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56 Cards in this Set
- Front
- Back
determinants of productivity
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1. physical capital (bldgs and structures)
2. human capital (knowledge and skills) 3. natural resources 4. technical knowledge |
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principle of diminishing returns
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the benefit from an extra unit of input declines as the quantity of the input increases
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why is the worker productivity graph in such a slope
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positive slope: b/c more capital brings more output
decreasing slope: b/c of diminishing returns |
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catch up effect
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less developed countries can increase their GDP MORE RAPIDLY B/C THEY BENEFIT MORE THAN DEVELOPED COUNTRIES FROM CAPITAL INVESTMENT OF SIMILAR SIZES
less productive countries befefit more b/c its on the part of the graph with a steeper slope |
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municipal bonds
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issued from gov't
owners dont pay income tax on it lower interest rate |
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debt finance
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bond market
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equity finance
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stock market
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index funds
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mutual funds that automatically buy stocks in a given stock index
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PUBLIC SAVING
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T-G
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PRIVATE SAVING
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Y-T-C
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NATIONAL SAVING
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S=I= Y-C-G
Y=GDP economy income that remains after consumption and gov't purchases (closed economy) |
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unemployed
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available for work but not employed (trying to find work for over 4 weeks)
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not in labor force
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student, retired person, discouraged worker
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unemployment rate
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# of unemployed/
labor force x 100 |
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natural rate of unemployement
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normal rate
NOT CYCLICAL |
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cyclical rate of unemployment
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deviation from natural rate
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frictional unemployment
...why? |
searching
(short term) b/c 1. sectoral shifts: changes in demand among different industries/regions 2. always changing economy |
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structural unemployment
...why? |
waiting
(long term) b/c 1. min wage laws 2. unions 3. efficiency wages |
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Efficiency Wages
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thoery that firms operate more efficiently if wages are higher
worker 1. health 2. turnover (keeps workers, low training cost) 3. quality 4. effort |
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3 requirements of "money"
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1. MEDIUM OF EXCHANGE
2. UNIT OF ACCOUNT (comparable prices) 3. STORE OF VALUE (purchasing power in the present and in the future) |
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commodity money
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money with intrinsic value
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fiat money
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no intrinsic value
established by gov't |
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M-1 money
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checkable deposits
cash |
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M-2 money
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M-1 plus
savings mutual funds small-time deposits |
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Board of Governers
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decide
-discount rate -rr -fed funds rate |
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Federal Open Market Committee
(FOMC) |
control
open market operations (purchasing and selling of gov't bonds) |
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money multiplier
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amt of $ that a banking system generates
-reciprocal of rr -higher rr means a smaller mm |
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3 ways Fed can change money supply
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1. OPEN MARKET OPERATIONS
2. DISCOUNT RATE (interest rate on the loans that the fed makes to banks) 3. RESERVE REQUIREMENTS |
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Federal Funds Rate
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interest rates that banks charge each other
fed decides on a target rate |
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Classical dichotomy theory
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2 types of variables:
1.REAL: measure in terms of relativity (GDP, interest rate, unemployment) 2. NOMINAL: measure in terms of money ($ supply, price level) real variables don't depend on nominal variables REAL ARE THE ONLY THING THAT MATTER IN THE LONG RUN |
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money neutrality thoery
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changes in money supply affect NOMINAL variables but NOT real
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what makes AD SHIFT
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Changes in GDP
C I G NX |
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what makes LRAS SHIFT
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changes in supplies of
1.LABOR 2. CAPITAL 3. NATURAL RESOURCES 4. TECHNOLOGY |
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what makes SRAS SHIFT
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everything that shifts LRAS
AND expected price level if Pe increases, shift left in the long run, expected price = actual price |
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why AD slopes downward
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1. wealth effect
2. interest rate effect 3. exchange rate effect |
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why SRAS slopes upward
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1. sticky wage theory
2. sticky price thory 3. misperceptions theory |
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natural rate of output
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what an economy produces when unemployment is at its normal rate
economy gravitates toward this in the LONG RUN |
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STAGFLATION
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stagnation = falling output
inflation = rising prices |
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demand for money
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interest rate determines opp. cost of holding $ cash
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fiscal policy
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1. gov't spending
2. taxation long run : CROWDING OUT EFFECT |
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monetary policy
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changing money supply/interest rate by changing money supply
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CPI
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CONSUMER PRICE INDEX
CPI current yr/ CPi base yr x 100 |
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inflation rate calculation
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CPI2-CPI1/ x 100
CPI1 or GDP deflator 2-GDP deflator 1/ x100 GDP deflator 1 |
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why CPI doesn't perfectly measure standard of living
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1. substitution bias (consumers substitute toward goods that have become relatively less expenseive)
2. introduction of new goods 3. unmeasured quality change (if quality increased, dollar value increased) |
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GDP deflator vs CPI
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GDP is only domestically
"currently produced" GS CPI is products bought by a "typical" consumer basket is FIXED |
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real interest rate
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nominal interest rate - inflation rate
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REAL GDP
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production of goods and services valued at CONSTANT PRICES
reflects growth change base yr prices with current year amounts |
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GDP deflator
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nominal GDP/ x 100
real GDP reflects changes in prices |
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President of fed reserve
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BEN BURNANKE
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unemployment in CA
unemployment in SAC |
CA: 12%
sac: 10% |
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crowding out
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gov't budget deficits (spending) cause a decrease in overall investment
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how can interest rates AND investments increase
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if EXPECTED RETURN on increasing investment is HIGH
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spending multiplier effect
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AD demand shifts extra
multiplier = 1/1-MPC applies to C I G and NX |
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MPC
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marginal propensity to consume
extra income that househods consume instead of save |
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automatic stabilizers
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stimulate AD durring a recession without policy makers doing anything!
1. taxes: fall during a recession (like a tax cut) 2. gov't spending increases (for unemployment benefits, etc...stimulates AD) |
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perfectly competitive market (4)
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1. many buyers and sellers
2. free entry 3. price takers 4. homogenous goods |