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Macroeconomic > National Income Determination > Flashcards

National Income Determination Flashcards

1
Q

Business Cycles

A

They are economic-wide fluctuations in total national output, income, and employment usually lasting for a period of 2 to 10 years marked by widespread expansion or contraction in most sectors of the economy.

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2
Q

Two main phases of business cycles

A
  1. Prosperity

2. Depression

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3
Q

All the phases of the business cycle

A
  1. Expansion
  2. Peak
  3. Recession
  4. Trough
  5. Recovery
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4
Q

Expansion

A

There’s an increase in various economic factors such as production, employment, output, wages, profit, demand and supply of products, and sales.

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5
Q

Peak

A

Increase in growth rate of business cycle achieves its maximum limit

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6
Q

Recession

A

Is a recurring period of decline in total output, income, and employment lasting usually from 6 months to a year and marked by widespread contractions in many sectors of the economy.

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7
Q

Trough

A

Economic activities of a country decline below the normal level. Growth rate becomes negative and there is a rapid decline in national income and expenditure.

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8
Q

Characteristics of recession

A
  1. Sharp contraction in consumer spending
  2. Fall in labour demand
  3. Fall in inflation rate
  4. sharp falls in business profits
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9
Q

Two main theories of business cycles

A
  1. Exogenous

2. Internal.

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10
Q

Exogenous sources of business cycles

A

They’re factors outside the economic system that lead to economic fluctuations, eg. Elections, pandemic, oil price shocks, wars

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11
Q

Internal sources of business cycles

A

They’re the factors within the economic system that generate expansions and contractions

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12
Q

[T/F] Business cycles may also be induced by aggregate demand or aggregate supply

A

True

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13
Q

[T/F] Demand-induced business cycles result from fluctuations in aggregate demand

A

True

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14
Q

[T /F] Supply-induced business cycles result from shocks to production that leads to fluctuations in economic activity.

A

True

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15
Q

Aggregate demand

A

Total quantities of goods and services demanded by households, firms, governments, and the external sector at various price levels

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16
Q

Mathematically, Aggregate demand is

A

AD = C^d + I^d + G + NX

where C^d = desired consumption
I^d= desired investment

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17
Q

Main determinants of consumption

A
  1. Current income
  2. Future income
  3. Wealth
  4. Interest rate
  5. Taxes
18
Q

The Keynesian Consumption Function

A

Expresses consumption as a function of current disposable income

C= a + BY^d

Y^d is disposable income
a is autonomous consumption
B is marginal propensity to consume

19
Q

Autonomous consumption

A

It is the level of consumption that does not depend of income

20
Q

Marginal Propensity to Consume

A

Measures the change in consumption per unit change in income.

21
Q

Properties of the Keynesian Consumption Function

A
  1. MPC is constant

2. Average Propensity to Consume decreases with income. [see notes]

22
Q

Factors that determine investment

A
  1. The user cost of capital (real interest rate)
  2. Business expectation about the future prospects of the economy
  3. Taxes
  4. Investment tax credit
23
Q

The Keynesian Savings Function

A

[- a + (1 - B) Y^d]

-a is autonomous dissaving
(1 - B) is marginal propensity to save.

24
Q

Investment tax credit

A

An amount that businesses are allowed by law to deduct from their taxes, reflecting an amount they reinvest in themselves

25
Q

Net exports depends on

A
  1. Domestic income
  2. Foreign income
  3. Real exchange rate
26
Q

The real exchange rate

A

The real exchange rate measures the price of foreign goods relative to the price of domestic goods.

27
Q

Mathematically, real exchange rate is

A

The ratio of a foreign price level and the domestic price level, multiplied by the nominal exchange rate.

28
Q

Fiscal policy

A

Refers to the changes in the level of government spending and/or taxes meant to influence the level of economic activity.

29
Q

Types of fiscal policy

A
  1. Expansionary policy (fiscal loosening)

2. Contractionary policy (fiscal tightening)

30
Q

Expansionary policy (fiscal loosening)

A

refers to increases in government spending or reduction taxes

31
Q

Contractionary policy (fiscal tightening)

A

Refers to increases in government taxes and/or reduction in government spending. Fiscal austerity

32
Q

Austerity

A

A set of economic policies a government implements to control public sector debt.

33
Q

Output (GDP) Gap

A

The difference between what the economy could have produced and what actually is produced thus, potential output minus actual output

34
Q

If output gap is positive i.e potential GDP is greater than actual GDP

A

We have recessionary gap

35
Q

If output gap is negative i.e potential GDP is less than Actual GDP

A

We have inflation gap

36
Q

If output gap is zero i.e potential GDP is equal to actual GDP

A

We have full employment

37
Q

Major goal of fiscal policy

A

Is to stabilize actual output close to the potential output

38
Q

[T /F] If actual output is greater than potential output (inflationary gap), contractionary fiscal policy can be used to reduce output to potential output

A

True

39
Q

[T /F] If actual output is less than potential output (recessionary gap), expansionary fiscal policy can be used to increase output to the full employment output

A

True

40
Q

Automatic stabilizers

A

In-built fiscal mechanisms within an economy that dampens effects of fluctuations in aggregate demand on actual output. Example, unemployment insurance

41
Q

Crowding out

A

Refers to offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduce investment spending.

Macroeconomic (3 decks)

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