#3 National Income

Question 1

Closed Economy

Answer 1

Just one economy, no trade

Question 2

Market-Clearing Model

Answer 2

Flexible prices

Question 3

Supply side

Answer 3

Factor markets (supply, demand, price)
Determination of output/income

Question 4

Production function formula

Answer 4

Y = F (K, L)
Output - F ( Capital, Units of Labor )

Question 5

What is Production function

Answer 5

Shows how much output (Y) economy can produce from (K) units of Capital and (L) units of Labor

Question 6

Production Function does

Answer 6

• reflects economy’s level of technology
• exhibit s constant returns to scale

Question 7

Constant returns to scale

Answer 7

Output = how much input changed

Y = ZY

Question 8

~. ~ ~
Y = F ( K, L)

Answer 8

Output is determined by fixed factor supplies and the fixed state of technology

Question 9

Distribution of National Income

Answer 9

Is determined by factor prices, the prices per unit firms pay for the factors or production

Question 10

Factor Prices

Answer 10

Are determined by supply and demand in factor markets

Question 11

Marginal product of Labor (MPL)

Answer 11

The extra output the firm can produce using an additional unit of labor

Question 12

Slope of Production Function

Answer 12

Equals Marginal product of labor

Question 13

As more labor is added, the marginal product of labor…

Answer 13

Declines

Question 14

Dimminishing marginal returns

Answer 14

As more input increases, marginal product falls

Question 15

The equilibrium real wage

Answer 15

The real wage adjusts to equate labor demand with supply

Question 16

Marginal product of capital (MPK)

Answer 16

R / P —> real rental rate

Question 17

MPK falls as K …

Answer 17

Rises

Question 18

MPK curve is…

Answer 18

Firm’s demand curve for renting capital

Question 19

Firms max profits by …

Answer 19

Choosing K such that MPK = R / P

Question 20

Equilibrium real rental rate

Answer 20

The real rental rate adjusts to equate demand for capital with supply

Question 21

Neoclassical theory of distribution

Answer 21

States that each factor input is part its marginal product

Question 22

If Y function has constant returns to scale, then

Answer 22

Y = (MPL x L) + (MPK x K)

National income = labor income + capital income

Question 23

Cobb-Douglas production function

Answer 23

Y = AK^a L^1-a

a - capital share of total infome
A - level of technology

Question 24

Components of aggregate demand

Answer 24

C = consumer demand for goods / services

I = demand for investment goods

G = government demand for goods / services

No NX since it’s closed economy (no trade)

Question 25

Consumption Disposable income

Answer 25

Is total income - total taxes Y - T

Question 26

Consumption function

Answer 26

C = C( Y - T )

Question 27

Marginal prosperity to consume (MPC)

Answer 27

Is the change in C when disposable income increases by 1$

Question 28

Investment Investment function

Answer 28

I = I (r) where r denotes the real interest rate, the nominal interest rate connected for inflation

Question 29

The real interest rate

Answer 29

- cost of borrowing - the opportunity cost of using one’s own funds to finance investment spending - I depends negatively on r

Question 30

Government spending

Answer 30

G excludes transfer payment ( social security benefits, unemployment insurance benefits )

Question 31

Real interest rate

Answer 31

Adjusts equate demand with supply

Question 32

The loanable funds market

Answer 32

A simple supply-demand model of the financial system

Question 33

Demand for funds

Answer 33

Investment

Question 34

Demand for loanable funds comes from

Answer 34

Investment - firms borrow finance spending on plant and equipment - consumers borrow to buy new houses

Question 35

Depends negatively on

Answer 35

r - r is the price of loanable funds

Question 36

The supply of loanable goods comes from

Answer 36

- Households use their saving to make bank deposits and purchase bonds and offer assets - Gov also might contribute to saving if it doesn’t spend all tax revenue

Question 37

Types of saving

Answer 37

Private saving = ( Y - T ) - G Public saving = T - G National Saving = Y - C - G

Question 38

T > G

Answer 38

Budget surplus —> Public saving

Question 39

T < G

Answer 39

Budget deficit —> Public saving negative

Question 40

T = G

Answer 40

Balanced budget —-> Public Saving

Question 41

Things that can shift the saving curve

Answer 41

1) Public saving —-> changes in G or T 2) Private saving —-> tax laws that affect saving

Question 42

Things that can shift the investment curve

Answer 42

1) Some tech innovations 2) Laws that affect investment