Unit 7

The Balance of Payments

The BOP is the measure of $ based on inflows or outflows between the US and the world. (What goes in US goes out.)
Inflows are accounted as CREDIT. (adds to acct.)
Outflows are accounted as DEBIT. (subtracts from acct.)

3 Parts:
Current Account
Capital Account:
Official Reserves Account
Double Entry Book Keeping:
This occurs every time a transaction is recorded; it records it twice.
The transactions effect each other; The BOP should always equal zero.

Current Account
Consists of the balance of trade (net exports)
Formula: *Exports-Imports*
Exports create credut to balance of payments.
Imports create a debit to BOP.

Net Foreign Income
This is income earned by US owned foreign assets-income paid to foreign held by US assets.
Net Transfers formula: Foreign aid- a debt to the current acct.

Capital Account
This is the balance of capital ownership.
This includes the purchase of real and financial assets. Direct investmentnt in the US is credit to capital acct.
Direct investment by US firms/individuals in foreign country are debits to the capital account.

The Relationship Between Current/Capital Acct.
(double entry book keeping)
Current Acct. and Capital Acct. should zero each other out, ALWAYS.

Foreign Exchange Market
This is the buying and selling of  currency.
The exchange rate is the price of a currency. Don't try to calculate the exact exchange rate!

Tips:
Always change the Dline on one currency graph, and the S line on the other. If the D on one graph shifts to the right, then the S line will do so on the other graph. The S and D always move in the same direction on both graphs.

Absolute Advantage: Faster, more efficient
Output problems look at production
Input problems deal with time.
Comparative Advantage is the lower opportunity cost.
Purchasing Power Parity:

• Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates 
• Why do we exchange currencies?
1. To sell exports and buy imports 
2. To invest in another countries stocks and bonds.
3. To build factories or stores in other markets.
4. To speculate on currency values
5. To hold currencies in bank accounts for future exports, imports, and business loans.
6. To control excessive imbalances. 

Unit 6

This unit is all about Economic Growth!
Economic Growth is a sustained increase in Real GDP/per capita over time.
We want our economy to grow because it leads to economic prosperity. It strengthens our over all well being, and it reduces scarcity.


Conditions For Growth
Rule of Law
Economic Freedom
Trade
Low inflationary Expectations
Willingness to sacrifice consumption in order to grow


Physical Capital:
Consists of tools, machinery, factories
PC is the product of investment. Investment is very sensitive to interest rates and unexpected rates of return.
It takes capital to make capital.
Technology and Productivity
Research and development yield increases in technology.
Productivity is the output per worker. More productivity equals more economic growth.


Human Capital
Human are the most important resource for a nation. Education, economic freedom, the right to acquire private property, stable food and water, and access to technology all contribute.


Obstacles to Economic Growth:

High inflation
Economic instability'
Absence if rule of law
Negative Incentivess
Lack of Savings
Failure to maintain existing capital
Crowding Out of Investment
Increased income inequality
Restricitons on Free Int'l Trade


Example of Economic Growth:

Unit 5

Unit 5
The Phillips Curve
The Phillips curves shows the relationship between unemployment and inflation. This only occurs i the short run.

The LRPC occurs at the natural rate of unemployment, which is represented by a vertical line. There is no trade off between unemployment and inflation in the long run.
The long run only shifts if the LRAS curve shifts. The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.
LRAS=LRPC

3 Types of Unemployment That Give You the Natural Rate:
Seasonal
Frictional
Structural
The natural rate of unemployment is 4-5%. Full Employment is the same as the natural rate of unemployment.

SRPC:
...has relevance to Okuns Law, and has an inverse relationship occurring between the unemployment rate and the inflation rate.
High inflation=low unemployment
High unemployment= Low inflation

What is "Reagonomics?"

Reagonomics, aka Supply Side, is the study of economists believing that the AS curve will determine levels of inflation, unemployment, and economic growth to increase the economy. You take actions to shift the AS curve to the right, always benefitting the company first. 

If they reduce marginal tax rates, you encourage more people to work longer in which they would forego their leisure time for extra income. Lower taxes are an incentive for businesses to invest in our economy, and create lower interest rates fir increases in business investment.

The Laffer Curve

This is a trade off between tax rates an government revenue, used t support supply side arguments. 

As tax rates increase from 0, tax revenues increase from 0 to some maximum level and then decline.

Criticism:'

Research suggests that impact of tax rates on incentives to work, save, and invest are all. Tax cuts also create demand, which can fuel inflation, which will cause demand to exceed supply.

(Click the link)

https://www.youtube.com/watch?v=62wK_rl9V2U

Unit 4

This unit mainly covers money: The Demand for Money. Demand for money has an inverse relationship between nominal interest rate, and quantity of money demanded.

• When interest rates increase, the demand for money decreases. 
• When interest rates decrease the demand for money increases.

Fiscal Policy includes:

• Congress/President
• Taxing or spending $

Monetary Policy: 

• the FED
• Open Market Operations
• Federal Funds Rate
• Reserve Requirement

Key Principles: 

-a single bank can create money through loans, by the amount of excess reserves. 

-banking systems as a whole can create money by a multiplier. 

• When the initial deposit in a bank is in cash, the money supply has no change because only the composition of money changed. 
• When the initial deposit is by the FED purchase of a brand from the public, the money supply will immediately increase because money coming from the FED is new money in circulation.
• When the initial deposit is a bank purchase of a bond from the public, the money supply will immediately increase because monkey coming from bank reserves is new $.

Factors that affect the deposit multiplier:

• if banks fail to loan out all ER
• if bank customers take their loans in cash rather than in new checking account deposits. 

Open Market Operations- Expansionary: buy bonds, increase the money supply

Contractionary: Sell bonds, lower the money supply

Discount Rate- Expansionary: decrease money supply Contractionary: increase money supply

Reserve Requirement- Expansionary: decrease RR(bc theres not enough $) Contractionary: increase RR, increase $ supply.

Prime Rate- the interest rate thats given to a bank's most credit worthy customers from 0-4%. 

Loanable Funds Market- the market where savers and borrowers exchange funds at the rate of interest. 

Changes in Demand:

• More borrowing=more demand for loanable funds
• Less borrowing=less demand for loanable funds

Changes in Supply:

• More saving= more supply of loanable funds
• less saving= less supply of loanable funds

What the Graph looks like: 

Video 6

This video is about Money market, loanable funds, and AD-AS. The purpose of macroeconomics is to be able to show the relationships between those 3 markets. If you put all 3 graphs side by side, you can show the difference and relationships between the markets. Deficit spending is when the government borrows money. When someone buys government securities, that is you giving money to the government. In the money market, the demand for money increases, so on the graph, it shifts to the rate. The quantity stays the same. You can demonstrate that on the loanable funds graph by saying it reduces the national money supply level. You then show that demand is shifting to the right, and draw a new line to the right.

Video 5

This video is about Money creation process. First is thought the money multiplier. Second is multiple deposit expansion. The third is Banks create money by making loans. The video then demonstrates several example problems on finding RR, or how to use RR to find information. If banks have excess reserves, it will reduce the total amount of money.

Video 4

This video is about Loanable funds. (money available for people to borrow from banking system.) Price is on vertical axis, and quantity is on the x axis. Its the quantity of loanable funds. Demand for loanable is downward sloping bc when interest rate is lower, people demand more money. Supply of loanable funds is upward sloping. (Easy graph to start with) Supply of loanable funds is dependent on savings. The more money people save, the more money banks can use for loans. Demand graphs can show you if you made a mistake when creating the loanable funds graph. If the govt is running a deficit, then the government is demanding money in order to spend it. If money is demanding more money, then the demand graph shifts to the right.

Video 3

Video 3 talks about the the Fed's tools of monetary policy. There are 2 categories in which the tools fall in: Expansionary and Contractionary. Expansionary is easy money, while contractionary is tight money. The FED has control over the Reserve Requirement, which is the percentage of the banks total deposits. Lowering this makes more money available. This is not used often because it could corrupt the whole system. The next one is discount rate, which is the rate the banks can borrow from the fed. They pay it back. The fed is a lender of last resort. The third one is buying or selling government bonds and securities. This is not a form of stocks. To expand money supply, the fed buys bonds. To lower the money supply, the fed will sell bonds.

Video 2

Video 2
In the second video, the different parts of the money graph are explained. When the DM is downward sloping, it is because when price is high, quantity is low.The relationship between interest and quantity are inversely related. Demand for money is set by the FED; it is fixed. It does not rely on interest rate. Increasing the money supply stabilizes interest rates.

Video 1

Video 1

The first video is is about the 2 different types of money: Fiat money, commodity, and representative money. Fiat money is not backed by precious metal, but is still considered money. Its only money because the government says so. Representative money is money presented by resources such as metal, gold or silver. Commodity money has two purposes, such as purchasing salt or cow.
The 3 functions of money are:
-a medium of exchange
-it can store for value, but can also be stored in a bank
-it is a unit of account
These are the main topics that are covered in this video.

Unit 3

Unit Overview:
Aggregate Demand- shows the amount of Real GDP that the private, public, and foreign sector collectively devise to purchase each possible price level.
The relationship between the price level and Real GDP is inverse.
3 Reasons AD is downward sloping:
1. Real Balance Effect- when price level is high, households and businesses cannot afford to purchase as much output.
2. Interest Rate Effect- a higher price level increases the interest rate which tends to discourage investment.
3. Foreign Purchase Effect- a higher price level increases the demand for relatively cheaper imports.
Shifts in AD:
-change in multiplier effect
-change in C Ig G or Xn
Increases shift to the right
Decreases shift to the left
Aggregate Supply: is the level of Real GDP that firms will produce at each price level.
Longrun vs. Shortrun:
Longrun- period of time where inout prices are completely flexible and adjust to changes in price level.
Shortrun- period of time where input prices are sticky and do not adjust to changes in the price level.
LRAS- marks the level of full employment in the economy..
because input prices are completely flexible in the long run, changes in price level do not change firms, real profits, therefore don't change firms level output.
SRAS- because input prices are sticky in the short run, SRAS is upward sloping.
Determinants of SRAS:
-Input Prices
-productivity
-legal-institutional environment
Shifts: increase-right decrease-left
Investment Demand:
-the shape of the ID curve is downward sloping.
Why?
because when interest rates are high, fewer investments are profitable; when they are low, more investments are profitable.
3 Schools of Economics:
-Classical (Says Law…supply creates its own demand.)
-Keynesian (Demand creates own supply.)
-Monetary (gov't. can best control the health of the economy.)
Fiscal Policy: changes in the expenditure on tax revenues of the federal government.
-2 tools of fiscal policy:
-taxes- gov't. can increase or decrease taxes
spending- gov't. can increase or decrease spending.
Balanced Budget- Revenues=expenditures
Budget Deficit- revenues<expenditures
Budget Surplus-Revenues>expenditures
Discretionary Policy-
Expansionary: think…deficit! (recession)
Contractionary: think…surplus (inflation)
Non-Discretionary: no action
Automatic: unemployment compensation and marginal tax rate.
Discretionary- increasing or decreasing voernment spending and/or taxes in order to return the economy to full employment.

Unit 2

The main focus in unit 2 is GDP

• GDP- the most important measure of growth. It is the total $ value of all final goods and services produced within a country's borders in a given year. 

• GNP-  the total $ value of all final goods and services by citizens of that country on its land or on foreign land. Think of it as being made by foreigners. 

• Whats not counted in GDP: 
• Intermediate Goods: only count final goods
• Secondhand goods: not counting used goods
• Non-market Activity: illegal drugs, babysitting, volunteering
• Financial Transactions: stocks, bonds, real estate
• Gifts: social security, scholarships, transfer payments 

• What IS counted: 
• Consumption: personal consumption of goods and services
• IG- Gross Domestic Private Investment: new factory equipment, construction, factory equipment maintenance, unsold inventory 
• Government Spending: govt. purchases of goods and services.
• X-Net exports subtract: exports-imports

• Formula for Expenditure approach (GDP)- C+Ig+G+Xn

• Income Approach: W+R+I+P+statistical adjustment (must equal GDP)

• Wages- compensation of employees, salary supplements, health, insurance
• Rents- Tenants and landlords, least payment of corporation
• Profit- corporate profit-coorporate income 

GNP: GDP+Net Foreign Factor

NNP: Net Nat'l. Product- GDP-depreciation 

NDP: GDP-depreciation

Nat'l Income: GDP-Indirect business taxes-depreciation-net foreign factor

• Nominal GDP- value of output produced in current prices
• Real GDP- the value of output produced in constant or base year prices.

Terms to Know:

Price Index: measures inflation by tracking changes in the market basket of goods compared to the base year. 

GDP Deflator- a price index used to adjust price index from nominal to real GDP.

Inflation: the rise in the general price level. 

Inflation Rate: measures the % increase in the price level over time. 

Unemployment: the percentage of ppl who do not have jobs but are in labor force.

Labor Force- the # of people in a country that are classified as employed or unemployed.

Fricitonal Unemployment: ppl that are btwn jobs

Seasonal Unemployment: ex: school bus drivers, life guards, easter bunny, santa etc.

Structural Unemployment: associated with the lack of skills or declining industry.

Cyclical Unemployment: associated with the downturns in the business cycle. 

Full Employment: occurs when there is no cyclical unemployment. 

Causes of Inflation:

-demand pull inflation: caused by excess of demand

-cost pull: caused by rise in per unit production cost due to increasing resource cost.

Anticipated Inflation: expecting it to happen.

Unanticipated Inflation: some ppl are hurt, some aren't.

Who ARE hurt: fixed income, lenders, creditors, savers

Who ARENT hurt: borrowers 

Helpful tutorial on GDP:    https://www.youtube.com/watch?v=2-n1ruKJakw

Unit 1

Vocab to know:

• Macroeconomics- the study of major components of the economy. Examples: inflation,supply and demand wages

• Microeconomics- study of households and firms make decisions and how they interact with the market, basically what type of business is being had.

• Positive Economics- describing the world as is. ex: Minimum wage loss causes unemployment.

• Normative Economics- claims that attempt to predict how the world should be/ opinion based.
• Needs- basic requirements for survival.

• Wants- desires.

• Scarcity- limited or not enough.

• Shortage- quantity demanded is greater than quantity supply. 

• Goods- tangible, sold, traded, bought, produced. -consumer goods: goods that are intended for final use. ex: candy. -Capital goods: items used for creation of other goods. ex: machinery, factories, trucks.

• Services- work performed for someone else.

• Factors of Production- Land: natural resources. Labor: work forces. Capital: human capital, physical capital. HC: knowledge and skills a worker gains through experience. PC:human made products to produce other goods. Entrepreneurship: starting own business.

• Trade offs- alternatives given up when we choose one course of action over another.

• Opportunity cost- choosing our next best alternative.

• Production Possibility Curve- shows the most society can produce if uses every available source to best of its ability.  

E- Technological improvement, economic growth, discovering new resources.
D- Decrease in population, underemployment,  unemployment, war/famine.

*you can use the following link as a guide through the entire unit* 

https://www.youtube.com/playlist?list=PL275E49435929D711

Unit 1- Productions Possibilities Graph Answers

Answers:
1. A
2. C
3. E
4. D