INTRODUCTORY TERMS/CONCEPTS/DEFINITIONS

OPPORTUNITY COST

INVISIBLE HAND

COST VS PRICE

SAVING VS INVESTMENT

CORRELATION VS CAUSATION

TIME LAG

EFFECTIVE DEMAND

FACTOR OF PRODUCTION

CAPITAL GOOD

DEFLATION VS DISINFLATION

DEBT VS DEFICIT VS DEBT CEILING

DATA STUDENTS ARE RESPONSIBLE FOR

GROWTH RATE

CURRENT GDP

UNEMPLOYMENT RATE

INFLATION RATE

EXCHANGE RATE

DOLLAR VS YEN

DOLLAR VS EURO

BACKGROUND DATA

SAVING

U.S. LAST/LESS THAN 5 PCT OF GDP

POVERTY STANDARDS

UNITED STATES

POOR FAMILY OF 4 INCOME $18,400

POOR IN US WOULD BE WEALTHY IN MOST COUNTRIES

WORLD STANDARD

POOR FAMILY INCOME $1,460

GDP/INCOME

MOSTLY CONSUMER GOODS (71 PCT)

VOLUNTARY TRANSACTION => BOTH PARTIES GAIN

SUPPLY AND DEMAND

DISEQUILIBRIUM PRICES

EQUILIBRIUM PRICE

DEMAND VS QUANTITY DEMANDED

DEMAND IDENTIFIES QUANTITY DEMANDED AT EACH PRICE

EFFECT OF CHANGE IN SUPPLY

LAW OF DEMAND

SUPPLY VS QUANTITY SUPPLIED

EFFECT OF CHANGE IN SUPPLY

LAW OF SUPPLY

SUPPLY VS QUANTITY SUPPLIED

EFFECT OF CHANGE IN DEMAND

PROFIT AS A NECESSARY CONDITION

LAW OF MARKETS: SUPPLY AND DEMAND/PRICE DETERMINATION

DISEQUILIBRIUM PRICES

IDENTIFY SURPLUS OR SHORTAGE

CHANGE IN PRICE DOES NOT CHANGE DEMAND

CHANGE IN PRICE DOES NOT CHANGE SUPPLY

AS PRICE CHANGES CHANGE THE QUANTITY DEMANDED

AS PRICE CHANGES CHANGE THE QUANTITY SUPPLIED

DRIVEN BY SELF-INTEREST/PROFIT NOT SOCIAL WELFARE

FIRMS CHANGE PRICES AND OUTPUT

IN ORDER TO IMPROVE PROFIT

NOT TO GET TO EQUILIBRIUM

INVENTORIES AS SHOCK ABSORBERS

INVENTORY CHANGES AS SIGNALS

NO INTENTIONAL MISTAKES

CHANGE IN DEMAND VS CHANGE IN QUANTITY DEMANDED

CHANGE IN SUPPLY VS CHANGE IN QUANTITY SUPPLIED

CHANGE IN DEMAND CAUSES CHANGES IN

EQUILIBRIUM PRICE

QUANTITY SUPPLIED

CHANGE IN SUPPLY CAUSES CHANGES IN

EQUILIBRIUM PRICE

QUANTITY DEMANDED

PRICING AND OUTPUT DECISIONS

MADE BY INDIVIDUAL UNITS (FIRMS)

FIRMS SET PRICES THEN WAIT FOR RESULTS

FIRMS CHANGE PRICES AND OUTPUTS

IN ORDER TO IMPROVE PROFIT

NOT TO GET TO EQUILIBRIUM

SIMULTANEOUS CHANGES IN MARKET CONDITIONS

ONE KNOWN, ONE UNKNOWN

WHEN SHOULD THE GOVERNMENT PLAY IN THE ECONOMY?

THERE MUST BE A PROBLEM

GOVT MUST HAVE ABILITY TO IMPROVE SITUATION

MACROECONOMICS/POLICY GOALS

UNEMPLOYMENT/JOBS

INFLATION/DEFLATION

GROWTH

EXCHANGE RATE

TAXES

CALCULATE

AVERAGE TAX RATE

MARGINAL TAX RATE

DISTINGUISH AMONG

PROGRESSIVE TAX

PROPORTIONAL TAX

REGRESSIVE  TAX

EFFECT OF TAX RATE CUT

EFFECT ON TAX REVENUE

EFFECT ON OUTPUT (TAX BASE)

FILE: 252N04.HTML

MEASURES OF INCOME AND OUTPUT

GDP

NOMINAL VS REAL

REAL = NOMINAL/PRICE INDEX

REAL PER CAPITA

PER CAPITA = REAL/POPULATION

DPI...AFTER TAX INCOME

DPI = GROSS –TAXES

CAN BE CHANGED BY

CHANGE IN GDP

CHANGE IN TAXES

OUTPUT (GDP) DETERMINES JOBS

MORE OUTPUT => MORE JOBS

LESS OUTPUT => FEWER JOBS

TYPES OF UNEMPLOYMENT

NATURAL

JOB SEARCH

SOME BENEFITS TO SOCIETY

STRUCTURAL

SOME BENEFITS TO SOCIETY

FRICTIONAL

SOME BENEFITS TO SOCIETY

REAL/CYCLICAL UNEMPLOYMENT

JOBS RELATED TO REAL GDP

COST TO SOCIETY

HOW MUCH REAL UNEMPLOYMENT IS THERE?

MEASUREMENT PROBLEM

DATA INTERPRETATION PROBLEM

SOLUTIONS FOR UNEMPLOYMENT

JOB TRAINING

CHILD CARE AND OPPORTUNITY FOR WOMEN

ZERO UNEMPLOYMENT IS PROBABLY NOT THE BEST GOAL

INFLATION/PRICE INDEX

PRICE INDEX

AVERAGES...SOME INCREASES, SOME DECREASES

MARKETBASKET

BASE YEAR

CORE RATE

DISINFLATION/DEFLATION

CPI MOST WIDELY USED INDEX

FILE: 252NO5.HTML

BUSINESS CYCLE

PATTERNS IN REAL GDP

EXPANSION/RECOVERY/GROWTH

EXPANSION SINCE NOVEMBER 2001

RECESSION MARCH 2001 TO NOVEMBER 2001

RECESSION/STAGFLATION

AGGREGATE SUPPLY/AGGREGATE DEMAND THEORY

CAUSES OF SHIFTS

AGGREGATE DEMAND

CONFIDENCE/EXPECTATIONS

POLICY

MONETARY POLICY

AGGREGATE SUPPLY

COST

TAXES/POLICY

CONFIDENCE

EFFECTS OF SHIFTS IN AGGREGATE SUPPLY/AGGREGATE DEMAND

IDENTIFY THE EFFECTS OF A SHIFT IN TERMS OF

INFLATION

EXPANSION

RECESSION

JOBS

UNEMPLOYMENT RATE

KEYNESIAN THEORY

SYSTEM UNSTABLE, PROBLEMS CAN GROW

IN THE LONG RUN WE ARE ALL DEAD

EQUILIBIUM CAN => UNEMPLOYMENT

NEED FOR GOVT INTERVENTION

AT WHAT GDP DOES PRODUCTION = SALES?

SALES = C + I + G + X - M

ALWAYS TRUE

PRODUCTION = C + I + G + X - M

ONLY TRUE AT EQUILIBRIUM

FILE 252N06.HTML

CONSUMER SPENDING/CONSUMPTION FUNCTION

CONSUMER SPENDING DRIVEN BY DISPOSABLE INCOME

CALCULATE MARGINAL PROPENSITY TO CONSUME (MPC)

C = DPI - SAVING

INVESTMENT DRIVEN BY INTEREST RATES

ACCELERATOR HYPOTHESIS

DESIRED OPERATING RATE IS LESS THAN 100%

TRADE PATTERNS

NET EXPORTS AFFECTED BY PATTERNS IN ALL COUNTRIES

EXCHANGE RATES

PRICES

INCOMES

FILE: 252N07.HTML

ADJUSTMENT CYCLE

dSALES => dGDP => dDPI => dSALES

BE ABLE TO EXPLAIN THE SEQUENCE OF EVENTS

MULTIPLIER EFFECT

MULTIPLIER CONCEPT

MULTIPLIER CALCULATES EFFECT OF SPENDING CHANGE

DESIRED INVENTORY VS UNINTENDED INVENTORY

CALCULATE MULTIPLIER FROM MPC

FISCAL STIMULUS

TARGET LEVEL OF GDP

USE MULTIPLIER TO CHOOSE POLICY

dGDP = [MULTIPLIER] * d FISCAL POLICY

IF dGDP = M*dG

THEN dG = dGDP/M

INTEREST RATES/CROWDING OUT

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FISCAL STRATEGIES:

DIFFERENCE BETWEEN FISCAL TOOLS VS. FISCAL STRATEGY

DOING NOTHING IS NOT AN OPTION:

BUDGET REQUIRED EACH YEAR

ANNUAL BALANCE

EFFECTS OF OPTIMISTIC, CONFIDENT LEADERS

FORECAST REQUIRED

NO REDUCTION OF DEBT

BUSINESS CYCLE BALANCE

DOUBLE FORECAST REQUIRED (O MOS. ‑ 10 YRS)

MORE DIFFICULT TO BALANCE DUE TO DEPTHS AND HEIGHTS

NO REDUCTION OF DEBT

STRUCTURAL DEFICIT (FORMERLY FULL EMPLOYMENT BALANCE)

NO FORECAST REQUIRED

REALISTIC TARGET REQUIRED

ESTIMATING THE FULL UNEMPLOYMENT RATE

DIFFERENCE BETWEEN FISCAL TOOLS VS. FISCAL STRATEGY

252N08.HTML

FIAT MONEY

BANK RUN

FEDERAL RESERVE ACT OF 1913

LABOR NOT NECESSARILY REPRESENTED ON BOARD

ALAN GREENSPAN IS CHAIR

OPEN MARKET COMMITTEE (FOMC)

MODERN BANK FAILURES

OVER 95 PERCENT DUE TO BAD LOANS

LESS THAN 5% FOR ILLEGAL OR UNETHICAL ACTIVITY

MONETARY BASE:

RAW MATERIAL, NOT MONEY

NOT A MEASURE OF THE MONEY SUPPLY

MONEY SUPPLY MEASURES

M1 V M2 V M3

MONEY CREATION

RESERVE REQUIREMENT

NONE FOR SMALL BANKS

10 PCT FOR LARGE BANKS

NONE FOR ANY CD’S OR SAVINGS ACCOUNTS

RESERVE ASSET

EXCESS RESERVES

LOAN CREATION CAPACITY

MONEY CREATION CAPACITY

NO FED CONTROL

MONEY CREATION CAPACITY 
= EXCESS RESERVES 

= LOAN CREATION CAPACITY

MONEY CREATION REQUIREMENTS

EXCESS RESERVES

WILLING LENDER

WILLING BORROWER

FED USES TOOLS TO MEET OBJECTIVES

252N10.HTML

OBJECTIVES OF MONETARY POLICY

OUTPUT/GDP

JOBS/ UNEMPLOYMENT RATE

INFLATION/DEFLATION TARGET

EXCHANGE RATE TARGET

TOOLS

ACTIVE TOOLS

OPEN MARKET PURCHASES

INACTIVE TOOLS (NOT USED)

OPEN MARKET SALES

DISCOUNT RATE MANAGEMENT (AS OF JAN03)

RESERVE REQUIREMENT (AS OF 1937)

OPEN MARKET OPERATIONS/PURCHASES
 TARGET ON FFR (CURRENTLY 1 PCT)
 T-BILLS
 ROLE OF PRIMARY DEALERS

BOND (T-BILL) MARKET
 FACE VALUE
 MATURITY DATE
 MARKET PRICE

INTEREST RATE

FEDERAL FUNDS MARKET

RATE DETERMINATION

EFFECT OF OPEN MARKET PURCHASE

BOND MARKET/MONEY MARKET INTERACTION

EFFECTS OF INCREASED L

ON MONEY MARKET

ON BOND MARKET

ON INTEREST RATES AND BOND PRICES

EFFECTS OF INCREASED M

ON MONEY MARKET

ON BOND MARKET

ON INTEREST RATES AND BOND PRICES

EFFECTS OF INCREASED INCOME (GDP)

ON MONEY MARKET

ON BOND MARKET

ON INTEREST RATES AND BOND PRICES

EFFECTS OF INCREASED PRICES (INFLATION)

ON MONEY MARKET

ON BOND MARKET

ON INTEREST RATES AND BOND PRICES

TYPES OF SPENDING SENSITIVE TO INTEREST RATES

ANYTHING WITH BORROWED MONEY

MONETARIST PERSPECTIVE

MV = PQ

VELOCITY OF MONEY

LONG RUN STABILITY FOR ECONOMY

PHILLIPS CURVE

 
EXPLAIN PHILLIPS CURVE USING
 AGGREGATE DEMAND
 AGGREGATE SUPPLY
 CAPACITY LIMITATIONS

FILE: 252N11.HTML

SUPPLY SIDE ECONOMICS/CAUSES OF SHIFT IN AGGREGATE SUPPLY

 COST REDUCTION
 AFTER TAX PROFIT EXPECTATIONS
 MARGINAL TAX RATE
 LABOR PRODUCTIVITY
 INVESTMENT

HUMAN CAPITAL/EDUCATION

SOURCES OF PRODUCTIVITY GROWTH