Equations in Economics Flashcards
What is the Harrod Domar model?
The Harrod Domar Model suggests that the rate of economic growth depends on two things:
Level of Savings (higher savings enable higher investment)
Capital-Output Ratio. A lower capital-output ratio means investment is more efficient and the growth rate will be higher.
Rate of economic growth (g) = Level of savings (s)/Capital output ratio (k)
https://www.economicshelp.org/blog/498/economics/harod-domar-model-of-growth-and-its-limitations/
What is the Keynsian Multiplier?
The sum of all the rounds of expenditures $1+$MPC+$MPC2+$MPC3+$MPC4 and is not infinite, this spending equals 1/(1-MPC)
What is the Fisher Effect?
related nominal interest rate (i) to the rate of inflation (π) and the “real” interest rate (r). The real interest rate (r) is the interest rate after adjustment for inflation. It is the interest rate that lenders have to have to be willing to loan out their funds. The relation
(1+i) = (1+r) (1+π) = 1 + r + π + r π and is equivalent to i = r + π(1 + r).
What is Aggregate Demand?
consumption (C), investment (I), government (G), and net exports (NX), thus AD=C+I+G+NX.
Output is at its equilibrium level when the quantity of output produced is equal to the quantity demanded. Thus, an economy is at equilibrium output when Y=AD=C+I+G+NX.
When AD, the amount people want to buy, is not equal to output, there is unplanned inventory investment or disinvestment, IU=Y-AD, where IU is the unplanned additions to inventory. If output is greater than AD, there is unplanned inventory investment, IU > 0. If output is below AD, inventories are drawn down until equilibrium is restored. The relationship between consumption and income is described by the consumption function.
What is the Consumption Function?
[C=C +cYD] where 0
C is the slope of the consumption and is also the marginal propensity to consume (MPC), which is the increase in consumption per unit increase in income. The rest of the fraction (1-c), if it is not spent, is saved.
What is Savings?
Savings is equivalent to Income - Consumption, SY-C, which is known as the budget constraint, implies a savings function.
S equivalent to Y - C = Y - C - cY = -C + (1-c)Y.
Savings is an increasing function of the level of income because the marginal propensity to save (MPS), s = 1-c, is positive. Savings increases as income rises.
What is the Budget Constraint of the Consumer?
p1x1+p2x2 > m, we can then view this as p1x1+x2 < m, where the amount of money spent on good 1, p1x1, plus the amount spent on all other goods (ceteris paribus), x2, must be no more than the total amount of money the consumer has to spend, m.
What is the Baumol-Tobin model?
The formula for the demand for money:
M/P=sqrt(tc(Y)/2i)
which shows that the demand for money decreases with the interest rate and increases with the cost of transacting.
What is the Cobb-Douglas Production Function?
Q = KaL1-a, where a + (1 - a)= 1 meaning there is a constant return to scale.
What is the Solow model for Long-term Growth?
It is built on two equations, a production function and a capital accumulation equation (Jones 2002). Capital (K), Labor (L), and Output (Y). The production function is assumed to be in Cobb-Douglas form and begins with: Y = F(K,L) = KaL1-a, where is a number between 0 and 1.
This exhibits a constant return to scale, which is if all inputs are doubled then outputs will exactly double. Remember that if F(aK,aL)=aYfor any number (a > 1), then there is a constant return to scale. If F(aK,aL) > aYthen there is an increasing return to scale. If F(aK,aL) < aYthen there is a decreasing return to scale (Jones 2002).
(1) K = sY
(2) Y = F(K,L)
(3) K = sF(K,L)
(4) L(i) = Loent
(5) K = sF(K,Loent)