Wednesday, January 25, 2012

WSJ GOP Editorial

The GOP Deserves to Lose

That's what happens when you run with losers.

By BRET STEPHENS

Let's just say right now what voters will be saying in November, once Barack Obama has been re-elected: Republicans deserve to lose.

It doesn't matter that Mr. Obama can't get the economy out of second gear. It doesn't matter that he cynically betrayed his core promise as a candidate to be a unifying president. It doesn't matter that he keeps blaming Bush. It doesn't matter that he thinks ATMs are weapons of employment destruction. It doesn't matter that Tim Geithner remains secretary of Treasury. It doesn't matter that the result of his "reset" with Russia is Moscow selling fighter jets to Damascus. It doesn't matter that the Obama name is synonymous with the most unpopular law in memory. It doesn't matter that his wife thinks America doesn't deserve him. It doesn't matter that the Evel Knievel theory of fiscal stimulus isn't going to make it over the Snake River Canyon of debt.

Above all, it doesn't matter that Americans are generally eager to send Mr. Obama packing. All they need is to be reasonably sure that the alternative won't be another fiasco. But they can't be reasonably sure, so it's going to be four more years of the disappointment you already know.

Getty Images

Is this the best they can do?

As for the current GOP field, it's like confronting a terminal diagnosis. There may be an apparent range of treatments: conventional (Romney), experimental (Gingrich), homeopathic (Paul) or prayerful (Santorum). But none will avail you in the end. Just try to exit laughing.

That's my theory for why South Carolina gave Newt Gingrich his big primary win on Saturday: Voters instinctively prefer the idea of an entertaining Newt-Obama contest—the aspiring Caesar versus the failed Redeemer—over a dreary Mitt-Obama one. The problem is that voters also know that Gaius Gingrich is liable to deliver his prime-time speeches in purple toga while holding tight to darling Messalina's—sorry, Callista's—bejeweled fingers. A primary ballot for Mr. Gingrich is a vote for an entertaining election, not a Republican in the White House.

Then there is Mitt Romney, even now the presumptive nominee. If Mr. Gingrich demonstrated his unfitness to be a serious Republican nominee with his destructive attacks on private equity (a prime legacy of the Reagan years), Mr. Romney has demonstrated his unfitness by—where to start?

Oh, yes, the moment in last week's debate when Mr. Romney equivocated about releasing his tax returns. The former Massachusetts governor is nothing if not a scripted politician, and the least one can ask of such people is that they should know their lines by heart. Did nobody in Mr. Romney's expensive campaign shop tell him that this question was sure to come, and that a decision had to be made, in advance, as to what the answer would be? Great CEOs don't just surround themselves with consultants and advance men. They also hire contrarians, alter egos and at least someone who isn't afraid to poke a finger in their chest. On the evidence of his campaign, Mr. Romney is a lousy CEO.

But it's worse than that. The usual rap on Mr. Romney is that he's robotic, but the real reason he can't gain traction with voters is that they suspect he's concealing some unnameable private doubt. Al Gore and George Bush Sr. were like that, too, and not just because they were all to the proverbial manor born. It's that they were basically hollow men.

Thus the core difference between Mr. Romney and Mr. Obama: For the governor, the convictions are the veneer. For the president, the pragmatism is. Voters always see through this. They usually prefer the man who stands for something.

What about Rick Santorum and Ron Paul? They are owed some respect, especially for the contrast between their willingness to take a stand for principle against the front-runners' willingness to say anything. But Messrs. Santorum and Paul are two tedious men, deep in conversation with some country that's not quite America, appealing to a devoted base but not beyond it. Sorry, gentlemen: You're not going anywhere.

Related Election 2012 News

Finally, there are the men not in the field: Mitch Daniels, Paul Ryan, Chris Christie, Jeb Bush, Haley Barbour. This was the GOP A-Team, the guys who should have showed up to the first debate but didn't because running for president is hard and the spouses were reluctant. Nothing commends them for it. If this election is as important as they all say it is, they had a duty to step up. Abraham Lincoln did not shy from the contest of 1860 because of Mary Todd. If Mr. Obama wins in November—or, rather, when he does—the failure will lie as heavily on their shoulders as it will with the nominee.

What should readers who despair of a second Obama term make of all this? Hope ObamaCare is repealed by the High Court, the Iranian bomb is repealed by the Israeli Air Force, and the Senate switches hands, giving America a healthy spell of Hippocratic government.

All perfectly plausible. And the U.S. will surely survive four more years. Who knows? By then maybe Republicans will have figured out that if they don't want to lose, they shouldn't run with losers.

Write to bstephens@wsj.com

Tuesday, January 24, 2012

Game Theory Returns!

Skip to the third section of this Colbert Report show:
http://www.hulu.com/watch/322350/the-colbert-report-mon-jan-23-2012

Wednesday, January 18, 2012

MIT Lecture to watch

See: http://mitworld.mit.edu/video/875

Tuesday, January 10, 2012

Exam Outline

There will be ten multiple choice, followed by four free-answer questions based on old midterm questions. Total will be 250 points. I completed the entire exam in under 50 minutes, so 90 min. should be plenty for all of you. Of course, should you require more time, it will be available for you.

Best,
Mr. Joy

Monday, January 9, 2012

National Review on President Obama's Re-Election

NATIONAL REVIEW ONLINE www.nationalreview.com PRINT

The Corner

The one and only.

Obama Might Be Reelected . . .

By Victor Davis Hanson

January 6, 2012 2:54 P.M.

. . . if he just stays silent and undercover in Hawaii all year. It was always unlikely that an inherently dynamic nation like the U.S. could stay in a recession or a near-recession slowdown for five years (since late 2007), and we should expect a mild rebound in 2012, at least by election time — before the deeper reckoning with our massive debt and expansionary money policy comes due.

Based on the Chicago-style promises we’re now hearing — debt relief for students, mortgage relief for the underwater homeowner, pay increases for federal workers, non-enforcement of immigration law for the Latino bloc, and recess appointments for the unions and the left-wing base — in 2012 there will be a huge turnout of professional elites, environmentalists, gays, minorities, unions, youth, the indebted, and the needy, with which blocs the Democrats will seek to make up for the loss of the “clinger” states and somehow reach 51 percent of the vote. I guess that alienating the independents and Reagan Democrats, rather than winning them over, is the new fallback strategy, based on the premise they are lost anyway and what chafes them excites the base.
Obama had a Democratic Congress for two years, his populism is rendered suspect by his Wall Street fundraising and intimacy with the likes of Jon Corzine and Peter Orszag, and there have been scandals ranging from Solyndra to Fast and Furious — but I don’t think these will be real issues.
The message will probably be: “I, Obama, ended two wars, killed bin Laden, shifted money from the wealthy and defense waste to the middle classes, and would have done even more had an obstructive Congress not stopped me.” We should expect that, despite his obvious delight in public adulation, the president will be probably be less seen and heard. In December, his virtual absence from the public arena did wonders for his poll numbers, unlike his Kansas-type speechifying. The less people see and hear him, the more they think of the old image of Obama rather than the present reality.
The far louder Republicans will be cast in their traditional role — the Scrooges forcing necessary budget cuts on the backs of the recipients of Obama’s largess as they work to preserve “tax cuts for the wealthy” — in a pretty straightforward us-vs.-them pitch. There is not a lot for a low-profile Obama to run on, since most everything the old high-profile president has done — Obamacare, cash-for-clunkers, the stimulus, the GM/Volt mess, the Solyndra-like partnerships, the $5 trillion in borrowing, added regulations, and tabling gas and oil development — either is unpopular or hasn’t worked, often both. So Obama will run on the proposition that there were three Bush terms, from 2001 to 2011; that he, the middle-class warrior, will finally be able to free Americans from the damage done by Bush; and, of course, that things would have been even worse had he not put up the fight he did. Quietly borrowing more money is much more popular than loudly stopping it.
From the fractious Republicans, in between their attack ads on one another, we still haven’t heard of a simple four- or five-point agenda that rebuts the above, e.g., calls for massive new oil and gas development that will create jobs, new wealth, and greater energy independence; pruning back the size of government; repealing regulations and unleashing the private sector through budget discipline and a complete overhaul of the tax code; entitlement reform; and the preservation of defense.

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Sunday, January 8, 2012

Old Midterms - Complete

Economics Midterm 1 (100 points) – September 23, 2011

A professional basketball team has a new assistant coach. The assistant notices that one player (aka “the star player”) scores on a higher percentage of her shots than the other players. Based on this information, the assistant suggests to the head coach that this star player should take all the shots. That way, the assistant reasons, the team will score more points and win more games. On hearing this suggestion, the head coach fires his assistant for incompetence. What was wrong with the assistant’s idea? (15 pts.)
How will a reduction in the number of hours worked each day affect an economy’s production possibilities curve (all other variables being held constant)? (7 pts.)
Susan can pick 4 pounds of coffee in an hour or 2 pounds of nuts. Tom can pick 2 pounds of coffee in an hour or 4 pounds of nuts. Each works 6 hours per day. (35 pts.)

What is the maximum number of pounds of coffee the two can pick in a day?
What is the maximum number of pounds of nuts the two can pick in a day?
If Susan and Tom were picking the maximum number of pounds of coffee when they decided that they would like to begin picking 4 pounds of nuts per day, who would pick the nuts, and how many pounds of coffee would they still be able to pick?
Now suppose Susan and Tom were picking the maximum number of pounds of nuts when they decided that they would like to begin picking 8 pounds of coffee per day. Who would pick the coffee, and how many pounds of nuts would they still be able to pick?
Would it be possible for Susan and Tom to pick a total of 26 pounds of nuts and 20 pounds of coffee each day? If so, how much of each good should each person pick?
Is the point (30 pound of coffee per day, 12 pounds of nuts per day) an attainable point? Is it an efficient point? What about the point (24 pounds of coffee per day, 24 pounds of nuts per day?)
On a graph with pounds of coffee per day on the vertical axis and pounds of nuts per day on the horizontal axis, show all the points you identified in question 3 parts a-f. Connect these points with straight lines. Is the result the PPC for the economy consisting of Susan and Tom?

Distinguish between the meaning of the expressions ‘change in demand’ and ‘change in the quantity demanded.’ Draw graphs to illustrate your point. (15 pts.)
Last year a government official proposed that to protect the poor from rising gasoline prices, a price cap of $3.00 per gallon. The average price of gasoline in the United States is now $3.556. (28 pts.)

If this proposal had been enacted by Congress and the President, would the $3.00 mark be a price ceiling or a price floor?
What would the relationship be between the supply and demand of the price of gasoline?
What social behaviors would be observed in terms of gasoline purchasing? Why?
Draw a supply and demand graph showing the current equilibrium point ($3.556) and the proposed price cap of $3.00. The United States consumes 378 million gallons of gasoline per day, according to the Department of Energy.

Economics Midterm 2 (100 points) – October 19, 2011

Mr. Brown and nine friends are having dinner at the Moonstone Grill north of McKinleyville. To simplify the task of paying for their meal, they have agreed in advance to split the cost of their meal equally, with each paying one-tenth of the total check. Having cleared the entrée dishes, the waiter arrives with the dessert menu, on which Mr. Brown’s favorite items are pumpkin pudding ($10) and chocolate mousse ($6). Mr. Brown’s reservation prices for these items are $4 and $3, respectively. (27 pts)

If Mr. Brown is the only person who is interested in dessert, will he order dessert, and, if so, which one? What are his economic surpluses from the two items? (12 pts)
Would he order dessert if he were dining by himself? (7 pts)
Would Mr. Brown order dessert if there were only 5 people splitting the check instead of 10? (8 pts)

In the country Breakfastland, which has a competitive market economy, citizens eat only bagels and cereal for every meal. Suppose the demand for bagels rises dramatically while the demand for breakfast cereal falls. Briefly explain how Breakfastland’s competitive market economy will make the needed adjustments to reestablish an efficient allocation of society’s scarce resources. (8 pts)
Suppose that a U.S. worker can produce 1000 pairs of shoes or 10 industrial robots per year. For simplicity, assume there are no costs other than labor costs and firms earn zero profits. Initially, the U.S. economy is closed. The domestic price of shoes is $30 a pair, so that a U.S. worker can earn $30,000 annually by working in the shoe industry. The domestic price of a robot is $3,000, so that a U.S. worker can also earn $30,000 annually working in the robot industry.

Now suppose that the

U.S.

opens trade with the rest of the world. Foreign workers can produce 500 pairs of shoes or 1 robot per year. The world price of shoes after the

U.S.

opens its markets is $10 a pair, and the world price of robots is $5,000. (35 pts)

What do foreign workers earn annually, in dollars, within these two industries? (4 pts.)
When it opens to trade, which good will the United States import and which will it export? (4 pts.)
Find the real income of U.S. workers after the opening to trade, measured in (1) the number of pairs of shoes annual worker income will buy and (2) the number of robots annual income will buy. Compare to the situation before the opening of trade. Does trading in goods produced by “cheap foreign labor” hurt U.S. workers? (20 pts.)
How might your conclusion in part “c” be modified in the short term, if it is costly for workers to change industries? What policy or government response might help with this problem? (7 pts.)

In studying for his economics final, Sam is concerned about only having two things: his grade and the amount of time he spends studying. A good grade will give him a benefit of 20; an average grade, a benefit of 5; and a poor grade, a benefit of 0. By studying a lot, Sam will incur a cost of 10; by studying a little, a cost of 6. Moreover, if Sam studies a lot and all other students study a little, he will get a good grade and they will get poor ones. But if they study a lot and he studies a little, they will get good grades and he will get a poor one. Finally, if he and all other students study the same amount of time, everyone will get average grades. Other students share Sam’s preferences regarding grades and study time. (30 pts.)

Model this situation as a two-person prisoner’s dilemma in which the strategies are to study a little and to study a lot, and the players are Sam and all other students. Include the payoffs in the matrix. (20 pts)

Economics Midterm 3 (100 points) – November 18, 2011

Here are some data for an economy. All figures are in millions of dollars (20 pts)

Consumption expenditures $600

Exports $75

Government purchases of goods and services $200

Construction of new homes and apartments $100

Sales of existing homes and apartments $200

Imports $50

Beginning-of-year inventory stocks $100

End-of-year inventory stocks $125

Consumption of fixed capital $25

Business fixed investment $100

Government payments to retirees $100

Household purchases of durable goods $150

Find GDP and explain your calculation (8 pts)
Find NDP and explain your calculation (8 pts)
If this economy has 18,000 people, what is its GDP per capita? (4 pts)

The outputs and prices of goods and services in Country X are shown in the table below. Assume that 2009 is the base year. (30 pts)

	2009 Quantity	2009 Price (base year)	2010 Quantity	2010 Price
Food	6	$2.50	8	$2.50
Clothes	5	$6	10	$10
Entertainment	2	$4	5	$5:

a. Calculate the following:

i. The nominal gross domestic product in 2010 (5 pts)

ii. The real GDP in 2010 (10 pts)

If in one year the price index is 50 and in the next year the price index is 55, what is the rate of inflation from one year to the next? (5 pts)
Assume that 2011’s wage rate will be 3% higher than 2010 because of inflationary expectations. The actual inflation rate is 4%. At the beginning of 2011, will the real wage be higher, lower, or the same as 2010? (5 pts)
Assume that Mr. Brown gets a fixed-rate loan for 3.25% from a bank when the expected inflation rate is 3%. If the actual inflation rate turns out to be 4%, who benefits fro the unexpected inflation? Mr. Brown, the bank, neither, or both? Explain. (5 pts)

Using Okun’s law, fill in the four pieces of missing data in the table below. The data are hypothetical. (20 pts)

Year	Real GDP	Potential GDP	Natural unemployment rate (%)	Actual unemployment rate (%)
2001	7840	8000	(a)	6
2002	8100	(b)	5	5
2003	(c)	8200	4.5	4
2004	8415	8250	5	(d)

Natural unemployment rate for 2001 (5 pts)
Potential GDP for 2002 (5 pts)
Real GDP for 2003 (5 pts)
Actual unemployment rate for 2004 (5 pts)

Data on a before-tax income, taxes, paid, and consumption spending for the Simpson family in various years is given below. (30 pts)

Before-tax income ($)	Taxes paid ($)	Consumption spending ($)
25,000	3,000	20,000
27,000	3,500	21,350
28,000	3,700	22,070
30,000	4,000	23,600

Graph the Simpsons’ consumption function (C vs. DI) (5 pts)
Find their households marginal propensity to consume. (10 pts)
Find their households marginal propensity to save. (5 pts)
Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1000 at each level of after-tax income. (“Income does not include the prize money) (10 pts).

i. How does this change affect the graph of their consumption function? (5 pts)

ii. How does it affect their marginal propensity to consume? (5 pts)

What is the equilibrium outcome in this game? From the students’ perspective, is it the best outcome? (10 pts)

BONUS Question

Explain in four to six sentences why a military arms race is an example of a prisoner’s dilemma. (5 pts)

Economics Midterm 4 (100 points) – December 16, 2011

For each of the following, use an AD-AS diagram to show and explain the short-term effects on GDP and the price level. (42 pts, or 7 pts each)

An increase in consumer confidence that leads to higher consumption spending.
A reduction in taxes
A decline in planned investment spending by businesses.
A sharp drop in oil prices.
A war that raises government purchases.
A sharp decrease in net exports.

Aggregate Expenditures Model (32 pts)

What are the four components of the Aggregate Expenditures Model which add up to equal real GDP? (8 pts)
Suppose that a certain country with a private, closed economy has an MPC of 0.99 and a real GDP of $100 Billion. If its investment spending decreases by $1 billion, what will be its new level of real GDP? (8 pts)
What is a recessionary gap? What is the impact on unemployment of a recessionary gap, and of GDP growth? Does it produce a negative or positive GDP gap? (8 pts)
How is a recessionary gap different from an inflationary gap? Does an inflationary gap produce a negative or positive GDP gap? What is the impact of an inflationary gap on unemployment and price level? (8 pts)

Discuss your research project, and give a brief overview of your January presentation proposal. (26 pts)

What country have you chosen to study? Why? (6 pts)
What makes your country’s economy different from your classmates? (10 pts)
Overall, what are the strengths and weaknesses of your country’s growth potential? (10 pts)

Complete Study Guide

I cannot take credit for this study guide, but should look HERE:
http://www.mckinneyisd.net/information/docs/feng.pdf

Again, we have not covered everything that is listed, such as determinants of fiscal and monetary policy, but there is a lot that we have covered.

If you think that the amount of material I'm presenting here is a bit overwhelming, you are probably right. Frankly speaking, the exam will force you to work (i.e. it won't be as easy as the last midterm), but it won't match the third midterm in terms of difficulty. I aim to have four to five problems, with at least one problem from each midterm time period. In the next post, I will list all the midterm problems in a comprehensive format.

Key Definitions

Ditto from the last post.

Key Definitions:

Aggregate demand: A schedule or curve which shows the total quantity of goods and services demanded (purchased) at different price levels.
Aggregate supply: the total amount spent for final goods and services in the economy.
Absolute advantage: the comparison among producers of a good according to their productivity (NOT their opportunity costs).
Allocative efficiency: the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price (marginal benefit) are equal.
Automatic stabilizers: changes in fiscal policy that stimulate AD when the economy goes into a rece4ssion without policymakers having to take any deliberate action.
Business cycle: recurrent ups and downs over a period of years in the level of economic activity.
Capital: human-made resources (machinery and equipment) used to produce goods and services; goods which do not directly satisfy human wants.
Catch up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
Ceteris paribus: "other things equal" used as a reminder that all variables other than the ones being studied are assumed to be constant.
Circular flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms.
Classical dichotomy: the theoretical separation of nominal and real variables.
Comparative advantage: a lower relative cost than another producer.
CPI: an index which measures the prices of a fixed market basked of consumer goods bought by a typical consumer.
Consumption schedule (curve): a schedule showing the amounts households plan to spend for consumer goods at different levels of income.
Contractionary fiscal policy: a decrease in AD brought about by a decrease in government spending for goods and services, an increase in net taxes, or some combination of the two.
Contractionary monetary policy: a decrease in AD brought about by a decrease in the money supply, which in turn results from the Fed selling government securities, increasing the discount rate, or increasing the reserve requirement.
Cost push inflation: inflation resulting from a decrease in AS (from higher wage rates and raw material prices) and accompanied by a decrease in real output and employment.
Crowding out effect: the rise in interest rates and the resulting decrease in investment spending in the economy caused by increased borrowing in the money market by the government.
Cyclical unemployment: Unemployment caused by insufficient AD.
Demand deposit: a deposit in a commerical bank against which checks may be written.
Demand pull inflation: inflation resulting from an increase in AD
Depreciation of the dollar: a decrease in the value of the dollar relative to another currency; a dollar now buys a smaller amount of the foreign currency.
Discount rate: the interest rate which the FED charge on the loans they make to commercial banks.
Economic efficiency: getting the most from our scarce resources: for a given amount of input producing the greatest amount of goods and services. Or, producing a certain amount of goods and services with the least amount of inputs.
Economic resources: land, labor, capital, and entrepreneurial ability which are used in the production of goods and services.
Equality versus efficiency tradeoff: the decrease in economic efficiency which may accompany a decrease in income inequality.
Equity: the property of distributing economic prosperity fairly among the members of society.
Excess reserves: the amount by which a bank’s actual reserves exceeds its required reserves.
Expenditures approach: the method which adds all the expenditures made for final goods and services to measure the GDP (the alternative is to add up incomes – the income approach).
Exports: goods and services produced in a nation and sold to customers in other nations.
Fallacy of composition: incorrectly reasoning that what is true for the individual (or part) is therefore necessarily true for the group (or whole)
Federal funds rate: the interest rate banks charge one another on overnight loans made out of their excess reserves.
Fiat money: anything that is money because government has decreed it to be money (it has no intrinsic value)
Fiscal policy: changes in government spending and tax collections designed to achieve a full employment and noninflationary domestic output.
45 degree line: a line along which the value of the GDP (measured horizontally) is equal to the value of Aggregate expenditures (measured vertically). All points on this line are equilibrium points!
Fractional reserve banking: a banking system in which banks hold only a fraction of deposits as reserves.
Frictional unemployment: unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers "between jobs"
Full employment: when the unemployment rate is equal to the full employment unemployment rate there is only frictional and structural unemployment; cyclical unemployment equals zero. At this point we are also at potential output.
GDP: the total market value of all final goods and services produced during a given time period within the boundaries of the U.S., whether by American or foreign-supplied resources.
GDP deflator: the price index for all final goods and services used to adjust the money GDP into real GDP. (a substitute for the CPI).
GNP: the total market value of all final goods and services produced within a given time period by American residents, whether these people are located in the U.S. or abroad.
Imports: spending on goods and services produced in a foreign nation.
Inflation: a rise in the general level of prices in the economy (percentage change in either the CPI or the GDP deflator)
Investment: spending on capital equipment, inventories, and structures. NOT the purchase of financial assets (stocks and bonds).
Invisible hand: the tendency of firms and households seeking to further their self interests in competitive markets to further the best interest of society as a whole.
Productivity: total output divided by the quantity of labor employed to product the output.
Law of increasing opportunity cost: as the amount of a product produced is increased, the opportunity cost of producing an additional unit of the product increases.
Liquidity: money or things which can be quickly and easily converted into money with little or no loss of purchasing power.
LRAS: the AS curvfe associated with a time period in which input prices and output prices move freely.
M1: the narrowly defined money supply; currency and checkable deposits.
M2: a more broadly defined money supply; equal to M1 plus noncheckable savings deposits, money market deposits, mutual funds, and small time deposits.
M3: very broadly defined money supply: includes M2 plus large time deposits.
Macroeconomics: the study of economy-wide phenomona, including inflation, unemployment, and economic growth.
Marginal analysis: decision making which involves a comparison of marginal (extra) benefits and marginal costs.
Marginal propensity to consume (MPC): fraction of any change in income spent for goods and services; equal to the change in consumption divided by the change in disposable income.
Marginal propensity to save (MPS): fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income.
Menu costs: the costs of changing prices
Microeconomics: the part of economics concerned with such individual units within the economy as Industries, firms, and households; and with individual markets, particular prices, and specific goods and services.
Monetary neutrality: the proposition that changes in the money supply do not affect real variables
Moneterism: the macroeconomic view that the main cause of changes in aggregate output and the price level are fluctuations in the money supply; advocates a monetary rule.
Monetary policy: changing the money supply to assist the economy to achieve a full employment, noninflationary level of total output.
Money: any item which is generally acceptable to sellers in exchange for goods and services.
Natural rate hypothesis: the idea that the economy is stable in the long run at the natural rate of unemployment; views the long run Philips curve as vertical at the natural rate of unemployment.
Normative economics: that part of economics pertaining to value judgements about what the economy should be like; concerned with economic goals and policies.
Okun’s law: the generalization that any one percentage point rise in the unemployment rate above the full employment unemployment rate will increase the GDP gap by 2.5 percent of the potential GDP of the economy. So…start in long run equilibrium – as the unemployment rate increases by 1% we see GDP growth decrease by 2.5 percent.
Opportunity cost: the amount of other products which must be forgone or sacrificed to produce a unit of a product.
Philips curve: a curve showing the relationship between the unemployment rate and the inflation rate. In the short run it shows a negative (inverse) relationship. In the long run there is no relationship.
Positive economics: the analysis of facts or data to establish scientific generalizations about economic behavior (as opposed to normative economics).
Potential GDP: the real output an economy is able to produce when it fully employs its available resources.
Production possibilities frontier: a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Productive efficiency: the production of a good in the least costly way (minimum ATC)
Rational expectations theory: the hypothesis that business firms and households expect monetary and fiscal policies to have certain effects on the economy and take, in pursuit of their own self interests, actions which make these policies ineffective.
Ricardian equivalence theorm: the idea that an increase in the public debt will have little or no effect on real output and employment because taxpayers will save more in anticipation of future higher taxes to pay the higher interest expense on the debt. Meant to show fiscal policy is ineffective: I won’t consume more when you lower my taxes because I know you are going to raise them in the future…
Say’s Law: the macroeconomic generalization that the production of goods and services (supply) creates an equal aggregate demand for these goods and services. The implication is that we can never have a recession due to a shortfall in AD (this law was shown to be false!)
Shoeleather costs: the resources wasted when inflation encourages people to reduce their money holdings and make trips to the bank more frequently.
Stagflation: inflation accompanied by stagnation in the rate of growth of output and a high unemployment rate in the economy. Caused by a decrease in AS.
Structural unemployment: unemployment caused by changes in the structure of demand for goods and in technology; workers who are unemployed because their skills are not demanded by employers, they lack sufficient skills to obtain employment, or they cannot easily move to locations where jobs are available.
Terms of trade: the rate at which units of one product can be exchanged for units of another product; the amount of one good or service given up to obtain one unit of another good or service.