preliminaries and the Keynesian cross Flashcards
what are the factors of production?
all resourceses used in the production of goods and services. they are labour, capital , land and enterprise
what is the circular flow of income and spending?
there are two actors: firms and households. households provide the labour to the firms in exchanged for goods and services. firms pay the households with labour which they then use to spend on the goods.
what is the aggregate output?
the total value of all goods and services produced by firms.
how can you calculate the aggregate output?
by adding up total income or total expenditure. this is due to one persons expenditure being anothers income
what are the three withdrawels from the circular flow?
1) people save - as people save part of their income, this is not spent on consuming goods
2) governments levy taxes - income is reduced by taxation so less is spent on consumption
3) people buy foreign goods- income is spent on foreign goods therefore demand for domestic decreases
what are the three injections into the circular flow?
1) firms invest - money is spent in the domestic economy and this is usually financed from savings
2) government spending - governments spend the money from taxation into the economy with public consumption or investment
3) exports - foreign individuals may spend their income on our goods providing increase to our economy
if investment is understood to include inventory changes then what does this mean for the injections and leakages and why?
it will mean that the injections will be equal to the leakages. this is due to the fact that if demand falls short of supply then the firms will be forced to demand their own goods and add them to their inventory stock. if supply falls short of demand then the demand will just be left unsatisfied or they will provide the preexisting stock. that means that investment will always be high enough or low enough to force injections to be equal to withdrawels
what is money
anything that the sellers generally accept as payment for goods and services
what is the quantity equation for the quantity theory of money?
M x V = P x Y
what factor is constant in the quantity theory of money?
the velocity of money is constant
how does the quantity equation explain inflation?
as the velocity of money is constant then if the money supply increases faster then the real incomes grows then the price level must increase causing inflation
what is the aggregate supply curve?
it indicates how much output firms are willing to produce at various price levels
what is the government budget?
it is primarily a planning instrument. in hindsight it breaks down government receipts and expenditures and shows how deficits are being financed.
what is the balance of payments?
it is a record of a countrys trade in goods, services and financial assets with other countries
what is the central bank?
a government agency primarily responsible for supplying the economy with the right amount of money
what are the two purposes of the balance of payments?
it adds detail to the general notion of imports and exports but also traces how any given imbalance between exports and imports are being financed
what is the formula for government debt?
government spending - government taxation = government debt owed to private sector + government debt owed to the public sector
what are the three parts of the balance of payments?
there is the capital account,, the current account and the official reserve account
what does the balance of payments equal?
the balance of payments always equal 0
what is the current account?
the current account records the goods, services and transfers into and out of the country. it measures the net demand for domestic currency which results from the net sales of domestically produced goods and services to the world, plus cross border income flows and transfer payments.
what can the currenrt account be approximated too?
the net exports - the net imports
what is the capital account?
it records the flow of financial assets into and out of the country. it registers the net demand for the domestic currency which results from the net sales of domestic bonds and other assets to foreigners
what can the capital account be approximated to?
assuming that F is the net foreign assets ( foreign assets held domestically - domestic assets held foreignly) then the CP = - change in F
what is the offical reserve account?
it records the purchases and sale of foreign currency by the central bank. it measures the net demand for the domestic currency which the purchase or sale of currency reserves held by the central bank constitutes
how can the official reserve account be approximated quantitatively?
if the RES denotes the central banks foreign currency reserves then the OR = - change in RES
what is a model?
a simplified or logically coherent story that links economic variables like consumption and taxes to each other
what are empiracle tests?
they are confrontations of hypotheses derived from models with real world data or events. they serve to gauge whether a model is useful or not.
what are institutions?
they are economic political or legal structures within which individuals operate. examples are formal organisations, written law or informal customs and norms
how do institutions affect economic theories?
due to the large impact that institutions have on the economy, economists will now have to apply heightened sensitivity to which policies to be put in place in relation to the institution. for example one policy that is successful in the europe labour market may fail in the united states.
what is a steady- state income?
it is the level of income that is generated if all factors of production are being used at normal rates and if the economies capital stock is at its long run equilibrium level
what is the potential income?
it is the income that can be produced with the current labour and capital. the capital stock may or may not have reached its equilibrium level
what is the buissness cycle?
the buissness cycle refers to recurring fluctuations of income relative to potential income. a boom describes rising incomes (relative to potential income) and a recession describes declining incomes (relative to potential incomes)
what is the formula for aggregate (Planned) expenditure?
consumption + planned investment + government expenditure + net exports
what is actual expenditure?
the sum of all categories of demand including unplanned investment
what is aggregate expenditure?
the sum of all planned or voluntary spending on domestically produced goods and services
what equation only holds in equillibrium?
actual expenditure= total income = aggregate expenditure
this is due to the planned investment always equaling the total investment when in equillibrium
what are net taxes?
gross taxes - transfers
what does the government spending in aggregate expenditure only represent?
it only represents the government purchases of goods and services
what is the marginal propensity to consume?
it says by how much consumption rises if incomes rise by one unit
what is the keynesian cross?
it is a diagram which plots planned expenditure against income and actual expenditure against income. equilibrium income obtains where both lines cross
what is the gradient of the actual expenditure curve in a expenditure against income diagram?
the gradient is equal to 1as the expenditure is always equal to income
what is the gradient of the planned expenditure curve in an expenditure against income diagram?
the gradient is postive but smaller than 1 since individuals do not want to consume all of their income but instead save some
where does the actual expenditure curve cross the axis?
it crosses through the origin
what type of equillibrium is the keynsian cross and why?
it is a demand side equillbrium as it assumes that the firms produce any amount of the goods that are demanded
what is the equation for the simple multiplier?
1/(1-c)
what is the effect on the keynsian cross of an increase in government spending?
it shifts the aggregate expenditure curve up by the amount of government expenditure. this will result in a greater actual expenditure and income equillibrium
what is the more complex multiplier?
1/ [ s(1-t) + t + m ] where c is rewritten as (1-s) and t is the tax rate , m is the marginal propensity to import
what occurs to the aggregate expenditure curve when you decrease the tax rate?
the aggregate expenditure curve has a steeper gradient but the y intercept remains the same
what is the consumption per period equal to?
it is equal to the expected lifetime income divided by the expected remaining lifetime n
how does the consumption plan react to changes in the asset markets?
if your financial assets decrease in value, then you will adapt your consumption plan to be more modest
what occurs to the aggregate expenditure curve when the income rise is considered permanently?
the aggregate expenditure curve will be steeper and the multiplier effects will be larger
what occurs to the aggregate expenditure curve when the income rise is considered temporary?
the aggregate expenditure curve is small and so is the multiplier effect
what can booms and recessions be triggered by?
booms and recessions can be triggered by changes in government spending, booms and recessions abroad that affect our exports, changes in consumption or investment which are primarily caused by interest rate and tax rate
