Macroeconomics Flashcards
What are the 3 components of income to a closed economy
Consumption, investment, gov expenditure
What is a stock
A stock is a quantity measured at a point in time.
What is a flow
A ow is a quantity measured per unit of time.
What’s market clearing
An assumption that prices are exible, and adjust to
equate supply and demand.
Happens when prices are flexible rather than sticky
What’s the aggregate demand eqn
AD= C+I+G
What is a consumption a function of
Y-T
What is Investment a fn of
Interest rate
What is the Aggregate supply eqn
F(K,L)
Function of capital and Labour
Definition of consumption
The value of all goods and services bought by households
What is disposable income
total income minus total taxes
What is marginal propensity to consume (MPC)
The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.
It’s the slope of the consumption function C(Y-T)
What’s average propensity to consume (APC) and how does it change with increasing income
A ratio of total consumption to total disposable income for different levels of disposable income It is calculated by dividing the amount of consumption by disposable income for any given level of income
It falls as income rises (more likely to save as income rises)
Difference between Keynes and Fisher models for consumption
Keynes: Current consumption depends only on current income.
Fisher: consumption depends on lifetime income, and people
try to achieve smooth consumption. (depends only on the present value of
lifetime income.)
What 8s the lifetime resources eqn
Wealth + years to retirement x annual income
W + RY
What is the smooth consumption eqn
Lifetime resources / lifetime years
What is the Life Cycle hypothesis
The LCH says that income varies systematically over the phases of the
consumers life cycle, and saving allows the consumer to achieve smooth
consumption.
For the Permanent income hypothesis, what is the income equation
Y= Yp + Yt
Permanent plus transitory income
What is the PIH consumption eqn
C= aYp
a > 0 is the fraction of permanent income that people consume per
year.
What’s the difference between the PIH and LCH
LCH: current income changes systematically as people move through their life
cycle.
PIH: current income is subject to transitory uctuations.
What is the basis behind the random walk hypothesis
based on Fishers model & PIH, in which forward-looking consumers base
consumption on expected future income
If PIH is correct and consumers have rational expectations, then consumption
should follow a random walk (i.e., a martingale): changes in consumption
should be unpredictable.
Consumption appears random as consumers have factored in
changes in permanent income, so the changes dont actually affect C.
What is the principle behind the consumption model of instant gratification
people are likely to not be perfect decision makers,
Save too little due to instant gratification of
consuming.
Gross investment
Total capital spending
Net investment
Gross investment minus an estimate for capital
consumption (replacement for depreciated goods)
What are the 3 components to the cost of capital
Interest cost
Depreciation
Capital loss (negative as capital gain reduces cost of capital)
Factors that affect levels of investment
Business confidence
Profitability
Public policies
Technological shocks
Inadequate financial systems
Name 4 types of gov spending
Current spending
Capital spending
Interest payments
Transfer payments
3 types of taxes
Direct taxes (on earnings) Indirect taxes (on expenditures) Wealth taxes (capital transfer)
Why don’t monopolists operate in inelastic demand section
As here the marginal revenue is negative
Equation for Lerner Markup Index and what is it a measure of
L = P - MC / P
Measure of Market power
Higher numbers is greater market power
Perfectly comparative firm L = 0
L = 1 monopoly power
Can also be written as - 1/demand elasticity. Less elastic demand implies more market power.
How does Lerner index correspond with price distortions
Higher Lerner markup index shows higher price distortion (due to low demand elasticity)
Define market power
The ability of a firm to profitably charge a price above the perfectly competitive levels
In perfect competition what is the long run price
P= marginal cost = min AC
In a monopoly what is relation between MR and MC
MR = MC when at optimal quantity (profit maximisation)
Why do monopolist firms only operate in elastic region
The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic
MR equation in terms of P and e
MR = P ( 1 + 1/e )
What is MPK
Marginal product of capital, the additional output as a result of an additional unit of capital.
Define the Gov spending multiplier and give it’s equation
The increase in spending resulting from a £1 increase in G
= MPC / 1 - MPC
What does MPC x ΔY equal
ΔConsumption
