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ECON 381 > Exam 1 (Ch. 1 - 4) > Flashcards

Exam 1 (Ch. 1 - 4) Flashcards

1
Q

According to the classical labor supply function, an equiproportionate rise in wages and all product prices would:

A

have no effect on the labor supply.

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2
Q

In the classical model, a rise in real aggregate demand:

A

raises prices.

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3
Q

The classical labor market assumes:

A
  1. an auction market
  2. perfectly flexible wages and prices
  3. perfect information
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4
Q

The marginal product of labor is

A

the change in output per each change in labor input.

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5
Q

A shift in the production functions is a result of:

A
  1. a change in capital stock over time

2. a technological change which alters the amount of output for given levels of input

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6
Q

If the marginal product of labor (MPN) exceeds the real wage rate (W/P) then

A

firms can increase profits by hiring more workers thereby causing the MPN to fall.

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7
Q

In the classical system, the supply of labor is a function of

A

the real wage.

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8
Q

In the classical model, if the production function is such that as employment increases the marginal product of labor (MPN) falls, then

A

the quantity of labor demanded will be negatively related to the real wage rate.

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9
Q

According to the classical economists, the level of individual satisfaction depends:

A

positively on both real income and leisure.

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10
Q

In the classical model, if a worker’s money wage rose from $10 to $20 while all product prices doubled this worker would:

A

supply the same amount of labor before and after the hourly wage increase.

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11
Q

An increase in the capital stock will cause

A

the production function to shift up raising the marginal product of labor (MPN) causing labor demand to increase.

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12
Q

What is the economic problem?

A

unlimited wants vs. scarce resources

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13
Q

Define microeconomics

A

individual household and firm decisions, emphasis on cost benefit analysis and decisions at the margin

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14
Q

Define macroeconomics

3 specifics

A

looking at the whole economy:

  1. employment
  2. national output (GDP)
  3. inflation
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15
Q

4 Classical Economists

A

Smith
Malthus
Ricardo
Mill

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16
Q

4 Neoclassical Economists

A

Marshall
Jevons
Pareto
Walras

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17
Q

Monetarist

A

Milton Freedman

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18
Q

GDP vs Real GDP vs GNP

A

Measure of all domestically produced final goods for a given period. Real GDP is adjusted for inflation.

GNP measure of final goods produced by American companies world wide

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19
Q

10 GDP Notes

A
  1. ignores depreciation
  2. only measures this year’s output
  3. does not measure changes in quality
  4. does not reflect value of intangibles (externalities)
  5. does not reflect the purpose of production
  6. doesn’t reflect things not for sale (mom’s jobs)
  7. does not reflect distribution of goods and services
  8. doesn’t measure illegal production
  9. doesn’t include transfer payments
  10. doesn’t include the sale of financial assets (bonds)
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20
Q

Injections v. Leakages

A

Injections:

  1. Investment
  2. Government Spending

Leakages:

  1. Savings
  2. Taxes

Injections = Leakages in equilibrium

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21
Q

5 Points of Mercantilism

A
  1. National power is goal of economic policy
  2. more gold = more national power
  3. gold comes from trading with foreigners
  4. gov’t subsidizes large companies (E India Trading)
  5. favor large numbers of wage workers
    Focus is on accumulation of GOLD
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22
Q

Law of Diminishing Marginal Returns

A

when adding successively equal, extra units of one input, while holding all other inputs fixed, the amount of extra output will decline

23
Q

Velocity will increase with

A

more frequent use of credit cards

24
Q

In the classical theory, aggregate demand is determined by

A

the quantity of money

25
Q

In the classical model, with a vertical aggregate supply curve, a reduction in government spending will

A

have no effect on aggregate demand

26
Q

In the classical model, bond-financed government spending which pushes up the interest rate will result in

A

the crowding out of private consumption and private investment

27
Q

In the classical system, an increase in government spending can be financed…

A
  1. taxes
  2. selling bonds
  3. creating new money
28
Q

Using the classical theory of the interest rate, an increase in government spending financed by bonds will

A

leave aggregate demand unchanged as consumption and investment spending decrease by the exact amount of the increase in government spending

29
Q

In the classical model, a reduction in the marginal income tax rate would

A

increase both the after tax real wage and the labor supply

30
Q

In the classical model, if the marginal income tax rate were to increase then

A

the labor supply would decrease causing the aggregate supply curve to shift left

31
Q

In the classical model, a decrease in government spending shifts the

A

demand of loanable funds to the left

32
Q

In the classical system, what factors determine the interest rate?

A
  1. real savings
  2. the value of the gov’t deficit
  3. real investment demand
33
Q

Explain the role of money in the classical system (3 uses). What role does money have in determining real output, employment, the price level, and the interest rate?

A
  1. Medium of Exchange—double coincidence of wants
  2. Unit of Account—understanding relative values
  3. Store of Value—holds your wealth

Quantity of money determines aggregate demand and therefore the price level.

34
Q

Define “velocity of money”.

A

average number of times each dollar is used in transactions during a given period

35
Q

Factors of velocity

A

(Price Level * Output) / Money Supply

36
Q

What is the relationship between velocity and the Cambridge k?

A

V = (1/k)

Md = k * P * Y

37
Q

What effect would an increase in the velocity of money have on output, employment, and the price level.

A

?

38
Q

What determines the interest rate in the classical theory?

A
  1. Real savings
  2. The value of the government deficit
  3. Real investment demand
39
Q

6 major policy conclusions of classical economics

A
  1. The economy is self adjusting and always tends towards full employment
  2. Wages and prices are fully flexible
  3. The interest rate adjusts to cushion in order to absorb any demand-side shocks that could affect output and employment
  4. Classical government policy = non-interventionist
  5. No restrictions on the markets
  6. Should keep monetary levels stable to stabilize prices
40
Q

4 ways to calculate GDP

A
  1. sum all (price * quantities)
  2. Expenditures approach
  3. Incomes approach
  4. Value & sum intermediate goods
41
Q

3 Price Indices

A
  1. Fixed basket, Laspeyres, overstates inflation
  2. Changing basket, Paasche, understates inflation
  3. Average of the two, Fisher
    Pf = SQRT( Pl * Pp )
42
Q

How does an increase in price affect the real wage? Firms?

A

Real wage will go down (w/p). Firms will hire more workers because MRN is higher.

43
Q

How does an increase in nominal wage affect the real wage? Firms?

A

Real wage will increase (w/p). Firms will hire fewer workers.

44
Q

What are the only factors that affect aggregate output?

A
  1. change in technology
  2. change in capital stock
  3. change in population
45
Q

3 equations of exchange

A
  1. M * V = P * T
  2. M * V = P * Y (Income approach)
  3. Md = k * P * Y (Cambridge approach)
46
Q

Loanable funds exogenous factors

A
  1. government deficit and demand
  2. business profit expectations
  3. household preferences about consumption and savings
47
Q

What is the impact of a decrease in the marginal tax rate?

A

Labor supply shifts to the right because after-tax real wages increase. This causes output to shift right also. This is only done in emergencies.

48
Q

Aggregate production function

A

Y = f ( K-bar, N )

49
Q

Productivity of Thrift

A

Sr = Ir + ( G - T )

50
Q

4 classical graphs

A
  1. Labor market
  2. Aggregate production function
  3. Price level
  4. Interest rate
51
Q

Fiscal Policy

A

No impact except changes in the marginal tax rate

52
Q

Tax Policy

A

No impact except crowding out

53
Q

Monetary Policy

A

Only changes AD and therefore price level

54
Q

What is true in the case of a negatively sloped labor supply curve?

A

income effect > substitution effect

ECON 381 (2 decks)

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