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Applied Macro Chapters 1-4

Applied Macro Chapters 1-4 - Chapter 1 Economics social...

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Chapter 1 Economics: social science analyzing material problems. A means by which people can satisfy desires for goods and services. Limited material resources Land Labor Capital Entrepreneurship Macroeconomics: aggregated (seeing as a whole) economic activity Microeconomics: disaggregated economic activity Normative Economics: Determining what should be Positive Economics: Determining what is Economic Analysis 1. Gathering the Facts 2. Formulating and Testing Theory 3. Making Economic Policy Reasons for 2009 crisis 1. Speculation 2. Greed 3. Fraud 4. Lax Oversight of Federal Lending 5. Unconstrained risk of institutions Basic Summary of basically whats going on in the economy. Many believe it started with the housing market. Federal Reserve set interest rates at historic lows and kept them there longer than usual. This fueled high demand in housing market. Rapid increase of home prices led to many home loans. “subprime loans” were high risk loans that led to many people defaulting and refinancing. The housing market started to crumble in 2007/2008. This led to Adjustable Rate Mortgages (ARM) to skyrocket Unaffordable Mortgages Investors coul not “flip” homes for profit Defaulted Mortgages led to a lot of houses on the market and, therefore, caused a sharp decline in housing costs. Home Building declined builders went out of business. Many firms either went out of business, merged with other corporations, or went out of
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business. Economy officially entered recession in December 2007 Local Governments rely on property taxes as major revenue source. This affected government expenses (such as education). Government essentially picked winners and losers and bailed out the ones they thought could succeed with help. Adam Smith (founder of modern economics) wrote Wealth of Nations believed that people acted on own self interest really important idea in this book * believed economic role of government is to create conditions which individuals pursuit of self interest maximizes public welfare. Jeremy Bentham (founder of Hedonism “self satisfaction”) Homo Economicus “economic person” – measured every action in terms of amount of self satisfaction. Homo Communista – Marxist attack against self interest. Barely anyone agrees with this anymore. Alfred Marshall- people’s motivation is desire for monetary gain Social Security (1935)- transfers funds from current workers to current retirees. With average life expectancy rising over 77 years By 2016, benefits paid out exceeds taxes collected Without reform, by 2038 program will be insolvent Solution? One idea is “privatization of Social Security” Secret to becoming a Millionaire: avoid procrastination (most common financial failure) and “compounding interest” How to deal with “under performing schools” School Vouchers: certificate allowing parents to use tax dollars to pay for childs education at a school of choice. Idea is to motivate under performing Schools to be better or they lose funding.
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Applied Macro Chapters 1-4 - Chapter 1 Economics social...

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