Midterm Reviewer

1. MIDTERMS - REVIEWER
Microeconomics – examines the behavior
of individual decision-making units both
business firms and households
Macroeconomics – deals with the
economy as a whole. Examines the
behavior of economic aggregates such as
aggregate income, consumption,
investment, and the overall level or prices.
Great Depression – was a period of severe
economic contraction and high
unemployment that began in 1929 and
continued throughout the 1930s.
John Maynard Keynes – believes that
governments could intervene in the
economy and affect the level of output
and employment. He also published The
General Theory of Employment, Interest,
and Money.
Three Major Concerns of
Macroeconomics:
1. Inflation
2. Output Growth
3. Unemployment
Inflation – is an increase in the overall
price level.
Hyperinflation – is a period of very rapid
increases in the overall price level.
Deflation – is a decrease in the overall
price level.
Business Cycle – is the cycle of short-
term ups and downs in the economy
Aggregate output – is the total quality of
goods and services produced in an
economy in a given period
Recession – a period during which
aggregate output declines.
Depression – a prolonged and deep
recession
Unemployment rate – is the percentage of
the labor that is unemployed. The key
indicator of economy’s health.
Kinds of Government Policy Influencing
the Macroeconomics
1. Fiscal Policy – refers to the
government policies concerning
taxes and spending
2. Monetary Policy – consists of tools
used by the Central Bank to control
the quantity of money in the
economy
3. Growth or Supply-Side Policies –
are government policies that focus
on stimulating aggregate supply.
Instead of aggregate demand
Components of Macroeconomics
1. Households
2. Private Sector
3. Public Sector
4. International Sector
Circular Flow Diagram – shows the income
received and payments made by each
sector of the economy
Market Arenas:
1. Goods and Services Market
2. Labor Market
3. Money (Financial) Market

2. Financial Instruments
1. Treasury Bonds, Notes, and Bills
2. Corporate Bonds
3. Shares of Stock
Gross Domestic Product (GDP) – the total
market value of all final goods and
services produced within a given period by
factors of production located within a
country. Ignores all transaction in which
money or goods change hands but in
which no new goods and services are
produced.
Ways of Calculating GDP
1. Expenditure Approach – a method
of computing GDP that measures
the total amount spent on all final
goods during a given period
2. Income Approach – a method of
computing GDP that measures the
income received by all factors of
production in producing final
goods
Expenditure Formula Consists Of:
1. Personal Consumption
Expenditures (C) – households
spending on consumer goods
2. Gross Private Domestic Investment
(I) – spending by firms and
households or new capital
3. Government consumption and
Gross Investment (G)
4. Net Exports (Ex – Im) -net
spending by the rest of the world,
or exports (Ex) minus imports (Im)
Income Formula Consist Of:
1. National Income – is the total
earned by the factors of production
owned by a country’s citizens
2. Net National Product – equals
gross product minus depreciation
3. Personal Income – is the income
received by households after
paying social insurance taxes but
before paying personal income
taxes
Nominal GDP – is GDP measured in
current dollars, or the current prices we
pay for things. Nominal GDP includes all
the components of GDP valued at their
current prices
Underground Economy – is the part of an
economy in which transactions take place
and in which income is generated that is
unreported and therefore not counted in
GDP
Gross National Income (GNI) is a measure
used to make international comparison of
output. GNI is GDP converted into dollars
using an average of currency exchange
rates over several years adjusted for rates
of inflation.
Aggregate Output – is the total quantity of
goods and services produced (or
supplied) in a n economy in a given
period.
Aggregate Income – is the total income
received by all factors of production in a
given period.
Aggregate Output (income) – is a
combined term used to remind you of the

3. exact equality between aggregate output
and aggregate income
Saving – is the part of its income that a
household does not consume in a given
period.
Aggregate Consumption Includes:
1. Household income
2. Household wealth
3. Interest Rates
4. Households’ Expectations About
the future
Investment – refers to purchases by firms
of new buildings and equipment and
additions to inventories, all which ass to
firm’s capital stock
Desired or Planned Investment – refers to
the additions to capital stock and
inventory that re planned by firms
Actual Investment – is the actual amount
of investment that takes place; it includes
items such as unplanned changes in
inventories
Planned Aggregate Expenditure – is the
total amount the economy plans to spend
in a given period. It is equal to
consumption plus planned investment
Equilibrium – occurs when there is no
tendency for change.
Multiplier – is the ratio of the change in the
equilibrium level of output to a change in
some autonomous variable.
Autonomous Variable – is a variable that is
assumed not to depend on the state of the
economy
FINALS – REVIEWER
BARTER
– Direct exchange of goods for other
goods is called barter
– system for exchange of goods
without the use of money
DIFFICULTIES IN BARTER SYSTEM
1. Lack of common measure of values
2. Lack of bauble coincidence of
wants
3. Difficulties in tax collection
4. Payments in the future
5. Lack of store values
MONEY
- Greases the wheels of exchange
and, thus, makes the whole
economy more productive
- Modern medium of exchange and
the standard unit in which prices
and debts are expressed
- Any material, which is commonly
accepted and generally used as a
medium of exchange for all types
of transactions
KINDS:
1. Currency notes
2. Coins
3. Chequing deposits
PRIMARY FUNCTION OF MONEY
1. Medium of exchange
Money acts as a medium of exchange and
helps in overcoming the difficulty in barter
economy. In all market transactions,

4. money is used to pay for goods and
services.
2. Unit of account
Money serves as a common measure of
value. The value of goods and services
can be expressed in terms of unit of
money.
3. Standard of deferred payments
Money is used to make payments in the
future time. It is the only unit of account
which is easy to borrow and easily to lend.
4. Store of values
Money is the most liquid of all assets,
therefore it is, easier to store values
(resources) in the form of money.
CHARACTERISTICS OF MONEY
1. Acceptability
People must be willing to take in exchange
for what they are selling.
2. Scarcity
If the item being used as money is very
plentiful, it will not remain its value. As
items used for money become common,
they lose their buying power.
3. Durability
A problem with some items used as money
in the past, such as farm products, as that
they spoiled or got damages easily.
4. Divisibility
For money to be used, it also should be
divisible.
5. Portability
As people become more mobile, they
demand a money form that as portable.
BANKO SENTRAL NG PILIPINAS
- Originally established on 1948
- Transitioned to BSP on 1993
OBJECTIVES
1. Maintain price stability
2. Promote and preserve monetary
stability
3. Convertibility of national currency
RESPONSIBILITIES
1. Provides policy in money banking
and credit
2. Supervises operations of banks
FUNCTION
1. Liquidity management
2. Currency issue
3. Lender of last resort
4. Financial supervision
5. Management of foreign currency
reserves
6. Determination of exchange rate
policy
GOVERNOR’S POWERS & DUTIES
1. Prepares agenda, policies and
measures
2. Execute and administer the policies
and measures
3. Direct and supervise the operations
and administration of BSP
4. Appoint and fix the remunerations
and other employments of
personnel
5. Render opinions, decisions or
rulings
6. Exercise such other powers vested
by the monetary board

5. MONETARY BOARD
1. Issue rules and regulations
2. Direct the management, operations
and administration of BSP
3. Establish a human resource
management system
4. Adopt an annual budget for and
authorize such expenditures by the
Bangko Sentral
5. Indemnify its members and other
officials of the Bangko Sentral
BUSINESS CYCLE
- Alternating increases and decrease
in economic activity over time
PHASES OF BUSINESS CYCLE
 PEAK
Business has reached a temporary
maximum
 RECESSION
A period of decline in total output, income
and employment
 TROUGH
(depression) Output and employment are
at lowest
 EXPANSION
Real GDP, income and employment rise
UNEMPLOYMENT
- The condition of not being able to
find work, it covers those who are
willing to work but not able to find
work
TYPES OF UNEMPLOYMENT
1. Avoidable Unemployment
It is associated with insufficient demand
for workers caused by many factors.
2. Unavoidable Unemployment
It is inevitable.
a. Frictional unemployment –
individuals searching for jobs
or waiting to take jobs soon
b. Structural unemployment –
occurs due to changes in the
structure of the demand for
labor
c. Cyclical unemployment –
caused by the recession phase
of business cycle
COMPUTING FOR UNEMPLOYMENT RATE
𝑁𝑜. 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
× 100%
UNDEREMPLOYMENT
- A person is employed in a job that
is not in line with their skills and
education
OKUN’S LAW
- Every 1% of cyclical unemployment
creates a 2% GDP gap
UNEQUAL BURDENS
1. Occupation
2. Age
3. Race and ethnicity
4. Gender
5. Education
6. Duration
INFLATION
- General rise in the price level
- Reduces purchasing power of
money

6. CONSUMER PRICE INDEX (CPI)
𝐶𝑃𝐼 =
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑀𝑜𝑠𝑡 𝑅𝑒𝑐𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡
𝐵𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑎𝑟𝑡𝑖𝑐𝑢𝑙 𝑎 𝑟 𝑌𝑒𝑎𝑟
𝑃𝑟𝑖𝑐𝑒 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑀𝑎𝑟𝑘𝑒𝑡
𝐵𝑎𝑠𝑘𝑒𝑡 𝑖 𝑛 𝑡ℎ𝑒 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟
× 100%
INFLATION RATE
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑑𝑒𝑥
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟
𝐼𝑛𝑑𝑒𝑥 𝑖𝑛 𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟
× 100%
TYPES OF INFLATION
1. Demand-Pull Inflation
Excess spending relative to output.
Central bank issues too much money
Reduces real output. Redistributes a
decreased level of real income
2. Cost-Push Inflation
Due to rise in per-unit input costs
One view is that zero inflation is best.
Another view is that mild inflation is best
NOMINAL INCOME
– received as wages, rent, interest or
profits
REAL INCOME
– amount of goods and services
nominal income can buy. It is
nominal income adjusted for
inflation
AFFECTED BY INFLATION
1. Fixed-income receivers
2. Savers
3. Creditors
UNAFFECTED BY INFLATION
1. Flexible-income receivers
2. Debtors
DEFLATION
– sudden decrease in inflation
HYPERINFLATION
– sudden increase in inflation
WAGES
- refers to the payment or
remuneration for the use of labor
services of the share of labor from
the national income
SALARIES
- the income or compensation for
the higher forms of labor
REAL INCOME
- refers to the total economic goods
and services that can be
purchased with a given money
income
MONEY INCOME
- refers to the monetary units that
one receives or earns over a given
period of time
THE GOVERNMENT AND FISCAL POLICY