5-1. Macroeconomics Flashcards
What is macroeconomics?
Study of economic activity and outcomes for an entire economy.
What are the 2 elements in the microeconomic 2-sector free-market model?
Resources and payments.
What are the 3 elements to add in macroeconomics model?
Government, financial sector, foreign sector (imports/exports).
What are the flows from individuals to those added 3 elements and to individuals?
From individuals:
To government: taxes. From: transfer pmts (wages)
To financial sector: savings. From: Interest/dividends
To foreign sector: Imports (buys). From: Interest/dividends (pay).
What are the flows from businesses to those added 3 elements and to individuals?
From businesses:
To government: taxes. From: spending/subsidies.
To financial sector: interest/dividends. From: Investments
To foreign sector: Imports (buys). From: Interest/dividends (pay).
What are leakages? Examples?
Individuals’ income not spent on domestic consumption.
Taxes, savings, imports (pay).
What are injections? Examples?
Additions to domestic production not from individuals’ expenditures.
Investment expenditures, government spending, exports.
Aggregate demand: what does it measure? What does it equal to?
Total spending in economy.
Sum of all market demand curves.
Aggregate demand: what is it include?
Consumption spending.
Investment.
Government spending.
Net exports (Net imports would be subtracted).
Aggregate demand: what is consumption spending? Does it include new housing? How much does it account for the aggregate US spending? What is the primarily factor that determines it?
Spending by individuals on goods and services.
No, it’s investment.
70%.
Personal disposable income (PDI).
Aggregate demand: measures of consumption: what is consumption functions? What are 2 cases of PDI and CS?
Measures the relationship between disposable income (PDI) and consumption spending (CS).
- CS>PDI = borrowing (debt) or spending savings.
- CS
Aggregate demand: measures of consumption: what is Average Propensity to Consume (APC)? How is average propensity to save (APS) computed?
Measures the percent of disposable income (PDI) spent on consumption (CS).
Ex: if PDI=$1 and CS=$.85, then APC=85%.
APS=reciprocal of APC. Therefore, APS+APC=100%
Aggregate demand: measures of consumption: What is Marginal Propensity to Consume (MPC)? What is marginal propensity to save (MPS)?
Measures the change in consumption spending as a percent of the change in disposable income.
Ex: If $1.00 additional disposable income is received and .90 is spent on consumable goods, MPC = 90%
Ex: Yr 1 spending $90 out of $100 PDI. Yr 2 spending $150 out of $200 PDI. (150-90)/(200-100)=.60
MPS = reciprocal of MPC - MPS+MPC=100%
Aggregate demand: what is investment spending? examples? How much does it account for the aggregate US spending?
Spending on capital items.
Residential and non-residential construction, business property, plant, equipment, business inventory.
15%. Tend to fluctuate much more than consumption spending.
Aggregate demand: what is the most significant influencing factor? Other factors?
Sig: Interest rates.
Demographics, consumer confidence, consumer income/wealth, level of capacity utilization, technological advances, vacancy rates, current/expected level of sales.
Aggregate demand: what is government spending and what is excluded?
Purchase of goods and services by all levels of government.
Excludes: transfer pmts because they are not for goods or services.
Aggregate demand: how does change in government spending impact various factors? what is a way to finance changes in government spending?
It typically impacts taxes, which impact personal disposable income, which change personal consumption.
Financed by government borrowing.
Aggregate demand: what are 2 ways government directly affects aggregate demand?
By changes to government spending and government taxation.
Aggregate demand: what is discretionary fiscal policy?
Use of government spending and taxation to impact aggregate demand.
Aggregate demand: How can government impact aggregate demand?
To increase aggregate demand:
By increasing gov. spending, decreasing taxation, increasing transfer pmts.
To decrease aggregate demand:
By decreasing gov. spending, increasing taxation, decreasing transfer pmts.
Aggregate demand: what is exports? Imports?
Ex: amount of foreign spending on US goods.
Im: amount of US spending on foreign goods.
Aggregate demand: what is net exports? How does it impact aggregate demand?
Exports - imports.
If exports > imports = positive: increase aggregate demand.
If exports < imports = negative: decrease aggregate demand.
Aggregate demand: has US been net export or import country?
Net import country.
Aggregate demand: what factors influence imports/exports?
- Relative levels of income/wealth
- Relative currency exchange rates
- Relative price levels
- Relative inflationary rates
- Import/export restrictions and tariffs
Aggregate demand: what shifts aggregate demand curve?
Factors other than price change.
Aggregate demand: what are factors shift aggregate demand curve outward (increase)?
Reduction in personal or corporate tax. Improved consumer confidence. New technology resulting in increased investment. Interest rate declines. Government spending increase. Export increase/import decrease. Increases in wealth.
Aggregate demand: what are factors shift aggregate demand curve inward?
Opposite of what shifts outward.
Aggregate demand: what is multiplier effect? Example?
Ripple effect of a change in demand on total change in demand.
Ex: increased investment spending = more personal income = more consumption spending.
Aggregate demand: how is multiplier effect measured?
Using marginal propensity to consume (MPC):
Multiplier = change in spending x [1 / (1-MPC)]
Aggregate demand: example:
MPC=.80. Investment spending=+$10,000,000.
What would be the result on multiplier and what does it mean?
Multiplier = 10,000,000 x [1 / (1 - .80)] = $50,000,000
An increase in investment spending of $10,000,000 will cause an increase in demand of $50 million.
Aggregate supply: definition?
Total output of goods and services produced in the economy at different price levels.
Aggregate supply: What are 3 types of slope?
- Classic aggregate supply curve
- Keynesian aggregate supply curve
- Conventional aggregate supply curve
Aggregate supply: classic aggregate supply curve: what is it look like on a graph? Characteristics? Example?
Completely vertical supply curve.
No change in output as price increase at full employment.
Maybe associated with the very short-term.
Ex: limited concert tickets
Aggregate supply: Keynesian aggregate supply curve: what does it look like? What is the relationship with full employment?
Horizontal up to the output at full employment, then slopes upward.
Qty increases at the same price until full employment, then increased qty only with increased supply.
Aggregate supply: Conventional aggregate supply curve: what does it look like? Relationship with full employment?
Continuous positive slope that is steeper for output after full employment.
At full employment, prices increase proportionately faster than output supplied.
Aggregate supply: what factors cause shift in the curve?
Factors other than price change. Shift outward: *Resource increase. *Cost of resource decrease. *Technological advances occur.
Aggregate equilibrium: where is it on a graph?
Where AS (aggregate supply: half U shape) and AD (aggregate demand: downward straight slope) meets.
Aggregate equilibrium: what is Y-axis and X-axis?
Y: Price level.
X: Real output
Aggregate equilibrium: what changes? How is the new equilibrium determined?
Change in aggregate demand and/or supply.
It depends on whether demand or supply is increased/decreased,
The extent of each increase and/or decrease,
Which theoretical supply curve is assumed.
Aggregate equilibrium: conventional supply curve: what happened to the curve when only demand changes? Only supply change?
D: Equilibrium qty and price will change in the same direction as demand.
S: Equilibrium qty will change in the same direction, but price will change in an opposite direction.
Aggregate equilibrium: Keynesian supply curve: what happened to the curve when only demand changes? Only supply change?
D: More or less output until output at full employment at which point, output and price level each increase.
S: No effect unless AD intersects supply where it is positively sloped.
