Economic Fluctuations and Unemployment Flashcards
Define ‘business cycles’
Periodic fluctuations in the rate of economic activity, measured by: levels of employment, prices and production
Distinguish between autonomous (exogenous) and induced spending
Autonomous spending > expenditures that consumers must make even when they have no disposable income, e.g. food + shelter
Induced spending > spending that rises with income
How do we calculate MPC?
Change in C/Change in Y
*where change in C > 0 and change in Y < 1
How do we calculate APC?
C/Y
State the consumption function
C = alpha + bY
*where alpha is autonomous consumption and b is MPC
State the savings function
S = -alpha + (1-b)Y
*where alpha is autonomous consumption and b is MPC
Define APS
The proportion of disposable income that households want to save
How do we calculate APS?
S/Yd
What are the 3 major forms of investment?
Investment in inventories
Investment in residential housing construction
Investment in business fixed capital
How do we calculate the economy’s MPS?
Change in AE/Change in Y
*where AE = aggregate spending and the slope: 0 < c < 1
Define the ‘multiplier effect’
A fall in investment has a magnified effect on output
How do we calculate the size of the multiplier?
k = 1 / (1-b)
State the equilibrium condition
AE = Y = C + I
*where AE = aggregate expenditure
How do we calculate net tax rev?
Tax rev - transfer payments
*always +ve since tax rev > TP
State the tax function
T = T0 +tY
*where T0 is autonomous taxes, e.g. VAT (not related to income)
Define ‘fiscal policy’
The discretionary use of changes in G or t to affect the level of output
What’re the limitations of the fiscal policy?
Time lag (swift policy changes are rarely possible)
Public investment is irreversible
Define ‘inside wealth’
An asset issued by an agent in priv. sector (e.g. firm) and held by another agent (e.g. household) in same sector
What’re the determinants of net exports?
Foreign GDP (rise > NX shifts upwards)
Relative international prices
What is the Tinbergen principle?
To simultaneously obtain 2 objectives, authorities need 2 independent instruments
Why does GDP fluctuate?
Fluctuations in AD
Most important > changes in private investment > more volatile
Why is it that if investment spending rose with GDP, the upward movement in GDP could be sustained?
The accelerator
The availability of funds
Expectations
State the 2 measures of unemployment
The claimant count
ILO unemployment
