Jonathan James

9/25/23

Lecture 1. Introduction to Economics and Course

Main concept for this module (part 1)

-What is the purpose of an economy and economists?

-Economics is the science of decision making.

-How do people make choices?
-Which choices are best for society? (Ex. Me getting a college
education is good for society.)
-Can we encourage choices that are better for society?
-Economics is intuitive
-Cost v. Benefit (ex. Should I go to college?)
-Intuition is a good starting point, but you need a deeper
understanding to solve important problems
-Course Goal: build on our basic economic tuition to make it more
useful
-What causes economic growth?
-Economic growth: when people/groups become richer
-Living standards can be improved?? <— relatively new idea
-Malthusian Trap: changes in standard of living due to births/
deaths
-^ used to be the only way for standard of living to increase (ex.
Your siblings die of the plague so you get more personal space
and more food.
-The Malthusian Trap is “broken” when a country breaks out of
these old rules. (ex. When England stopped living in poverty in the
mid 1700s, and standard of living began to increase exponentially.)
My guess is it’s because of the Industrial Revolution, but many
countries have still not experienced the breaking of the Malthusian
Trap.
-Poverty is an issue that needs to be solved.
-The poorest countries have lower life satisfaction, are hungrier,
and have lower life expectancies.
-Economists focus on the big picture (ex. Are electric busses good for
the environment? Well, they cost money that could be spent
elsewhere for the environment. Instead, lets expand the regular bus
service so that people will choose busses over cars in the first place.)
-Choices create a trade-off. Economists are trained to identify and
evaluate these trade-offs.
-Okay, economics=choices. Then, what is an economy?
-Economy=how society makes decisions on the many choices that
affect society
-Microeconomics=individual decisions (households and companies)
-Macroeconomics=the economy as the whole
-Remember, economics is predictable
-ex. Your grade in this class is predictable. The workload is
predictable. The schedule is predictable. Hooray!
-Office hours: mon/wed 2:30-4:00pm
-You can also use the discussion forums and they are faster than
waiting for office hours. Just post a screenshot on there.
-Any textbook edition is fine.
-Supplemental videos will be posted on the canvas.
-You will need a calculator for the exams -any calculator- not your
phone though. We will work with basic algebra and geometry.
-Quizzes are ten questions taken from a bigger bank of questions.
-Since exam questions are straight from the quiz question banks,
you should take the quizzes multiple times to get more questions
and study for exams. There are a LOT though, so don’t worry about
getting ALL the questions.
-One lecture quiz per lecture
-Four exams (45 questions each)
-ALSO taken from the quiz question bank
-Listen to the planet money podcasts
-There will be planet money podcast quizzes (super easy)
9/27/23
Lecture 2: The power of interconnectedness, trade, and comparative
advantage

On exams/quizzes?:
-x the bubble, don’t fill it in
-you will need your empt id
-pen or pencil works

Should societies be self-sufficient or interconnected?

How can society be organized in the most prosperous (efficient) way?

-Intuitively, it is easier, smarter, and more realistic to be

interconnected.
-However, intuition is not provable or clear.

Interconnectedness allows people to specialize.

-There are many ways to specialize, but there is one most efficient
way.
-Actionable: You are able to tell if people are specialized in the most
efficient way.
-Interconnectedness is associated with international trade, but the
concepts can be applied on smaller scales as well

Comparative Advantage: The producer with the comparative

advantage has the lowest opportunity cost.
Trade-off: More time spent producing good A = Less time spent
producing good B
Opportunity cost of 1 unit of Good 1 = (loss of good 2)/(gain of good 1)

DIY PPF
-Choose and label an X and Y axis
-Plot the two extreme points
-Draw a line connecting the points
-Calculate the slope (y maximum/x maximum)(this is the opportunity
cost)
The country should choose a point along the line for their production.
However, the line will move if they trade, so they should plan to trade in a
way that lets them plot their point above the original PPF.
-Points above the line: Efficient, but infeasible (not possible)
-Points below the line: Feasible, but inefficient
Each unit of good x reduces the possible quantity of good y by the slope.
A steep slope shows a strong comparative advantage for one good.

Countries have three options:

1. Produce good x and trade for good y
2. Produce good y and trade for good x
3. Don’t trade-produce and consume along the PPF line

Countries will always choose a trading option because it benefits them

more. They choose which good to specialize in based on which has a
lower opportunity cost (aka they choose based on their comparative
advantage).

Trade benefits ALL participating countries. ALL countries have a

comparative advantage. Trade allows the low-cost producer to specialize.

Absolute Advantage: Who can produce the largest amount for a given
input

The terms of trade affect how countries specialize their workers.

Global output increases when countries specialize in what they are good
at and trade for what they need.

You can make a PPF graph of multiple countries at once.

-The no-trade line will not be considered the PPF
-The PPF will be a multi-segment line.
10/2/23
Lecture 3: Supply and Demand

How can society harness the power of trade?

How do we solve the logistics of interconnectedness?

Big idea: The pursuit of self-interest may lead to an outcome that is in

society’s interest. (Hands-off system - the govt. doesn’t have to do
anything)
-voluntary interactions between buyers and sellers

Market: group of potential buyers and sellers for a particular good or

service (ex. “The market for adult diapers increases as society ages)
Market system: millions of individual markets
Market outcome is determined by decisions of buyers and sellers.
Terms of trade: the price of something, aka the market price
Market quantity: how much is produced + consumed
Market outcome changes when one seller has control (a monopoly) over
a market.

How do buyers and sellers make decisions in a single market?

How do we measure the benefit buyers/sellers receive by participating
in the market?

Quantity demanded: the amount consumers would like to buy at a given

price

Law of Demand: when price increases, quantity demanded decreases.

(ex. When eggs get more expensive, people want to buy less eggs.)

Demand curves show consumer decisions, like willingness to pay.

Consumer Surplus: CS = WTP - price

WTP = Willing to pay
Consumer surplus is the net benefit to the consumer of buying the
good.
What determines willingness to pay?
-Taste/preference
-income
-prices of other stuff
-expectations about the future (ex. I think I will lose my job soon, so I better
not buy that.)

Demand curve=willingness to pay curve

-any widespread change in WTP will shift the demand curve (ex. In a
recession, people will have less money, and therefore be willing to pay less
money for Netflix.)

Inferior goods: You buy less of this when you get richer
Normal goods: You buy more of this when you get richer
Substitute goods: goods that compete with each other. (ex. When the price
of Starbucks goes up, people will buy more McDonalds coffee)
Compliment goods: goods that are commonly bough together. (ex. When
the price of hamburger meat goes up, the demand for hamburger BUNS
goes down (and the demand for hamburger meat ofc))
Budget effects: When a giant expense (like housing or cars) increases,
demand for regular stuff (like cookies) goes down.

Changes in consumer behavior are due to one of these reasons:

1. A change in WTP (Demand increases or decreases, probably due to
one of the reasons listed above^)
2. A change in price (increase or decrease in quantity demanded due to
change in price)

Quantity Supplied: Amount producers would like to sell at a given price

Producer surplus: PS = actual price - cost to produce the good

Total producer surplus is measured by finding the area of the triangle under
the price and above the supply curve.

Cost to produce depends on:

-input prices -technology (production process)
-Expectation -opportunity cost
Leftward shifts Rightward shifts
(demand curve): price decreases (demand curve): price increases and
and people’s demand has gone people’s demand has gone up
down (supply curve): price decreases and
(supply curve): price increases quantity supplied increases
and quantity supplied decreases

Changes in producer behavior are due to one of these reasons:

1. changes in costs (this shifts the supply curve)
-change in input cost, technology, expectations, opportunity cost,
etc
-“supply increases” or “supply decreases”
2. change in price (this is just movement along the curve)
-“increase/decrease in the quantity supplied due to change in price”
10/4/23
Lecture 4: Equilibrium in Markets
Questions for end:
are scantrons provided? yes
Is the exam in this room, at 4:10, just like usual? yes
Do we have until 6:00 for the exam? yes

Remember, outcomes are efficient if they maximize gains from trade.

Equilibrium: opposing forces balance each other

— quantity demanded=quantity supplied
— All economic forces push price to equilibrium
— Price too low=shortage. More buyers than products, so sellers
raise price.
— Price too high=surplus. Overflowing shelves of overstock. Prices
must be lowered.

The supple and demand model is unrealistic in some ways. Companies

don’t all perfectly fit the standard graph. The model is pretty accurate
though. Companies charge pretty close to the equilibrium price. (ex.
Scouts coffee charges similar prices to Starbucks.)
-More importantly than exact prices matching up, the graphs are
extremely reliable in predicting what will happen to markets when stuff
happens (government subsidies, taxes, lower production costs, tariffs
on imports, etc.)

Causes of changes in equilibrium

-changes in consumer willingness to pay
-changes in supplier costs
P and Q=Price and Quantity
How to analyze changes in equilibrium:
1. draw the demand/supply curves. Locate initial equilibrium
2. Determine if event impacts WTP (shifts demand) or impacts
production cost (shifts supply)
3. draw new demand/supply curves
4. Determine new equilibrium
Important: say “quantity demanded increases” not “demand increases”
Examples:
-High gasoline prices increase WTP for Electric Vehicles (Increases
demand for EV). Makes sense cause electric vehicles don’t use gas.
-Higher steel prices from international tariffs increase costs. (Decrease
supply of EV)

IF all costs and benefits of the market come from buyers and sellers (no
external benefits/costs)
AND
price is determined by competition with no monopolies/excessively
influential sellers.
THEN
free markets are efficient (maximize the gains from trade).

Markets that WOULD (and do) benefit from a centralized market:

-The market for higher education (college)
-college doesn’t just benefit you, it also benefits your future
employers and customers, who exist because you went to college.
Because of this external benefit to society, the government subsidizes
you to go to college (we get government scholarships).
-The market for cigarettes
-Cigarettes have an external cost. They give nearby people health
issues from secondhand smoke. Because of this external cost, the
government made it illegal to advertise cigarettes on tv, and taxes
cigarettes more.

Total surplus: Producer surplus + Consumer surplus

Recipe for maximized gains from trade:

-Produce stuff for the lowest possible cost.
-Sell stuff to places that will benefit the most.

Producing too little stuff: unexploited gains from trade

Producing too much stuff: wasted resources
Both are negative outcomes for society. Equilibrium maximizes gains
from trade.
The government does still do stuff in the economy:
-Intervenes in the case of monopolies
-Subsidizes some markets, like electric vehicle market
-Works toward equity by helping low income people
-Overall, tries to help to outcomes be more efficient

The production of many good creates air pollution. There is no incentive

good enough to prevent this. There is a possible role for the government to
create a better outcome.
-Economists actually AGREE on how to solve the carbon emission issue.
The solution: create a market for carbon. Let market forces determine who
can pollute and how much, The government sets the level of pollution.
-This idea has largely been ignored in previous years
-Basically, the price is 0 right now for pollution, which is why so many
people are polluting. Adding like a $20 tax per billion metric tons would
reduce pollution from 6 billion tons to 4 billion tons.
10/11/23
Lecture 5: GDP and the Measurement of Economic Progress

GDP (aggregate/total output): Gross Domestic Product:

-measure of a country’s income
-since people consume the things they produce, it’s a rough measure
of standard of living
-since one person’s income is another’s spending, it also measures
income technically
-best measure of how well an economy is performing
-Doesn’t count intermediate goods, previously produced goods, or
transfers of assets.
-The price of a box of Oreos isn’t added to GDP the year it’s sold. It is
added to GDP the year it is produced.
~“The market value of all finished/final goods and services within a
country in a year.”~

Higher population lowers standard of living. You have to look at the GDP
per capita to see the standard of living.

We assume Income=Expenses when calculating GDP. It can be

calculated using either income or expenses.

To calculate GDP: do price x quantity for every good the country

produces. Then, add all the answers up.

When comparing GDPs of different countries, you will generally need to

make all the units (currencies) the same. For our purposes, we will put
everything in dollars.

Largest GDP=Largest economy

GDP per capita=GDP/population

Nominal GDP: calculated using prices from the time of sale

Real GDP: Adjusts for inflation by multiplying the same set of prices by
each year’s quantities produced.
P x Q = GDP. Therefore, an increase in either price or quantity will
increase GDP.

GDP deflator (a price index): measures inflation

-a price index measures how a group of prices move over time.
-inflation is a change in the general level of prices.

GDP deflator = (nominal GDP/real GDP) x 100

Recession: a decrease in GDP and employment

Short run fluctuations in GDP are called business cycles/fluctuations

Two common ways of splitting GDP (ways economist do the accounting)

Y = GDP aka total output
1. National Spending Approach
-Every PURCHASED item
-Add up all of the purchases by different groups
-Y=C+I+G+NX
-consumed goods/services, stuff purchased as an investment (like a
tractor), stuff the government buys, and exports minus imports (net
exports)
-A decrease in imports would decrease consumed goods
2. Factor Income Approach
-Add up the income generated by producing goods and services

Protectionists: People who think the US shouldn’t trade with anyone

Stuff GDP DOESN’T account for, and is therefore not a perfect measure
or standard of living:
-pollution level of the country
-production by illegal/underground economies
-household work
-loss of natural resources
-crime
-health or quality of life
10/16/23
Lecture 6: The Wealth of Nations and Economic Growth

Only recently did nations begin to experience sustained economic

growth.
-Not all nations have experienced this yet = vast differences in living
standards across the world.
-Adam Smith wrote An inquiry into the Nature and Causes of the
Wealth of Nations (1776). Attempted to figure out why a nation would
be able to grow/improve its living standards.

Theorized Cause of a nation getting sustained economic growth

-This is a flowchart 1—> 5
1. Ultimate Causes: (geography, luck, culture, ideas, history, etc.)
2. Institutions
3. Incentives
4. Immediate causes: Factors of Production (organization of: physical
capital, human capital (years of education), and technical knowledge)
5. GDP per capita

Everyone used to be poor.

Countries began to experience economic growth at different time periods
and rates, some not at all.
-UK and US (colonies) were first to experience growth (1650-ish)
-Many countries have had slow or no growth
-GDP per Capita graphs look like a hockey stick - sudden, crazy fast
growth

Ratio scales help us visualize and compare growth rates.

-Each unit on the Y-axis is a doubling of the Y variable. (The Y-axis
units are exponential)
-Makes slope differences more obvious, so it isn’t just a bunch of lines
exploding straight up (too hard to tell the difference between)

Country notes:
India: economic growth occurred after gaining independence from Britain
China: Was ahead of the UK until around 1950
The power of growth is that it compounds. Even slow growth produces big
changes if it’s sustained over a long time.
-Rules of 70: 70/annual growth rate %=doubling time for economy

Bad news: most of the world is still poor, living less happy, less long, less
peaceful lives.
Good news: Economic growth has lifted billions out of poverty.
-This is why we need economics-to help countries improve their
condition

Looking Again at the causes of growth/wealth

Factors of production:
-Physical capital: stock of tools-machines, structures, equipment
-Human capital: Productive knowledge and skills acquired through
education, training, and experience.
-Technological knowledge: knowledge about how the world works,
used to produce goods and services
High GDP per capita = the country has lots of this stuff^
-Institutions: The “rules of the game” that structure economic incentives
-laws, regulations, social traditions, customs, practices
-If you want to promote growth, you should create incentives that
align self-interest with social interest
-Rich countries have institutions that make people want to invest
in the above three causes^^ (ex. US makes people want to go to
college (increase human capital) because college educated jobs
make more money.)
-Property rights: ownership rights over possesions
-if the farmer doesn’t own the farm, and is scared that the
government could take their farm at any time, then the farmer
won’t try very hard to invest in his farm.
-Competitive and open markets
-half of GDP per capita is explained by the three factors of
production.
-The other half is explained by failure to use factors of
production efficiently. (ex. factories in many countries aren’t
organized in ways that maximize production).
-Honest government
-A corrupt government wastes the time/money of its worker citizens
 -Political (in)stability
-causes (un)certainty about future institutions
-A dependable legal system
-Enforcement of contracts
-protects property rights
-protects capital markets
-Natural Resources
-History
-Geography
-Access to a sea port = more trade
-Luck

Remember, wealthy, rich, countries incentivize factors of production.

How should we decrease poverty?

-have an honest government
-have a competitive and honest market
-Donate to www.givedirectly.org
-they give your money directly to someone who needs it. These
people are extremely poor and will spend the money on highly productive
things, like medicine, goats, irrigation, transportation, etc. THESE ARE
FACTORS OF PRODUCTION
10/18/2023
Lecture 7: Economic Growth

Y=GDP=output

The (Robert) Solow Growth Model

-Describes how the factors of production (capital, labor, and technology)
combine to produce output (GDP).
-K=units of physical capital
-e * L=Human capital
e is education level
L is number of workers
-A=technical knowledge
-Assume a very simple economy, with no government or trade.
-Y=C+I

Assume e and L don’t change, and that the economy can choose K.
-Simple production function: Y=A*F(K)
-Increasing in K but at a decreasing rate
-Diminishing *marginal product* (ex. First 2 hours of studying are
productive, but the last 2 hours will be less helpful to your exam
score.)
-Common example: Y=A
-The equation is a lineS
-changes in K affect Y

Factors of Production:
-Physical Capital
-Human Capital
-Technical Knowledge

Depreciation: process of going from new to old things. physical things do

not last forever.
-Assume capital depreciates at a constant rate, denoted by a squiggly
symbol.
-If you never invest in new things, your stuff will constantly depreciate
until you have zero capital.
-Assume investment is a constant fraction of output.
-Amount of investment function: I=(gamma)Y, where gamma is the rate
of investment.
-Investment must be greater than depreciation to create economic
growth. Investment is the source of economic growth.

Note: In the graphs we’re referring to, capital(k) is the x-axis, and
GDP(output) is the y-axis.

-Steady state: Capital stock this year=Capital stock next year

-Where the depreciation line and the investment line intersect. In
other words, where depreciation=investment

Catch-Up Growth: poor country —> wealthy country. It’s “catching up”
-cannot continue forever.
-Very rapid initial growth
Cutting-Edge Growth:
-Achieved through increasing technological knowledge and ideas
-Production function: Y=A TK

Economics of Ideas
1. Ideas generally occur because people are trying to make lots of
money (patent system). Incentives matter.
2. Physical Capital depreciates. Ideas do not. (ex. The pythagorean
theorem doesn’t get used up. Ideas can be shared freely with unlimited
people.
3. Government’s role in improving production of ideas - basic science
can’t be patented. Therefore, there isn’t much incentive to develop new
basic science discoveries. The government subsidizes people to go into
these fields, to try and combat this.
4. Many positive feedback loops.
-The larger the market, the greater the incentive to research and develop
new ideas.
-Most of the world is poor and can’t afford to work on “ideas”. As the
world becomes richer, more people will be able to work on ideas, which
will continue to make the world even RICHER.
10/23/23
Week 5: Sales Contracts (continued)

Bring a Scantron for the exam

requirement contract
output contract
yes, bc the change of mind wasn’t made in good faith
negligence

To study for test

-quizlet of vocal words
-review all goodnotes
-review all slides
-review all reading summaries/notes

Today’s material:

Good vs. Intellectual property

-The UCC simplifies law and allows for flexibility to new circumstances
-computer programs, software, are goods when they are in tradable
mediums
-“Intellectual Product” (IP) is not a good
-(Ex. Music floating in the air from a concert is not a good. A CD or
mp3 file of music is a good. A lecture is not a good. A book of the lecture
is a good.)

What about services that come with goods? (Ex. Apple tech support
services)
-If the tech support is the main thing, and just one or two iPhones are
purchased, the tech support is not a good.
-Which one is the ESSENCE of the contract?:
-The sale of the goods (UCC applies)
-The service (UCC does not apply)
-Did one cost significantly more?
UCC rule 2-306
-requirement and output contracts can be demanded/enforced
-requirement contract: everything you make in the next 2 years
-output contract: everything I need for this season

UCC rule 2-201 (statute of frauds)

-a contract for the sale of good $500+ is not enforceable unless it’s
written.
-A term can even be missed by accident.
-Contracts are not enforceable for quantities of goods that exceed
the amount in the writing.

Simple Delivery Contract: When goods are transferred at the time of sale or later
(ex. if the seller delivers the goods), then…
-title transfers when contract is executed. Until the contract’s terms
are executed, the buyer has not gotten their end of the deal.
-Risk of loss transfers when the buyer takes possession of the goods,
unless the seller isn’t a merchant, in which case, the risk of loss
transfers when the seller “tenders” the goods to the buyer.

Common-Carrier Contract: When a seller uses a common carrier (ex. UPS) there
are two types of contracts:
1. Shipment contract: Seller is responsible for the goods until they go out for
delivery. Title of goods transfers when the goods are delivered to the shipping
point.
-Denoted by “goods will be delivered FOB shipping point.”
2. Destination contract: Seller is responsible for the goods until they are
delivered to the specified destination. Title of goods doesn’t transfer until the
goods arrive.
-Denoted by “goods will be delivered FOB destination point” or by
specifying the delivery address in the contract.

Goods-in-bailment Contract: When goods are stored in a warehouse or with some

other third party.
-Whoever has title/risk of loss depends on whether the seller has a
document showing title, and whether the document is negotiable
-Negotiable: the document says “deliver to the order of the seller”
-means that the seller can “endorse it” over to the buyer, transferring title/
risk of loss to the buyer
-without these words, the title will still pass when the seller endorses it, but
risk of loss won’t transfer until the buyer gets possession of the goods.
-no ownership document?
Remedies under the UCC:
-If a seller delivers non-confirming goods, the buyer can
1. Cancel the contract
2. Obtain “cover” (buy a substitute promptly and in good faith)
3. Ask a judge to order specific performance (for the seller to deliver
the goods quantified in the contract - if money damages wouldn’t be
sufficient, maybe if the goods were very unique)
4. Sue for money damages
10/25/23
Lecture 8: Saving, investment, and the financial market

Two most important markets in economy

1. loanable funds market (savings, like in banks)
2. The labor market (workers)

We are suppliers in both of these markets

1. we supply our savings to people who want to get loans
2. we supply our labor to people who need workers

as price of bonds rises, the return rate goes down

Savings: income not spent on consumption

Investment: purchase of new capital goods

Financial Intermediaries:
-Banks
-We need an intermediary bc we don’t trust random borrowers to pay
us back.
-includes commercial banks and shadow banks
-shadow banks: non-regulated banks, like hedge funds and
investment banks
-Bond Markets
-Stock Markets

Opportunity costs of saving: you can’t spend right now

1. smoothing consumption
-u give up spending for now
2. rate of time preference (impatience)
-u have to wait
3. Marketing and psychological/information factors
-

Law of Supply: as interest rates increase, people will save more (higher
prices=higher quantity supplied)
Commercial Banks:
-banks receive savings fro lots of people.
-these funds are loaned to borrowers
-the banks charge interest to the borrowers

Bond Markets:
-some really big, well-known companies are so trustworthy that people
lend money directly to them, bc the company promised them that
they’d pay them back a higher amount.
-Bond: sophisticated “IOU” document
-Bonds do have risk- the risk that the borrowing company can’t/
doesn’t pay u back
-high risk=high interest

Stock Markets:
-not a good measure for the health of the economy
-trading stock doesn’t count as investment in the economy
-it’s the transfer of ownership between two people
-IPO (initial public offering)

The U.S Govt. usually runs a deficit each year.

Bonds are often resold.

-“P” is the re-sale price
-Face value: the value of the bond at maturity
-rate of return% = (FV - P)/P x 100

Watch the two videos

10/31/23
Lecture 9: Unemployment and Labor Force Participation

below average GDP and below average employment rates = recession

Growth comes from change.

-The growth that was shown off to the public: 210,000 jobs were added
to the economy in Feb 2014.
-The change that wasn’t mentioned: 4.59 million workers were hired.
4.38 million workers were fired or quit. HUGE amount of change for
these workers. Change can be GOOD.

Labor is the main input to GDP (60%)

Types of unemployment:
1. frictional unemployment (short-term, when someone is in-between
jobs, searching hard for the best match job for themself)
2. Structural unemployment (long-term, awful- just can’t find a job
because something (the company, the economy, technologies, etc.) has
changed in structure. Depressing for workers.)
-can be a result of labor regulations
-unemployment benefits sometimes discourage people from
getting jobs.
-high minimum wage makes people want jobs, but it puts some
companies out of business since they can’t afford to pay their
workers that much. This reduces how many jobs there are.
-without proper employment protection laws, companies might
choose not to hire whole groups of people, just based on
stereotypes
3. Cyclical unemployment (fluctuations in GDP: “business cycle”)
structural u.e. + frictional u.e. = non-cyclical u.e.

Labor force participation rate (LFPR): % of civilian, working age,

population, who are non-institutionalized and looking for work.
When the gov’t changes policy to decrease unemployment, it generally
increases inflation. (and vice versa)

Creative Destruction: the natural consequence of economic progress.

Means that as new jobs appear, some jobs disappear.

Problems with unemployment:

-financially and psychologically devastating
-means that the economy is underperforming
-big source of unhappiness for people

some people in the general population are working age

some people in this working age population want a job (labour force)
some people in the labour force are employed
The unemployed people in the labour force are the ones counted in the
unemployment rate.

Employed: you got paid for at least one hour of work in the week.

Unemployment rate problems:

-It doesn’t count...
-discouraged workers (they were in the unemployment rate, but they
got so discouraged that they gave up looking for a job and got
moved to the “out of labour force” section
-underemployed workers (they want more hours and are upset about
that, but their cut in hours isn’t noted in the unemployment rate as
long as they work at least one hour per week.)
-mal-employed workers (college grads working at Starbucks- people
who should be working at more productive jobs, but aren’t. This lack
of productivity is not noted in the unemployment rate.)
11/6/23
Lecture 10: Inflation and the Quantity Theory of Money

myth:
-inflation makes you able to buy less (hurts your real buying power)
-this is not true. The wages generally increase with the inflation.

Inflation: an increase in the general (average) level of prices

-expressed as a percentage change

Real prices: prices adjusted for inflation

Consumer price index (CPI): the price of a group of goods

-a broad measure of how prices are changing for a category of goods
-CPI graphs show inflation
-Only the most common, relevant items are measured (80,000 different
goods)
-the numbers directly correlate to increases in real prices

GDP Deflator: ratio of nominal GDP to real GDP multiplied by 100

Producer Price Index (PPI): Measures the avg price received by

producers. Includes intermediate and finished goods and services

Inflation rate = (new% - old%)/old% x 100

The inflation rate is higher than it has been since the 1980s, but in
general, people’s incomes are still moving up and down with the inflation.

DEflation is uncommon, but it happens

Hyperinflation: inflation exceeding 50% per month

-Why does this happen? why does any inflation happen?
-Answer: quantity theory of money
Quantity theory of money: When the money supply grows, inflation
happens at an equal percent change. In other words, inflation is primarily
caused by increases in the supply of money (M)
-uses ideas from the solow growth model
-Y = output
-p = price level in the economy
-Nominal GDP (expenditures) = P x Y
-velocity of money: the avg number of time a given dollar was spent on
finished goods and services in a given year. For the US, this number is
about 6.
-quantity equation: M x V = P x Y
-changes in the quantity of money supply (M) leads to changes in
nominal expenditure

-Not all prices adjust at the same speed.

-Prices that are slow to move are called “sticky prices”
-These products become cheap to consumers until the price goes up
-In response, the consumers buy more, which raises the price back up
-In other words, the consumer’s output rises slightly (they can buy more
stuff with their money) until prices rise to match wage increases.

In the long run, money is neutral.

(Ex. If the money supply doubles, the prices would double too, in the long
run.)
Wait - why doesn’t the gov’t just print a bunch of money to pay off our debt
then?? It will go back to normal eventually according to this lecture!
-BECAUSE: the other gov’ts would find out and realize that the money
would be worth way less soon, so they would demand more money, and
then we’d be back in the same spot, except that now other countries may
not want to lend us money anymore.

Is Inflation good or bad?

-low, predictable inflation does nothing bad. It can actually be good,
because it pushes lazy workers to work more (more productivity for the
economy yay!)
-Intentionally keeping inflation too low can create probems
-recession, unemployment, etc.
-High/unpredictable levels of inflation are BAD for the economy
-difficult for the economy to function at these rates
-price confusion: people can’t tell if price changes are from inflation (buy
the same amount) or high demand (buy less of it). So consumers don’t
know what to do.
-money illusion: people confuse nominal and real price changes.
-redistributes wealth from lenders to borrowers (if inflation is suddenly
and unpredictably super high, then interest rates mean way less and the
lender has barely made anything).
-printing money and gov’t debt (gov’ts pay off their debt by increasing
taxes or printing more money)
-people don’t want to agree to long-term debt contracts
-very difficult/painful to stop
-everyone moves to higher tax brackets
11/13/23
Lecture 11: Business Fluctuations

Recession: Significant, widespread decline in real income and employment

Business Fluctuations/cycles: inevitable. Fluctuations in real GDP growth

around its trend growth rate.

Aggregate: relating to the whole economy

Aggregate supply and aggregate demand model:

~Models inflation and real GDP growth
~Shows the effect of shocks/disturbances
~Moves similarly to the traditional supply/demand model
-Aggregate Demand Curve:
-Quantity Theory of Money (M + V=P + Y)
-Can shift temporarily (bc of a change in v) or permanently (bc of a
change in M)

-(Long-run) Aggregate Supply Curve:

-Solow Growth Model (Y=F(A, K, eL)
-The vertical line
-If this line moves, it’s because of a real shock that increased or
decreased productivity (that makes sense, because this is the long-
run curve)

-Short-run Aggregate Supply Curve:

-Sticky prices (prices and wages don’t change to match inflation
instantly.) This is shown by the parabola shape of the curve. Firms are
willing to increase wages, but not so willing to decrease wages, since
it decreases morale so much.

Since prices aren’t perfectly flexible, deficiencies in aggregate demand

(decreases in spending) can generate recessions. ~John Maynard Keynes
11/15/23
Lecture 12: The Federal Reserve System and Open Market Operations

Federal Reserve (The Fed): the US central bank

-In charge of monetary policy
-can influence the money supply to hopefully stabilize prices and
maximize employment
-the fed is independent. They aren’t mentioned in the constitution or
any of the three gov’t branches. This independence is important so
that the economy doesn’t get politicized by corrupt politicians.
-Is constantly innovating monetary policy
-is the government’s bank (US treasury stuff, gov’t borrowing (issuing
bonds))
-is the banks’ bank. Banks (like chase) have deposits at the federal
reserve. Banks also loan each other money through the fed.
-manages direct deposit

Money: any widely accepted means of payment

-most common ones: currency (coins, bills, etc), checking accounts,
savings deposits, bank reserves held at the fed.

Liquid Asset: An asset that can be used for payments or, quickly
converted to money without loss of value.

Reserve Banking:
-reserves play an important role in the financial system
-reserves are not currency, but electronic claims that can be converted
into currency if the bank wishes

Money Supply: 3 main defintions

-monetary base (MB): currency and total reserves held at the fed
(aka everything that the fed can control)
-M1: currency + checkable deposits
-M2: M1 + savings deposits, and other stuff

The fed controls MB, which they hope to use to influence M1 and M2.
Loans count as deposits, because they increase the money supply. Each
time a sum of money is loaned out, that sum counts as an increase to
the money supply. (Ex. If I have $1000 and put it in the bank, the money
supply is $1000. If the bank loans out $500 of my money, then the new
money supply is $1500.) As you can see, the money supply can be more
than the existing amount of cash.

think about it: higher reserves means lower money supply

Reserve Ratio (RR): the ratio of reserves to deposits

-Depends on:
-laws and federal reserve requirements
-how liquid the bank wants to be

Money Multiplier (MM): The amount the money supply expands with
each dollar increase in reserves: MM = 1/RR
- △MS = △Reserves x MM

How the fed controls the money supply:

-by changing the banks’ incentives to hold reserves
-buying a bank’s bonds
-selling bonds to the bank
-paying interest on reserves held by banks at the fed

Federal Funds Rate: the interest rate that banks use among each other
when loaning each other one-day loans
-determined every 6 weeks by the Federal Open Market Committee
(FOMC)

-Buying bonds increases the price, reducing the interest rate.

-Selling bonds decreases the price (bc it raises supply of bonds),
increasing the interest rate.
Aggregate Demand (spending) curve
-The fed is the primary actor on the AD curve, more than any other
institution. However, the fed’s actions take time to work through the
economy. So, the fed make small little changes over time.

Lender of Last Resort: If a bank is about to go bankrupt, the fed can

decide to loan them money.
11/27/23
Lecture 13: Monetary Policy

-The Fed keeps in mind history (old financial issues that it handled well or
badly) when it makes decisions
-The Fed doesn’t have the full picture usually, since economic data is
often revised, so they often make slow, incremental changes
-The Fed often accidentally makes too big of a change or too small of
a change. Both have negative effects.
-Many variables outside of the Fed’s control also affect the aggregate
demand curve

Monetary Policy: The central bank’s choice regarding the money supply.
(what should they do that will work best?)
-must consider unintended side effects of their chosen policy

Expansionary Policy: raises aggregate demand, real income, and

employment
Contractionary Policy: reduces aggregate demand. Real income, and
employment

Monetarism: doctrine that says “changes in the money supply are the
main causes of economic fluctuations.” Implies that a stable money
supply would lead to a stable economy.

Dissinflation: Bringing inflation down. (Ex. from 8% to 4%)

Deflation: negative price growth. Goal inflation is a negative number, like
2%.

Questions:
-when you said “the fed influenced interest rate on housing” did you
mean the interest that savers get paid by the bank? the rate at which
borrowers boreor the interest that loaners pay the bank? Are these
interchangeable since they go together? Is that why is usually isn’t
specified?
-When the govt borrows money from a bank, is that buying a bond or
The question:
Should the fed decrease or increase the money supply?
-Decrease money supply=lower inflation :), but increase chance of
recession >:0
-Increase money supply=dampen loss in real growth :), but increase
inflation >:P

A time that the fed did too much: 2008 housing bubble
-economy was booming in 2000
-recession in 2001
-also in 2001, US had a terrorist attack. This lowered productivity
(fear of what might strike next = less investing and more saving for
just in case)
-the unemployment rate didn’t recover
-so the fed pursued expansionary policy
-Banks became insolvent bc they were over invested in the housing
market. They were over invested bc interest rates were so low and
house value kept increasing.

There are too many constant changes in the AD curve for the fed to
respond to everything. So how should the fed decide when to step in?
-some economists say that the fed should have steady rules that
they always follow, even if it isn’t a perfect rule.

Ways the fed can affect variables of the economy:

1) money supply growth targetting M
2) inflation targeting pi
3) nominal GDP targeting M + V
4) Taylor rule (compares actual v. potential output)
-“The fed should conduct monetary policy by trying to close the gap
between actual and potential output. Always try for the potential
output.”)
-FFR = 2 + pi + 0.5(pi-2)+ 0.5GAP
12/4/23
Lecture 14: The Federal Budget: Taxes and Spending

Federal tax revenue (the government’s source of income)

-The government takes about 18% of US workers’ GDP

Sources of revenue:
-Individual income tax (50% of fed gov revenue)
-Social security and medicare (33%)
-Corporate income tax (10%)
-Everything else (7%)

Question:
Isn’t the social security tax just an income tax? I mean, it’s a percentage
taken from your income, right?

Ways we could structure taxes

-Flat tax: everyone pays the same percent (ex. A poor person would pay
a small amount of of money and a rich person would pay a high amount)
-Regressive tax: the higher the income, the lower the tax percentage
-Progressive tax (US tax system): the higher the income, the higher the
tax percentage

Marginal tax rate: the tax rate paid on each additional dollar of income (if
they make any more money, how much tax will they have to pay on it?
what bracket is their income in right now?)
Average tax rate: the total tax payment divided by total income (the
average rate you pay per dollar)
Deductions: individual expenses exempt from taxes

Tax incidence: who writes the check is not always who pays for the tax
(Ex. A corporation has to pay a higher tax. They write the check to the
govt and “pay” the tax, but they just got that money from lowering their
workers’ pay, so technically the WORKERS paid the tax.)
Interest from savings accounts are taxed at the same rate as labor
income.
-Many economists say that this is bad. Why? because they think we
shouldn’t be taxing labor OR savings, since both of these activities are
GOOD for the economy and therefore should be encouraged, not
punished with a tax.

Many economists think we should have a national sales tax. (We don’t
right now, we just have the option for states to have state sales taxes. Ex
Oregon doesn’t have a sales tax.)
-Some people oppose this bc it would probably be impossible to make
it progressive, However, they are wrong. You COULD make it progressive
(taxes the rich more) by taxing “income-savings” because income-
savings=consumption.

Some people think we should stop trying to tax corporations.

-bc corporations use deductions and carve-outs for taxes anyway
AND
-bc taxes that the corporations DO pay will just cause the company to
lower their workers’ pay and make less investments

Spending

Almost two-thirds of US spending is spent on four programs:

-social security (24%)
-defense (15%)
-medicare (15%)
-medicaid (9.1%)

Social Security:
-“pay-as-you-go” system, meaning that you are funding the program right
now - you are paying for the current retirees. You are not ensured to get a
payout when you are older.
-due to the aging population, decrease in population growth, and
increased life expectancy, we are running low on workers to pay toward
social security. Soon, we won’t be able to keep up and pay everyone.
-Good solution: increase immigration so we have more workers
Federal deficit and debt
-Deficit: The annual difference between federal spending and
revenues
-National Debt: total money owed by the fed govt at a given point. A
cumulative total of previous obligations
-Every year, the US govt pays interest to bondholders who lent it
money (7.2%)

National Debt Held by the Public: all the federal debt held by indiviudals,
corporations, and governments. Less than the actual national debt.
12/6/23
Lecture 15: Fiscal policy

Monetary policy: Works by trying to change to money supply. (ex. By

buying or selling bonds in order to change there money supply of banks
to control how much they loan out, therefore controlling the country’s
money supply.)
Fiscal policy: Works by trying to change to velocity of money. (ex. Writing
checks like the covid stimulus checks. This increased the speed of
money changing hands.)
-Another definition: fed govt policy on taxes, spending, and borrowing
that is designed to influence business fluctuations (to flatten out the
fluctuations).

Both of these policies shift the AD curve in the same way, because a
change in V shifts the curve in the same direction as a change in M.

Methods for fiscal policy

1. Govt sends people money to increase C or I (via tax cuts or credits)
2. Govt starts projects to increase G, aka govt spending

Tax credits: extra money for no additional work

Tax cuts: workers get extra money, plus incentives work bc less gets
taken back by the govt.

Fiscal policy only works if there are unused resources, like unemployed
people.
Explanation: If all factors are being used, then an increase in govt
projects will make people leave their jobs to work on that project, The
net effect on the economy would be zero because people just switched
jobs to be productive somewhere else. (Called “Crowding out” because
the govt is crowding out the other jobs with new, unnecessary jobs.)

In other words, recessions are the best time for the govt to start new
projects because that brings unemployed resources back into the game.
Multiplier effect: additional increase in spending cause by increase in
government spending.
-more unemployed resources = more multiplier effect from fiscal
policy
-Therefore, the govt targets checks toward people or groups who will
likely spend the money and employ resources. (ex. NOT comfortable
rich people or savers, bc the goal is to get the money moving) (ex 2. A
company who will use the money to expand and create new jobs)

The debate over fiscal policy is whether crowding out or the multiplier
effect would be the result.

Limits to fiscal policy

Timing: policy takes time to be approved and implemented, partially
bc politics get in the way,
Automatic stablizers are a good solution. These are laws that
put certain fiscal policy into action instantly when a certain
trigger occurs.
Best Action?: Difficult to choose spending or tax cuts
Tax cuts effect: puts more spending in the hands of private
groups.
Spending effect: puts more spending in the hands of the
government

What about when there’s a real shock?

-Monetary policy and fiscal policy aren’t very effective against real
shocks
-There are some reforms that can be effective, but they are super hard
to implement

Bad stuff about fiscal policy

-it’s supposed to be counter-cyclical, meaning that you spend in
recessions and save during booms, but many politicians don’t do it
this way. They do the opposite, which is called “common sense” policy,
or “austerity”
-Some countries can’t do any fiscal policy bc they are so in debt that
extra govt spending would just make people more anxious rather than
spend.
When is fiscal policy a good idea?
-When many resources are unemployed, bc fiscal stimulus will be
extremely effective
-when the problem is an AD deficiency, rather than a real shock
-more automatic stabilizers should be built in
-when govt policy would cause a high multiplier effect.