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ECON 101 > Final > Flashcards

Final Flashcards

1
Q

Income expenditure identity (GDP)

A

Y = C + I + G + NX

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2
Q

Basic macroeconomic model

A

1) Households
2) Firms
3) Markets

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3
Q

Macroeconomics

A

Long-run growth, business cycles, role of gov, fiscal policy

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4
Q

3 methods to measure GDP

A

1) Product - value added
2) Expenditure - Y = C + I + G + NX
3) Income - wages, profits, loan interest, gov taxes

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5
Q

GDP vs. GNP

A

GDP - inside borders
GNP - US citizen, anywhere

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6
Q

Price index

A

Measures inflation rate

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7
Q

CPI

A

Based on goods consumed, will overstate inflation

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8
Q

Key facts of business cycles

A

1) Deviations from real GDP trend
2) Comovements of deviations from real GDP trend

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9
Q

Peak

A

Positive deviations from real GDP trend

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10
Q

Trough

A

Negative deviations from real GDP trend

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11
Q

Boom

A

Persistent positive deviations from real GDP trend

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12
Q

Recession

A

Persistent negative deviations from real GDP trend

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13
Q

Comovement characteristics

A

Procyclical: moves together with real GDP
Countercyclical: moves opposite with real GDP
Leading: can help predict future GDP
Lagging: GDP predicts it

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14
Q

Consumption

A

Procyclical, coincident, less variable than real GDP

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15
Q

Investment

A

Procyclical, coincident, more variable than real GDP

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16
Q

Price level

A

Countercyclical, coincident, less variable than real GDP

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17
Q

Money supply

A

Procyclical, leading, as variable as real GDP

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18
Q

Employment

A

Procyclical, lagging, less variable than real GDP

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19
Q

Real wage

A

Procyclical

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20
Q

Average labor productivity

A

Procyclical, coincident, less variable than real GDP

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21
Q

Disposable income

A

Wage + Dividends - Taxes

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22
Q

Optimal bundle for the consumer

A

MRS of leisure, consumption (x,y) = real wage

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23
Q

Marginal rate of substitution

A

Rate consumer is willing to give up consumption for leisure

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24
Q

Consumption and leisure normal goods

A

If income increases, then consumption and leisure both increase

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25
Q

Increase in the real wage

A

Substitution effect: consumption increases
Income effect: leisure may increase or decrease depending on which effect is stronger

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26
Q

Pure income effect happens when

A

Disposable income increases through more dividends or less taxes

27
Q

Production function characteristics

A
  • Constant returns to scale
  • Diminishing marginal product of labor and capital
  • More capital = larger marginal product of labor
28
Q

What happens when there is an increase in total factor productivity?

A

Marginal product of labor increases

29
Q

Optimal bundle for the firm

A

Marginal product of labor = Real wage

30
Q

One-period macroeconomic model includes:

A

1) Consumers
2) Firms
3) Government

31
Q

Exogenous variables

A
  • Capital stock K
  • Total factor productivity z
  • Gov spending G
32
Q

Endogenous variables

A
  • Output Y
  • Consumption C
  • Employment Ns,Nd
  • Taxes T
  • Real wage w
33
Q

Pareto optimal

A

Can’t make anyone better without making anyone worse

34
Q

First welfare theorem

A

Competitive equilibrium is Pareto optimal

35
Q

Second welfare theorem

A

Pareto optimum is a competitive equilibrium

36
Q

What invalidates the welfare theorems?

A

Externalities, distortionary tax (income tax), not being price-taker, monopoly

37
Q

Effect of an increase in gov spending

A

Pure income effect since there is now more taxes so consumers have less income
- Employment increases and consumption decreases (negative)

38
Q

Effect of an increase in total factor productivity z

A

Substitution effect: output, consumption, real wage increases
Employment depends on the substitution or income effect

39
Q

Production possibilities frontier

A

Shows consumption/leisure bundles possible given technology

40
Q

Equilibrium

A

MRS l,c = MRT l,c = MPN (Consumer = Firm = Market)

41
Q

Solow model

A
  • Exogenous growth model
  • Growth in labor force causes output, consumption, investment to increase
  • Must improve technology z for a better standard of living
42
Q

Output per worker reaches….

A

Steady state in the long run if technology z doesn’t change

43
Q

What increases output per worker in the long run?

A
  • Increase in savings rate
  • Decrease in population growth rate
44
Q

Effect of an increase in savings rate

A

Consumption per worker may increase or decrease

45
Q

Golden rule

A

Marginal product of capital stock K = Depreciation rate

46
Q

Growth accounting

A

Measures how much capital stock, employment, TFP contributes to the growth in output

47
Q

Solow residual

A

Output / KN

48
Q

Two-period model includes:

A
  • Current and future income
  • Current and future lump-sum taxes
49
Q

Lifetime budget constraint

A

Present value of consumption = Present value of disposable income

50
Q

Lifetime wealth

A

Present value of current and future disposable income

51
Q

Current and future consumption are:

A

Normal goods

52
Q

If current income increases, then:

A
  • Current and future consumption increase
  • Current savings increases
53
Q

If future income increases, then:

A
  • Current and future consumption increase
  • Current savings decreases
54
Q

If permanent income (both current and future) increases:

A

Larger increase in current consumption

55
Q

Optimal point of consumption for consumers (consumption/savings)

A

MRS c, c’ (x,y) = 1 + r

56
Q

Increase in real interest rate r for lender

A
  • Substitution effect: current consumption decreases, future consumption increases, current savings increases
  • Income effect: current and future consumption increase
57
Q

Increase in real interest rate r for borrower

A
  • Substitution effect: current consumption decreases, future consumption increases, current savings increases
  • Income effect: current and future consumption decrease
58
Q

Total effect of increase in real interest rate r for lender

A

future consumption increases, not sure about current consumption and current savings

59
Q

Total effect of increase in real interest rate r for borrower

A

Current consumption decreases, current savings increases, not sure about future consumption

60
Q

Ricardian equivalence theorem

A

Timing of taxes collected by the gov (now or future) doesn’t matter
- Because consumers change their savings accordingly to compensate for the change in future taxes

61
Q

Credit market imperfection

A

When the lending interest rate is less than the borrowing interest rate
(charging more to borrow)
- Ricardian equivalence doesn’t hold

62
Q

Effect of current tax cut with imperfection

A
  • Increases current consumption (spends whole tax cut)
  • No effect on savings (does not save tax cut like normal)
63
Q

What do good and bad borrowers do?

A

Increase the default premium (cost to borrow)

64
Q

Limited commitment

A

If borrowers don’t have collateral, less incentive to pay loans

ECON 101 (2 decks)

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