Unit 4 Flashcards
HW questions
Definition: Deficit
The yearly difference when government spending exceeds government revenue
Which factor do Keynesians consider the most important in the Investment Decision
Expectations
What is the Keynesian view of Investment?
Generally Unstable
Based on your answer in the last question, which of the following are the reasons why?
- The large number of factors involved in the Investment Decision
- Changes in expectation
If “I” decreases by 165 and “G” increases by 406, given an MCP = 0.8 what would be the change in GDP?
Net Δ x (1/ 1-mpc) = Δ GDP
Net Δ= ΔI+ ΔG
What are the 3 demands for money according to Keynesians? Which is the most important
- Transaction
- Precautionary Money(Emergency)
- Assets*
Which of the following are or could be a problem of the deficit/debt that we discussed in class?
I. Inflation may increase
II. Interest rates may increase
III. The U.S. will go bankrupt
- Inflation may increase
- Interest rates may increase
What Chain of Logic generally represents the Crowding-Out Effect?
G↑/T↓→ i↑→ I↓
The truth about the false trade-off, according to Monetarist is?
Economic Security comes from Economic Efficiency
What is the false trade- off the Monetarists believe modern market economics have accepted?
Give up Economic Efficiency for Economic Security
What are the two Monetarist’s views of government policies?
- Many are wrong from the start
- If the policy is correct it will take too long to work
What is the Monetarist view of competition and what did competition do for the economy?
Favor more competition, increases economy efficiency
What is the #1 economic problem, according to Monetarist?
Inflation
Which of the following statements are true?
I. A structural deficit can be due to the government cutting taxes
II. If a deficit exist and the economy is at Full Employment it is called a structural deficit
III. A cyclical deficit is not mainly due to a drop in government revenues during a recession
- A structural deficit can be due to the Gov cutting taxes
- If a deficit exists and the economy is at Full Employment it is called a structural deficit
Pragmatist Monetarist believe that…
M should be used to counteract bad economic policies of the President/ Congress
How do Imports and Exports change/ shift the Consumption Function when added?
Exports shift it up, Imports lower the slope(rotate it flatter)
Explain the Multiplier Effect (Chain-of-Logic with numbers)
Auto C↑→ GPD↑→ C↑→ GPD↑→ C↑→ GPD↑
$100B→ $100B→ $90B→$90B→$80B→$80B
Explain how Keynesians believed that monetary policy worked in theory?
- In an Expansion (Inflation) * policy works
MS ↓ → i rate ↑ →slow growth of “I”→ reduce multiplier effect→ slow the growth of GDP
In a Recession (unemployment) - policy likely doesn’t work
MS↑→ i rates↓→ “I” ↑ → set of possible multiplier effect→ GDP↑
Explain how foreign trade is supposed to work?
I (U.S.) ↑ → GDP (U.S.) ↑ → M (U.S.) ↑ → X(W) ↑ → GDP(W) ↑ → M(W) ↑ → X(U.S.) ↑ → GDP(U.S.) ↑…(cycle)
Investment decisions
Classical and objective
1. Interest rate
2. Rate of return
Keynesian and subjective
3. Expectations (view of future)(I for future)
4. Excess capacity (unused production)
5. Technology
- most important
Foreign sector
x (exports)
- are autonomous to GDP
x has the same multiplier effect as auto c, I or G
Foreign sector
m (Imports)
- are ties to GDP
- reduce the multiplier
MPM
margina propensity to import
the part of every dollar spend on imports
Structural Deficit
Government spending exceeds government revenue when the economy is at Full Employment
Cyclical Deficit
Government spending exceeds government revenue when during recession government revenue falls as a result of less people working and firms generating less profit/ automatic stabilizers increase spending