Final Exam Flashcards
elastic
- degree that supply and demand respond to price change
- supply curve flatter
inelastic
-no matter the price consumers will continue to buy
burden of tax
-falls on the inelastic side of the market
which way does supply curve shift by the amount of tax?
supply curve shifts up by amount of tax
exercise tax
- fixed dollar amount paid for each unit
- on buyers (shift demand down)
- on sellers (shifts supply up)
inequality
- sometimes measured as ratio of richest quintile to poorest quintile
- can be hard to capture (and to track poorest)
- has been increasing in the US since 1970s (cheap labor from abroad creates decrease in wages, capital owned by increasingly small share)
LDC
least/ less developed country
poverty
- sometimes measured as living in less than $1.00 /day (LDC)
- US definition is living on less than 23K a yr for family of 4
- unemployment: 5%
policies to address poverty
- min wage law
- welfare
- negative income tax
- transfers
- give cash ex
- give conditional can transfers ex
min wage law
-can create job shortages if min wage is binding (above set wage level)
welfare
-can discourage working
negative income tax
- can encourage working but only up to a certain point
- gov collects tax revenue from high income households and gives substitutes to low
transfers
- only up to a certain point
- “leaky bucket” too much bureaucracy to manage
- redistribution of income and wealth
give cash example
- universal basic income
- give directly
give conditional cash transfers (CCT) example
- progress
- opportunities
labor force (LF)
employed + # unemployed + # neither
how is unemployment estimated monthly
estimated by bureau of labor statistics (BLS) by conducting a census population survey (CPS) of 60 K households
budget constraint
- represents all possible bundles (x,y) that a consumer can afford
- Income = (Px)(Qx) + (Py)(Qy)
- set equal to Qy for equation of budget constraint line
if Px decreases
budget constraint pivots out (on x axis)
if income increases
budget constraint shifts out (parallel)
how to find BC point on x axis
income / Px
how to find BC point on y axis
income / Py
indifference curve (IC)
- represents consumer’s willingness to trade one good for another
- higher IC is better
- downward sloping
- IC’s don’t cross
- bowed inward
perfect compliments
two goods with right angle indifference curves (spooning right angles)
perfect substitutes
two goods with straight line indifference curves (look like demand curve)
optimal consumer choice
- when IC is tangent to BC
- where MRS = slope of BC
MRS
- marginal rate of substitution
- rate at which consumer is willing to substitute two goods
- dy / dx slope of indifference curve
normal good
- any good for which demand increases when income increases
- ex. with positive income elasticity of demand
inferior good
- type of good which demand declines as level of income or real GDP in the economy increases
- ex. opposite of normal good
what happens to normal and inferior goods when income increases
- normal good: demand rises when income rises
- inferior good: demand falls when income rises
what happens to normal and inferior goods when price changes
- normal good: Q demand increases price decreases
- inferior good: Q demand decreases price decreases
price change
income effect + substitution effect
income effect
change in consumption that results when price change moves the consumer to a higher or lower indifference curve
substitution effect
change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new MRS
information asymmetry
when one agent in a market transaction (buyer/seller, worker/employer) has more information than the other
moral hazard
- hidden action (dishonest behavior)
- ex. worker at a job
adverse selection
- hidden type / characteristic
- ex. used cars
George Akerlof
- won Nobel prize in 2001
- work on formalizing adverse selection
- ex. used market for lemons in the used car industry
lemon problem
how quality of good traded in a market can degrade in pretense of information asymmetry between buyers and sellers
asymmetric information
sellers knowing more than they tell the buyers
gross domestic product (GDP)
the total value of everything produced by all the people and companies in the country
determinate of productivity
- physical capital
- human capital
- natural capital
- technical knowledge
how to increase productivity
- invest in capital rather than consumption goods
- invest when leans are cheap (low r)
national saving
- S
- private saving + public saving
- savings = investment
private saving
- amount households have left after paying taxes
- (Y - C - T)
- GDP - consumption - taxes
public saving
- amount of tax revenue gov has after paying for its spending
- (T - G)
- taxes - government purchases
if (T - G) > 0 …
gov surplus
if (T - G) < 0 …
gov deficit
gov deficit
- amount that something falls short (usually money)
- gov must borrow money (from private lenders)
- gov deficit since 1969
what happens when the gov borrows
- sell a bond
- pulls money from the private sector
- decreases money supply
- aka open market sales
what happens when the gov lends
- buys bonds
- injects money into private sector
- increases MS marginal supply
- aka open market purchases
FOMC
- committee inside the federal reserve bank
- gov in open market operation
government bonds
treasury securities
bills
less than 1 hr maturity
notes
1-10 hrs maturity
bonds
greater than 10 hrs maturity
two types of bonds
with and without coupons
without coupons
- present value formula
- P = face value / (income + interest rate) ^maturity
with coupons
- 10% of FV
- P = longer equation
n
maturity
r
intrest rate
FV
face value
as interest rate increases…
demand for loans decreases
when fed buy bonds
- loans money to banks
- money supply increases
- reserves increase
when fed issues / sells bonds
- it borrows money
- money supply decreases
fed funds rate
rate at which banks lend to each other
mm
- money multiplier
- when money gets re-loaned
rr
reserve ratio
deficits
- increase demand for loans
- increase interest
high interest
- reduces borrowing demand for capital investing
- income decrease
- GDP decreases
to get interest to decrease gov will:
- buy bonds
- print money -> inflation
CPI
price index of a given basket of goods for a given base year
deflation
- when cost of basket decreases
- negative inflation
disinflation
inflation still pos, but falling over time
