Section I.B.2 Economics Flashcards
What is Marginal utility?
Concept that value increases for each unit of consumption up to a point at which value begins decreasing for each additional unit consumed
Who was John Maynard Keynes?
(1883-1946)
A British economist known for his work in macroeconomic theory and business cycles. Keynes refuted neoclassical economics theories that suggest free market forces would effectively correct or manage swings in cycles and unemployment.
Keynesian economics theory suggests that in the short-run, economic productivity is highly impacted by aggregate demand (spending) and this demand is not equal to the capacity of an economy. Especially in times of recession, the economy is influenced by myriad factors that can cause economic and financial disruptions. Hence, government intervention is necessary to correct these short-run inefficiencies.
What is the law of demand?
There is an inverse relationship between the price and quantity demanded. Ex. The higher the price will result in less demand. A lower price will result in a higher demand.
What is the law of supply?
There is a positive relationship between the price and quantity supplied. Ex. A higher price will result in a higher supply. A lower price will result in a lower supply.
What is elasticity?
The measurement of how demands changes based on incremental changes in price.
There ratio of change (in percentage) in the quantity to the change in the price.
Substitute good are similar, comparable b goods that may satisfy consumer demand is prices rise
Complimentary good add value to the consumer when used in tandem. These range from strong to weak.
How do you calculate elasticity of demand?
% change in quantity demanded
/
% change in price
What are demand-side Policies?
Fiscal policy - the government’s spending and taxing actions
Monetary policy - manipulation of the money supply
What are supply side policies?
Goal: to create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop goods.
Supply-siders focus on how tax policy can be used to improve incentives to work and invest.
What does monetary and fiscal policy do?
- role of central banks
- interest rates determination of nominal and real
- yield spreads and the yield curve
- velocity of money
- taxation
- government spending
What is monetary policy?
Includes actions by a country’s central bank intended to accomplish it’s core objectives to maximize employment, promote stable growth and acceptable levels of inflation.
Central banks enact monetary policy by controlling the money supply through open market operations, setting the discount rate and reserve requirements.
What is fiscal policy?
It is often used to describe a government’s ability to manager or control government spending and revenue generating (tax) policy.
The impact of a government’s fiscal policy can be seen in a number of ways including personal consumption (spending) and saving, debt levels, business investment, exchange rates, etc.
Expansionary fiscal policy (e.g., tax reduction, government spends on infrastructure and capital projects, etc.) is often used to encourage growth and risk-taking.
Contractionary fiscal policy (e.g. tax increases, government budget cuts, etc.) Is often used to slow down growth to avoid excess inflation or bubbles.
What is the role of central banks?
A government or quasi-governmental entity responsible for overseeing a country’s monetary system.
Goals may include controlling inflation, stabilizing the local currency, and maintaining full employment.
Activities may include issuing currency, regulating credit, bank oversight, serve banking needs of the government, act as lender of last resort, and manage exchange reserves.
What are yield spreads?
The difference in yield percentage between two debt instruments or categories of debt.
What happens to spreads during periods of uncertainty and fear?
They typically widen
What is the yield curve?
Graphical illustration of the relationship between yields and maturities
A normal yield curve is upward sloping due to higher yields for longer maturities
Information on expected future short-term rates can be implied from the yield curve
Expectations of a rise in short-term rates and an increase in the liquidity premium are examples of situations likely leading to an increase in the yield curve.
A flat or inverted yield curve may indicate a recession is forthcoming (there is historical evidence tonsupport this theory, but recession is not a certain outcome).
