Economics Cheat Sheet PDF

Preview

Summary

Download Economics Cheat Sheet PDF

Description

Long Run Growth Policies Labour Productivity – Quantity of G/S produced in one hour by one worker Technological Change – Change in ability of more output with given quantities.(SHIFTS PER WORKER PRODUCTION FUNCTION UP) Three sources; 1. Better machinery Equipment 2. Increase human capital 3. Better organization/managing Human Capital – Accumulated knowledge/skills from education/life skills Unemployment Unemployment rate = Number of unemployed/labour force x 100 Participation Rate = Labour force/working age population x 100 Cost to economy – Loss of GDP, Loss human capital, retraining cost Cost to Gov. – Benefits net drain budget, Opportunity costs of unemployment benefits, loss tax revenue Cost to Individual – Loss income, social cost (Health/ family) Cyclical Unemployment – Caused by business cycle contraction (Less production  Less work) Frictional Unemployment – Matching of workers with Jobs (Re-entering after absence/students first entering) Seasonal Unemployment – Factors such as weather, variations in tourism Structural Unemployment – Mismatching skills with jobs (Technological change makes redundant) Gov. Policies – Help reduce structural unemployment through retraining. Inflation Measuring Inflation – CPI = Expenditures current year/expenditures base year x 100 Nominal Inflation – Stated interest rate on a loan Real Interest Rate – Nominal interest rate minus inflation rate (Provides better cost of true borrowing/true return) Causes of Inflation Demand Pull Inflation – Caused by increase in AD for G/S, and production can’t meet immediately

Cost Push Inflation – As a result of supply shock (anything that decreases AS e.g Increase import prices, Increase wages, Increase in indirect taxation) Aggregate Expenditure/ Output in Short Run Aggregate Expenditure – Total amount of spending in economy (Model SR between total spending/GDP) Variables of level of consumption – Current disposable income, household wealth, Expected future income, Price Level, interest rate Change in National Income – Change in Consumption + Change in Saving + Change in Taxes Planned Investment Variables – 1. Expectations of future profitability (Optimism/pessimism) 2. Interest Rate (Higher rates, less Investment Spending) 3. Taxes (Lower Corporate taxes, increase Investment spending) 4. Cash Flow (Cash revenues/cash spending) Net Export Variables – 1. Aus Price level relative to others 2. Aus Econ Growth relative to others. 3. Exchange rate between $A and others. Autonomous/Induced Consumption – Independent of income / determined by income Autonomous/Induced Expenditure – Independent of GDP / Dependent of GDP Multiplier – Increase in Autonomous Exp. Leads to larger increase in Real GDP (Change in Equilibrium real GDP/Change in autonomous expenditure= 1/1-MPC) Aggregate Demand and Aggregate Supply AD – Curve that shows relationship between price and quantity of real GDP demanded by households Why it slopes downward – 1. Wealth effect (Change in price level effects consumption) 2. Interest rate effect (Price level effects consumption) 3. International trade effect (Price level effects NX) Variables that shift AD – 1. Change in Gov. Policy (Increase Taxes, decrease spending and AD) 2. Changes in expectations of household firms (Increase in this, increase in spending) 3. Changes in foreign variables (Imports will rise, exports fall) LRAS – Relationship in LR between price level and Quantity of real GDP supplied. Shifts in curve – 1. Increase in resources 2. Increase in machinery and equipment 3. New technology

SRAS – Slopes up, reflects firms will produce more in response to higher prices. Changes in price is a movement ALONG curve Variables that shift – 1. Expected change future prices 2. Adjustment of workers to expectation of price level 3. Unexpected change of price of important resources Variables that shift LRAS/SRAS – 1. Increase in labour force/capital resources 2. Technological Change. Expansion – 1. AD shifts to right, and real GDP/ price level rise Contraction – Lower NX, Higher interest rates – Shift AD to left Supply Shock – SRAS shifts to left, real GDP falls/ price levels rise Money Banks and Monetary Policy Wealth – Net worth of a person, total value of assets Income – Is amount of money received for services Credit – Loans provided to the private non-bank sector Simple Deposit Multiplier – 1/RR RBA Roles – 1. Implement Monetary Policies (Via interest rates) 2. Maintain financial integrity Managing financial liquidity/ Interest rates – Cash Rate – Interest charged on loans/pay to borrow funds overnight Open Market Operations – selling/buying financial instruments such as private bonds. Exchange rate management – Value of A$ determined by S/D of Aus $ Velocity of money = (PxY)/M Monetary Policy – Actions to manage interest rates in pursuit of goals; 1. Full employment 2. Stability of currency 3. Economic prosperity and welfare for Aus people. Demand for Money – Sloping downward to show inverse relationship between interest rates on financial assets and quantity of money demanded. Other variables that cause a shift; 1. Real GDP (Increase shift to right) 2. The Price level (Increase shift to right) Manages Supply of Cash – Recall – use open market operations to sterilize liquidity, to keep interest rate stable Open Market Operation – Buying/selling financial instruments e.g. Bonds

Managing Interest Rates – Exchange Settlement accounts (Funds between financial institutions) To Reduce Cash Rate – Not sterilize overnight surplus, and purchase bonds, or buy back repurchase agreements To increase cash Rate – Not sterilize overnight shortage and sell bonds to financial institutions Interest Rate affects on AD – Will not affect Gov. purchases but will effect; 1. Consumption 2. Investment 3. Net Exports. Expansionary Monetary Policy – RBA decrease interest rates and hopefully boost Real GDP (Shifts AD right more than without policy/also LRAS) Contractionary Monetary Policy – used during high periods of inflation rates, slows down AD by increasing interest rates, decreasing C,I,NX (Shifts AD less to right than without policy) Favor of Inflation Targeting – 1. LR no impact on Potential GDP 2. Makes it easier to form expectations 3. Provides Measure of RBA performance Against Inflation Targeting – 1. Pursuing other goals is limited 2. Assumes they can predict rates (Not always true) 3. May make RBA less accountable for other goals For RBA Independence – 1. Avoids inflationary Spending 2. Avoids monetary policy to further goals Against RBA Independence – 1. Independent central bank not accountable to voters, may implement monetary against wishes of electorate. 2. Too much economic power on those of the RBA board Fiscal Policy Fiscal Policy – Changes in Federal Taxes and purchases to achieve policy Objectives Automatic Stabilizers – Transfer payments and taxes that automatically increase or decrease along the business cycle (Unemployment welfare) Expansionary Fiscal Policy – Increase in G Purchases, or decrease in T to boost AD (Shifting AD further to right without policy)  Contraction/Recession Contractionary Fiscal Policy – Decreases in G spending, or increase in T, to reduce AD and inflation. (Shifting AD to right by less than it would without policy)  Rising inflation rate

Multiplier effect – Increase in autonomous expenditure, leads to larger increase in real GDP Gov. Purchase Multiplier = Change in equilibrium real GDP/Changes in gov. Purchases Tax Multiplier = Change in equilibrium real GDP/Change in taxes. Effects of this; 1. Higher tax rate, smaller multiplier. 2. Cut in tax increase the size of multiplier effect. Multiplier effect – Both Expansionary/Contractionary have effects, increase in T will reduce household disposable income and consumption spending, businesses lower production and lay off the workers, leads to reductions in consumption. Limits to fiscal policy – Timing lags, Takes time to collect data, takes time for policy to get approved, takes time to be implemented. Crowding out – Caused by Gov. spending, decline in private expenditures. SR impacts; 1. Higher Interest rates 2. Resource crowding (Gov. competes with Priv. Sector for labour) Deficit Increase during contraction – 1. Tax revenue fall 2. Unemployment benefit payments increase Surplus Increase during Expansion – 1. Tax revenue increase 2. Unemployment benefits payments decrease Long run effect of tax policy – Reducing each can increase AS 1. Personal Income tax. 2. Company Income tax 3. Taxes on capital gains 4. Land taxation Macroeconomics in an Open Economy Open Economy – interactions in trade/finance with other economies Closed Economy – No interactions in trade/finance with other economies Current account is made up of; Balance of Payments – Record of international trade/borrowing/lending with other countries Current Account – Records Current, or short term, flow of funds in and out of countries. Incorporating balance of trade and net income Balance of trade in G/S – Difference between value of G/S exported vs Imported Net Primary Income (NPI) – Income received by Australians from overseas investments, minus income paid overseas e.g. Dividends/profits

Net Secondary Income (NSI) – Difference between transfers made to residents of other countries and transfers received by other countries. Capital Account – Records migrants assets transfers, debt forgiveness and sales and purchases of nonproduced, non-financial assets. Financial Account – Records purchases of physical financial assets made abroad. Balance of payment is always ZERO Nominal Exchange Rate – Value of one economies currency in terms of another Variables of Currency Demand – 1. Higher foreign GDP 2. Higher Australian Interest Rates 3. Future expectation higher. Currency Appreciation – Market Value rises due to another currency (Depreciation is opposite) Causes of shifts in demand and supply of currency – 1. Changes in income levels (effects demand for G/S 2. Changes in interest rates (Effects desire to invest 3. Speculation change (Change in expectation value) Appreciation – Decrease exports (expensive) increase imports  NX, AD, Real GDP fall Depreciation – Increase exports (Cheaper), decrease imports (expensive)  NX, AD, Real GDP rise Current Account Balance = NX + NPI Private Saving = Y - C -T Public Saving = T - G Gross National Income = C + I + G + NX + NPI OR GDP + NPI National Saving = (C + I + G + NX) +NPY – C – G OR = I + CAB (CAB = NX + NPI) Saving and Investment Equation = I + NFI (For AUS S – I = NFI) Monetary Policy in open economy – 1. Greater impact on AD e.g. Decreased interest rates Increase AD 2. Lead to increased spending Fiscal Policy in open economy – 1. Has smaller impact on AD e.g. Gov purchases/tax cuts 2. Puts upward pressure on interest rates  may lead to exchange rate appreciation (Decreased NX and Decreased rte of AD)...