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MACRO-unit two Flashcards

0
Q

Saving Schedule/function

A

Saving= Disposable income-consumption

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1
Q

Consumption Schedule/function

A

Reflects the direct consumption and disposable income relationship

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2
Q

Break even income

A

The point where households will spend all their earned income

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3
Q

APC

A

Average propensity to consume (percentage of income consumed)

Consumption/income

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4
Q

APS

A

Average propensity to save (percentage of income saved)

Saving/income

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5
Q

MPC

A

Marginal propensity to consume

Change in consumption/change in income

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6
Q

MPS

A

Marginal propensity to save

Change in saving/change in income

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7
Q

MPC+MPS=

A

1

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8
Q

Determinants of consumption and saving

A

1) wealth (wealth effect shifts consumption schedule up and saving down)
2) borrowing
3) expectations
4) real interest rates

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9
Q

When will investment be undertaken?

A

If the expected rate of return (r) = or > real interest rate (i)

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10
Q

Investment demand curve determinants

A

1) costs of acquiring/maintaining capital goods
2) business taxes
3) technology
4) stock of capital goods
5) business expectations

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11
Q

Where does the variability of investment come from?

A

1) variability of expectations
2) durability
3) irregularity of innovation
4) variability of profits

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12
Q

Multiplier effect usage

A

determines how large an increase in GDP is due to an increase of spending

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13
Q

What is the relationship between spending and GDP?

A

Direct

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14
Q

Multiplier equations

A

change in real GDP/initial change in spending

1/1-MPC or 1/MPS

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15
Q

Why is initial change in spending generally associated with investment?

A

Because of investment’s volatility

change in consumption, net export, and gvnmt purchases also lead to the multiplier affect

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16
Q

Why do levels of investment generally change?

A

Due to changes in real interest rates or shifts of the investment demand curve

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17
Q

APC and APS equation

A

point on consumption curve/point on 45 degree line
point on savings curve/point on 45 degree line

APC+APS=1

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18
Q

Relationship between APC and APS

A

inverse

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19
Q

Why is AD downsloping?

A

Real-balances effect, interest-rate effect, and foreign purchases effect

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20
Q

Real-balances effect

A

Inflation causes a reduction in purchasing power leading to less consumer spending

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21
Q

Interest-rate effect

A

With a specific supply of money, a higher price level increases the demand for money which raises the interest rate and lowers investment purchases

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22
Q

Foreign purchases effect

A

An increase in one countries price level relative to the price levels in other countries reduces the net export component of that country’s aggregate demand

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23
Q

Determinants of Aggregate Demand

A

Changes in the level of spending my consumers, businesses, government and foreign buyers

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24
Immediate short run aggregate supply curve
Both input and output prices are fixed | Curve is a horizontal line
25
Short run aggregate supply curve
Nominal wages and input prices are fixed, output prices vary | Upsloping, relatively steep to the right of full employment and relatively flat to the left
26
Long run aggregate supply curve
All prices vary | Vertical curve at the full employment level
27
Determinants of aggregate supply
Input prices, productivity, and legal-institutional environment
28
What happens with an increase of aggregate demand to the right of full employment output?
Inflation and a positive GDP gap
29
What happens when the AD curve shifts to the left of the full employment output?
Recession, negative GDP gap and cyclical unemployment
30
Cost push inflation
Result of a decrease in aggregate supply which leads to a negative GDP gap
31
Why are prices inflexible downward?
1) fear of price wars 2) menu costs (lowering prices creates other costs) 3) wage contracts 4) morale, effort, and productivity 5) minimum wage
32
Aggregate demand
amount of a nation's GDP that buyers collectively desire to purchase at each price level
33
What makes up the majority of business costs?
Wages and salaries
34
What happens with a decrease in wages?
Per unit production costs are reduced which causes the aggregate supply curve to shift right
35
Productivity
Total output/total input
36
Legal institutional environment effect on supply
1) changes in taxes and subsidies | 2) changes in the extent of regulation
37
Net export effect
the change in real GDP that occurs when an increase in the price level leads to a change in the relative prices of imports and exports
38
How does a change in real interest rate affect the investment demand?
Changes the point not the curve
39
"Too much money chasing too few goods"
Demand pull inflation
40
Crowding out
When the government needs to borrow money for discretionary policy, they end up discouraging private investment. This happens because the gvnmt causes the demand to go up causing the interest rate to go up. This is bad because private investment is better than gvnmt investment.
41
Automatic stabilizers
Aspects of our structure that already help to stabilize - spend more in recessions and less when its doing well ie: unemployment insurance
42
Discretionary policy (fiscal)
BY CHOICE congress must pass a law ie: tax cuts
43
Problems of timing with fiscal policy
1) recognition lag 2) administrative lag 3) operational lag
44
Why won't the US go bankrupt?
1) refinancing | 2) taxation
45
Fiscal policy
Use of government spending and/or tax collection to influence the economy
46
Stimulus package
Government spends money to stimulate the economy
47
Expansionary fiscal policy
The goal is to get GDP to rise and it is used to avoid a recession or to help a recession -increased government spending -tax cuts The outcome is that more is spent on goods and services which increases demand and raises output and gdp (prices will rise too)
48
Contractionary fiscal policy
Goal is to temper economic growth because too much growth can lead to inflation. It is used during expansion or a peak of the business cycle -decreased government spending -tax increases/elimination of tax cuts Outcome is that there is less spent on goods and servises which leads to decreased demand and more stable prices
49
Is medicare discretionary?
No
50
Limits and criticisms of fiscal policy
1) difficult to change spending levels 2) entitlement spending (social security, medicare, vets) 3) lots of lags (inside lags- recognition and administrative, outside lags-operational) 4) political pressure (huge role in passing a law) 5) must be coordinated with monetary policy 6) often offset by local and state governments 7) concerns over impacts on deficit and debt
51
Recession
Any time real output
52
CEA
council of economic advisors
53
Changes that occur without congressional action
Non-discretionary or automatic
54
Budget deficit
Government spending in excess of tax revenues
55
Budget surplus
tax revenues in excess of government spending
56
Net taxes=
tax revenue-(transfers and subsidies)
57
Built in stabililzer
anything that increases the government's budget deficit or reduces surpluses
58
Tax rate=
Tax revenue/GDP
59
Relationship between GDP and taxes in a progressive tax system
tax rate rises with gdp
60
Relationship between GDP and taxes in a proportional tax system
tax remains constant
61
Relationship between GDP and taxes in a regressive tax system
tax falls when gdp rises
62
An economy is more stable if the tax system is..
progressive

AP Econ (15 decks)

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