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Macroeconomic Theory > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

Factors of production are classified into

A
  1. Capital
  2. Labour
  3. Others

Others include Raw material, land, energy

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2
Q

The amount of output produced depends on the quantities of

A

Capital and labor and their productivity

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3
Q

Productivity depends on

A

technology and management

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4
Q

Production Function is

A

A mathematical expression relating the amount of output
produced to quantities of capital and labor utilized, given current state of technology

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5
Q

The production Function

State the Production Function Formula

A

Y = A F (K, N)

‘Y’ is real output and ‘A’ is overall total factor productivity

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6
Q

Cobb-Douglas
Production Function

A

Y = A (K^α) (N^(1-α))

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7
Q

This production function applies to

Y = A F (K, N)

A

Both an economy as a
whole and individual firms

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8
Q

This production function applies to

Y = A F (K, N)

A

Both an economy as a
whole and individual firms

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9
Q

Increase in productivity (A) happens from

A

Improvements in technology or any other change in the economy that allows capital and labor to be utilized more effectively

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10
Q

The Shape of the production function is

A

Upward sloping but with decreasing slope as increasing the variable on the x-axis

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11
Q

Why does the slope of the production function becomes flatter as input rises

A

Diminishing marginal
product as input increases

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12
Q

Marginal Product of Capital is

A

The increase in output produced that results from one-unit increase in the capital stock.

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13
Q

MPK =

A

Change in Y/ Change in K

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14
Q

The slope of production function graph (Y vs. K) is the same as

A

MPK

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15
Q

Two main properties of production functions:

A
  1. MPK/MPN is always positive (more K increases Y or more N increases Y)
  2. Diminishing marginal productivity of capital/Labour (MPK declines as K rises or MPN declines as N rises)
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16
Q

Marginal Product of Labor is

A

The increase in output produced that results from one-unit increase in labor

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17
Q

MPN =

A

Change in Y/ Change in N

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18
Q

The slope of production function graph (Y vs. N) is the same as

A

MPN

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19
Q

Supply shocks involves a change

Productiivity shocks

A

In an economy’s production function

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20
Q

Supply shocks affect the

A

output that can be
produced for a given amount of inputs

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21
Q

Supply shocks incorporates changes in

A

The supply of factors of production other than capital and labor or changes that affect technologies or production methods used

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22
Q

Positive supply shocks can happen from

A
  • Inventions
  • Innovation in Management techniques
  • Government regulations
  • Oil prices
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23
Q

Positive supply shock raises

A

Output for a given amount of K and N

Upward Shift

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24
Q

Negative supply shock can happen because of

A

Unfavorable Weather, Oil prices

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25
Q

Negative supply shock leads to

A

a Lower output for a
given amount of K
and N

Downward shift

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26
Q

To be able to answer the following question:

“How much labor do firms want to use?”, a set of assumptions must set

List these assumptions

A
  • Hold capital stock fixed.
  • Workers are all alike
  • Labor market is competitive.
  • Firms demand the amount of labor that maximizes profits.
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27
Q

How firms demand the amount of labor that maximizes profits

A

It compares the cost of additional labor (wage) with its additional benefit (additional output produced)

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28
Q

Marginal Product of Labor (MPN) measure

A

The benefit of employing an additional worker in terms of extra output produced

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29
Q

Marginal Revenue Product of Labor (MRPN) measures

A

The benefit of employing an additional worker in terms of extra
revenue produced

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30
Q

MRPN =

A

P multiplied by MPN

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31
Q

To Maximize Profit the firm will either

The profit-maximizing point for a Firm

A
  • Set the nominal wage equal to the marginal revenue product of labor
  • Set the real wage equal to the marginal product of labor
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32
Q

W = MRPN where the ‘W’ here represent

A

Nominal Wage

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33
Q

w = MPN where the ‘w’ here represent

A

Real Wage=W/P

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34
Q

Increase employment if for an additional worker

Elaborate both in real and Nominal terms

A

MPN>w (Real terms)
P x MPN > W (Nominal terms)

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35
Q

Decrease Employment if for the last worker employed

Elaborate both in real and nominal terms

A

MPN < w (Real terms)
P x MPN < W (Nominal terms)

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36
Q

MPN curve is the same as

A

Labor demand curve

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37
Q

Labour demand curve shows

A

The quantity demanded of labor at any real wage

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38
Q

Any point on the labor demand curve is a

A

Profit maximising point

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39
Q

How changes in real wages affect the labour demand curve

A

Movements along the curve

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40
Q

An increase in productivity will cause

Factor that shifts the aggregate labour curve

A

The labour demand curve shifts to the Right

41
Q

An increase in Capital stock causes

Factor that shifts the aggregate labour curve

A

The labour demand curve shifts to the Right

42
Q

The Reason behind shifts of the aggregate labour demand curve when productivity increases

A

Beneficial supply shock increases MPN and shifts MPN curve up and to the right

43
Q

The Reason behind shifts of the aggregate labour demand curve when Capital stock increases

A

Higher capital stock increases MPN and shifts MPN curve up and to the right

44
Q

Aggregate Labor Demand is the

A

sum of the labor demands of all the firms in an economy.

45
Q

How does Supply shocks and change in the capital stock affect the aggregate labor demand

A

Causes a shift

46
Q

Aggregate labour demand curve looks exactly like

A

Labor demand for an individual firm

47
Q

The supply of labor is determined by

A

Households

48
Q

To determine how much to work, individual compare

A

Benefit (income earned) with cost (forgone leisure)

49
Q

Leisure refers to

A

all off-the-job activities

E.g. Eating, Sleeping etc.

50
Q

What should individuals do to maximize utility

A

Individuals should work until the utility received from additional income equals the loss of utility associated with the missed leisure

51
Q

Real Wage is the

A

Amount of real income the worker receives in exchange for giving up a unit of leisure for work

52
Q

Two effects arise when Real wage increase

A
  1. Substitution effect
  2. Income effect
53
Q

Substitution effect is

A

The tendancy to supply more labour due to higher wages

One day rise in real wage

54
Q

Income Effect is

A

Tendency to
supply less labor due to becoming wealthier

E.g. Winning a lottery or an increase in expected future income

55
Q

Which effect is related to an increase in labour supply

A

Substitution Effect

56
Q

Which effect is related to a decrease in labour supply

A

Income effect

57
Q

What are some of the factors that can affect the Income and Substitution effect?

A
  1. Length of time the increase is expected to last.
  2. Intial level of income
  3. Person’s family situation
  4. Income tax rate
58
Q

Which effect is more likely to persue if there is a temporary increase in Wages

A

Substitution effect

59
Q

Which effect is more likely to persue if there is a high income tax rate

A

Income effect

60
Q

The labor supply curve Relates the amount of labor supplied to

A

The current real wage rate (expected future real wage)

holding other factors constant

61
Q

Why Labor supply curve is upward sloping

A

Because as current wage rate inc. the supply of labor inc.

62
Q

What factors causes the labor supply curve to shift to the left

A
  • Inc. in expected income
  • Inc. in wealth
63
Q

Aggregate labor supply curve

A

It is the total amount of labor supplied by everyone in the economy

64
Q

An increase in the current economy-wide real wages would cause a raise or reduction in the quantity of labor supplied ?

A

Raises quantity of labor since an inc. in w could encourage people out of the labour force to seek work

65
Q

Factors that causes a shift in the labor supply curve

A
  • Wealth
  • Expected future real wage
  • Working-Age population
  • Participation rate
66
Q

Factors that causes the labor supply curve to shift to the left

A
  • Wealth
  • Expected future wage
67
Q

Factor that causes the supply curve to shift to the right

A
  • Working age population
  • Participation rate
68
Q

Why does an inc. in wealth causes the labor supply curve to shift to the left

A

Increase in wealth increases amount of leisure workers can afford

69
Q

How is equilibrium determined in the labor market?

A

When aggregate quantity of labor demanded equals aggregate quantity supplied

70
Q

When sketching the labor market equilibrium, if there was temporary adverse supply shock what happens to the new equilibrium

A

Demand curve for labor will shift to the left leading to
* Lower real wage
* Employment falls

71
Q

Permenant supply shocks causes a shift in

A

in both demand and supply

72
Q

What is the main issue that could have caused the following:
Lower expected future wage consequently a rightward shift in labor supply curve

A

A permenant supply shock

73
Q

Full employment output is the level of output denotes

A
  • firms in the economy supply when wages and prices have fully adjusted
  • it is the level of output supplied when aggregate employment equals its full-employment level
74
Q

(Y-bar) = A.F(K, N-bar)

What would affect Y-bar

A

Any change in N-bar or A

75
Q

How would adverse supply shock that reduces MPN affect Y-bar

A
  • Reduces A hence lowering ouput directly
  • Reduces demand for labor and hence reduces N-bar that reduces Y-bar
76
Q

Adverse supply shock lowers labor demand, reducing employment and real wage, as well as reducing

A

Output

77
Q

Participation rate is

A

Fraction of adult population (working age population) in the labor force.

= Labor Force ÷ Adult Population

78
Q

Discouraged workers are

A

Unemployed people that decided to leave the labor force

not working in activities outside the labor market

79
Q

Unemployment spell

A

The period of time that an individual is continously unemployed

80
Q

Duration of unemployment spell

A

The length of time that an unemployment spell lasts

81
Q

Complete unemployment spell

A

It begins when the person become unemployed till he is no longer unemployed

82
Q

Incomplete or ongoing spells

A

Are spells that have not ended

83
Q

Mean duration of unemployment is

A

The average length of incomplete spells

84
Q

Duration of unemployment spells increase during

A

Recession

and decrease during expansions

85
Q

Even at full employment, Unemployment rate is not zero

A
  1. Frictional Unemployment
  2. Structural unemployment
86
Q

Frictional unemployment happens due to

A

Matching process

87
Q

Frictional unemployment happens due to

A

Matching process

88
Q

Structural unemployment is

A

Long-term chronic unemployment

89
Q

Structural unemployment happens due to

A

Low skilled labor or relocation of labor across industries

90
Q

Natual rate of unemployment prevails when

A

Output and employment are at full level

91
Q

Cyclical unemployment is

A

The difference between actual unemployment rate (u) and natural unemployment rate (u-bar)

92
Q

If cyclical unemployment is positive then

What is happening in terms of output and employment

A

Output and employment are below
their full employment levels

93
Q

If cyclical unemployment is negative then

A

Output and employment exceeds their full employment levels

94
Q

Okun’s law is considered a ________ more than a law

A

Rule of Thumb

95
Q

Okun’s law show the relation between

A

output (relative to potential
output) and cyclical unemployment

i.e. how changes in unemployment affects output

96
Q

State the equation of okun’s law

A

(Y-bar minus Y)/ Y-bar = 2(u-(u-bar))

97
Q

According to Okun’s law, for each percentage point increase in unemployment, the gap
between full employment output and actual level of output increases by

A

2% point

98
Q

According to Okun’s law, the percentage gap between potential and actual output equals 2 times

A

Cyclical unemployment

Macroeconomic Theory (8 decks)

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