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Macroeconomics > Discussion sheets 2 > Flashcards

Discussion sheets 2 Flashcards

1
Q

Per-worker production function

A

The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

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2
Q

Key assumption to long run economic growth

A

Capital is subject to diminishing returns

Law of diminishing returns: as more capital per worker is added to the production process, output per worker increases at a decreasing rate

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3
Q

Labor Productivity

A

Refers to the amount of goods and services that a worker can produce from each hour of work

Total output (real GDP)

Total # of hours of labor used to produce that output

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4
Q

Who are on demand side in a lonable funds market?

A

spenders/borrowers

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5
Q

Whose on the supply side in a lonable funds market?

A

savers/lenders

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6
Q

Equilibrium in lonable funds market

A

Interest rate and investment (quantity of lonable funds)

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7
Q

Demand curve for lonable funds shifters - Krugman

A

Changes in perceived business opportunities

Changes in the government’s borrowing

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8
Q

Supply curve for lonable funds shifters - krugman

A

Changes in private savings behavior

Changes in capital inflows

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9
Q

Marginal propensity to consume

A

MPC = Changes in consumption

         Change in desposable income

= ∆C

∆YD

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10
Q

MPC =

A

The slope of the consumption function

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11
Q

Consumption function

A

The relationship between consumption spending and disposable income

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12
Q

Disposable income

A

National income - (Taxes - Government transfer payments)

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13
Q

Disposable income* =

A

National income - Net Taxes

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14
Q

Net Taxes =

A

Taxes - Transfers

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15
Q

Marginal propensity to save:

A

= Change in saving

Change in disposable income

= ∆S

∆YD

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16
Q

National Income =

A

Consumption + Savings + Taxes

Y = C + S + T

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17
Q

MPC + MPS =

A

1

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18
Q

Aggregate Expenditure Model

A

A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming the price level is constant

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19
Q

Aggregate expenditure =

A

Consumption + Planned investment + Government purchases + Net exports

AE = C + I + G + NX

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20
Q

Actual investment =

A

(Planned investment) + (Unplanned change in inventories)

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21
Q

AE + unplanned change in inventories =

A

GDP

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22
Q

Macreconomic equilibrium occurs when

A

AE = GDP

*there is no unplanned change in inventories

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23
Q

When AE < GDP

A

inventories will rise

GDP and total employment will fall

production will fall

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24
Q

When AE > GDP

A

Inventories will fall

GDP and total employment will rise

Production will increase

25
Q

The Multiplier Effect

A

The proces by which an increase in autonomous expenditure leads to a larger increase in real GDP

26
Q

Autonomous expenditure

A

Expenditure that does not depend on the level of GDP

27
Q

Multiplier =

A

∆Y

∆Autonomous expenditure

28
Q

Multiplier* =

A

1

1 - MPC

29
Q

The AD curve shows:

A

The relationship between the price level and the quantity of real GDP demanded by households

30
Q

Why is the AD curve downward sloping?

A

Assum that G is determined by government policy and is not affected by the price level

Wealth effect: changes in the price level affect C

Interest-rate effect: change in the price level affect I

International-trade effect: changes in the price level affect NX

31
Q

Variables that shift the AD curve

A

Changes in government policy -Monetary and Fiscal Policy

Changes in the expectations of households and firms

Changes in foreign variables (exchange rates)

32
Q

Long-Run Aggregate Supply (LRAS)

A

Long-run relationship between the price level and quantity of real GDP supplied (vertical line)

*does not depend on the price level, because it is determined only by labor, capital, and technology

33
Q

Short-run Aggregate Supply (SRAS)

A

short-run relationship between the price level and quantity of real GDP supplied (upward sloping curve)

34
Q

Why is SRAS upward sloping?

A

because prices of inputs rise more slowly than prices of final goods and services (sticky wages and prices)

35
Q

Variables that shift the SRAS:

A

Increase in the labor force and the capital stock

Technological change (change in productivity)

Expected changes in the future price level

Unexpected changes in the price of an important natural resource (oil)

36
Q

Goals of Fiscal Policy

A

Government can change taxes and government expenditures to achieve various macroeconomic policy objectives

  1. Stable Prices
  2. High Employment
  3. Economic Growth
37
Q

Automatic stabilizers

A

Government spending and taxes that change automatically with business cycles

*NOT considered fiscal policy

ex. unemployment insurance claims

38
Q

Expansinoary Fiscal Policy

A

Government reduces taxes or increases government spending to shift AD right

Increases GDP and Prices

39
Q

Contractionary Fiscal Policy

A

Government increases taxes or reduces government spending to shift AD left

Decreases GDP and Prices

40
Q

Limits of Fiscal Policy

A

Fiscal policy can be poorly timed - if government implements a tax cut when a recession is about to end, AD can shift too far right, and the result will be higher inflation

Fiscal policy is tougher to reverse than monetary policy because it takes time to vote on tax cuts/spending bills, while the Fed only has to conduct open market operations

41
Q

Multiplier effect

A

How an initial increase in autonomous expenditures leads to a series of increases in consumption spending

42
Q

Why is the tax multiplier (in absolute value) smaller than the government purchase multiplier?

A

The fraction of the tax cut that households save and spend on imports will not increase aggregate demand

43
Q

Crowding out

A

How increasing government spending can cause private expenditures to decrease (sensitivity to the interest rate)

44
Q

Budget defecit

A

Government expenditures > tax revenue

45
Q

Budget surplus

A

Government expenditures < tax revenue

46
Q

Cyclically adjusted Budget deficit/surplus

A

The deficit or surplus that the federal government would have if the economy were at potential GDP

*Shows would would happen if the business cycles were not occurring

**Used to determine the true size of the deficit/surplus

47
Q

Tax Wedge

A

The difference between pre-tax and post-tax return to an economic activity

48
Q

Income tax

A

Lower income taxes increase the quantity of labor supplied in the economy, which can increase aggregate supply

49
Q

Corporate Income Tax

A

Lower corporate income taxes allow firms to have more money that they can use for investment of for reserach and development, which can potentially increase the pace of technological change

50
Q

Taxes on Dividends and Capital Gains

A

Lowering taxes on stock dividend payments and capital gains payments can increase the supply of loanable funds from households to firms and increase savings and investment and lowering the quilibrium real interst rate

51
Q

Economic Effect of a Tax Reform

A

Tax reforms can increase the size of the labor force, and the amount of investment in a new capital and newer technology, so the result is that it can increase potential GDP growth further

52
Q

Government purchases Multiplier

A

∆Y

∆G

=

1

1 - MPC

53
Q

Government purchases Multiplier with taxes

A

∆Y

∆G

=

1

1 - MPC (1 - t)

54
Q

Tax Muliplier

A

∆Y

∆T

=

- MPC

1 - MPC

55
Q

Balanced budget Multiplier (∆G = ∆T)

A

∆Y

∆G

+

∆Y

∆T

= 1

56
Q

Lump-sum tax

A

Yd = Y - T

57
Q

Tax rate

A

Yd = (1 - t) x Y

58
Q
A

Macroeconomics (26 decks)

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