Macro Econ Text 2 Flashcards
Historical school of economic thought?
Name the 3
Pure market economy - Classical liberal - Mercantilist - Communist Pure command economy
Classical liberal
Philosophical roots started with whom
John Locke and the belief of life the Devine right of kings is wrong
Classical liberal
Economist
Quesnay came up with
Laissez faire - leave it alone the economy, it will heal itself
Adam Smith and his wealth of nations (1776)
Wealth of nations not measured by gold it is measured by the consumption of a nation
Pursuit of own happiness
Classical liberal
Major ideas and policy
Q
Laissez Faire
Leave it alone, “let the economy heal itself”
A
Wealth of nations
Wealth of nations not measured in going or but in consumption of goods, etc
- trade is positive
Pursuit of own interest not the king
Competition
Mercantilist
Philosophical roots
Thomas Hobbs
Devine right of kings
God gave kings power to rule over the people
Mercantilist
Economist
Thomas mun
Measure of wealth is gold
Mercantilist
Major ideas and policy
Measure of wealth of a nation is gold
Dominion of king to collect all through expeditions etc
Classical communist
Philosophical roots
Hegel The dialectic Thesis clash with antithesis Creates sythesis clash with antithesis Creates synthesis
Classical communist
Economist
Karl Marx Wrote communist manifesto Dialectic materialism Inevitable violent revolution Abolition of traditional institutions Dictatorship of proletariate Collectivization of society --- central planning and the egalitarian society Each according to ability and each to according to need
Classical communist
Main ideas and policies
Dialectic materialism Inevitable violent revolution Abolition of traditional institutions Dictatorship of proletariat Collectivization of society Central planning and egalitarian society
Current school of economic thought
PME -Austrian -Monetarism (monetarist) -Keynesian -communist PCE
Monetarist
Economist
Friedman
Monetarist
Problem they want to solve
They believe that they handled Great Depression wrong
The root cause was 1913 us set up the central bank federal reserve
They should of contract the the supply of money instead of giving out more money which only made it worse
Monetarist
Main idea and policy
Indirect govt control
Monetary policy: federal reserve system
Regulate money supply, interstate banking
Austrian
Economist
Problem want to solve
Policy and main idea
F Hayek
Wrote the road to serfdom
Monetary policy leads to problems, doesn’t cure, but causes boom and bust cycle
Laissez faire - end govt controls
Minimum role of Govt protection Ending fiscal policy and monetary policy Collectivization Individual freedom
Communist
Economist
Problem want to solve
Policy and main idea
1917 Lenin and stalin
Violent revolution has to happen and it can happen on its own
Bolshevik revolution
Dialectic materialism
Inevitable violent revolution (oppressed rise up)
Dictatorship of proletariate
Abolish traditional institutions
Central planning (collectivization and egalitarian)
Keynesian
Economist
Problem want to solve
Policy and main idea
JM Keynes
Wrote general theory Direct government intervention In form of fiscal policy --- government spending -- taxation -- debt -- regulation
Business cycle
Over expansion
To much growth in economy
(can’t be sustained)
Goes over the steady growth ideal
Business cycles:
Expansion
economy moves from a trough to a peak. It is a period when the level of business activity surges and gross domestic product (GDP) expands until it reaches a peak.
Increase growth of economy
Business cycle
Stagnation
No growth in economy
Business cycle
Contraction
contraction occurs after the business cycle peaks but before it becomes a trough.
to occur when a country’s real GDP has declined for two or more consecutive quarters.
Decline in growth of an economy
Business cycle
Recession
Period of economic down
Business cycle
Depression
Long period of recession
GDP (Gross Domestic Product)
What is what does it measure
measure of a nation’s total economic activity.
More specifically, GDP represents the monetary value of all goods and services produced
How much people spend
Unemployment
What is it
People who are out of work but are looking for jobs
Unemployment types
FSCS
Frictional
Seasonal
Cyclical
Structural
Fscs
Frictional unemployment
Out of work for personal reasons
Seasonal unemployment
Out of work during a certain time
Cyclical unemployment
Out of work because downturn in business cycle (downturn in economy)
Structural unemployment
Out of work but looking for a work all the time (never get job even if economy is good)
Inflation
Is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling
CPI (Consumer price index)
measure that examines the weighted average of prices of a basket of consumer goods and services
Seigniorage
Seigniorage may be counted as revenue for a government when the money that is created is worth more than it costs to produce it.
Keynesian and neo classical divergence
Economy self correcting or not
Keynesian —
Economy is not self correcting
Neo classical view—
Economy is self correcting
GDP
What it allows us to measure
Easy to make comparison against other nations
Easy to measure
Easy to see changes over time
Doesn’t input household task (not paid)
Looks at money flow
Classical view that the economy is self or not correcting
The economy is self correcting
Interest and investment fall
People panic spend less and save more
Therefore people borrow more
Keynesian view that the economy is self or not correcting
The economy is not self correcting
Businesses borrow less therefore pay people less
Consumption function is what
an economic formula representing the functional relationship between total consumption and gross national income.
Consumption function:
Multiplier effect
5000=4000+1000
4000=3200+800
3200=2560+640
2560=2048+512
Total potential changes 25000=20000+5000
MPC (Marginal Propensity to Consume) is what
How much you spend per amount you earn
Ex) mpc=3/4
4000 (income) x (3/4)= 3000 spent
Therefore mps= 1/4
MPS (Marginal propensity to spend)
Is what
How much you save per amount you earn
Ex)
MPS=1/4
Income: 4000
4000(1/4)= 1000 spent
Multiple (multiplier factor) factor
How to find and is used for what?
It is found using the formula:
1/mps
Ex) 1/mps= 1/1/4= 4
This is then used to find total potential change (income spending in the economy)
4 x original income from multiplier effect
Fiscal policy prescriptions for contraction
Increase government spending and decrease taxation
Bring back to full employment level
Fiscal policy prescriptions for over expansion
Decrease government spending and increase taxation
Bring back to full employment level
FEL (Full employment level)
level of employment rates where there is no cyclical or deficient-demand unemployment.
The equilibrium point
Fiscal policy prescriptions
Which is popular
Balanced
+G-T
-G+T
Increased government spending and decrease taxation
Creates a deficit putting us in debt
But the beliefs is that in the long run you will be able to pay off the debt
Print more money and borrow more money
Fiscal policy prescriptions
Which is unpopular
Balanced
+G-T
-G+T
Decreasing government spending and increasing taxation is unpopular
It sounds better and creates a surplus
Which conferences a deficit
Forecasting ( economic indicators)
Lagging
Coincident
Leading
Lcl
What is lagging economic indicator
Analyze the past
What is coincidental economic indicator
Explain the present
What is leading economic indicator
Predict the future
Critique about fortune telling
Economist are basically fortune teller
Philips curve what is
Shows the trade off b/w the rate of inflation and the rate of unemployment
the fiscal policy prescriptions aim to be in the middle, during contraction, increasing government spending and citing taxes
Fiscal policy states to fight over expansion (inflation) you cut gov spending and increase tax, to fight contraction you would do it in vice versa
Phillip curve prescriptions
Fiscal policy states to fight Over expansion (inflation) you cut government spending and increasing tax
Contraction (unemployment) you increase government spending and cut taxes
Phillips curve what do the critics say
Phelps and critics say that the Phillips curve is wrong
Inflation and unemployment come at the same time
And
Inflation doesn’t go way right away
The economy is unpredictable there have been some time in history that both inflation and unemployment have been high, creating stagflation– how do you combat that
Stagflation
High unemployment and high inflation
Public goods what are they
They are goods that benefit all and are non exclusive
Owned by government
They create a “free rider problem” which won’t be covered by the private sector
Lead to tyranny, offense and waste
Ex) the lighthouse
Free riders at the Light house
Light houses used to be private owned and built
But people using the light house want a free ride bc they don’t want to pay for the light house
So they go to the government and ask them to tax people (to pay for it) or else there will be no light house
Who does better private or public companies
Private companies does better job then government public companies
Bc govt has no incentives to renovate or do above and beyond (cause they got monopoly)
Private company also has motivation
Private owned institutions = less taxes and better service then govt owned
Lorenz curve shows what?
It shows the distribution of income
Perfectly equal distribution Robin Hood effect Actual distribution Sharif effect Perfectly unequal distribution
Robin Hood effect on Lorenz curve
There is a legitimate function off
Government to redistribute income from the rich to give to the poor
Lorenz curve critics
Name the 3
Power critics
Productivity critics
Ethics critics
PPE
Power critics
The rich have more power
The powerful May say that they are helping the poor to be popular but they really intend to take from both the rich and the poor to give to the powerful
Productivity critics
Equal distribution of income limits the incentives for productivity and growth
Even the poor are better off in a growing economy with incentives for productivity
Ethics critic
If it is wrong for a person to take another persons money against their will, then it is also wrong to ask others to do it for them
The action is the same no matter how much people approve
Laffer curve
representation of the relationship between rates of taxation and the resulting levels of government revenue.
Laffer curve
As tax rate goes up government get less revenue
Cut taxes increases govt revenue
Taxes and affect on human behavior
People change behavior at high tax
They: Hide income Move way Stop work Rebel with a rebellion
People react to cut taxes at low tax by
Revealing income
Moving into area
Starting work
Cooperating
Historical examples of laffer curve
American revolution is an example
Before revolution the Boston tea party is also an example when the people of the colony threw tea into harbor because of unfair/high taxes from England and king
Taxation without representation
Tanstaafl
The ain’t such thing as a free lunch
Nothing is free because someone had to pay for the said good down the line of creating it
Hidden tax
Government get money in different way by either printing more money inflation or by borrowing money crowding
Austrian critic
Cut the real tax which is govt spending so there is real growth in future
Tax purposes
So govt can collect revenue
Redistribution of income
– tax some to give to others
Manipulate values
– taxing something to discourage without taking item away and tax break to encourage
3 tax types
Regressive
Proportional
Progressive
Regressive tax
Rate of taxation decrease as income rises
Same tax amount for each person
Different tax rate for each person decreasing
Proportional tax
Rate is same but as income increases amount taxes increases
Tax amount is different and rising
Tax rate is same rate
Progressive tax
Greater the income the different the rate and amount paid
Tax amount is different rising
Tax rate is different rising
Alternative to tax
Managing resources better
User fees (tax people who use it)
Lottery
Check off
Allows people to check off how much they meant to get taxes on of tax form
4 tax objections
Excessive
Abusive and unfair
Manipulative of values
Wasteful and corrupting
Tax objections
Excessive
Too much
Protect ability to get campaign contribution
Too many
Too complicated
Abusive and unfair
IRS
Big cases big problems
Small cases small problems
They lie (can’t be held accountable) they promise to give money but they never do
Ex
Pres nixon gave enemy list to irs so they can audit them
Manipulative of values
Tax high for some - discourage behavior
Tax low for some - encourage behavior
To discourage sinful behavior we have sin taxes
Like smoking and the cigarette tax
Congress spending subsidies Tabasco farm
Drinking alcohol tax congress spending at military
Working .income tax .unemployment care
Wasteful and corrupt
People pay for things that they are uninterested in though taxes therefore wasteful
Moral objection
Go to jail for it paying tax or pay them and go to hell
Moral hazard
Alcohol drug addicts
Like
Moral hazard
Govt policies that reward and encourage reckless behavior by removing risk
Disaster relief stuff like insurance
What is debt
Govt give and take
Federal recipient and outlays rarely match current breakdown
Govt spend more then take in tax
