ECON 2 Study Guide - Final Guide: Liquidity Trap, Potential Output, Demand Shock
ECON 2 Study Guideî
Chapter 1-2:î
âPositive Statement: Stating a theory that can be tested as a factî
âNormative Statement: Judgement/opinion (should, must, etc.)î
âPrice Index: Weighted average of all prices in the economy (CPI orî
GDP deflator)î
âCommand Economy: Decisions made by the governmentî
âFree Market Economy: Consumers decide what to produce based onî
income and WTPî
âWhat to produce and with what resources?î
âLand â Payment is the rentî
âLabor â Payment is wageî
âCapital â Physical (not financial) payment of interestî
âEntrepreneurship â Payment of profit/loss (Mgmt/marketing)î
Chapter 6:î
âCost of Living for Each Year = # of good x price of goodî
î
âCPI = îCost of Living in Current Yearî x 100 (No Units)î
Cost of Living in Base Yearî
âInflation Rate = îCPI current year - CPI previous yearî x 100 (percentage)î
î CPI previous yearî
MEMORIZE UNEMPLOYMENT STUFF (labor force/not in labor force)î
âUnemployment Rate = î# of unemployedî x 100î
# of labor forceî
âLabor Force = # of employed + # of unemployedî
âLabor Force Participation Rate = î # in labor force î x 100î
# total populationî
People not part of labor force: Army, Retirees, household workers,î
institutionalized people, discouraged workersî
âEmployment Rate = î # of employed î x 100î
# total populationî
âTypes of Unemployment:î
âFrictional â wait for the right job to fit your skillsî
âStructural â lack skills to keep up with the economyî
âNatural â Frictional + Structuralî
âCyclical â under a recession (can be zero)î
î
Chapter 7:î
GDP - The sum of all final goods and services newly produced in a nationî
at a given period of time (annually or quarterly)îî
â Only includes final goods (no intermediate goods)îî
â Only includes goods/services produced in the year of interestîî
â Only domestically produced regardless if the producer is foreignî
or domesticî
Expenditure Approach: C + I + G + NXî
âCî â Consumption:î durable goods (last over one year), non-durableî
goods, services (physical)î
âIî â Investmentî (physical production): residential (offices/buildings),î
non-residential (tools/machinery), change in inventory (end of year -î
beginning of year)î
âGî â Government Spending:î all levels of local, state, federal expensesî
except transfersî
âTransfer Payments excluded from GDPî
â Unemployment benefits, social security, welfare, veterans,î
subsidies, food stamps, and pensionsî
âNXî â Net Exportsî (exports-imports)î
î
Other Transactions Excluded from GDP:î
1. Private Gifts/Donationsî
2. âTransferâ Paymentsî
3. Buying/Selling Stocks (considered titles of indebtedness; donâtî
contribute to real production)î
4. Unpaid Houseworkî
5. Financial Transactions (buy/sell bonds)î
î
Income Approach: Income Items + Non-Income Items + Net Foreign Incomeî
âIncome earned by Americans domestically or overseasî
âIncome Itemsî â rents, wages (private/public and self employment),î
interest, profits, employee compensationî
Document Summary
Positi(cid:376)e 1tate(cid:295)e(cid:296)t: 1tati(cid:296)(cid:258) a theo(cid:336)(cid:383) that ca(cid:296) be tested as a (cid:257)act. No(cid:336)(cid:295)ati(cid:376)e 1tate(cid:295)e(cid:296)t: jud(cid:258)e(cid:295)e(cid:296)t/opi(cid:296)io(cid:296) (cid:706)should, (cid:295)ust, etc. (cid:707) P(cid:336)ice i(cid:296)de(cid:382): wei(cid:258)hted a(cid:376)e(cid:336)a(cid:258)e o(cid:257) all p(cid:336)ices i(cid:296) the eco(cid:296)o(cid:295)(cid:383) (cid:706)cpi o(cid:336) Co(cid:295)(cid:295)a(cid:296)d eco(cid:296)o(cid:295)(cid:383): decisio(cid:296)s (cid:295)ade b(cid:383) the (cid:258)o(cid:376)e(cid:336)(cid:296)(cid:295)e(cid:296)t. F(cid:336)ee ma(cid:336)ket eco(cid:296)o(cid:295)(cid:383): co(cid:296)su(cid:295)e(cid:336)s decide (cid:377)hat to p(cid:336)oduce based o(cid:296) i(cid:296)co(cid:295)e a(cid:296)d wtp. Capital (cid:784) ph(cid:383)sical (cid:706)(cid:296)ot (cid:257)i(cid:296)a(cid:296)cial(cid:707) pa(cid:383)(cid:295)e(cid:296)t o(cid:257) i(cid:296)te(cid:336)est. Cost o(cid:257) li(cid:376)i(cid:296)(cid:258) (cid:257)o(cid:336) each yea(cid:336) = # o(cid:257) (cid:258)ood (cid:382) p(cid:336)ice o(cid:257) (cid:258)ood. Cpi = cost o(cid:257) li(cid:376)i(cid:296)(cid:258) i(cid:296) cu(cid:336)(cid:336)e(cid:296)t yea(cid:336) (cid:382) (cid:656)(cid:655)(cid:655) (cid:706)no u(cid:296)its(cid:707) I(cid:296)(cid:257)latio(cid:296) rate = cpi cu(cid:336)(cid:336)e(cid:296)t (cid:383)ea(cid:336) - cpi p(cid:336)e(cid:376)ious (cid:383)ea(cid:336) (cid:382) (cid:656)(cid:655)(cid:655) (cid:706)pe(cid:336)ce(cid:296)ta(cid:258)e(cid:707) Memori(e unemployment 1tuff (cid:706)labo(cid:336) (cid:257)o(cid:336)ce/(cid:296)ot i(cid:296) labo(cid:336) (cid:257)o(cid:336)ce(cid:707) U(cid:296)e(cid:295)plo(cid:383)(cid:295)e(cid:296)t rate = # o(cid:257) u(cid:296)e(cid:295)plo(cid:383)ed (cid:382) (cid:656)(cid:655)(cid:655) Labo(cid:336) fo(cid:336)ce = # o(cid:257) e(cid:295)plo(cid:383)ed + # o(cid:257) u(cid:296)e(cid:295)plo(cid:383)ed. Labo(cid:336) fo(cid:336)ce pa(cid:336)ticipatio(cid:296) rate = # i(cid:296) labo(cid:336) (cid:257)o(cid:336)ce (cid:382) (cid:656)(cid:655)(cid:655) People (cid:296)ot pa(cid:336)t o(cid:257) labo(cid:336) (cid:257)o(cid:336)ce: a(cid:336)(cid:295)(cid:383), reti(cid:336)ees, household (cid:377)o(cid:336)ke(cid:336)s, i(cid:296)stitutio(cid:296)alized people, discou(cid:336)a(cid:258)ed (cid:377)o(cid:336)ke(cid:336)s. E(cid:295)plo(cid:383)(cid:295)e(cid:296)t rate = # o(cid:257) e(cid:295)plo(cid:383)ed (cid:382) (cid:656)(cid:655)(cid:655)