The One - Period Model Flashcards
An increase to Government Spending within the One - Period Model will result in…
Results in a negative income effect. Increased government expenditure must be financed by an increased taxation on the consumer. This consequently leaves the consumer financially worse off - as it decreases consumption and leisure, thus resulting in a downward shift in the PPF.
What is meant by ‘Pareto Optimum’?
This makes the representative consumer as well off as possible, given what is currently available and feasible within that economy.
The One - Period Model represents a simplistic closed economy model, but what 2 factors does it trade off?
There is a trade-off between leisure and production. If leisure increases that must imply the labour hours supplied onto the labour market falls - therefore resulting in a decrease to the total output supplied.
What should we expect to see if TFP (Total Factor Production) increases?
An increase to TFP results in an upward shift to the PPF curve. Increased production must also offset increases to both Consumption and Leisure; meaning both C and L undertake an upward shift - making the consumer better off.
What does the ‘Laffer Curve’ show?
It shows the relationship between tax rates and the amount of tax revenue collected by governments.
Can the pareto optimum be achieved within an economy that utilizes distortional taxation?
No. This point is not feasible as the linear budget constraint prevents the economy from producing at the max point on the PPF. The economy can produce close to the pareto optimum while distortional taxation is present - but cannot achieve it.
What is the most realistic point on the ‘Laffer Curve’ that an economy will expereince?
No set point, varies by economy but most economies lie on the left hand side of this graph - low tax rate but
generates a substantial income to generate
government expenditure.
Where does the competitive equilibrium point occur?
This is where the indifference curve is tangent to the PPF
In a one period economic model, the government budget constraint requires that government spending
= Taxes
In response to an increase in total factor productivity
The substitution effect suggests that hours worked should increase while the income effect suggest that the hours worked should decrease
If the government replaces a lump sum tax with a proportional labor income tax, then…
Then both employment and output will decrease - as their is less incentive to work, meaning that the labour hours supplied will decrease; thus decreasing productivity.
