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Ch.

2 Comparative advantage

Comparative advantage

Absolution advantage

Do for which opportunity cost is the lowest

The most output

Production possibilities curve

Unattainable

Attainable

Inefficient

Efficient

Specialization

Bigger benefit with larger difference between


opportunity cost

Too much is not good

Ch.3 Supply and demand

Central planning

The market planning

Decision by individuals or small group

Buyers and sellers signal wants and costs

Increased price

Substitution effect

Income effect

Demand proportional to income

Inferior good

Overall purchasing power decrease

Normal good

Buyers switch to substitute

Demand inversely proportional to income

Buyers surplus

Sellers surplus

Market price reservation price

Total surplus

Reservation pricemarket price

Buyers surplus + sellers surplus

Efficiency principle

Marginal cost = marginal cost

Ch.4 Spending, income, and GDP

GDP

Gross domestic product

The market value of final goods and services produced in a


country in a given period of time

Y = C + I + G + NX

Exclude intermediate good

Consumption expenditure (C)

Spend by household

The largest component

Investment (I)

Purchase of capital good

Inventory

Government purchase

Social security

Food stamp

Exclude interest payment

Net export (NX)

Exclude transfer payment

Export import

Real GDP

Price of based year

Measure number of output

Nominal GDP

Price of current year

Ch.5 inflation and the price level

CPI

Consumer price index

Measure of cost of living in a particular period

Price index

Measure of average price of goods and service to the base


year

Inflation

% change in CPI

Deflation

Real wage

Measured in purchasing power

Hyperinflation

-ve inflation

Extremely high rate of inflation

Real interest rate

% change in purchasing power

R = Ipi

Ch.6 Wages and unemployment

Diminishing returns to labor

Value of marginal product(VMP)

Extra revenue per each added worker

Reservation wage

More worker but less additional output

The lowest wage worker accept

Labor force

Employed + unemployed

Unemployment rate

unemployed
labor force

population16 +
labor force

Discouraged workers

Excluded from labor force

Frictional unemployment

Between job

Short

Low economic cost

Cyclical unemployment

Economic slow down

Short

Decline real GDP

Structural unemployment

Long

Lack of skills

Seasonal

High cost

Ch.7 Economic growth

Real GDP per capita

Output/worker

Y
N
( POP
)=( YN )( POP
)

Share of labor force

Average labor productivity

Human capital

Physical capital

Diminishing returns to capital

Extra output produced by extra product declines

Fill the lowest productive use first

Limitation exits

Land and other natural resources

Technology

Most important

Entrepreneurship and management

Political and legal environment

Ch.8 Saving, capital formation, and financial


market

Saving

Saving rate
saving
income

Wealth

Asset

Liabilities

Balance sheet

Change in wealth

Unit of time

Stock

Saving + capital (gains loss)

Flow

-ve

+ve

A point of time

National saving

S = YCG

Private saving + Public saving

Private saving

By individual and business

Sprivate = YTC

Public saving

Surplus

Tax collection > spending

Balanced

Deficit

Spublic = TG

Government budget

T = TaxesTransfergovernment interest payment

Tax collection < spending

Household saving

Life-cycle

Precautionary

Bequest saving

Real interest rate

Purchasing power

MB of extra saving

Supply of saving (S)

Demand for investment (I)

Ch.9 Money, prices, and the financial system

Bond

Legal promise to repay a debt

Principal amount

Maturation date

length

Coupon payment

Amount lent

Interest payment

Coupon rate

Interest rate

Higher risk

Stock

Partial ownership

Receive dividend

Risk premium

Rate of return to hold risky asset

Money

Any asset can be used in making purchase

Medium of exchange

Unit of account

Store of value

Bank reserve

Meet withdrawal and payment

Reserve-deposit ratio

Bank reserve < deposit

Fed

Federal reserve system

Monetary policy

reserve
deposit

Fractional reserve banking system

Higher rate

Money supply

Regulation of financial market

Velocity of money (V)

V =( P Y )/M
Quantity equation

M V =P Y

Speed of money changes hands in transaction for final good


and service

Ch.10 Short-term economic fluctuation

Business cycle

Short-term fluctuation in GDP

Recession

Real GDP fall >= 2 months

Peak

Trough

Depression

Significant recession

Expansion

Boom

Potential output (Y*)

Full-employment output

Output gap

Y 100
Y
Y

Recessionary gap

Y < Y*

Expansionary gap

Strong and long expansion

Y > Y*

Okuns law

uu
Output gap=2
Cyclic unemployment

Ch.11 Spending, output, and fiscal policy


**Hard copy**

Ch.12 Monetary policy and the Federal

Reserve

Banking panics

Customers believe >1 banks might be bankrupt

Federal funds rate

Rate of commercial banks charge each other on short-term


loans

Demand for money

Factors

Output

Price levels

Technological

Financial

Foreign demand for dollars

Supply of money

Vertical

Open-market purchase of bonds by Fed

Open-market sale of bonds by Fed

Increase money supply

Decrease money supply

Discount window lending

Bank borrow reserve from Fed at discount rate

Lend borrowed reserve

Increase money supply

Ch.13 Aggregate (demand, supply) and


stabilization policy

Aggregate demand curve

Wealth effect

Higher price level

Interest rate effect

Reduce the value of assets

Higher price level

Increase in MD

Interest rate increase

Decrease in consumption and planned investment

Exchange rate effect

Higher price level

Higher interest rate

Increase MD

Increase value of dollar

Decrease in NX

Demand shocks

Change AD

Factors

Consumer confidence

Consumer wealth

Business confidence

Opportunities of new technologies

Foreign demand for US goods

Stabilization policy

Government policy

Fiscal policy

Government spending or taxes

Monetary policy

Nominal money supply

Local financial assets become more attractive

Price shock

Interest rate

Shift AS

-ve

+ve

left

Right

Self-correcting economy

Long-run

Slow speed

Fiscal and monetary policy useful

Fast speed

Fiscal and monetary policy not useful