Macroeconomics Unit III: Aggregate Demand

AGGREGATE DEMAND

• shows the amount of real GDP that the private, public, and foreign sector collectively desire to produce at each possible price level. 
• relationship between price level and level of real GDP is inverse.

AD Curve

Why is AD a downward slope?

• Real Balances Effect: when price level is high, households can't afford it. 
• Interest-Rate-Effect: a rise in price level increases the interest rate (discourages investment).
• Foreign Purchases Effect: a rise in price level increases the demand for cheap imports.

Shifts in AD (two parts)

1. change in C, IG, G, and/or Xn
2. a multiplier effect that produces a greater change than the original change in the four components. 

• increase in AD= AD →
• decrease in AD= AD ←

DETERMINANTS OF AD

Consumption

1. Consumer Wealth 

• more wealth: more spending AD →
• less wealth: less spending AD ←

     2.  Consumer Expectations

• positive expectations: more spending AD →
• negative expectations: less spending AD ←

     3.  Household Indebtedness

• less debt: more spending AD →
• more debt: less spending AD ←

     4.  Taxes

• less taxes: more spending AD →
• more taxes: less spending AD ←

Gross Private Investment

1. Real Interest Rate

• lower real interest rate: more investment AD →
• higher real interest rate: less investment AD ←

     2.  Expected Returns

• higher expected returns: more investment AD →
• lower expected returns: less investment AD ←
• influenced by expectations of future profitability, technology, degree of excess capacity( existing stick of capital), and business taxes.

Government Spending

• more government spending: AD →
• less government spending: AD ←

Net Exports

1. Exchange Rates (international value of money)

• weak money: less imports, more exports  AD →
• strong money: more imports, less exports AD ←

     2.  Relative Income

• strong foreign economy: more exports AD →
• weak foreign economy: less exports AD ←

Psychology Unit II: Research Methods

RESEARCH METHODS

Hindsight Bias

• tendency to believe, after learning the outcome, that you knew it all along.

Overconfidence

• we tend to think we know more than we do.

Barnum Effect

• tendency for people to accept very general or vague characteristics of themselves and take them to be accurate.

Applied Research

• clear and practical
• you can use it

Basic Research

• explores questions that you may be curious about, but not intended to be immediately used.

Hypothesis

• expresses a relationship between two variables
• If, then statement

Ex. If a prisoner learns a work skill while in jail, then he is less likely to commit a crime when he is released. 

Variable

• that can vary among participants in a study

Independent Variable

• what is being manipulated in an experiment

Ex. administration of a drug - the dosage and the timing

Dependent Variable

• what is being measured in an experiment.

Ex. impact of the drug

Operational Definitions

• explain what you mean in your hypothesis 
• how will the variables be measured in "real life" terms?

Sampling

• identify population you want to study
• must be representative of the population you want to study

Experimental Method

• looking to prove casual relationships
• a cause has an effect

Ex. Smoking causes health issues.

Confounding Variable

• anything that could cause a change in B, that is not A.

Ex. weather can cause an increase or decrease in sales of ice cream and amount of murders.

Hawthorne Effect

• even control group may experience changes 
• the fact that you know you are in an experiment can cause change

Correlation Method

• expresses a relationship between two variables that does not show causation

Ex.  Height and weight: taller people tend to be heavier

Positive Correlation

• variable goes in the same direction

Ex. The more time you spend running on a treadmill, the more calories you will burn.

Negative Correlation

• Variables go in opposite directions

Ex. The more one works, the less free time one has.

Survey Method

• most common type of study in Psychology
• need a good random sample
• cheap and fast
• measures correlation

Naturalistic Observation

• watch subjects in natural environment
• do not manipulate environment

Correlation Coefficient

• number that measures the strength of a relationship
• range: -1 to +1 
• relationship gets weaker the closer you get to zero

Case Study

• detailed picture of one or a few subjects
• tells a story (descriptive research)
• does not give correlation data

Statistics

• recording the results from our studies

Descriptive Statistics

• describes sets of data

Range

• difference between the lowest and highest number

Standard Deviation

• variance of scores
• around the mean
• the higher the variance or standard deviation, the more spread out the distribution is

Z Scores

• a unit that measures the distance of one score from the mean
• positive z score means a number above the mean
• negative z score means a number below the mean

Human Research

• no coercion- must be voluntary
• informed consent
• anonymity
• no significant risk
• must debrief

Animal Research

• clear purpose 
• acquire animals legally
• treated in a humane way
• least amount of suffering possible

Macroeconomics Unit II: Unemployment

UNEMPLOYMENT

• Percentage of people who do not have a job, but are part of the labor force

Labor Force

• Number of people in a country that are classified as either employed or unemployed
• (# of unemployed + # of employed)

Unemployment Rate

• (( # of unemployed)/ (# of unemployed + # of employed)) x 100

Not in the Labor Force

• kids
• full time students
• retired people
• military personnel
• mentally insane
• incarcerated 
• stay at home parents
• discouraged workers

Frictional Unemployment 

• Between jobs because they have chosen new opportunities, lifestyles, and education levels.

Ex. quit job to go to school or college graduate

Seasonal Unemployment 

• People wait for the right season to conduct their trade.

Ex. mall Santa, school bus driver, or lifeguard

Cyclical Unemployment

• Associated with downturns in business cycle.

Ex. recession

Structural Unemployment

• Associated with a lack of skills, or declining industry, or change in technology.

Ex. can't read or write or factory moves cities

Full Employment

• Occurs when there is no cyclical unemployment present in economy
• Natural Rate of Employment: 4-5%
• Achieved when labor markets are in balance
• Structural and Frictional

Why is unemployment good?

• Less pressure to raise wages
• More workers available for future expansions

Why is unemployment bad?

• Not enough competition
• Too much poverty
• Too much government assistance needed

Okun's Law

• For every 1% of unemployment above NRU, causes a 2% decrease in real GDP

Macroeconomics Unit II: Inflation

Inflation

• rise in general level of prices
• standard rate: 2%- 3%

Inflation Rate

• measures the percentage increase in price level over time
• key indicator of economy's strength

Deflation

• decline in general price level

Disinflation

• occurs when the inflation rate itself declines

Consumer Price Index

• measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
• indicates changes in price level and cost of living

Finding Interest Rate Using Market Basket Data

• ((current year market basket value) - (base year market basket value) / (base year market basket value)) x 100

Finding Interest Rate Using Price Indexes

• ((current year price index) - (base year price index) / (base year price index)) x 100

Estimating Inflation Using Rule of 70

• used to calculate the number of years it will take for price level to double at any given rate of inflation
• (years needed to double inflation) = (70/(annual inflation rate))

Determining Real Wages

• ((nominal wages)/(price level)) x 100

Real Interest Rate

• (nominal interest rate) - (inflation premium)
• cost of borrowing or lending money that is adjusted for expected inflation 
• expressed as a percentage

Nominal Interest Rate

• unadjusted cost of bond or loan money

Causes of Inflation

• Demand (Pull): caused by excess of demand over output that pulls prices upward
• Cost (Push): caused by a rise in per unit production cost due to an increase in resource cost

Effects of Inflation

• Anticipated: being put on notice or removal from a job
• Unanticipated: being directly told of last day on job

Who is helped by inflation?

• Borrowers (because the money they pay back will be paid with cheaper dollars than what they were loaned out)
• Fixed Contracts

Who is hurt by inflation?

• People on fixed income
• Savers
• Lenders/Creditors

Macroeconomics Unit II: Gross Domestic Product (GDP) & Gross National Product (GNP)

GROSS DOMESTIC PRODUCT

• Total dollar value of all final good and services produced within a country's borders within a given year.

Ex. On American soil

    

Gross National Product

• Total dollar value of all final goods and services produced by Americans in a year.

Ex. American Nike Factory in China

GDP Calculations

C + IG + G + Xn

• C = Consumption Individuals contribute 67% to economy (purchasing final goods and services)
• IG = Intermediate Goods

1. New Factory Equipment
2. New Construction Housing
3. Factory Equipment Maintenance
4. Unsold inventory of products built in a year

• G = Government Spending
• Xn = Net Exports 

1. (exports-imports)

Not Included in GDP

1. Used or second hand goods
2. Intermediate Goods (goods and services bought for resale or further processing and manufacturing)
3. Non-Market Activity (illegal drugs, unpaid work, doing own repairs, prostitution, babysitting, growing own fruits and vegetables to eat)
4. Financial Transactions (stocks, bonds, and real estate)
5. Gifts on Transfer Payments

• Private: Produces no output, one individual provides to another individual.

Ex. Scholarships

• Public: Recipient contributes nothing to output or production.

Ex. Welfare and Social Security

Equations

• Budget: government purchases of goods and services + government transfer payments - government tax/fee collection (If a positive number it is a deficit and a negative number is a surplus)
• Trade: exports - imports  (If a positive number it is a surplus and a negative number is a deficit)
• GNP: GDP + net foreign factor payment
• Net National Product: GDP - depreciation
• Net Domestic Product: GDP -depreciation
• National Income: GDP - indirect business taxes - depreciation - net foreign factor payment
• Disposable Personal Income: National Income - personal household taxes + government transfer payment.

Nominal GDP

• A value of output produced in current prices
• (Price) x (Quantity)
• Can increase from year to year in either output or price increase

Real GDP

• A value of output produced in constant or base year prices
• is adjusted for inflation
• (Base year price) x (Current year quantity)
• Can increase from year to year only if output increases

Price Index 

• Measures inflation by tracking changes in the price of a market basket of goods compared to the base year.
• ((Price of market basket of goods in current year) x (Price of market basket of goods in base year)) x 100

GDP Deflator

• Also a price index that is used to adjust from nominal to real GDP
• Before base year: GDP Deflator is less than 100
• Base year: GDP Deflator will equal 100
• After base year: GDP Deflator will be greater than 100
• ((Nominal GDP) / (Real GDP)) x 100

GROSS NATIONAL PRODUCT

Income Approach

• Add up all income earned by households and firms in a single year.
• Equation: W + R + I + Statistical Adjustments
• Wages
• Rents
• Interest Payments
• Profits

Expenditure Approach

• Add up market value of all domestic expenditures made on final goods and services in a single year.
• Equation: C + IG + G + Xn

Macroeconomics Unit II: Circular Flow Model

CIRCULAR FLOW MODEL

• Represents the transactions in an economy by blows around a circle. 

Three Economic Factors

1. Households: Person or group of people that share their income.
2. Government
3. Firms: Organization that produces good and services for sales.

Two Markets

• Resource or Factor Market: Where households sell resources and businesses buy resources.
• Product: Where goods and services are produced by businesses and are bought and sold by the household.