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Econ 114 > 3.1-3.3 > Flashcards

3.1-3.3 Flashcards

1
Q

national economy is driven by the

A

demand for goods and services

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2
Q

internally the demand for g/s is made by

A

households, firms, and government

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3
Q

externally, demand is made for

A

domestic g/s by foreign governments, firms, and households in the form of exports

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4
Q

a self-contained, self-reliant national economy where its citizens can only buy what they make

A

closed economy (autarky)

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5
Q

type of economy with no imports or exports

A

closed economy

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6
Q

strive to maximize some objective, subject to some constraint

A

households, firms, and governments

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7
Q

are the basic unit of consumption and savings

A

households

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8
Q

households own

A

all factors of production

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9
Q

households earn income by

A

selling factors of production

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10
Q

households, for earning income by selling factors of production receive in return

A 
dividends
interest
profits
wages/salaries
rent
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11
Q

the total income earned by households from sale of factors of production consititues

A

Gross Domestic Income (GDI)

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12
Q

the dollar value of GDI is expressed in

A

real not nominal terms

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13
Q

reduces the value of the dollar

A

inflation

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14
Q

inflation adjusting the dollars of yesterday yields their

A

real value today

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15
Q

measuring in past year’s dollars yields their

A

nominal value

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16
Q

some household income is also taxed away by gov. leaving households with

A

disposable income

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17
Q

some is spent some is saved

A

disposable income

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18
Q

how much of your disposable income is spent or saved depends on

A

national income

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19
Q

are dependent variables induced by changes in national income

A

consumption and savings

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20
Q

what is the objective function of housholds

A

to maximize their well-being/utility

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21
Q

what are households constrained by

A

the demand for factors of production

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22
Q

the sole source of goods and services to satisfy the demand of households

A

firms

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23
Q

firms buy these from households

A

factors of production

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24
Q

the value of all goods and services produced by firms

A

Gross Domestic Product (GDP)

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25
Q

firms use these to invest in capital plant and equipment to produce same or more output the next year

A

residual revenue

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26
Q

investment by firms has 2 parts

A
  1. depreciation of existing plant and equipment that wears down
  2. spent on new plant and equipment
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27
Q

net new investment is

A

total investment minus depreciation

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28
Q

firms decision to invest is dependent on

A

the expectation of profit

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29
Q

investment is an ________ variable, independent of

A

autonomous

national income

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30
Q

objective function of firms is to

A

maximize profits constrained by the cost of factors of production

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31
Q

governments tax households, reducing gross to

A

disposable income

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32
Q

Governments redistribute tax revenue to buy

A

private and public goods and services from firms

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33
Q

government is spending is _________ of national income

A

autonomous

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34
Q

government spending is dependent on

A

political forces

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35
Q

if one expects prices to fall tomorrow, then

A

one holds off spending today

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36
Q

one lives in the present and acts in the future

A

futurity

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37
Q

the determining variable to spending price is the

A

overall aggregate price level of millions of different goods and services

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38
Q

aggregate price level is measured by a

A

price index of all goods and services

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39
Q

households, firms, and governments share the same expectations about

A

aggregate price level

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40
Q

if the price level changes

A

spending changes

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41
Q

if the aggregate price level is fixed this means that an increase in demand will

A

not result in an increase in aggregate price level

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42
Q

AE=

A

C+I+G

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43
Q

AE, C, I, and G stand for

A
  • aggregate expenditure
  • consumption by households
  • investment by firms
  • government spending
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44
Q

income (Y) must equal

A

aggregate expenditure (AE)

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45
Q

AE=Y at every point on the

A

45 degree line

46
Q

the final use of goods and services by households

A

consumption

47
Q

savings is the difference between

A

income and consumption

48
Q

changes in what causes changes in disposable income (Yd)

A

-taxes to and transfers from governments

49
Q

as Yd increases, consumption and savings

A

increases

50
Q

consumption and savings are induced by changes in

A

disposable income

51
Q

the consumption function is the relationship between

A

disposable income and consumer spending

52
Q

consumption function is expressed as

A

C=a+bYd

53
Q

in the consumption function “a” stands for

A

survival level of consumption when income is 0

54
Q

in the consumption function “b” and “Yd” stand for what

A 
b= marginal propensity to consume
Yd= gross income - net taxes
55
Q

what must households do when consumption is greater than income (consumption function line is above the Y=AE line)

A

dis-save

56
Q

when disposable income is greater than consumption, this means households

A

can save part of their Yd and can use it for investments

57
Q

the slope of the consumption function is

A

the marginal propensity to consumer (b)

58
Q

measures how much of each additional dollar in income is spent on consumption

A

marginal propensity to consume

59
Q

one factor affecting MPC is

A

progressive income tax

60
Q

higher the income ______ the rate of taxation

A

higher

61
Q

the percentage of each additional dollar of income taken by the government is the

A

marginal tax rate (MTR)

62
Q

under progressive income tax, the MTR

A

rises with income

63
Q

the consumption function bends lower as it passes from

A

lower to a higher MTR

64
Q

MPC changes as disposable income is reduced by a

A

higher MTR

65
Q

under progressive taxation, the slope of the consumption function becomes

A

MPC- changing MTR

66
Q

taxes are ____ from the system reducing ______ from hosueholds

A

leakages

disposable income

67
Q

savings function is the difference between

A

disposable income - consumption

68
Q

where the consumption function and Y=AE intersect, savings are at

A

0

69
Q

marginal propensity to save is expressed as

A

MPS= (1-b)

70
Q

other influences on savings include changes in:

A
  1. interest rate
  2. the value of net assets
  3. changes in aggregate price level
  4. expected future income
71
Q

where consumption function and Y=AE intersect is where

A

consumption = Yd

72
Q

what could be earned using the same money to buy a financial asset with a guaranteed rate of return

A

interest rate

73
Q

interest rate has a guaranteed

A

rate of return

74
Q

if the interest rate falls then investments

A

increase

75
Q

if interest rate rises then investments

A

decrease

76
Q

raising and lowering the interest rate, reduces or increases investment which affects

A

GDP

77
Q

investment is expressed as

A

I = (profit, interest rate)

78
Q

pi stands for

A

expected rate or return of profit

79
Q

investment is autonomous to

A

income (Y)

80
Q

the investment function has a slope of

A

0

81
Q

2 types of investments

A
  1. enterprise

2. speculation

82
Q

enterprise investing is

A

investing for the long-run

83
Q

speculation investing is

A

playing the market

84
Q

Keynes compared the stock market to a

A

beauty pageant

85
Q

Keynes believed that investment involved the ______ of the entrepreneur

A

animal spirit

86
Q

government spending is funded by

A

taxes on household income and/or borrowing on financial markets

87
Q

government spending influences

A

income

88
Q

income does not influence

A

government spending

89
Q

government spending is autonomous of

A

real GDP

90
Q

the government spending function has a slope of

A

0 (is above investment function)

91
Q

to plot the AE curve we must add

A

C+I+G vertically at each level of Y

92
Q

the slope of the AE curve is the same as the

A

marginal propensity to consume (MPC)

93
Q

actual aggregate expenditure is always equal to

A

real GDP

94
Q

equilibrium occurs at point

A

v

95
Q

what is the component that may very in aggregate expenditure and why

A

investment, due to inventories

96
Q

when aggregate planned expenditure is less than actual

A

inventories increase

97
Q

if actual aggregate expenditure is greater than planned AE

A

inventories shrink

98
Q

export’s levels are determined by: (3)

A
  1. international price of CAN $
  2. the real GDP of foreign countries
  3. trade agreements
99
Q

the lower the Canadian dollar, the ________ the real GDP of foreign countries and exports

A

higher

100
Q

the higher the Canadian dollar the _________ the real GDP of foreign, countries and exports

A

lower

101
Q

the export function is expressed as

A

X= ($Cdn, GDPf)

102
Q

exports are autonomous of

A

income (y)

103
Q

export function has a slope of

A

0 (below investment function)

104
Q

their level is induced by Canadian real GDP (Y) and affected by the exchange rate for the Cdn dollar and trade agreement

A

imports

105
Q

the import function is the relationship between

A

income and imports

106
Q

imports are induced by changes in

A

income

107
Q

the marginal propensity to import (MPM) measures

A

changes in imports divided by changes in income

108
Q

the slope of the consumption function and the AE curve will be ______ depending on the value of the MPM

A

reduced

109
Q

net exports =

A

exports - imports

110
Q

AE is determined by assuming that

A
  1. APL is fixed, closed economy

2. the MTR is flat

Econ 114 (7 decks)

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