2. Opportunity cost - The value of what is given up when you make a choice is the opportunity cost of your decision Positive Economics - Economic analysis that have a definite right or wrong answer - Laws of economics Normative Economics - Economic analysis involving how the world should work - Is it better to impose a certain economic policy or not Unemployment Rate - Percentage of the Labor Force that is unemployed Number of people unemployed 7 million divided by total workforce 150 million X 100 =.046 x 100 = 4.6%

3. Opportunity cost - The value of what is given up when you make a choice is the opportunity cost of your decision Positive Economics - Economic analysis that have a definite right or wrong answer - Laws of economics Normative Economics - Economic analysis involving how the world should work - Is it better to impose a certain economic policy or not Unemployment Rate - Percentage of the Labor Force that is unemployed Number of people unemployed 7 million divided by total workforce 150 million X 100 =.046 x 100 = 4.6%

4. Opportunity Cost - - Opportunity cost of Fish to Coconuts - from pt. A to pt. B OC of 8 fish = 6 coconuts / OC of 1 fish = 6/8 or 3/4 of a coconut OC of 6 coconuts = 8 fish / OC of 1 coconut = 8/6 or 1&1/3 fish

5. 4 Economic Growth - Expansion of an economies production possibilities - ability to produce at a point outside original PPC

6. 5 Absolute Advantage - Can produce more of a good with given resources Comparative Advantage - Having a lower opportunity cost for producing a good

7. 6 Tom has a comparative advantage (lower opp. cost) in producing fish Hank has a comparative advantage (lower opp. cost) in producing coconuts

8. 7 Tom produces only fish (lower opp. cost) Hank produces only coconuts (lower opp. cost) They trade for what the other produces

9. 8 Tom and Hank each increase their consumption of both goods by specializing and trading with each other

10. PamlandLillytonia Wheat 150 1 300 2 200 1 600 3 DVDs 2 1 600 200 = = =2 =3

11. 0 Quantity Price $ 123 1 2 3 4 5 A B 4 Decrease in Quantity Demanded for Butter Quantity Price $ 1 2 3 1 2 3 4 5 4 Increase in Demand for Margarine 0

12. 0 Quantity Price $ 123 1 2 3 4 5 A B 4 Decrease in Quantity Demanded for Hotdogs Quantity Price $ 1 2 3 1 2 3 4 5 4 Decrease in Demand for Buns 0

13. 12 Quick Check: If the price of a good increases, the demand for a substitute good will _____________? If the price of a good decreases, the demand for a compliment good will _____________? increase

14. 13 Quick Check: If your income increases, your demand for inferior goods will _____________? If your income decreases, your demand for normal goods will _____________? decrease

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25. 24 GDP as Spending - Total of all domestic spending on final goods and services GDP = C + I + G + X - IM (Consumer + Investments + Government + Net Exports) GDP as Factor Income - Total income earned by factors of production = Labor + Interest + Rent + Profit of shareholders

26. BasketballsGallons of MilkHaircuts YearPrice Number sold Price Number sold Price Number sold 2000$56.0070$3.10600$10220 2004$59.00100$3.30850$11270 2008$64.00110$4.10900$15300 Nominal GDP: 2000 _______ 2004 _______ 2008 _______ Real GDP: 2000 _______ 2004 _______ 2008 _______ $7980 $10,935$11,950 $11,675$15,230 x ++ x x

27. 26 Unemployment Rate - % of the Labor Force that is unemployed - good indicator of job market condition increases during recession - decreases during expansion Number of unemployed 7 million Labor force (Empl. + Unempl.) 150 million =.046 x 100 = 4.6% Labor Force Participation Rate - % of working age population that is in the labor force Labor Force 150 million Population over 16 200 million =.75 x 100 = 75% X 100

28. Quick Check: Frictional Unemployment - Structural Unemployment - Cyclical Unemployment - A) Unemployment that follows phases of “business cycle” B) Unemployment that occurs when people are looking for work C) When workers’ skills do not match those needed as the job market changes B A C

29. 28 Inflation Rate - The percent increase in the level of prices per year Inflation Rate = X 100 - Avg. U.S. inflation is around 3 - 4% per year Real Interest Rate - Nominal interest rate adjusted for inflation - Nominal Interest Rate minus Inflation Rate Ex: NIR of 8% - Inflation Rate of 5% = Real Interest of 3% Difference in Price Level Original Price level

30. 29 Calculating CPI - Current cost of “market basket” base period cost - Current base period is 1982-1984 (CPI = 100) Example: 2014 - $360 Base - $200 Inflation Rate - Inflation rate is percent change from year to year difference in CPI original CPI Example: 80 divided by 100 =.80 X 100 = 80% Avg. annual Inflation rate = 80% divided by 30 yrs. = 2.6% = 1.80 x 100 = 180 x 100 X 100

31. Sect. 4 - National Income & Price Determination Module 16 - Income & Expenditure Marginal Propensity to Consume (MPC) - What is the increase in consumer spending when disposable income rises by $1 MPC = Change in Consumer Spending Change in Disposable income Ex: If consumer spending goes up by $6 billion when disposable income goes up by $10 billion MPC = = 0.6 ($.60 of every dollar of disp. income) $6B $10B

32. 31 Marginal Propensity to Save (MPS) - The fraction of additional $1 of disposable income that is saved MPS = (1 - MPC) EX: 1 -.6 =.4 ($.40 of every dollar) Autonomous Change in Aggregate Spending - An initial rise or fall in aggregate spending that is the cause of a series of income and spending changes Multiplier - The ratio of of total change in GDP caused by Autonomous Change in Consumer Spending 1 1 (1- MPC) MPS Ex: = = 2.5 X $100 billion = $250 billion =Multiplier = 1.4 1 (1 -.6)

33. 32 Consumption Function - Equation showing how a consumer household’s spending varies with disposable income c = a + MPC x Yd c - consumer spending a - autonomous consumer spending MPC - Marginal Propensity to Consume Yd - current household disposable income

34. The Long-Run Aggregate Supply Curve - Shows relationship between price level and aggregate output supplied if all prices were fully flexible (wages, inputs, sale price) - shows potential aggregate output Short Run to Long Run - Short-run aggregate supply can be above or below potential output but over time it will equal long-run potential output

37. Recessionary Gap - When aggregate output is below potential output - initiated by a negative demand shock Inflationary Gap - When aggregate output is above potential output - initiated by a positive demand shock Output Gap - The difference between actual aggregate output and potential output Output Gap = x 100 If positive = Inflationary Gap If negative = Recessionary Gap Current Output - Potential Output Potential Output

40. 39 Measuring the Money Supply - Two monetary aggregates calculated by The Federal Reserve M1 = Only cash, travelers checks, and checkable bank deposits - $1,676.4 trillion ( 51% cash, 48% checking, 1% trav. checks) M2 = M1 + Near Moneys (liquid - savings accounts, CDs, money market) - $8,462.9 trillion

41. 40 Module 24 - The Time Value of Money Borrowing, Lending, and Interest - The cost for borrowed money is interest - a percentage of the money we borrow paid over time $X x (1+r ) Ex: $500 x (1 + 0.08) = $500 x 1.08 = $540 Present Value - What is the value of a dollar today as compared to the value of that dollar in the future $X / (1+r ) Ex: $540 / (1 + 0.08) = $540 / 1.08 = $500

43. Money Multiplier - The total number of dollars created in the banking system for each additional dollar added to the monetary base Multiplier = 1/ rr Ex #1: If rr =.10 then 1/.10 = 10 x $1000 = $10,000 addition to the Money Supply Ex #2: If rr =.05 then 1/.05 = 20 x $1000 = $20,000 addition to the Money Supply

48. 47 Module 31 - Monetary Policy & the Interest Rate Target Federal Funds Rate - The interest rate the Fed sets to achieve the desired monetary policy goal - uses open market operations to shift money supply Expansionary Monetary Policy - Policy that increases demand which increases Real GDP Increase in money supply lowers interest rate more investment and consumer spending increase in AG demand increase in Real GDP

49. 48 Contractionary Monetary Policy - Policy that decreases demand which decreases Real GDP Decrease in money supply raises interest rate less investment and consumer spending decrease in AG demand decrease in Real GDP Taylor Rule for Monetary Policy - Rule for setting the federal funds rate that includes the inflation rate and output gap Target Federal Funds Rate = 1+ (1.5 x inflation rate) + (0.5 x output gap) Ex: Infl. Rate = 3% x 1.5 = 4.5 Output Gap = - 4% x 0.5 = - 2 1 + 4.5 + - 2 = 3.5%

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52. 51 Module 34 - Inflation and Unemployment: The Phillips Curve Short-run Phillips Curve (SRPC) - Negative relationship between the unemployment rate & the inflation rate Nonaccelerating Inflation Rate of Unemployment (NAIRU) - The unemployment rate at which inflation does not change over time Long-Run Phillips Curve - Shows relationship between unemployment and inflation including expectations of inflation

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