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Useful Laws and Concepts
Say's Law-Aggregate supply creates aggregate demand because workers earn money, need to spend it
Okun's Law-Every 1% increase in unemployment rate corresponds to a 2% drop in GDP (compared to pGDP)
Law of One Price-Without trade barriers or restrictions, one good sold in different locations must sell at the same price
Laffer Curve-Compares tax rate to government revenue, low taxes bring in less revenue, but high taxes cause businesses to move away and also result in less revenue
Paradox of Thrift-When individuals save more, aggregate demand decreases, which will cause savings to decrease as well. This paradox, populared by John Meynard Keynes, implies that an increase in savings can hurt the economy
Quantitative Easing-Expansionary monetary policy (in this case, buying securities) to increase money supply and stimulate economy
Budget sequestration-Sets a hard cap on various categories in the government budget. If surpassed, the US Treasury withholds funds above the cap.
Austerity measures-Contractionary fiscal policy (either increasing taxes or lowering government spending) to prevent government default
Useful Terms
Choke Price-Lowest price at which quantity demanded of a good is zero
Required Rate of Return-Minimum annual percentage earned by investment that will cause individual/company to invest, depends on risk tolerance, inflation, etc.
Stress Tests-Tests whether banks have enough capital to survive adverse conditions, required for banks with over $50 billion in assets once a year
Efficieny Wages-Pay workers wages higher than market-clearing wage to increase efficiency and reduce turnover
Sunk Costs-Costs that have already been incurred, cannot be recovered
Pareto Optimal-Allocation of resources so that making one person better makes another person worse off, linked to Pareto frontier and Pareto improvement
Purchasing Power Parity-The exchange rate of different curriences is equal to the ratio of their purchasing power
Cost of Living Adjustments (COLa)-Cost of mantaining a certain standard of living, can be used to compare different geographical regions or purchasing power parity
Consumer Price Index (CPI)-Uses base year quantities, prefered by US government, thought to overestimate inflation
Liquidity Trap-If demand for money is flat, changes in money supply won't affect interest rates, which limits the effectiveness of monetary policy
Zero-Lower Bound-If short-term nominal interest rate is at or near zero, a liquidity trap occurs