CH 3-6 Economy in the Long Run Model Flashcards
Factors of Production
K- Capital & L- Quantity of Labor
Returns to Scale can be
Constant, Increasing or Decreasing
Constant Returns to Scale
Double Input means Double Output
Increasing Returns to Sclae
Double input means more that Double Output
Decreasing Returns to Scale
Double input means less than double output
Production Function
Y= F (K,L) “output is a function of capital and labor”
If capital and labor are fixed..
Output is fixed as well
Marginal Product of Labor (MPL)
Nominal Wage”W/P”Price of Output
-OR-
Real Wage
Marginal Product of Capital (MPK)
Nominal Rental Rate “R/P” Price of Output
-OR-
Real Rental Rate
Cobb-Douglas Production Function
Y= A x K* x L ^(1-*)
- is “Alpha” the capitols share of total income
National Savings
S=Y-C-G (Outpur-Consumption-Government Spending)
Public Savings
S= T-G Taxes- Government Spending
Private Savings
S=Y-T-C (income-taxes-consumption)
Budget Surplus
Tax Revenue > Government Spending
Budget Deficit
Tax Revenue < Government Spending
Loanable Funds Market
Model with the real interest rate “r” on y axis and Investment, Savings “I,S” on the x axis
Increasing government spending will _________ investment
Decrease, gov spending “crowds out” investment
Three types of Economies
Closed, Small Open, and Large Open
Trade Balance= Net Capital Outflow
S-I = NX
Real Exchange Rate
Nominal Exchange Rate x Price of Domestic Good/
Price of Foreign Good
Real Exchange Rate “E” =
e x (P/P*) nominal exchange rate x Price Level Ratio
