Purdue ECON 252 Exam 2 Latest Update Graded A

Purdue ECON 252 Exam 2 Latest Update Graded A capital accumulation the growth of capital resources, including human capital. when a country saves more, this grows faster. aggregate investment savings rate x GDP political creative destruction the process in which economic growth destabilizes existing regimes and reduces the political power of rulers. creative destruction refers to the process by which new technologies replace old ones, new businesses replace established companies, and new skills make old ones redundant. reversal of fortune Though the inequalities in GDP per capita around the world have multiple causes, the evidence from the economic experiences of former European colonies suggests that institutional factors, and not geography, are central to explaining these disparities. cyclical unemployment deviation of the actual unemployment rate from the natural rate of unemployment. rises in recessions and falls in economic booms. natural rate of unemployment the rate around which the actual rate of unemployment fluctuates wage rigidity refers to the condition in which the market wage is held above the competitive equilibrium level that would clear the labor market structural unemployment arises when the quantity of labor supplied persistently exceeds the quantity of labor demanded. frictional unemployment A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs. Wage flexibility The ability of real wages to change in response to changes in demand for and supply of labour potential workers includes everyone in the general population with three exceptions: children under 16 years of age, people on active duty in the military, and institutionalized people, like those in nursing homes or jail employed a person who works for pay at least part time or more unemployed a person who does not have a paid job, has actively looked for work in the prior four weeks, and is currently available to work. labor force the sum of all employed and unemployed workers not in the labor force Potential workers who are not employed and are not seeking work, such as stay at home parents, disabled workers, retirees, and students. unemployment rate unemployed/labor force labor force participation rate labor force/potential workers value of marginal product of labor the contribution of an additional worker to a firm's revenues diminishing marginal product of labor each additional worker creates less marginal output than the workers who were hired before labor demand curve depicts the relationship between the quantity of labor demanded and the wage. The value of the marginal product of labor is also the labor demand curve, because they both show how the quantity of labor demanded varies with the wage movement along the labor demand curve occurs when the wage changes and no other economic variables change other than the quantity of labor demanded shift of the labor demand curve many factors can change the value of marginal product of labor at each quantity of labor changing output prices When the price of haircuts goes down, the value of the marginal product of barbers also declines. This implies that the firm would like to hire fewer barbers at any given wage, shifting the labor demand curve to the left. Changing demand for the output good or service When the demand for haircuts declines, this will impact the value of the marginal product of barbers even if it does not directly change the price of haircuts. Falling demand for haircuts lowers the number of customers coming to the barbershop, leading each barber to spend more time waiting idly rather than cutting hair. Such declines in demand for output will shift the labor demand curve to the left. Changing technology When changes in technology increase the value of the marginal product of labor, the labor demand curve shifts to the right. For example, technology that was developed in the late nineteenth century first enabled hair stylists to straighten or curl hair: "perms." The ability to offer perms increased the marginal product of hair stylists and shifted the demand curve for hair stylists to the right. Technological progress and increases in productivity typically shift the labor demand curve to the right changing input prices Businesses use labor and other factors of production, like machines and tools, to produce goods and services. When the cost of these other factors goes down, businesses purchase more of them. This usually increases the marginal product of labor, shifting the labor demand curve to the right. labor supply curve represents the relationship between the quantity of labor supplied and the wage Changing tastes Societal norms can effect people's willingness to take a paid job. In WWII more women were willing to work shifting the labor supply curve to the right Changing opportunity cost of time Devices like vacuum cleaners, dishwashers, laundry machines, and lawnmowers lower the opportunity cost of working outside the home by freeing up time that was previously needed for home production. Changing population Increases in the size of the population, which increase the number of potential workers in the economy, also shift the labor supply curve to the right. One factor increasing population is immigration. market clearing wage The competitive equilibrium wage. At this wage, every worker who wants a job can find one: the quantity of labor demanded matches the quantity of labor supplied. frictionless labor market firms can instantly hire and fire workers, both workers and firms have complete information about each other, and the wage adjusts instantly to clear the market (setting the quantity of labor supplied equal to the quantity of labor demanded) people paid minimum wage 1% of workers collective bargaining contract negotiations that take place between firms and labor unions labor union an organization of workers that advocates for better working conditions, pay, and benefits for its members efficiency wages Wages above the lowest pay that workers would accept; employers use them to increase motivation and productivity. Reduces worker turnover, motivates workers to not lose their job and work hard, and peoples graciousness to have a job makes them work hard too to keep it. downward wage rigidity Cuts in the wage hurt worker morale and lower productivity. As a result, many firms would rather fire workers than cut their wages. economic growth the increase in real GDP per capita of an economy growth rate the change in a quantity—here, real GDP per capita—between two dates, relative to the baseline (beginning of period) quantity. = (later year - base year) / base year national income accounting identity GDP = the sum of aggregate consumption and investment savings rate Total Saving / GDP subsistence level the minimum level of income per person that is generally necessary for the individual to obtain enough calories, shelter, and clothing to survive. Malthusian cycle the pre-industrial pattern in which increases in aggregate income lead to an expanding population, which in turn reduces income per capita and ultimately puts downward pressure on population. Industrial revolution 1700s; Britain proximate causes of prosperity high levels of factors such as human capital, physical capital, and technology that result in a high level of GDP per capita. fundamental causes of prosperity factors that are at the root of the differences in the proximate causes of prosperity, such as geography, culture, and institutions geography hypothesis claims that differences in geography, climate, and ecology are ultimately responsible for the major differences in prosperity observed across the world. ex many parts of the world, particularly sub-Saharan Africa, are disadvantaged economically because infectious diseases, such as malaria and dengue fever, spread there more easily culture hypothesis different values and cultural beliefs fundamentally cause the differences in prosperity around the world. ex the origins of the industrialization of Europe could be traced to Protestantism institutions the formal and informal rules governing the organization of a society, including its laws and regulations. They are determined by individuals as members of a society, place constraints on behavior, and shape behavior by determining incentives. institutions hypothesis claims that differences in institutions—that is, in the way societies have organized themselves and shaped the incentives of individuals and businesses—are at the root of the differences in prosperity across the world inclusive economic institutions protect private property, uphold law and order, allow and enforce private contracts, and allow free entry into new lines of business and occupations. ex USA extractive economic institutions do not protect private property rights, do not uphold contracts, and interfere with the workings of markets. They also erect significant entry barriers into businesses and occupations. ex North Korea nominal interest rate i, is the annual cost of a $1 loan, so i × L is the annual cost of an $L loan real interest rate nominal interest rate - inflation rate. this formula is called the Fisher equation credit demand curve the schedule that reports the relationship between the quantity of credit demanded and the real interest rate. when it is relatively steep, the quantity of credit demanded doesn't change that much in response to variation in the real interest rate. when it is relatively flat, the quantity of credit demanded is relatively sensitive to variation in the real interest rate shifts in credit demand curve changes in perceived business opportunities for firms, changes in household preferences or expectations, and changes in government policy credit supply curve the schedule that reports the relationship between the quantity of credit supplied and the real interest rate. shifts in credit supply curve changes in the saving motives of households and changes in the saving motives of firms Assets include the investments the bank has made; government securities the bank holds; and the money the bank is owed by borrowers, including households and firms that have taken loans from the bank liabilities claims that depositors and other lenders have against the bank bank reserves consist of vault cash and reserves held at the Federal Reserve Bank. they are available at a moment's notice. cash equivalents riskless, liquid assets that a bank can immediately access, like deposits with other private banks liquid assets cash and items that can be quickly converted to cash with little or no loss in value riskless asset asset who's value doesn't change from day to day Long-term investments mostly comprise loans to households and firms but also include things like the value of the real estate that the bank uses for its operations, such as its bank branches and corporate headquarters demand deposits funds that depositors can access on demand by withdrawing money from the bank, writing checks, or using their debit cards. Short-term borrowing consists of loans from other financial institutions that are short in duration long-term debt debt that is due to be repaid by the bank in a year or more to an institution that loaned the money to the bank (creditor) Stockholders' Equity Total assets−Total liabilities What banks do identify profitable lending opportunities, transform short-term liabilities, like deposits, into long-term investments in a process called maturity transformation, and manage risk by using diversification strategies and also by transferring risk from depositors to the bank's stockholders and, in some cases, to the U.S. government. maturity the time until debt must be repaid maturity transformation the process by which banks take short-maturity liabilities and invest in long-maturity assets (long-term investments)