MacroEcon Ex 2

Question Answer
Tax Pd-Ps: drives a wedge between the price buyers pay and the price sellers receive
Subsidy Go to the right hand side of equilibrium — government is giving you money so government surplus is negative
Laffer Curve shows relationship between the size of the tax and tax revenue — if tax too much, then the government actually loses money
Gross Domestic Product the market value of all FINAL goods and services produced within a country in a given period of time
When firms spend money what does it become income
the circular flow diagram illustrates gdp as spending, revenue
What kind of data is GDP annually or a quarter (3 months)
components that add up to the GDP Y=C+G+I+NX
transfer payments are social security and unemployment insurance benefits — Government excludes these
what does NX stand for Net Exports
How to calculate NX exports – imports
Y stands for Real GDP
nominal gdp values output using CURRENT prices; not corrected for inflation
Real Gdp values output using the prices of a BASE year; is corrected for inflation
g is economic growth; real gdp this year – real gdp last year/ real gdp last year * 100%
what does gdp not do does not value quality of environment, does not value leisure time, does not value non-market activity, does not value equitable distribution of income
Consumer Price Index measure the typical consumer's cost of living
how is consumer price index calculated Cost of living this year/ cost of living base year *100
definition of consumption spending by households on goods and services (new housing, haircut, refrigerator)
investment purchase of goods that will be used in the future to produce more goods and services
Govt purchases spending on goods and services by local, state, and federal government (repaving highways)
net exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports) (french wine)
problems with CPI include substitution bias (beef too spendy, get chx instead), introduction of new goods (iphone, GPS), unmeasured quality change (quality goes up so does value); CPI overstates increases in COL
how to compare dollar amts with inflation amount in todays dollars = amount in year t dollars * price level today/price level in yr t
to find inflation rate change or percentage change in x: new value of x – old value of x/ old value of x * 100
present value the amount that would be needed today to yield that future sum at prevailing interest rates
PV calculated: PV = FV/(1+r)^N
future value the amount the sum will be worth at a given future date, when allowed to earn interest at the prevailing rate
FV calculated: FV = PV (1+r)^N
compounding accumulation of a sum of money where the interest earned on the sum earns additional interest
the rule of 70 if a variable grows at a rate of x percent per year, that variable will double in about 70/x years
if someone is risk averse they do not like uncertainty
utility subjective measure of well-being that depends on wealth or numeric value of satisfaction/dissatisfaction (3 out of 5 stars)
diminishing marginal utility a $1000 loss reduces utility more than a $1000 gain increases it
adverse selection a high risk person benefits more from insurance, so is more likely to purchase it (don't have it now)
moral hazard people with insurance have less incentive to avoid risky behavior
diversification reduces risk by replacing a single risk with a large number of smaller, unrelated risks; can reduce firm specific risk (affects only single company), cannot reduce market-risk (affects all companies in stock market)
index fund mutual fund that buys all the stocks in a given stock index
revenue raised by inflation tax is known as seigniorage
how to calculate gdp price level x Quantity
monetary neutrality the proposition that a change in the money supply affects Nominal variables, not real variables
unit of account provides buyers and sellers a common reference point for valuing goods ad services — listed in same units (dollars) ?
store of value transferring purchasing power from the present to the future — savings
medium of exchange provides an accepted method of payment for goods and services — check — reduces transaction costs
liquidity refers to how quickly an asset can be converted into a medium of exchange
an item has intrinsic value if it has value outside of its use as money (commodity)
what is money anything that is generally accepted in payments for goods/services or in the repayment of debts
wealth the total collection of pieces of property that serve to store value
income flow of earnings per unit of time (flow concept)
commodity money valuable, easily standardized and divisible commodities
Fiat money Paper money decreed by government as legal tender
checks instruction to your bank to transfer money from your account
electronic payment online bill payment
E-money electronic money — debit card, stored-valued card, e-cash
what falls under M1 (most liquid assets) currency + travelers checks + demand deposits + other checkable deposits
what falls under M2 everything in M1 + more — savings ; not so liquid
Financial system helps match the saving of one person with the investment of another
Financial market directly provide funds to borrowers
Bond certificate of indebtedness
stock claim to partial ownership in a firm
financial intermediaries institutions through which savers can indirectly provide funds to borrowers
Mutual funds institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
private saving portion of households income that is not used for consumption or paying taxes = Y-T-C
public savin ax revenue less government spending =T- G
national saving private saving + public saving = Y-C-G
saving means investment in a closed economy
budget surplus an excess of tax revenue over government spending = T-G (=public saving)
Budget defecit a shortfall of tax revenue from government spending =G-T