3.1-3.3 Flashcards
1
Q
national economy is driven by the
A
demand for goods and services
2
Q
internally the demand for g/s is made by
A
households, firms, and government
3
Q
externally, demand is made for
A
domestic g/s by foreign governments, firms, and households in the form of exports
4
Q
a self-contained, self-reliant national economy where its citizens can only buy what they make
A
closed economy (autarky)
5
Q
type of economy with no imports or exports
A
closed economy
6
Q
strive to maximize some objective, subject to some constraint
A
households, firms, and governments
7
Q
are the basic unit of consumption and savings
A
households
8
Q
households own
A
all factors of production
9
Q
households earn income by
A
selling factors of production
10
Q
households, for earning income by selling factors of production receive in return
A
dividends interest profits wages/salaries rent
11
Q
the total income earned by households from sale of factors of production consititues
A
Gross Domestic Income (GDI)
12
Q
the dollar value of GDI is expressed in
A
real not nominal terms
13
Q
reduces the value of the dollar
A
inflation
14
Q
inflation adjusting the dollars of yesterday yields their
A
real value today
15
Q
measuring in past year’s dollars yields their
A
nominal value
16
Q
some household income is also taxed away by gov. leaving households with
A
disposable income
17
Q
some is spent some is saved
A
disposable income
18
Q
how much of your disposable income is spent or saved depends on
A
national income
19
Q
are dependent variables induced by changes in national income
A
consumption and savings
20
Q
what is the objective function of housholds
A
to maximize their well-being/utility
21
Q
what are households constrained by
A
the demand for factors of production
22
Q
the sole source of goods and services to satisfy the demand of households
A
firms
23
Q
firms buy these from households
A
factors of production
24
Q
the value of all goods and services produced by firms
A
Gross Domestic Product (GDP)
25
firms use these to invest in capital plant and equipment to produce same or more output the next year
residual revenue
26
investment by firms has 2 parts
1. depreciation of existing plant and equipment that wears down
2. spent on new plant and equipment
27
net new investment is
total investment minus depreciation
28
firms decision to invest is dependent on
the expectation of profit
29
investment is an ________ variable, independent of
autonomous
| national income
30
objective function of firms is to
maximize profits constrained by the cost of factors of production
31
governments tax households, reducing gross to
disposable income
32
Governments redistribute tax revenue to buy
private and public goods and services from firms
33
government is spending is _________ of national income
autonomous
34
government spending is dependent on
political forces
35
if one expects prices to fall tomorrow, then
one holds off spending today
36
one lives in the present and acts in the future
futurity
37
the determining variable to spending price is the
overall aggregate price level of millions of different goods and services
38
aggregate price level is measured by a
price index of all goods and services
39
households, firms, and governments share the same expectations about
aggregate price level
40
if the price level changes
spending changes
41
if the aggregate price level is fixed this means that an increase in demand will
not result in an increase in aggregate price level
42
AE=
C+I+G
43
AE, C, I, and G stand for
- aggregate expenditure
- consumption by households
- investment by firms
- government spending
44
income (Y) must equal
aggregate expenditure (AE)
45
AE=Y at every point on the
45 degree line
46
the final use of goods and services by households
consumption
47
savings is the difference between
income and consumption
48
changes in what causes changes in disposable income (Yd)
-taxes to and transfers from governments
49
as Yd increases, consumption and savings
increases
50
consumption and savings are induced by changes in
disposable income
51
the consumption function is the relationship between
disposable income and consumer spending
52
consumption function is expressed as
C=a+bYd
53
in the consumption function "a" stands for
survival level of consumption when income is 0
54
in the consumption function "b" and "Yd" stand for what
```
b= marginal propensity to consume
Yd= gross income - net taxes
```
55
what must households do when consumption is greater than income (consumption function line is above the Y=AE line)
dis-save
56
when disposable income is greater than consumption, this means households
can save part of their Yd and can use it for investments
57
the slope of the consumption function is
the marginal propensity to consumer (b)
58
measures how much of each additional dollar in income is spent on consumption
marginal propensity to consume
59
one factor affecting MPC is
progressive income tax
60
higher the income ______ the rate of taxation
higher
61
the percentage of each additional dollar of income taken by the government is the
marginal tax rate (MTR)
62
under progressive income tax, the MTR
rises with income
63
the consumption function bends lower as it passes from
lower to a higher MTR
64
MPC changes as disposable income is reduced by a
higher MTR
65
under progressive taxation, the slope of the consumption function becomes
MPC- changing MTR
66
taxes are ____ from the system reducing ______ from hosueholds
leakages
| disposable income
67
savings function is the difference between
disposable income - consumption
68
where the consumption function and Y=AE intersect, savings are at
0
69
marginal propensity to save is expressed as
MPS= (1-b)
70
other influences on savings include changes in:
1. interest rate
2. the value of net assets
3. changes in aggregate price level
4. expected future income
71
where consumption function and Y=AE intersect is where
consumption = Yd
72
what could be earned using the same money to buy a financial asset with a guaranteed rate of return
interest rate
73
interest rate has a guaranteed
rate of return
74
if the interest rate falls then investments
increase
75
if interest rate rises then investments
decrease
76
raising and lowering the interest rate, reduces or increases investment which affects
GDP
77
investment is expressed as
I = (profit, interest rate)
78
pi stands for
expected rate or return of profit
79
investment is autonomous to
income (Y)
80
the investment function has a slope of
0
81
2 types of investments
1. enterprise
| 2. speculation
82
enterprise investing is
investing for the long-run
83
speculation investing is
playing the market
84
Keynes compared the stock market to a
beauty pageant
85
Keynes believed that investment involved the ______ of the entrepreneur
animal spirit
86
government spending is funded by
taxes on household income and/or borrowing on financial markets
87
government spending influences
income
88
income does not influence
government spending
89
government spending is autonomous of
real GDP
90
the government spending function has a slope of
0 (is above investment function)
91
to plot the AE curve we must add
C+I+G vertically at each level of Y
92
the slope of the AE curve is the same as the
marginal propensity to consume (MPC)
93
actual aggregate expenditure is always equal to
real GDP
94
equilibrium occurs at point
v
95
what is the component that may very in aggregate expenditure and why
investment, due to inventories
96
when aggregate planned expenditure is less than actual
inventories increase
97
if actual aggregate expenditure is greater than planned AE
inventories shrink
98
export's levels are determined by: (3)
1. international price of CAN $
2. the real GDP of foreign countries
3. trade agreements
99
the lower the Canadian dollar, the ________ the real GDP of foreign countries and exports
higher
100
the higher the Canadian dollar the _________ the real GDP of foreign, countries and exports
lower
101
the export function is expressed as
X= ($Cdn, GDPf)
102
exports are autonomous of
income (y)
103
export function has a slope of
0 (below investment function)
104
their level is induced by Canadian real GDP (Y) and affected by the exchange rate for the Cdn dollar and trade agreement
imports
105
the import function is the relationship between
income and imports
106
imports are induced by changes in
income
107
the marginal propensity to import (MPM) measures
changes in imports divided by changes in income
108
the slope of the consumption function and the AE curve will be ______ depending on the value of the MPM
reduced
109
net exports =
exports - imports
110
AE is determined by assuming that
1. APL is fixed, closed economy
| 2. the MTR is flat
