Week 6 Flashcards
When is a good excludable according to economists?
When a person can cheaply be prevented from using a good, economists say the good is excludable.
When is a good nonexcludable according to economists?
When a person cannot be cheaply prevented from using a good, economists say the good is non-excludable. Jeans are excludable; asteroid deflection is nonexcludable.
When is a good considered nonrival?
When one person’s use of a good does not reduce the ability of another person to use the same good, economists say the good is nonrival.
Whats the difference between private goods and public goods?
Private goods are excludable and rival.
Public goods are nonexcludable and nonrival.
What is a free rider?
A free rider enjoys the benefits of a public good without paying a share of the cost?
What are forced riders?
Some people want more national defense, some people want less, and pacifists want none. So, taxation means that some people will be turned into forced riders: they must contribute to the public good even though their benefits from the public good are low or even negative.
What part of the total amount of public goods produced should be produced by the government?
In principle, the government should produce the amount that maximizes consumer plus producer surplus or the total benefits of the public goods minus the total cost.
Explain club goods
Club goods are goods that are excludable but nonrival.
Explain common resources
Common resources are goods that are non-excludable but rival
Name the four types of goods
- Private Goods
- Common Resources
- Club Goods
- Public Goods
What does the aggregate demand curve tell us?
The aggregate demand curve tells us all the combinations of inflation and real growth that are consistent with a specified rate of spending growth.
Explain the Solow growth rate
The Solow growth rate is the rate of economic growth given flexible prices and the existing real factors of capital, labor, and ideas.
What is the RBC model?
Real business cycle
a way of thinking about business fluctuations often called the “real business cycle” model
In this model, the equilibrium inflation rate and growth rate are determined by the intersection of the AD and LRAS curves
Name a reason behind why growth rate fluctuates
One reason that the growth rate fluctuates is that economies are continually being hit by shocks, which shift the Solow growth rate
What is an aggregate demand shock?
An aggregate demand shock is a rapid and unexpected shift in the aggregate demand curve
Explain the phenomenon behind menu costs
Economist call the costs of changing prices menu costs because an obvious example is the costs of printing new menus when a restaurant changes its prices.
Name solutions to the tragedy of the commons
Command and control and, more recently, tradable allowances have been used to solve the tragedy of the commons problems.
What can be understood under ‘tragedy of the commons’?
The result of non-excludability and rivalry is often the tragedy of the commons: overexploitation and under maintenance of the common resource.
Name positive shocks that shift the aggregate demand curve
- A faster money growth rate
- Confidence
- Increased wealth
- Lower taxes
Name negative shocks that shift the aggregate demand curve
- A slower money growth rate
- Fear
- reduced wealth
- higher taxes
The government has two kinds of fiscal policy used to fight a recession. Name them
- The government spends more money
- The government cuts taxes, giving people more money to spend
Explain the multiplier effect
The additional increase in aggregate demand caused when expansionary fiscal policy increases income and thus consumer spending
Explain The Ricardian Equivalence
A tax cut opens the possibility of a special type of crowding out. When Ricardian equivalence holds, a tax cut doesn’t increase aggregate demand even in the short run.
What does crowding out mean?
When increased government spending comes at the expense of reduced private spending, we have the phenomenon of crowding out
Whats hte biggest problems with government spending as a boost to aggregate demand?
Most changes in government spending are not very large in the short run. If changes to government spending are not large in the short run, the boost to aggregate demand won’t be very large either
Name the list of relevant lags in government expenditure;
- Recognition lag
- Legislative lag
- Implementation lag
- Effectiveness lag
- Evaluation and adjustment lag
What are automatic stabilizers
Some kinds of fiscal policy are built right into the tax and transfer system, and they do take effect without significant lags
What are the differences between government spending and tax cuts?
The main difference is that a tax cut or tax rebate puts more spending in the hands of the private sector, while an increase in government spending puts more spending in the hands of the government.
When might fiscal policy make matters worse?
If expansionary fiscal policy is paid for by borrowing, taxes will rise in the future.
When is Fiscal Policy a good Idea?
When the government faces some immediate emergency, such as a war, a worsening depression, or a natural disaster.
Government spending is best for the macro economy when it is worth incurring some long-run costs to get a sort-run economic boost
Define Business fluctuations
Fluctuations in the growth rate of real GDP around its trend growth rate
Define a Recession
Significant, widespread decline in real income and employment
Define Inflation
Measure of the change in the underlying currency
How to calculate inflation rate?
((P2-P1)/P1)) x 100
Percentage change in a price index from one year to the next
P2 index value in year 2 and P1 index value in year 1
Whats the formula of quantity identity of Money (Irving Fisher)
M x v = P x Yr
- Money supply = M
- The velocity of Money = V
- Price level = P
- Real GDP = Yr.
M x V is the total amount spent on final goods and services and P x Yr is the price level times real GDP – Equals nominal GDP
Explain the AD/ AS Model
Aggregate Demand and Supply Model
Consists of three curves:
- The aggregate Demand Curve (AD)
- The Long-Run Aggregate Supply Curve (LRAS)
- The short-run aggregate supply curve (SRAS)
Shows how unexpected economic shocks can temporarily increase or decrease the rate of growth
Define the Aggregate Demand Curve
Shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth
Define The short-run aggregate Supply curve
Shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky
What are the limitations of fiscal policy
Difficult to time and dose fiscal policy so that aggregate demand shifts at the right moment by the right size
Name 3 Obstacles to Climate Policies
- Risk of stranded assets
- Time scale and hedging climate risk
- Leakage and green paradox effects government regulations will encourage firms to relocate
Define the Green paradox:
Companies want to be quick in burning fuels because it is not sustainable. They want to burn these fuels whilst they are still valuable. This speeds up the climate issues
Define Carbon offset:
A reduction in emissions of carbon dioxide made in order to compensate for emissions made elsewhere
