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Ec108 - Macro > The Goods Market > Flashcards

The Goods Market Flashcards

1
Q

When economists think about year-to-year movements in economic activity, they focus on

A

the interactions among production, income, and demand

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2
Q

1) changes in the demand for goods lead to changes in

A

production

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3
Q

2) changes in production lead to

A

changes in income

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4
Q

3) changes in income lead to

A

changes in the demand for goods

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5
Q

demand for goods Z =

A

Z = C + I + G + X - IM

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6
Q

In a closed economy

A

X = IM = 0

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7
Q

Closed economy Z =

A

Z = C + I + G

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8
Q

Composition of GDP: Consumption

A

goods and services purchased by consumers

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9
Q

Composition of GDP: Investment

A

the sum of non-residential investment and residential (houses) investment

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10
Q

Composition of GDP: Government spending

A

purchases of goods and services by the federal, state, and local governments; excluding government transfers

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11
Q

Composition of GDP: Exports

A

purchases of US goods and services by foreigners

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12
Q

Composition of GDP: Imports

A

purchases of foreign goods and services by US consumers, US firms and the US government

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13
Q

Composition of GDP: Net exports or trade balance

A

trade surplus: exports > imports
trade deficit: imports > exports

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14
Q

Composition of GDP: inventory investment

A

products made but not sold

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15
Q

% consumption in GDP 2014

A

68.3%

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16
Q

Consumption is a function of

A

disposable income (YD), which is the income that remains once consumers have received government transfers and paid their taxes

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17
Q

the consumption function

A

a behavioural equation that captures the behaviour of consumers

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18
Q

Consumption function is

A

a linear relation with two parameters, c0 and c1

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19
Q

Keynesian consumption function

A

C = c0 + c1YD

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20
Q

c1 in Keynesian consumption function

A

marginal propensity to consume, or the effect of an additional dollar of disposable income on consumption with 0 < c1 < 1

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21
Q

c0 in Keynesian consumption function

A

what people would consume if their disposable income equals zero with c0 > 0

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22
Q

Changes in c0 reflect

A

changes in consumption for a given level of disposable
income

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23
Q

Consumption increases with disposable income but

A

less than one for one (shallow gradient)

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24
Q

disposable income is

A

Yd = Y - T

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25
T in disposable income is
taxes minus government
26
endogenous variables
variables depend on other variables in the model
27
exogenous variables
variables not explained within the model but are taken as given instead
28
investment =
I = I (bar)
29
bar on investment means
investment is a given
30
G and T describe
fiscal policy - the choice of spending taxes by the government
31
reason 1 why G and T are exogenous
governments do not behave with the same regularity as consumers or firms
32
Reason 2 why G and T are exogenous
we will typically treat G and T as variables chosen by the government and will not try to explain them within this model
33
Determination of Equilibrium Output step 1
Assume X = IM = 0 (closed economy), so Z = C + I + G
34
Determination of equilibrium Output step 2
Replacing C and I from equations (3) and (4) Z = c0 + c1 (Y - T) + I(bar) + G
35
Determination of Equlibrium Output step 3
Equilibrium in the goods markets requires Y = Z
36
determination of equilibrium output step 4
Replacing Z in (6) by equation (5) gives Y = c0 + c1 (Y - T) + I(bar) + G
37
determination of equilibrium output step 5
In equilibrium, production (Y ) is equal to demand, which in turn depends on income (Y ), which is itself equal to production
38
first tool macroeconomists use
algebra to make sure that the logic is correct
39
second tool macroeconomists use
graphs to explain the results
40
third tool macroeconomists use
words to explain the results
41
To characterise equilibrium output in algebra step 1
Rewrite equation (7) Y = c0 + c1Y - c1T + I(bar) + G
42
To characterise equilibrium output in algebra step 2
Reorganize the equation (1 - c1) Y = c0 + I(bar) + G - c1T
43
T o characterise equilibrium output in algebra
Y = (1/(1 - c1))(c0 + I + G - c1T i)
44
autonomous spending
(c0 + I + G ¡ c1T) is the part of the demand for goods that does not depend on output
45
autonomous spending is positive because
if T = G (balanced budget) and c1 is between 0 and 1, then (G - c1T) is positive, and so is autonomous spending
46
multiplier
The term 1/(1 - c1) r, which is larger than 1 as 0 < c1 < 1.
47
the multiplier is larger when
c1 is closer to 1
48
an increase of consumption will increase output by
multiplier * consumption increase
49
To characterise the equilibrium graphically step 1
Plot production as a function of income. Because production equals income, their relation is the 45-degree line
50
to characterise the equilibrium graphically step 2
Plot demand as a function of income Z = (c0 + I(bar) + G - c1T) + c1Y
51
to characterise the equilibrium graphically part 3
in equilibrium, production equals demand
52
equilibrium output is determined by the condition that
production is equal to demand
53
if c0 increases by $1 bil, an increase in autonomous spending has a ________- effect on equilibrium output
more than one-for-one
54
pattern to get to equilibrium after demand shifts up
first round increase in demand -> first round increace in production -> second round increase in demand -> second round increase in production
55
the total increase in production after n+1 rounds is
a geometric series with a limit of 1/(1 - c1) which is the multiplier
56
equilibrium output in words 1
Production depends on demand, which depends on income, which is itself equal to production
57
equilibrium output in words 2
an increase in demand leads to an increase in production and income which in turn leads to a future increase in demand
58
equilibrium output in words 3
the increase in output is larger then the initial shift in demand, by a factor equal to the multiplier
59
equilibrium output in words 4
The multiplier depends on the propensity to consume, which can be estimated using econometrics – the set of statistical methods used in economics
60
dynamics of adjustment
the adjustment of output over time
61
how long the adjustment takes depends on
how and when firms revise their production schedule
62
John Maynard Keynes articulated an alternative model that focuses instead on ...
investment and saving in the General Theory of Employment, Interest and Money in 1936
63
Private saving (S) is
S ≡ YD - C S ≡ Y - T - C
64
by definition public saving =
T - G
65
budget surplus
public saving >0
66
budget deficit
public saving < 0
67
Generating IS relation step 1
In equilibrium Y = C + I + G
68
Generating IS relation step 2
Subtract T from both sides and move C to the left side Y - T - C = I + G - T
69
Generating IS relation step 3
The left side of the equation is simply S, so S = I + G - T
70
Generating the IS relation step 4
Or equivalently I = S + (T - G)
71
Two equivalent ways of stating the condition for equilibrium in the goods market
production = Demand investment = saving
72
Algebra of output equilibrium using IS relation step 1
Because consumption behaviour implies that S = Y - T - C = Y - T - c0 - c1(Y - T) Rearranging terms, so S = -c0 + (1 - c1) (Y - T)
73
marginal propensity to save
1 - c1 between zero and 1
74
Algebra of output using IS relation step 2
In equilibrium, I = S + (T - G), so that equation (10) becomes I = -c0 + (1 - c1)(Y - T) + (T - G)
75
Algebra of output equilibrium using IS relation step 3
Solve for output Y = (1/(1 - c1)) [c0 + I + G - c1T]
76
Algebra of output equilibrium using IS relation step 4
this is the same as equation (8) where I = I(bar)

Ec108 - Macro (2 decks)

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