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Macroeconomics > #3 National Income > Flashcards

#3 National Income Flashcards

1
Q

Closed Economy

A

Just one economy, no trade

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2
Q

Market-Clearing Model

A

Flexible prices

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3
Q

Supply side

A

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

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4
Q

Production function formula

A

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

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5
Q

What is Production function

A

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

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6
Q

Production Function does

A

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

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7
Q

Constant returns to scale

A

Output = how much input changed

Y = ZY

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8
Q

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

A

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

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9
Q

Distribution of National Income

A

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

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10
Q

Factor Prices

A

Are determined by supply and demand in factor markets

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11
Q

Marginal product of Labor (MPL)

A

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

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12
Q

Slope of Production Function

A

Equals Marginal product of labor

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13
Q

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

A

Declines

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14
Q

Dimminishing marginal returns

A

As more input increases, marginal product falls

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15
Q

The equilibrium real wage

A

The real wage adjusts to equate labor demand with supply

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16
Q

Marginal product of capital (MPK)

A

R / P —> real rental rate

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17
Q

MPK falls as K …

A

Rises

18
Q

MPK curve is…

A

Firm’s demand curve for renting capital

19
Q

Firms max profits by …

A

Choosing K such that MPK = R / P

20
Q

Equilibrium real rental rate

A

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

21
Q

Neoclassical theory of distribution

A

States that each factor input is part its marginal product

22
Q

If Y function has constant returns to scale, then

A

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

National income = labor income + capital income

23
Q

Cobb-Douglas production function

A

Y = AK^a L^1-a

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

24
Q

Components of aggregate demand

A

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)

25
Q

Consumption

Disposable income

A

Is total income - total taxes

Y - T

26
Q

Consumption function

A

C = C( Y - T )

27
Q

Marginal prosperity to consume (MPC)

A

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

28
Q

Investment

Investment function

A

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

29
Q

The real interest rate

A
  • cost of borrowing
  • the opportunity cost of using one’s own funds to finance investment spending
  • I depends negatively on r
30
Q

Government spending

A

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

31
Q

Real interest rate

A

Adjusts equate demand with supply

32
Q

The loanable funds market

A

A simple supply-demand model of the financial system

33
Q

Demand for funds

A

Investment

34
Q

Demand for loanable funds comes from

A

Investment

  • firms borrow finance spending on plant and equipment
  • consumers borrow to buy new houses
35
Q

Depends negatively on

A

r
- r is the price of loanable funds

36
Q

The supply of loanable goods comes from

A
  • 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
37
Q

Types of saving

A

Private saving = ( Y - T ) - G

Public saving = T - G

National Saving = Y - C - G

38
Q

T > G

A

Budget surplus
—> Public saving

39
Q

T < G

A

Budget deficit
—> Public saving negative

40
Q

T = G

A

Balanced budget
—-> Public Saving

41
Q

Things that can shift the saving curve

A

1) Public saving
—-> changes in G or T

2) Private saving
—-> tax laws that affect saving

42
Q

Things that can shift the investment curve

A

1) Some tech innovations
2) Laws that affect investment

Macroeconomics (8 decks)

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