Econ 204 Study Guide
EXAM 2 STUDY GUIDE – CHAPTERS 7 - 10 (partial)
ECON 204 SPRING 2013
Chapter 7 Inflation Deflation Effects of Inflation 1. Price effects a. Real vs. nominal income 2. Income effects 3. Wealth effects Money illusion Measuring inflation • Consumer Price Index (CPI) • Market basket Construction of a Price Index 1. Calculate cost of basket in each year 2. Create Price Index using chosen base year
= ∗ 100
• Say’s Law Keynesian Theory • Inherently unstable economy • Government intervention Modeling the macroeconomy • Aggregate demand(AD) • Why downward-sloping? o Real-balances effect o Foreign-trade effect o Interest-rate effect • Aggregate Supply(AS) • Upward-sloping & shape? o Profit effect 1. Sticky wages o Cost effect o Cost effect dominates in the long run & at higher levels of output • Macro equilibrium o 2 potential problems 1. Undesirability 2. Instability • AS shifts o Almost anything that changes costs of production in a wide range of US industries • AD shifts o Changes in consumer behavior, firms’ willingness to invest, changes in gov’t spending • Multiple shifts o Business cycles result from recurrent shifts in AD & AS Competing Theories of SR Instability • Demand-side theories o Keynesian
3. Calculate inflation rates = − ∗ 100
The core rate • Excludes volatile food & energy prices. Price stability • Full employment and Balanced Growth Act of 1978 – target inflation of around 3% Quality changes • CPI can overstate inflation if quality changes are not accounted for Chapter 8 Classical Theory • Self-adjustment • Flexible prices & wages
1
EXAM 2 STUDY GUIDE – CHAPTERS 7 - 10 (partial)
ECON 204 SPRING 2013
Deficiency in spending would tend to depress the economy. Leaves goods unsold and production capacity unused. Claimed gov’t should increase spending o Monetary If credit isn’t available or interest rates are too high consumers won’t be able to buy as many cars, homes, etc. May limit business investment
ECON 204 SPRING 2013
Chapter 7 Inflation Deflation Effects of Inflation 1. Price effects a. Real vs. nominal income 2. Income effects 3. Wealth effects Money illusion Measuring inflation • Consumer Price Index (CPI) • Market basket Construction of a Price Index 1. Calculate cost of basket in each year 2. Create Price Index using chosen base year
= ∗ 100
• Say’s Law Keynesian Theory • Inherently unstable economy • Government intervention Modeling the macroeconomy • Aggregate demand(AD) • Why downward-sloping? o Real-balances effect o Foreign-trade effect o Interest-rate effect • Aggregate Supply(AS) • Upward-sloping & shape? o Profit effect 1. Sticky wages o Cost effect o Cost effect dominates in the long run & at higher levels of output • Macro equilibrium o 2 potential problems 1. Undesirability 2. Instability • AS shifts o Almost anything that changes costs of production in a wide range of US industries • AD shifts o Changes in consumer behavior, firms’ willingness to invest, changes in gov’t spending • Multiple shifts o Business cycles result from recurrent shifts in AD & AS Competing Theories of SR Instability • Demand-side theories o Keynesian
3. Calculate inflation rates = − ∗ 100
The core rate • Excludes volatile food & energy prices. Price stability • Full employment and Balanced Growth Act of 1978 – target inflation of around 3% Quality changes • CPI can overstate inflation if quality changes are not accounted for Chapter 8 Classical Theory • Self-adjustment • Flexible prices & wages
1
EXAM 2 STUDY GUIDE – CHAPTERS 7 - 10 (partial)
ECON 204 SPRING 2013
Deficiency in spending would tend to depress the economy. Leaves goods unsold and production capacity unused. Claimed gov’t should increase spending o Monetary If credit isn’t available or interest rates are too high consumers won’t be able to buy as many cars, homes, etc. May limit business investment