Unit 4: Money

Use of Money:
- Medium of exchange: Borrow and trade
- Unit of Account: Establishes economic value
- Store of Value: Money olds value over period of time whereas products may not

Types of Money:
-Commodity Money: gets vale from type material from which it is made. Ex. Gold
- Representative Money: paper money backed by something tangible that gives it value.
- Fiat Money: money because the gov. says so.

Characteristics of Money:
- Divisible
- Portable
- Uniform
- Acceptable
- Scarce
- Durable

Money Supply:
- M1 Money: 75% of money in circulation and easy to convert.
  >Currency: Cash and coin
  >Checkable Deposit: Check-in account
  >Travelers Check: very liquid
- M2 Money: M1 money, Savings accounts and deposits held by banks outside the US.
- M3 Money: M2 money certificate of deposits AK CAs

Video

Monatary Policy/ Money supply videos

Video 1: There are 3 types of money; Commodity Money, Representative Money, and Fiat Money. Fiat money is the type of money we use today. It is an object, usually paper or coins, that has value because the government says it has value. There are also 3 functions of money It a can like a Median Exchange, stores value, and a unit of account.

Video 2: Money market graph is very similar to the supply and demand graph. The only difference is it is interest rate and quantity being measured instead of price and quantity. This is because Interest rate is the price to borrow money.

Video 3: There are tools to which the FED and manipulate money supply. These are called Expansionary and Contractionary. Expansionary is used to battle a recession. Contractionary is used to battle inflation.

Video 4: The loanable funds graph is also very similar to the supply and demand graph. The only difference is that the quantity of loanable funds instead of goods. Also, in this graph, savings are considered a plus. This is because savings in the bank mean more loanable money.

Video 5: Money creation is done by making loans. This is because when a bank loans out money, they charge interest. The money being loaned with increases with the money multiplier. The money multiplier is 5.

Interest Rate and Investment Demand

Inflation= Implication/ Output independent of changes in the price level

Investment: Money spent on
- Factories
- Equipment/ Machinery
- Technology (Hardware and software)
- New homes
- Inventories (goods sold by producers)

Expected rate of return
- Cost analysis
- Benefits of rate of return
- Interest cost
- Amount of investment

Nominal is the observable rate of interest. Real subtracts out of inflation and is only known ex post facto.
 r%= i%- pi%

*Real interest rate= r%

Wages

Nominal Wages: Amount of money received by worker per unit of time

Real Wages: Amount of goods and services a worker can purchase with their nominal wage.
*Real Wages= purchasing power of nominal wages

Sticky wages: the nominal wage level that is set according to an initial price level. Does not very due to labor contracts or other restrictions.

Employment

Full Employment: 
When equilibrium exists where AD intersects SRAS and LRAS at the same point.
























 Recessionary Gap: 
exists when equilibrium occurs below full employment


Inflationary Gap:
When equilibrium occurs beyond full employment output

Aggregate Supply

Aggregate Supply: is the level of real GDP that firms will produce at each price level.

Long- Run:
- Period of time where input prices are completely flexible and adjust to change.
- In long run, the level of real GDP, supplies is independent of the price level.

Short- Run:
- Period where input prices are sticky and do not adjust to changes in the price level.
- In short- run, the level of real GDP supplied is directly related to the price level.

Long Run Aggregate Supply:
- Mark the level of full employment
- Vertical at full employment
- Input prices are flexible

*Per unit production cost= total input cost/ total output cost

Determinants of SRAS:
- Input price
- Productivity
- Legal- Institutional environment.




Input Prices:
- Domestic Resource Prices
   - Wages (75% of all business cost)
   - Cost of capital
   - Raw materials
- Foreign Resources
- Market Power


*Productivity= total output/total input
*Legal Institutional Environment= Taxes/ subsities

Shifters In AD

2 thing that can cause AD to shift:
 - A change in C, Ig, G, or Xn
 - A multiplier effect that produces a greater change than the original change in the 4 components.

1. Consumption
Household spending is affected by
- Consumer Wealth
- Consumer Expenditur
- Household Indepth
- Taxes

2. The Real GDP rate
Expected returns are influenced by:
- Expectation of future profitability
- Technology
- Degree of access capacity ( existing stock capital)
- Business Taxes

3. Government Spending
- More government spending = Increase in AD
- Less government spending = Decrease in AD

4. Net Export
Net exports are sensitive to:
- Exchange Rates (International Value of $)
- Relative Income

Aggregate Demand Curve

Aggregate Demand (AD): the demand by consumers, business, government, and foreign countries.
- Changes in price level cause a move along the curve.

1. Real Balance Effect:
- Higher price levels reduce the purchasing power of money
- Decreases the quantity or expenditure
- Lower prices increase purchasing power of money.

2. Interest Rate Effect:
- When price level increase, lenders need to charge higher interest rates to get a real return on their    loans.
- Higher interest rates discourage consumer spending and business investment.


3. Foreign Trade Effect:
- When US price levels rise, foreign buyers purchase fewer US goods and Americans buy more foreign goods.
- Exports fall and import rise causing GDP it decrease.

Types of Unemployment

There are four types of unemployment; Frictional, Structural, Seasonal, and Cyclical.

- Frictional Unemployment consist of those who are looking for a job. This could be either temporary unemployment or in between jobs. These people have transferable skills. Examples would be college graduates or someone that just quit their job.

- Structural Unemployment is caused by changes in the structure of the labor force that make certain skills useless. These worker do not have transferable skills. They must learn a new skill in order to get a job.

- Seasonal Unemployment is due to the time and nature of the job. Examples would be school bus drivers, life guards, and Santa impersonators.

- Cyclical Unemployment results from economic downturns such as a recession. As demand for goods and services falls, labor falls and workers are laid off.

Unemployment

Unemployment is the failure to use available resources particularly labor to produce desired goods and services. There are certain people in the labor force (employed+ unemployed). This includes:

-Anyone above the age of 16
- Willing and able to work

People not in the labor force include:

-Military
- Retired
- Student
- Disabled
- Homeworkers
- People in mental institutions
- People in Jail
- People not looking for a job



The acceptable unemployment rate in the US is 4-5 percent. This is also known as Full Employment or Natural Rate of Unemployment (NRU)

Formula for calculating Unemployment Rate: # of unemployed/ # of employed + # of unemployed . 100

Types of GDP

There are two types of GDP; Nominal GDP and Real GDP.

Nominal GDP is the value of output products in a current year price. It can increase from year to year if either the price  or the quantity increases. If there is an increase in prices also known as Inflation, we used this.

Real GDP is the value of output produced in constant base year prices. It can be adjusted for inflation. It can also be used to measure economic growth. Real GDP can increase from year to year if the output increases.

The formula for both is Price times Quantity. However they apply in different ways.

Nominal GDP is the price of the current year times the quantity of the current year

Real GDP is the price of the given bases year times the quantity of the current year. If the bases year isn't given, you can use the earliest year shown.

How to Calculate GDP

There are 2 methods in calculating GDP. One is called Expenditure Approach while the other is called Income Approach. However, Expenditure Approach is the method that is mostly used.

Expenditure Approach is when you add up all spending of final goods and services produced in a given year.

 The Formula is: C+IG+G+XN (refer to previous post for definition)

Income Approach is a lot more work. It adds up all the income that results from selling final good and services produced in a given year.

The formula is: Wages+ Rent+ Interest+ Profit+ Structural Adjustment (includes Indirect business taxes, Depreciation, and Net Foreign Factor Payment).

Unit 2: GDP

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a nation in a given year.


There are certain thing that are not included in GDP things such as:

-Intermediate Good (a product that needs further work)

- Used/Second hand good

- Purely financial transactions (Stock exchange)

- Illegal activities

- Unreported business activities such as tips

- Non market activities

- Transferred payments (scholarships, welfare, etc.)

- GNP (will discuss later on)

There types of transactions that are included in the calculation of GDP  include:

- Personal Consumption Expenditure or money spent on personal matters. This is represented by a C

- Gross Private Domestic Investment represented by an IG This includes money spent on:
       -Factory maintenance equipment
       - New factory equipment
       - Construction of housing
       - Unsold inventory of products made in a year. An example is a house that has been built with              movers living in it yet

- Government spending represented by G

- Net Export which in exports-imports. This is represented by XN

Business Cycle Vocabulary

Peak: Highest point of real GDP. Greatest amount of spending and lowest amount of unemployment. In this phase, inflation becomes a problem.

Expansion: Recovery stage. Real GDP is increasing due to an increase in spending and decrease in unemployment.

Contraction/Recession: Real GDP  declines for 6 months due to a reduction in spending and increase in unemployment .

Trough: Lowest point of real GDP. Least amount of spending and highest unemployment.

Formulas

TFC+TVC=TC

AFC+AVC=ATC

TFC/Q=AFC

TVC/Q=AVC

TC/Q=ATC

AFC.Q=TFC

AVC.Q=TVC

P.Q=TR

Elasticity of Demand

Elasticity of Demand: a measure of how consumers react to a change in price.

Elastic Demand: demand that is very sensitive to s change in price. (e>1)
                         - Products not a necessity
                         - There are available substitutes

Inelastic Demand: demand that is not very sensitive to a change in price. (e<1)
                         - Product is a necessity
                         - There are few or no substitutions
                         - People will buy no matter what

                                                  Price Elasticity of Demand

Step 1: Quantity = new quantity-old quantity/old quantity

Step 2: Price = new price-old price/old price

Step 3: PED = % change in quantity demanded/ % change in price demanded

Vocabulary

Trade- Offs: Alternatives that we when we choose one course of action over another.

Opportunity Cost: Next best alternative.

Production Possibility Graph (PPG): Shows alternative ways to use an economics resources.

Total Revenue: the total amount of money a firm receives from selling goods and service.

Variable Cost: a cost that raises or falls depending on how much is produced.

Fixed Cost: a cost that doesn't change no matter how much is produced.

Marginal Cost: the cost of producing one more unit of a good.

Unit 1

                                         Macroeconomics vs. Microeconomics

Macroeconomics: The study of the economy as a whole.
                            - Inflation
                            - International Trade
                            - Wages

Microeconomics: The study of individual or specific units of the economy.
                            - Supply and Demand
                            - Market Structure
                            - Business Organization

                                      Positive Economics vs. Normative Economics

Positive Economics: Attempt to describe the world as is. Very descriptive. Thrives on the what-ifs.
                                - Collects present facts.

Normative Economics: Attempt to prescribe how the world should be.
                                - Opinion based

                                                                 Needs vs. Wants

Needs: Basic requirement for survival.
          - Includes food, water, shelter and clothing.

Wants: Desire of citizens

                                                                Goods vs. Services

Goods: Tangible goods
           - Capital Goods: Items used in the creation of other goods.
           - Consumer Goods: Goods intended for final use by the consumer.

Services: Work that is performed for someone.

                                                             Scarcity vs. Shortage

Scarcity: Most fundamental economic problem that all societies face. It is hoe to satisfy unlimited wants with limited resources.

Shortage: Where quantity demanded is greater than quantity supplies

                                                         4 Factors of Production

- Land: Natural Resources
- Labor: Work force
- Capital: Human resources, physical resources
- Entrepreneurship: Innovative, risk takers