Unit 4 Money Exchange

3-20-17

Unit 4 Money Exchange

Barter System

• good and services are traded directly
• no money exchange

Money

• anything generally accepted in payment for goods and services
• money does not equal wealth and income
• wealth equals total collection of assets that store value 
• Income equals flow of earnings per unit of time
• can be used as

1. Medium of exchange: buys goods and services
2. Unit of account: measuring value of goods and services
3. Store value

Types of Money

• Representatives $
• something of value
• ex: IOU
• Commodity $
• something that preforms function of money and has alternative uses
• ex: Gold, salt, silver
• Flat $
• $ cause govt says so
• ex: paper, coin

Characteristics $

• durability, portability, divisibility, limited supply, uniformity, acceptability

3 Types of Money

• liquidity- ease with which an asset can be accessed and converted into cash

1. M1 (High Liquidity)- coins, currency, and checkable deposits (personal and corporate checking accounts which are largest compent of M1). AKA demand deposits. Generally money supply
2. M2 (Medium Liquidity)- M1 and savings deposits ($ market accounts), time deposits (CDs: certificates of deposit), and mutual funds below $100k
3. M3 (Low Liquidity)- M2 plus time deposits above $100k

Financial institutions

1. store money
2. save money

• savings acct., checking acct., CD, money market acct.

      3. loan money

• Interest- price paid for the use of borrowed money
• Principal- amount that you borrow

Types of Financial Intermediaries

• Commercial Banks
• savings and loans institution
• Credit Union
• Mutual Funds Companies
• Finance Companies

Financial System

• Assets- anything of monetary value owned by a person or business.
• Financial Asset- a paper claim that entitles the buyer to future income from the sellers.
• Physical Asset- claim on tangible object (Ex: car, house)
• If you go to your bank and take out loan 
• bank created Financial Asset, you have created a Liability
• Liability- requirement to pay money in the future (usually with interest)
• there are 5 major financial assets: loans, stocks, bonds, loan-backed securities, and bank deposits

Interest rates and Inflation

• The time value of money- A dollar is worth more today that it is tomorrow. You are losing money every second you are not investing.

Present vs. Future Value

• Future Value: If you invest (or lend) money to someone, it will compond (grow) according to the following equation: FV=PV(1+i)^t
• Present Value: amount of $ I need to invest new, in order to get some amount (FVS known) in the future. PV=FV/ (1+i)^N

Simple Interest Formula

• Let v= future value of $
• p= present value of $
• r= real interest rate (nominal-inflation rate) expressed as a decimal
• n= years
• k= # of times interest is credited per year
• simple interest formula
• v=(1+r) ^n X P

WOWOWOWOWOWOWOW!!! DON'T WORRY I GOTCHU

Unit 3

3-7-17

Fiscal Policy

How govt stabilize eco.

• Actions by congress to stabilize economy

Fiscal Policy

• changes in expenditures or tax revenues of federal govt
• 2 tools of fiscal polic
• taxes govt can increase or decrease taxes 
• spending govt can increase or decrease spending
• Fiscal policy is encoded to promote our nations economic goals: full employment, price stability, economic growth

Deficit, Surplus, Dept

• Balanced budget
• revenues = expenditures
• Budget deficit
• revenues< expenditures
• Budget Surplus
• revenue> expenditures
• govt debt
• sum of all deficits - sum of all surpluses
• Govt must borrow money when it runs a budget deficit
• Govt borrows from
• individuals, corporations, financial institution, foreign entities of foreign

Fiscal policy 2 options

• Discretionary Fiscal Policy(action)
• expansionary fiscal policy- think deficit
• constractionary fiscal policy- think surplus
• Non Discretionary Fiscal Policy (no action)

3 types of taxes

• 1- progressive taxes- takes a larger percent of income from high income group
• ex: current federal income tax system
• 2- proportional taxes (flat rate)- takes same % of income from all income groups
• 3- Regressive tax- takes larger percentage from low income groups

Contractionary Fiscal Policy

• laws that reduce inflation, decrease GDP
• decrease govt spending
• tax increase
• combinations of the two

Expansionary FP

• law that reduce unemployment and increases GDP
• increase govt spending
• decrease tax on consumers
• combinations of the two

Automatic/Built in stabilizer

• Anything that increases govt budget deficit during recession and increases its budget surplus during inflation without requiring explicit action by policymakers
• 1- transfer payments
• welfare checks, food stamps, unemployment checks
• 2- progressive income tax
• automatic stabilizers take 33-50% out 

Unit 3

2-26-17

MPC and MPS

Spending Multiplier effect

• initial change in spending (C,Ig,G,Xn) causes larger change in aggregate spending/ (AD)
• multiplier = Δin AD/Δin spending or ΔAD/ΔGDP
• why does this happen?
• expenditures and income flow continuously which set off spending increase in economy

Calculating spending multiplier

• multiplier = 1/(1-MPC) or 1/MPS
• Multilier are (+) when there is an increase in spending and (-) when there is a decrease

Calculate tax multiplier

• when govt taxes, the multiplier works in reverse
• bc now money is leaving circular flow
• Tax multiplier (note: it's negative)
• formula = -MPC/(1-MPC) or -MPC/MPS
• If there tax - cut, multiplier is positive bc there now more money in circular flow 
• Range 1- employment is high, roduction is low
• Range 2- unemployment is medium out put is high
• Range 3 - output high unemployment   

Unit 3

2-23-17

Consumption and savings

Disposable income (DI)

• income after taxes/ net income
• DI= gross income - taxes
• 2 choices, disposable income, households can either
• consume (spend money on goods and services) 
• save(not spend money on goods and services)

Consumption

• household spending
• ability to consume is contained by
• amount of disposable income
• propensity to save
• Do households consume if DI = 0?
• autonomous consumption
• Dissavings
• APC = C/DI % DI that is spent

Savings

• Household not spending
• ability to save is constrained by
• amount of disposable income
• propensity to consume
• Do households save if DI = 0? - No
• APS = S/DI% DI that not spent

APC and APS

• APC + APS = 1
• 1 - APC = APS
• 1 - APS = APC
• APC > 1 Dis-savings 
• -APS dis-savings

MPC and MPS

• Marginal Propensity to consume
• ΔC/Δ DI
• % of every extra dollar earned that is spent
• Marginal Propensity to save 
• ΔS/ΔDI
• % of every extra dollar earned that is saved
• MPC + MPS = 1
• 1- MPC = MPS
• 1- MPS = MPC

Determinants of C and S

• Wealth
• Expectations
• Household debt
• Taxes

  

Unit 3

2-21-17

Interest Rates and Investment Demand

• Investment
• Money spent or expenditures on:
• new plants (factories)
• capital equipment(machinery) 
• technology(hardware and software)
• new homes
• inventories(goods sold by producers)
• Expected Rates of Return
• cost/ benefit analysis - how business make investment
• how business count cost?
• invest cost
• How business determine amount of investment they undertake
• if expected return > interest cost, then invest
• if expected return < interest cost, then do not invest 
•  Real(R%) vs.Nominal(I%)
• How you compute real interest rate (R%)?
• r%= i% - π%
• nominal is observable rate of invest, real subtract out inflation ( π%) and is only known ex post factor
• what determines cost of investment decision?
• real interest rate (R%)
• Investment(ID) Demand curve shifts in (ID)
• shape of investment demand curve
• downward shaping
• Shifts in (ID)
• cost of production
• business taxes
• technology change
• stock of capital
• expectations

Aggregate supply

• Level of real GDP that firms produce at each price level (PL)
• long run vs. short run
• long run
• will be vertical
• period of time where input prices are completely flexible and adjust changes in price level
• level of real GDP supplied is independent at price level
• short run
• period where input prices sticky and do not adjust to changes in price levellevel of RGDP supplied directly related to price lvl
• Long run aggregate supply (LRAS)
• Yf is full employment
• bc inut prices are sticky SRAS is upward sloping
• Short run aggregate supply(SRAS)
• SRAS increase a shift to the right
• SRAS decrease a shift to the left 
• Per unit production cost= total input cost/ total output
• Determinate of SRAS
• Input price, productivity legal institutional environment
• Input
• Domestic resources prices
• wage(78% of business costs)
• price of capital  
• raw material (commodity prices)
• foreign resources price
• strong $- lower foreign resources prices
• weak= higher foreign resource prices
• Market Power
• monopolies and cartel that control resources control rice of those resources
• increase in resource prices = SRAS<-----
• decrease in resources prices= SRAS------>
• Productivity
• total output/total input
• more productivity = lower unit production cost = SRAS ----->
• lower productivity = higher unit production cost = SRAS<-----
• legal institution environment
• Taxes and subsides
• taxes ($ to govt) to business reduce per unit production cost=  SRAS <---
• subsides ($ to govt) on business reduce per unit production cost = SRAS--->
• govt regulation creates a cost of compliance= SRAS----->
• Deregulation reduces compliance cost = SRAS ---->

Unit 3

2-16-17

Aggregate Demand Curve

• Aggregate Demand curve
• AD is demand by consumers, businesses, government and foreign countries 
• changes in price level cause move along curve not shift on curve
• inverse relationship between price level and level of RGDP

• 3 reasons why AD downward sloping
• 1- wealth effect
• higher prices reduce purchasing power of $
• decreases quantity of expenditures
• lower price level increase purchasing power and increase expenditures
• 2- interest rate effect
• As price level increases, lenders need to charge higher interest rates to get real return on their loans
•  higher interest rates discourage consumer spending and business investment
• 3- Foreign trade effect
• When U.S, price level increases, foreign buyers purchases fewer U.S. goods and americans buy more foreign goods
• exports fall and imports rise causing RGDP demanded to fall. (Xn decreases)
• Shift in AD
• 2 parts to shift in AD
• A change in GDP
• multiplier effect that produces greater change than original change in 4 component
• Increases in AD=AD right
• Decrease in AD=AD left  
• 4 determinate of AD 
• 1-GDP: C, IG, G, Xn
• 2: Change in investment spending
• real interest rates (price of borrowing $)
• (if interest rate increases/decreases)
• future business expectations (High expectations)
• productivity and technology (new robots)
• business taxes (higher corporate taxes mean)
• 3: Change in govt spending
• war, nationalized health care, decrease defense spending
• 4 : change in net exports (X-M)
• exchange rates
• if U.S, dollar depreciates relative to euro
• national income compared abroad
• if major importer has a recession
• AD= GDP
• "if U.S. gets a cold, Canada gets Pneumonia
• Govt spending
• more govt spending AD ------->
• less govt spending AD <------- 

REALLY?!? LAST MINUTE STUDYING AGAIN?

Unit 2

1-26-17

Circular Flow Model

• Household- A person/group that shares income
• Business/Firm- Organization that produces goods and serves for sale
• GDP
• G-Gross
• D-Domestic
• P-Product
• Total value of all final good and services produced with countries border in a given year
• includes all production or income earned within U.S. and foreign countries
• Excludes production outside of U.S. even by Americans 
• GNP
• G-Gross
• N-National
• P-Production
• total value of all final goods services produced by the Americans in a given year
• includes production/income earned by Americans anywhere in the world
• excludes production by non-Americans even in the U.S. 
• GDP
• Formula: C +  IG + G + XN
• C- consumption (67%)
• IG- Gross private domestic investment (18%)
• factory equipment maintenance
• new factory equipment 
• construction of housing 
• Unsold inventory of product built in a year 
• G- Government purchases (17%)
• XN- Net exports
• Formula: Exports - imports 
• Include
• C
• IG
• G
• XN
• Exclude
• Intermediate goods
• goods to make final good
• avoid double or multiple
• Used or secondhand
• Stocks;bonds
• No production
• Unreported business activity(ex. Tips)
• Gifts and trans-fee payments
• things such as scholarships, social security , unemployment
• illegal activity
• Non market activity
• Income approval to GDP
• W + R + I + P +
• W-wages(compensation of employees/salaries)
• R-Rents(income received by households and business that supply property resources
• I- interest(money paid by private businesses for to supplier or loans used to purchase capital)
• P-Profits(When you own your own business)
• Formulas that you need to know
• Trade: Exports - imports
• Budget: Gov't purchases for goods and services + gov't transfer payments - gov't fee
• National income: compensation of employees + Rental Income + Interest Income + Proprietor's Income + Corporate Profits
• 2nd: GDP - indirect Business taxes - Depreciation - Net foreign factor payments
• Disposable personal income: National income - personal household taxes + gov't transfer payments
• Net National Product: GNP - Depreciation
• Net Domestic Product: GDP - Depreciation
•  Depreciation
• loss in value in capital equipment due to normal wear and tear 
• Gross investment formula: Net investment + Depreciation
• house is not consumption
• GNP formula: GDP + Net foreign factor payment
• another phrase for depreciation is consumption for fixed capital

2-3-17

Nominal GDP vs. Real GDP

• Nominal GDP
• value of output produced in current prices
• Formula : P X Q
• deduced from current year prices
• Value of output produced in constant based yr. prices
• Real GDP
• Formula: P X Q
• base yr. prices
• adjusted for inflation
• nominal can increases yr. to yr.
• Real GDP can increases yr. to yr. if only output increases
• base yr. nominal = GDP
• years after base yr., nominal > real GDP
• years before base year Real GDP> nominal GDP
• Base yr. is always the earlier year
• GDP Deflator
• Price index used to adjust from nominal to real
• Formula: (nominal GDP) / (Real GDP) X 100
• Base yr. GDP deflator will always = 100
• yrs. after base yr. GDP deflator will be greater than 100
• yrs. before base yr. GDP deflator will be less than 100
• Consumer Price Index (CPI)
• measures inflation by tracking changes in the price of market basket of goods
• Cars, trucks, etc.
• Formula: (price of market basket in current yr.) / (price of market basket in base yr.) X 100
• Inflation
• General rising level of prices
• reduces the purchasing power of money
• amount of goods and serves that money buys
• ideal inflation rate is 2-3%
• 3 causes of inflation
• Printing of money
• Demand pull inflation
• demand pulls up prices
• demand increases but supply stats the same
• overheated economy with excessive spending but same amount of good
• Cost push inflation
• higher production cost increase prices
• formula inflation: (current year price index - base yr. price index) / (base yr. price index) X 100 
• deflation - decline in general price level
• disinflation - occurs when inflation rate itself declines
• rule of 70
• used to calculate # of yrs. it will take for price level to double at any given rate of inflation
• formula: 70 / (annual rate of inflation
• real interest rate - amount of # that is borrowed 
• formula: real = nominal interest rate - expected inflation
• percentage increase in purchasing power that is borrower pays to the lender
• Nominal interest rate - percentage increase in money that the borrowers pay back to the lender not adjusting for inflation 
• Hurt inflation
• lenders people who lend money ( at fixed interest rates)
• people with fixed income
• savers
• Helped by inflation
• borrowers- people who borrow money
• a business where the price of the product increases faster than the price of resources

2-9-17

Unemployment

• Percent of people in labor force that want a job but not working
• Labor force
• consist of unemployed and employed
• if you work at least 1 hour a month than you are employed
• part time workers
• Not in labor force
• kids
• full time students
• people in mental institution 
• incarcerated- jail and prison
• retirees
• suesy home makers- people who stay home
• military person
• discouraged
• when  you are over 24 you are considered part of the work force
• unemployment= (unemployed + employed)
• also: (number employed) / (number in labor force) X 100
• 4 types of unemployment
• standard #4-5%
• 1. frictional unemployment1% 
• temporarily employed / being between jobs
• individual qualified workers with transferable skills but are not working     
• ex: high school and college graduates looking for jobs
• 2. seasonal unemployment
• specific type of frictional unemployment which due to tome of yr. and nature of the job
• these jobs will come back
• 3. structural unemployment
• changes in structures of labor force make some skill jobs obsolete
• workers DO NOT have transferable skill and jobs will never come back
• workers must learn new skill to result new jobs
• permanent loss of jobs is call creative destruction
• 4. Cyclical unemployment
• unemployment results from econ. down turns ( recession)
• as demand for goods and services fall, demand for labor falls and workers are fired
• Natural rate and full employment
• 2 of 3 types of unemployment are unavoidable
• frictional unemployment
• structural employment
• together make up natural rate of unemployment 
• formula: Frictional; +   Structural = full employment to NRU (4 to 5%)
• Full employment = no cyclical employment
• Okuns law: when unemployment rises 1% above natural rate , GDP falls by about 2%

WOW! LAST MINUTE STUDYING AGAIN?!?