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Comprehensive Midterm Review A very thorough review of the content covered up to the midterm. A majority of the notes here are prepared based on slides and in-class discussions.

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ECON 2000
Perry Sadorsky

Variables: Q = quantity that buyers demand Q = quantity that producers supply P = price of output Y = aggregate income C = consumer spending I = investment G = government purchases NX = net exports K = capital (tools, machines and structures used in production) L = labor W = nominal wage (dollars per hour of work) R = nominal rental rate W/P = real wage (output earned per hour of work) R/P = real rental rate r = real interest rate (nominal interest rate corrected for inflation, also the output earned in the future by lending one unit of output today) V = velocity T = value of all transactions M = money supply K = how much money people wish to hold for each dollar of income (exogenous) = inflation rate i = nominal interest rate (not adjusted for inflation, also the dollar earned in future by lending one dollar today) e = expected inflation rate L = # of workers in the labour force E = # of employed workers U = # of unemployed U/L = unemployment rate s = rate of job separations (employed workers that separate from their jobs) (exogenous) f = rate of job finding (unemployed workers that find jobs) s = the saving rate (exogenous) = the rate of depreciation k* = the value at which capital per worker remains constant n = rate of population growth d = spending on domestic goods f= spending on foreign goods * = foreign or world version of the variable r* = foreign interest rate (exogenous) e = nominal exchange rate, the relative price of domestic currency in terms of foreign currency (e.g. Yen per Dollar) = real exchange rate, the relative price of domestic goods in terms of foreign goods (e.g. Japanese Big Macs per U.S. Big Mac) NX() = demand for dollars E = labour efficiency g = technological progress A = the amount of output for each unit of capital (exogenous and constant) u = fraction of labour in research (exogenous) Equations: Demand Equation: Q = D(P, Y) Shows that the quantity demanded is related to price and aggregate income GDP: Y = C + I + G + NX Y = the value of total output C + I + G + NX = aggregate expenditure C = consumer spending I = investment G = government spending NX = net exports GNP GDP = factor payments from abroad factor payments to abroad GDP Deflator: GDP Deflator = Nominal GDP/Real GDP Reflects whats happening to the overall level of prices in the economy CPI in any month: 100 x (cost of basket in that month/cost of basket in base period) Unemployment rate: (Unemployed/Labour Force) x 100 % of the labour force that is unemployed Labour force participation rate: (Labour Force/Population) x 100 The fraction of the adult population that participates in the labour force Production function: Y = F(K, L) Shows how much output (Y) the economy can produce from K units of capital and L units of labour; exhibits constant returns to scale Marginal Product of Labour (MPL): MPL = F(K, L+1) F(K, L) The extra output the firm can produce using an additional unit of labour (holding other inputs fixed) K = capital L = labour MPL = W/P Each firm hires labour up to this point W = nominal wage P = price of output W/P = real wage Marginal Product of Capital (MPK) MPK = R/P The extra output the firm can produce using an additional unit of capital (holding other inputs fixed) Firms maximize profit by choosing K such that MPK = R/P K = capital R = nominal rental rate P = price of output R/P = real rental rate Total labour income: (W/P)L = MPL*L W = nominal wage P = price of output W/P = real wage L = labour MPL = marginal productivity of labour Total capital income: (R/P)K = MPK*K R = nominal rental price P = price of output K = capital MPK = marginal productivity of capital Production function with constant returns to scale: Y = MPL*L + MPK*K Y is national income MPL*L (marginal productivity of labour * labour) is labour income MPK*K (marginal productivity of capital * capital) is capital income Disposable income: Y T Y = total income T = total taxes Consumption function: C = C(Y - T) As (Y-T) increases, so does C The marginal propensity to consume is the increase in C caused by a one-unit increase in disposable income C = consumer spending Y = total income T = total taxes Investment function: I = I(r) r = real interest rate (the nominal interest rate corrected for inflation) I = investment Aggregate demand: C(Y - T) +I(r) + G Where Y, T and G are fixed/exogenous C = consumer spending Y = total income T = taxes I = investment r = real interest rate
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