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Midterm

ECN204 Midterm: ECN204 Final Exam notes Part 1.pdf


Department
Economics
Course Code
ECN 204
Professor
Eric Kam
Study Guide
Midterm

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Macroeconomics (BEFORE MIDTERM)
- Whole economy
- Subdivision/aggregates (total) ; GDP, inflation
- Economic growth, price stability (inflation), GDP
Inflation t price change from one period to another
Milton Friedman
- Took 5 years to get rid of inflation in Japan
- Inflation is just like alcoholism, in both cases, when you start drinking or when you start printing too
much money. The good effects come first; the bad effects only come later. That's why, in both cases,
there is a strong temptation to overdo it, to drink too much and to print too much money. When it
comes to the cure, it's the other way around, when you stop drinking or when you stop printing
money the bad effects come first and the good effects only come later. That's why it's so hard to
persist with the cure.
Aggregate Demand-Aggregate Supply Model (AS-AS)
Begin at Point A t produce @ 2%
inflation
SR increase, demand increase t
Point B for growth GDP
As price goes up, demand cuts t
Point C, D,
Inflation high, instability, move to
LR t Point E
LR t Long run, fixed technology,
resource
SR t short run
Short run t price not easily
adjustable (change)
Point F t worst situation, low GDP
level, high inflation
Orange arrowt inflate; Blue -
deflate
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Orange t Good first, bad after
1. Despite the central bank's attempts to reduce inflation between times B and E, the inflation rate
inevitably still increases. What can explain this?
Reduce demand
2. Suppose the economy is at time E. What must Argentina's central bank do in order to reduce the
inflation rate from 12% to 2%? Will this be politically popular?
3. Using the AD-AS model, explain what Friedman means by "When it comes to the cure, it's the other
way around, when you stop drinking or when you stop printing money the bad effects come first and
the good effects only come later. That's why it's so hard to persist with the cure."
Economic Models & Analysis
Prices t vertical axis Slope t rise/run (marginal effect) Intercepts
Consumption Function = C = mx + b (between income & consumption relationship)
Production Possibilities Model t allocate resources efficiently & effectively
Assumptions:
- Full employment & productive efficiency
- Fixed resources, technology
- Two goods, consumer & capital goods
Production Possibilities
Law of Increasing Opportunity Cost t Opportunity cost increases with amount produced, shape steeper
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Optimal Allocation t MC=MB
Marginal benefit t extra benefit associated with consuming one more unit
Marginal Cost t extra opportunity cost of that extra unit
Present Choices & Future Possibilities
Favoring present goods = consumer goods
Favoring future goods = capital goods
Resource Allocation t handle in different societies
- Command, Mixed, Invisible Hand (Free Market)
DATA t pieces of evidence about behavior
- Help quantify theoretical relationships, test models/beliefs
Types of Data
- Time series data *
- Cross section data (survey)
- Longitudinal data
Index Number t choose reference point
- Consumer Price Index (CPI)
- Nominal & Real variables
- Quality & Technological Change
- Measuring Change in economic variables
The Circular Flow Diagram
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