Name _____________________________ Note (PPC, COMP ADV)

Unemployment – “And I just want to be fly. What good is a degree when there’s no jobs to apply. And fast food wont do ‘cause you overqualified.”

The three types of unemployment are:

1.

An example is:

2.

An example is:

3.

An example is:

__________________________ unemployment is considered “unnatural” because it is due to recessions in the economy that can be eliminated through expansionary ___________________ (by Congress) or ________________ policy (by Federal Reserve).

Thus, full employment or the natural rate of unemployment includes _____________________ unemployment and _________________ unemployment but not _____________________ unemployment. It is usually around ___ to ___%.

_________________unemployment is considered “good” because ____________________________________________

_________________unemployment is also considered good because _________________________________________

The Civilian Labor Force (LF) is anybody who is _________ years or older (not in the military or prison) who are _______________ or __________________. The formula is: LF= _________ + _____________

The Labor Force Participation Rate is: _________________/___________________

The unemployment rate (U-3) is the ratio of __________________ to the ________________:

Unemployment rate (UR) = __________/______________ x 100

Discouraged workers are those people 16 or older who have ________________________________________________

An increase in discouraged workers ceterus paribus (all other things held constant) will ________________ the U-rate

Population Discouraged Employed Unemployed Labor Force

LF Participation Rate

U-Rate

2015 10,000 2,000 6,000 2,0002016 10,000 2,500 6,000 1,500b

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GDP - Blue skies, Smiling at me, Nothing but blue skies, Do I see, Bluebirds, Singing a song, Nothing but bluebirds, All day long, Never saw the sun shining so bright, Never saw things going so right, Noticing the days hurrying by

Gross Domestic Product is the total ____________ value of all ___________&______________produced in a _______________ (place) in a ________________(time period).

There are 2 primary ways to calculate GDP.

1. ________________________ approach (aka aggregate spending) a. The formula is: GDP = ___+___+___+________

2. ________________________ approach (aka aggregate income) a. Is the total of all ____________________ in a country.

i. Fill in the resource (factor of production) and income received from that resource below

Resource (Factor of Production) Type of Income Received (payment for resource)LandLaborCapitalEntrepreneurial

Gross Domestic Product is also equal to the national _________________ because all money that is spent will eventually become somebody’s ________________.

Y = RGDP Navy buys 2 new F-18 Hornet Fighter Jets

C – Consumption Bob buys 2 new Nike Jackets

I – Investment Bill Gates buys 2 Chinese made boats (can be 2)

G – Government Expenditure Bill builds a new factory

NX (X-M) – Net Exports Amy gives piano lessons to her daughter

Not Included Phil buys a new house

Unsold inventories at end of year

What things are not included in GDP calculations?

1. _____________________________2. _____________________________3. _____________________________4. _____________________________5. _____________________________

A country’s standard of living (SOL) is found via its by dividing its ____________________ by its ____________________.

Two ways to increase a country’s SOL

1. ___________________________________

2

2. ___________________________________

Nominal GDP is found by adding together all the quantities of goods and services using prices from the _______ year.

Real GDP is found by adding together all the quantities of goods and services using prices from a _______ year.

Business Cycle - Label the parts of a business cycle below (include: Peak, trough, expansion, contraction, recessionary gap, inflationary gap, LRAS (potential output) ….also indicate where/when unemployment is high and when it is low)

Inflation - Hey, Mr. President All your congressmen too You got me frustrated And I dont know what to do Im trying to make a living I cant save a cent It takes all of my moneyJust to eat and pay my rent

1. Inflation is when the average level of _____________ increases. This means that money __________ value and can purchase __________ goods and services than the previous year.

2. Hyperinflation is when the average level of increases but at a _____________ rate. 3. ___________________ is when the average level of prices increases (is positive) but at a decreasing (slower)

rate than the previous year4. _______________ is when the average level of prices decreases. This means that money ___________ value and

can purchase __________ goods and services than the previous year.

GDP Deflator

1. We use the GDP deflator to help calculate how much of a change in NGDP has been due to changes in _______________.

2. The formula for GDP deflator is ___________________________________3. To find the inflation rate from GDP deflator index numbers you use the following formula ______________

3

Pretend there is only 1 good in our classes’ economy. Calculate the following:

Year Cake Quantity

Cake Price ($)

NGDP RGDP GDP Deflator

Inflation Rate from previous yr

2000* Base 2 5 ------------2001 3 152002 5 20

You can rearrange the GDP Deflator equation to solve for RGDP. Show below

RGDP =

You can also use percentages to show the relationship between price index, RGDP and NGDP (Similar to Fisher Equation)

% ▲ RGDP = ____________________ - ___________________

CPI

CPI stands for ______________________ _____________________ _________________. CPI uses the total value of goods in a _______________ market ________________ of goods and services.

The formula to find the CPI of a particular year is found with the formula ________________________

You can find the inflation rate of the current year compared to a previous year with CPI with the following formula _______________________________

Year Shirt QFIXED

Shirt P Shoes QFIXED

Shoes P Cost of Basket ($)

CPI Index Inflation rate

2000*Base 1 15 1 75 -----------2001 1 25 1 802002 1 20 1 80

CPI is better to calculate the inflation that ________________ are experiencing. GDP Deflator is better to calculate inflation for _________________________. The PPI (Producer Price Index) is best for inflation of ________________.

Problems with the CPI Index include:

1.

An example would be:

2.

An example would be:

3.

An example would be:

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Inflation Pt 2

Money is usually considered _____________ because when prices increase due to EXPECTED inflation, wages will ________________ by an equal rate (%).

Unexpected price changes (inflation or deflation) helps some people and hurts others because ____________________________________________________________________________________________________________________________________________________________________________________________________

Unexpected Deflation InflationHelps 1.

2.1.2.

Hurts 1.2.

1.2.

Nominal & Real Income

The difference between nominal and real incomes is _________________________________________________

____________________________________________________________________________________________

Note: Formula to find real income is the same as GDP deflator (just substitute prices for incomes)

Inflation Index (in hundredths because of x 100) = Nominal Income/ Real income

or rearranged

Real Income = Nominal Income / Inflation index (in hundredths because of x 100)

Nominal Income CPI Index Real Income2014 50,000 180 -> 1.812015 51,000 185 -> 1.852016 51,000 190 -> 1.90

The Fisher Equation (equation that relates the value of real interest rates and nominal interest rates) is the following:

___________ Interest Rates = _________________ interest rates - __________________

Interest rates can be thought of as price or value of _______________________. When ___________ is more scarce, interest rates will ______________. When _____________ is plentiful, interest rates will ______________________

Interest rates (esp. real interest rates) are so important for economic growth because of their impact on _____________ (a category of GDP). When interest rates increase, _____________ decreases and vice versa. ______________ is the key to long run economic growth. The production function is Y= A(__,___,___,___) and the derivation for productivity Y/L = A(___,____,___,____). Note: A equals a variable that reflect the available production tech.

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Financial Sector - I'm on a boat and, it's goin fast and I got a nautical themed pashmina afghan I'm the king of the world, on a boat like Leo If you're on the shore, then you're sho' not me-oh

Private savings = ____________ - __________ - ____________

Public savings

A budget surplus is when government ___________ ___________ is greater than government _____________.

A budget deceit is when government _________________ is greater than government ________ ___________.

Financial institutions help match people wanting to _________ money with people needing to ___________ money for investments. Thus, ____________ = _____________.

Loanable funds are used for ________________________________________

Loanable funds are scarce in developing (poor) countries because ______________________________

The S curve is made up of _________________

The D curve is made up of _________________

Crowding out is when the _________ curve shifts to the ________. This causes interest rates to __________ and the quantity of loanable funds to _________________.

1.Show “crowding out” below 2. Show inc. investment incentives 3. Show inc. saving inventive

Bonds are certificates of _______________________.

Bond prices and interest rates have a _____________________ relationship.

What is a bond’s interest rate if a bond has a par value (face value) at maturity of $100 but is auctioned off for $75?

Show what will happen to the US bond market if the US Government issues more bonds because of a deficit.

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Cash Money - Bling bling, every time I come around yo city Bling bling, pinky ring worth about fifty Bling bling, every time I buy a new ride Bling bling, Lorinsers on Yokohama tires, bling bling

Before money, transactions were done through ______________. This required a _______________ __________________ of wants.

Money’s 3 uses

1. _________________________________________________________________________a. Example:

2. _________________________________________________________________________a. Example:

3. _________________________________________________________________________a. Example:

Commodity Money has value because ___________________________________________

Example:

Fiat Money has value because __________________________________________________

Example:

The money stock/supply is money that is considered M1. It is the ________ liquid. Liquidity means that money can be __________________________________________________________________

M1 is composed of these types of money:

M1 is when money is used as a _________________________________________ (1 of the 3 uses above)

M2 is composed of these types of money:

M2 is when money is used as a _________________________________________ (1 of the 3 uses above)

Demand Deposits are money that is found in ____________________________________________

The ______________ ________________ controls the US money supply and thereby also controls ________ _________ that affect how much investment happens.

Banking - I keep nothing but hundred dollar bills in the bank roll I got the kind of money that the bank can't hold

The US has a _______________ reserve banking system. That means that banks keep a ___________ of deposits as __________________ and use the rest to make loans.

A 100% reserve banking system would mean that ________________________ loans are made.

Reserve Requirements / Reserve Ratio are regulations on the ___________________________ that banks must hold against deposits.

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Money is created through a fractional reserve banking system because _________________________________

_______________________________________________________________________________

The money multiplier = ________________________________________

How much money will be “created” if there is $500 of reserves in the bank and R = 20%,

If R = 20%, fill out the asset & liability side of both banks T-Ledgers below (note, obviously this is only 2 of many banks in the process):

First NATIONAL BANK

Assets Liabilities

Reserves $ ______

Loans $ ______

Deposits $ 500

Second NATIONAL BANK

Assets Liabilities

Reserves $ ______

Loans $ ______

Deposits $ ____

Total amount of money created by the banking system = ____________________________

Total change in the money supply (M1) if the initial $500 deposit had been from a Federal Reserve bond purchase? ____

Total change in the money supply (M1) if the initial $500 deposit had been from cash from Joe’s wallet? _____________

Federal Reserve

The Federal Reserve is the ___________________ _________________ of the United States of America. It regulates the ___________ ___________ and oversees the ____________ __________________.

8

The Federal Reserve has _________ regional Fed branches located around the US. Monetary policy is set by the Federal ___________ _____________ Committee (FOMC).

The Federal Reserve has a dual mandate. It’s job is to:

1. ___________________________________________________________________

2.___________________________________________________________________

Expansionary Economic Policy is used when the economy is experiencing a ____________________ gap. This means that output is ___________ long run possible production and unemployment is _________________ than the natural rate.

Contractionary Economic Policy is used when the economy is experiencing a __________________ gap. This means that output is ___________ long run possible production and unemployment is _________________ than the natural rate.

The Federal Reserve has three tools of ________________ policy to help fix the economy in the __________ run.

(Note: the first 2 should be the ones the Federal Reserve can SET, the third what they TARGET – Show how the tool works in the second two columns)

Tool Expansionary Use of Tool Contractionary Use of ToolMonetary Policy Tool #1:

Monetary Policy Tool #2:

Monetary Policy Tool #3:

Open Market Operations (OMO’s)

The Federal Reserve sets Monetary Policy by buying or selling US Government ____________. This is meant to “target” (change) short term interest rates banks charge one another for overnight loans to satisfy ______________ ____________. This short term interest rate is called the ______________ _____________ rate. This is the most important interest rate in the economy because _____________________________________________________.

Sticky

Explain why and how ____________ and resource ___________ are “stuck” in the short run shown by the creation of a ___________ gap if AD shifts to the left or a ______________ gap if AD shifts to the right:

Explain why and how __________ and resource _____________ become “flexible” in the long run – shown by a shift in the ___________ curve:

Money Market Graph (graph below and label completely)

Federal Reserve Buys Bonds (Quantitative Easing) Federal Reserve Sells Bonds (Quantitative Tightening)

9

Higher Inflation Expectations cause… Lower Inflation Expectations cause…

Show what the Federal Reserve could do if they wanted to keep interest rates constant despite high inflation expectations in the economy.

Expansionary monetary policy will _________________ interest rates.

Contractionary monetary policy will ________________ interest rates.

AS/AD

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AD: Aggregate Demand is the__________ demand of an economy. The AD curve is __________ sloping.

The three reasons the AD curve is downward sloping are:

1.

2.

3.

LRAS: Long Run Aggregate Supply is the _____________ supply of goods and services in an economy. The LRAS curve is ____________________ (shape). It is similar to the _____________ ______________ curve. It represents total ________________ production and the natural _______________ ___________. We label it YF (full employment)

SRAS: Short Run Aggregate Supply is the _____________ supply of an economy in the short run. The SRAS curve is _________________ (shape). The three ranges of the SRAS are:

1._____________________________________. When AD inc, PL ____________ because _________________________.

2._____________________________________ When AD inc, PL ____________ because _________________________.

3. _____________________________________ When AD inc, PL ____________ because _________________________.

The reasons the LRAS curve will increase or decrease (shift left or right) are the same reasons why the ___________ ___________ _____________ shifts inwards or outwards. The 3 reasons are:

1. New _______________, _________________, or ___________________________

2. New ______________________________

3. Better ______________, __________________or ___________________________

The AD curve will shift left or right (increase or decrease) if any of the following categories that have to do with ____________________ change. These include: ____________, ________________, ______________, ______________

The SRAS curve will shift because of an increase or decrease in __________________ _____________ or if any of the same reasons that the LRAS change temporarily in the short run.

Some examples include:

The x-axis (RGDP) also equals ________________________ and the _____________ _____________ rate

A change on the y-axis (PL) is also known as a change in ____________________________ rate.

Fiscal Policy is policy by ____________________ to control the economy. Fiscal policy tools are:

(Note: Show how the tool is used and how it changes the AS/AD graph)

11

Tool Expansionary Use of Tool Contractionary Use of ToolFiscal Policy Tool #1:

Fiscal Policy Tool #2:

Automatic stabilizers are built in policies that can mitigate economic fluctuations that would usually cause an inflationary or recessionary gap. Give 2 examples below and how they would mitigate the fluctuation

Stabilizer If recessionary gap occurs… If expansionary gap occurs…Automatic Stabilizer #1:

Automatic Stabilizer #2:

Disposable income is extra money that people receive that can be spent.

Marginal Propensity to Consume (MPC) is how likely people are to _______________________their disposable income.

Marginal Propensity to Save (MPS) is how likely people are to ___________________________ their disposable income.

The Expenditure (Spending) Multiplier calculates how much of an impact an increase or decrease in _____________ ____________ will affect RGDP.

Expenditure Multiplier = ____________/______________ * ▲ in autonomous spending = total change in RGDP

1. If MPC = 80%, MPS = 20%, US gov’t spends 25M dollars on new warship production. Calculate effect on RGDP

2. If MPC = 60%, MPS = 40%, how much does the US gov’t need to spend to get out of a 40B recessionary gap?

The Tax Multiplier calculates how much of an impact an increase or decrease in _____________ will affect RGDP.

Tax multiplier = ___________/_______________ * ▲ in taxes = total change in RGDP

Balanced Budget Multiplier calculates how much of an impact a change in ________________ at the same time as a change in __________________ will change RGDP.

It always equals _________________ because:

Formula:

Which has a LARGER/GREATER impact on RGDP? A change in government spending or the same change in taxes? Why?

Show on left – US initially in a recession & uses expansionary fiscal policy (specify policy choice _________________)

Show on right – US initially w/ inflationary gap & uses contractionary fiscal policy (specify policy _________________)12

Show on left – US initially in a recession & uses expansionary monetary policy (specify policy choice _______________)

Show on right – US initially w/ inflationary gap & uses contractionary monetary policy (specify policy _______________)

Show Stagflation Show a permanent increase in land and labor

Show on left – US initially in a recession & long run equilibrium if government & Fed DOES NOTHING

Show on right – US initially w/ inflationary gap & long run equilibrium if government & Fed DOES NOTHING

Phillips Curve - What's goin' on? What's goin' on? I don't know what, they want from me It's like the more money we come across The more problems we see

The Phillips Curve describes the trade off between __________________ & ___________________13

The Phillips Curve equation is:

Unemployment Rate = ________________________ - α (_____________ - ___________)

Use the above equation to show how FED can lower unemployment.

Short Run Phillips Curve (SRPC) – Moving along the SRPC is similar to the AS/AD graph when _________ shifts

- Shifting the SRPC is similar to the AS/AD graph when _____________ shifts

-The SRPC shifts to the right when _____________ expectations _______________

-The SRPC shifts to the left when _____________ expectations _________________

Long Run Phillips Curve (LRPC) – Shows the ____________ ______________ rate. In the LR, it proves that inflation has ___________ affect on the _____________ ____________ rate.

Phillips Curve: Show on left – US initially in a recession & long run equilibrium if government & Fed DOES NOTHING

Phillips Curve: Show on right–US initially w/ inflationary gap & long run equilibrium if government & Fed DOES NOTHING

Quantity Theory of Money (QTM) - Ugh, you only live once,That's the motto.So take a chill pill, Ease off the throttle

QTM Equation: __________ x __________ = ___________ x ______________

P*Y also equals - _______________ GDP

Define velocity of money –

Velocity of Money is usually held constant but IRL (in real life) it is usually ____________ in high inflation countries.

What does the QTM say about the relationship between M and P*Y (assuming V is constant)? _____________________

How does the QTM say about the difference between the short run and long impact of monetary policy?

SR: __________ x ____________ = ____________ x _______________

LR: __________ x ____________ = ____________ x _______________

How much did you LOVE QTM (Scale of 90% – 100%) ___________ Hayek or Keynes: Better sensei? __________

International

A ______________ economy is when we do not consider foreign trade. 14

An _____________ economy is when we do interact and consider trade with foreign countries.

A trade surplus or positive trade balance is when ________________ is greater than ____________

A trade deficit or negative trade balance is when ________________ is greater than ____________

When USA dollars becomes more valuable it has ________________________________ in value

When USA dollars becomes less valuable it has ________________________________ in value

Using below, show how an increase in the desirability of US products will affect the value of pesos and $$

Country A (US $) Country B (Peso)

Demand or Supply (circle one) ______ Demand or Supply (circle one) ______

$$ has _________________ in value Peso has _________________ in value

The 6 determinants of FOREX exchange rates are:

1._______________________________________. How affects Country A (USA) ____________________

2. _______________________________________. How affects Country A (USA) ____________________

3. _______________________________________. How affects Country A (USA) ____________________

4._______________________________________. How affects Country A (USA) ____________________

5. _______________________________________. How affects Country A (USA) ____________________

6. _______________________________________. How affects Country A (USA) ____________________

*US v Peso: Higher Real interest rates in the US will cause the $ to ____________. As a result, Mexico will experience a ________ in the _________ of LF which will cause real interest rates to _______________.

International Trade

A tariff is a ________________ on foreign goods. Countries use tariffs to _______________ domestic producers.

15

A trade ___________________ limits the amount of foreign goods that can be imported into a country.

Quota Graph Show: Domestic Production, Foreign Quota, Inefficient Production, Loss of Consumer Surplus

Tariff Graph Show: Tariff Revenue, Deadweight Loss, Consumer Surplus, Producer Surplus

NCO (Net Capital Outflow): _______________ residents purchases of foreign assets minus _________________ purchases of domestic assets.

NCO also is called ______ _____________ ____________ (NFI).

Flow of capital abroad takes two forms (define each):

1. Foreign _________ Investment: 2. Foreign __________ investment:

* NCO > 0 is known as capital ________________. That is when domestic puchases of foreign assets are ________ than foreign purchases of domestic assets.

* NCO < 0 is known as capital ________________. That is when domestic puchases of foreign assets are ________ than foreign purchases of domestic assets.

*********Thus, NCO = NX**********

In a closed economy and in a situation of balanced trade, Savings (S) __________ Investment (I) In an open economy and in a situation of a trade surplus, Savings (S) __________ Investment (I)

o This means capital (assets) flow in/out (circle one) of the country and increase the supply of loanable funds in the domestic/foreign (circle one)

In an open economy and in a situation of a trade deficit, Savings (S) __________ Investment (I)o This means capital (assets) flow in/out (circle one) of the country and increase the supply of

loanable funds in the domestic/foreign (circle one)

International Part 2

16

Real Exchange Rate: the rate at which the ________ & _______ of one country trade for the _____ & ______ of another whereas the nominal exchange rate is just the rate that 2 countries _____________ trade for one another

Real Exchange rate =

Law of one price:

Arbitrage:

Purchasing Power Parity (PPP):

Show what happens in each triptych when

1. Budget Deficit – Crowding Out 2. Political Instability – Capital Flight

Balance of Payments - If it don't make dollars, it don't make sense Because you gotta give it up to the crown prince

- Balance of Payments - record of a country’s transactions in G&S&assets with the rest of the world and the record of the country’s sources (supply) and uses (demand) of forex. Made up of Current & Capital Accounts

- Current Account: Sum of its _______________, ___________________, & _______________________________o Exports are a __________ in the current account. Imports are a ___________ in the current account.o For each transaction in the current account, there is an ___________ __________ in the capital account.

- Capital Account: Sum of ____________________, _________________, _________________, & _____________- Explain why the current account and capital accounts will ALWAYS cancel each other out and net $0.

Your country is a creditor/debtor nation (circle one) if you have a negative current account ever year

17

Laffer Curve

Designed to show the relationship between the tax _______________ and tax ________________

Sketch one below. Show why a tax cut does not necessarily raise tax revenue

Lorenz Curve

Purpose:

Gini Coefficient:

Equation for Gini Coefficient =

Value of 1 = perfect __________________, Value of 0 = perfect __________________________

18