposits. The non-M1 components of M2 are small-denomination time deposits and retail money market funds.Mar 23, 2021 The Money Demand Curve: Shifters • Changes in Aggregate Price Level • The demand for money is proportional to the price level • if price level rises by 20%, the quantity of money demanded at a given interest rate also rises by 20%. It takes 20% more money to buy the same basket of goods and services. Saving and Supply • Private Saving: Household savings Public Saving: Government savings ● National Savings: Public + Private Savings Foreigners and Supply • Capital Inflow: the amount of money entering the country • Capital Outflow: the amount of money leaving the country Net Capital Inflow: inflow - outflow Borrowers and Demand ● Private Investing: borrowing by businesses and consumers Government Borrowing: deficit spending when government spending is greater than tax revenue Money Multiplier= 1/rrr Monetary Equation of Exchange (Quantity Theory of Money) MV = PY M = the amount of money in circulation "Money Supply" V = the average number of times per year a unit of money is spent "velocity of money" P = average price level Y = the level of output produced by a nation (real GDP) Policy makers and economists can use this equation to ensure they are balancing the price level and output growth by changing the money supply. P = Assuming Velocity of Money is constant, what would happen to the price level (P) if the money supply (M) increases faster than output (Y)? 1/27 Money supply is shifted by monetary policies Increase in demand for money will shift MS to the right. Decrease to the left Monetary is done by the feds Federal funds rate is a target rate that the feds want to charge banks To contract the economy. Raise the federal funds rate to expand is to lower . Monetary policies Limited reserve system is where keep limited amount of reserves Ample reserve systems. Have billions of dollars in reserves so small changes to discount rates and stuff like that have no effect. Expansionary is lowering federal funds rate Contractionary policy will decrease money supply. 2/2/23 • Unemployment will be high if inflation is low, inflation will be high when unemployment is low INFLATION RATE (%) 3 ● LRPC B SRPC 5 7 UNEMPLOYMENT RATE (%) 754 x 606 ● The phillips curve is just a point along the graph ● SRPC short run phillips curve ● The AD shock shifts along the SRPC (Moves the spot on the line) The SRAS shock causes a shift Of the SRPC (moves the entire line) • When inflation rate goes up, the SRPC goes left Whenever price level decreases SRAS goes right meaning GDP increases The point of the PC is to show the correlation between Unemployment and inflation LRPC shows the relationship between unemployment and and and inflation after expectations of inflation had time to adjust to the society • Anything that impacts frictional or structural unemployment to change would cause the LRPC to change. Increase in natural unemployment makes it go to the right, decrease would go to the left • Nominal wages is what causes a shift ● Good for business means SRAS shifts to the right SRAS and SRPC have an inverse relationship 1/3 Notes QUANTITY THEORY OF MONEY P=VM/Y VM = PY M= Money supply V= Velocity P=Aggregate Price Level Y= real GDP High money velocity is associated with healthy Bond Prices and Interest rates are inverse ● ● ● Government needs to borrow money Government borrowing shifts the loanable funds demand As a result rates increase Crowding out 2/10 1. Growth can be positive. If a nation's GDP increases between one period and the next, the economy has experienced growth. 2. Growth can be negative. If a nation's GDP decreases between one period and the next, the economy has contracted, and is experiencing recession. 3. Growth can be measured as the change in real GDP or real GDP per capita. 1. as output grows, income rises and the nation is richer; 2. a greater level of output generally means the nation's people have access to more and a greater variety of goods and services-new combinations of goods that previously lay outside the country's PPC are now attainable; 3. if the rate of economic growth exceeds the rate of population growth, the average person in a nation also becomes richer. Human Capital Health Skills Investment There are two types of policies which improve economic growth: Demand-Side Policies effect SRAS (Policies that improve capital) Only work when affect public or private policies Supply-Side Policies effect LRS (Policies that help firms and increase productivity) *Changes to SRAS and LRAS lead to long-term economic growth. Growth Rate = (GDP 2 - GDP 1/GDP 1)100 (New - Old/ Old times 100.