EC 202 Lecture Notes - Lecture 1: Loanable Funds, Federal Funds Rate, Price Level
Class 1
● Economics: the study of choices made by individuals, businesses and government etc,
due to scarcity (of time, resources, money etc).
○ We cannot have everything we want, so we have choice between available
options
○ Economics is not just about money; many economists study
health,education,crime etc
○ There are two main types of economics: microeconomics and macroeconomics
■ Microeconomics is the study of individual units that make up the economy
● Did the legalization of marijuana in oregon influence the DUI rate?
■ Macroeconomics is the study of the economy of an entire nation or
society
● Do increases in government spending increase interest rate?
● What causes the unemployment rate to increase?
●Topics in Macroeconomics
○ GDP
○ Unemployment
○ Inflation
○ Interest Rates
○ Government policy
■ Piscal Policy
■ Monetary Policy
●Gross Domestic Product
○ Measures the market value of the final goods and services produced within a
country during a specific time period
○ A good measure of welfare
■ More output implies more income
■ Generally increase in GDP means an increase in living standards/welfare
○ We generally care about two features of GDP
■ Long term growth in GDP (long run economic growth)
● The main question is what accounts for the difference in GDP
growth over time and across countries
● “Typical” growth in the US is about 3%
● Can government policies be used to influence GDP growth?
■ Fluctuations in GDP (business cycles)
● Every business cycle has two phases:
○ Expansion: persistent increase in GDP
○ Recession persistent decrease in GDP
● National Bureau of Economic Research (NBER) declares
recessions
● Business Cycle Peak: the turning point between an expansion and
a recession phase
● Business Cycle Trough: the turning point between a recession and
an expansion phase
● A complete business cycle goes:
Expansion => Peak =>Recession => Trough => Repeat
● The main questions about business cycles:
○ What causes recessions?
○ What reinforces them?
○ Can any government policies be used to avoid/mitigate
recessions?
● Unemployment
○Unemployment rate: the percentage of people looking for jobs who currently
don’t have a job
○The unemployment rate is a good indicator of how the labor market is doing
○The main questions about unemployment:
■ Why do we always have some level of unemployment?
■ What causes differences in unemployment rate over time?
■ Can government policy be used to influence unemployment in the short
run and the longer run?
● Inflation
○Increases in the overall price level
○Measured using the percentage increase in a price index over time
○The most well-known price index is consumer price index (CPI)
○A fall in the price index is called deflation
○The main questions about inflation:
■ What are the costs of inflation?
■ Why do we have inflation in the first place?
■ Can a government policy be used to influence the inflation rate?
● Interest Rates
○The price of loanable funds
○For a borrower, an interest rate is the cost of borrowing
○For a lender,; an interest rate is the return for lending
○There are many interest rates but they tend to move together (so we’ll usually
talk about “the” interest rate)
○The interest rates affect borrowing which affects spending by consumers and
businesses
■ Lower interest rates =>More borrowing=>More spending=>Higher GDP
○The main questions about interest rate:
■ What determines the interest rate?
■ How do changes in the interest rate affect the economy?
■ Can government policy be used to change specific interest rates?
● Government Policy
○The US has two types of policies that it can use to influence the macroeconomy
■ Fiscal policy: changes in taxes and spending
●Responsibility of the federal government
●Budget: tax revenue - spending (within a given year)
Document Summary
Economics: the study of choices made by individuals, businesses and government etc, due to scarcity (of time, resources, money etc). We cannot have everything we want, so we have choice between available options. Economics is not just about money; many economists study health,education,crime etc. There are two main types of economics: microeconomics and macroeconomics. Microeconomics is the study of individual units that make up the economy. Macroeconomics is the study of the economy of an entire nation or society. Measures the market value of the final goods and services produced within a country during a specific time period. Generally increase in gdp means an increase in living standards/welfare. We generally care about two features of gdp. Long term growth in gdp (long run economic growth) The main question is what accounts for the difference in gdp growth over time and across countries. Typical growth in the us is about 3% National bureau of economic research (nber) declares recessions.