Summary ecs1601-study-notes-final.

Contents WHAT IS MONEY? ................................................................................................................................... 6 FUNCTIONS OF MONEY........................................................................................................................... 6 Medium of exchange ........................................................................................................................... 6 Money is used as a unit of account. .................................................................................................... 7 Store of value/wealth .......................................................................................................................... 7 SUPPLY OF MONEY .............................................................................................................................. 9 A right shift of money supply represents an increase of MS ..................................................... 11 CREDIT CARDS VS MONEY ................................................................................................................. 12 DEMAND FOR MONEY .......................................................................................................................... 12 Motives of holding money .................................................................................................................... 12 1. Transaction motive ................................................................................................................. 12 2. Precautionary Motive –.......................................................................................................... 13 3. Speculative purposes ............................................................................................................. 13 Factors affecting Money Demand (MD) ............................................................................................ 13 Equilibrium in money market ............................................................................................................ 15 Monetary Policy ................................................................................................................................ 16 Impact of expansionary MP (increase of MS) ............................................................................... 16 SELF ASSESSMENT QUESTIONS ............................................................................................................. 17 MEASURING PERFOMANCE OF THE ECONOMY ................................................................................... 19 The Variables ..................................................................................................................................... 20 Defining GDP ..................................................................................................................................... 20 Ways of measuring GDP .................................................................................................................... 20 Expenditure Approach ................................................................................................................... 21 Consumption Approach ................................................................................................................. 21 Investment ..................................................................................................................................... 21 Stocks vs. Flows ............................................................................................................................. 22 Government Spending ................................................................................................................... 22 Exports and Imports ...................................................................................................................... 22 Value added....................................................................................................................................... 23 Downloaded by THEMBELANI MLOTYA () lOMoARcPSD| We simply Economics 3 012 751 7588 Illustration ...................................................................................................................................... 23 Final goods, value added, and GDP ............................................................................................... 24 Real vs. nominal GDP ..................................................................................................................... 24 The price level ................................................................................................................................ 25 GDP Deflator .................................................................................................................................. 25 Consumer Price Index (CPI) ........................................................................................................... 25 Measuring Inflation ....................................................................................................................... 27 CPI vs. GDP Deflator ...................................................................................................................... 27 INCOME DETERMINATION:KEYNISIAN MODEL .................................................................................... 29 Assumptions ...................................................................................................................................... 29 Differences from the Classical Model .......................................................................................... 29 The Keynesian Model w/out Government ............................................................................... 29 The Keynesian Model w / Government ................................................................................... 39 SELF ASSESSMENT QUESTIONS ......................................................................................................... 43 AGGREAGATE DEMAND / AGGEREGATE SUPPLY MODEL .................................................................... 44 FACTORS THAT SHIFT AD ................................................................................................................... 44 SHIFTS IN AGGREGATE SUPPLY ......................................................................................................... 47 What will change LRAS? Same factors that shift the PPF ................................................................. 47 CHANGES IN THE SRAS ...................................................................................................................... 48 UNANTICIPATED INCREASES IN SRAS ................................................................................................ 49 UNANTICIPATED DECREASES IN SRAS ............................................................................................... 49 UNEMPLOYMENT, BUSINESS CYCLES AND INFLATION ............................ Error! Bookmark not defined. The Business Cycle ............................................................................................................................ 51 III. Unemployment ...................................................................................................................... 54 Seasonal Unemployment .................................................................................................................. 55 Frictional Unemployment ................................................................................................................. 55 Structural Unemployment ................................................................................................................ 56 Cyclical Unemployment ........................................................................................................................ 56 Inflation ................................................................................................................................................. 58 Measuring Inflation .......................................................................... Error! Bookmark not defined.