Econ 102 2nd Midterm – Flashcards
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Increase in the minimum wage will
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increase structural unemployment
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Per-worker function
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relationship between real GDP per hour worked and capital per hour, holding the level of technology constant....Exhibits diminishing returns to capital
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When business taxes increase, the equilibrium interest rate will _____
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decrease
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Potential GDP is
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sometimes greater, sometimes less, and sometimes equal to actual real GDP
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If the government runs a deficit, what impact will this have on the loanable funds market
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the supply of loanable funds will decrease
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Real Interest
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Nominal-Interest Rate
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Decreased optimism about the future will
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shift left the aggregate demand line
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The aggregate demand and aggregate supply model explains
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short-run fluctuations in real GDP and the price level
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The value of the multiplier is larger when
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the value of the MPC is larger
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Curve showing the relationship between the price level and the level of aggregate expenditure in the economy
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Aggregate Demand
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An unexpected change in the price of oil is called
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a supply shock
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What is true about the basic or static aggregate demand and aggregate supply model?
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The economy does not experience long-run growth
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The notion that future growth in the US is unlikely to match up to growth that we have become accustomed to is called
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Secular Stagflation
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What is an example of a growth policy?
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Infrastructure investment
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How do we measure long-run economic growth?
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GDP per capita.......Real GDP/Population
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Why does GDP per capita rise?
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Improved products and services economic prosperity and leisure trends in hours of paid/unpaid work
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Growth Rate (% Change in GDP)
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(x2-x1/x1) x100
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Average Growth Rate
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x1+x2......../n
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Rule of 70
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Way to see how long it takes to double real GDP/capita 70/(% growth rate)
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Private Savings
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after tax income Sprivate=Y+TR-C-T
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Public Savings
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T-G-TR
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TR
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Transfers (social security)
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Total Savings (Same as Investment)
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Y-C-G
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Market for loanable funds
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Demand shifts: based on economy (cycle) Supply Shifts: based on government spending (less in deficit)
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Crowding out
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decline in private expenditures as a result on increases in government purchases
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Rate of long run growth is determined by
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labor productivity growth
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Labor Productivity
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the quantity of goods and services that can be produced by one worker in one hour of work
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2 Major Factors in Influencing Labor Productivity
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1) Increases in capital per hour worked 2) Improvements in technology
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Catch-up theory
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poor countries GDP/capita grows faster than rich countries
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Why is there low growth in poor countries:
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1) Government 2) Corruption 3) Poor education 4) Low rates of investment and trading
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How to avoid Corruption:
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The Rule of Law Property Rights
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Benefits of Globalization
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Foreign Help: direct investment, portfolio investment
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Growth Policies
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1) Promote Technological Progress- Intellectual Property, Research, Inventions 2) Subsidize Education- better workers 3) Infrastructure Investment- highways etc 4) Encourage Savings/Investment- incentives, remove barriers to international capital flow
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Labor Force
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Employed and unemployed
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Unemployed
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no job, actively looking for one
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Not included in labor force
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Full time students, retired people, available but not looking
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Unemployment Rate
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Unemployed/Labor Force
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Types of Unemployment
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1) Frictional-- short term, moving jobs 2) Structural-- arises from persistent mismatch between skills and jobs 3) Cyclical-- due to the business cycle
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Full employment
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0% Cyclical... Just Frictional+ Structural
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CPI
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(Expenditure in current year/ Expenditure in base year)x100 Price current yearxQbaseyear
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Substitution Bias
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consumers may change purchasing habits on goods if prices change
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Real Interest Rate
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Nominal-Interest rate
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What affects the level of investment?
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1) Expectations in future profitability 2) Interest Rates-- higher IR, lower investment spending 3) Profits- Most money, more investment spending
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Autonomous Expenditures
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1) Investment 2) Gov Spending 3) Net Exports
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Government Spending
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normally increased over time
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Determinants of Consumption
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Disposable income, Household wealth, expected future income, interest rate, price level
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Consumption Function
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Relationship between disposable income and consumption
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Marginal Propensity to consume (MPC)
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amount by which consumption spending changes when DPI changes MPC= (change in consumption/change in DPI) If: DPI goes up by 10 billion, consumption goes up by 10 billion`
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Aggregate Expenditure
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total planned spending C+Ip+G+NX Ip= planned investment
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Planned Investment
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Does not include the build up of inventories PI= Actual Investment-Unplanned change in inventories
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IF: AE=GDP
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Inventories are unchanged Equilibrium
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IF: AE< GDP
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Inventories Rise Producers will produce less
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AE>GDP
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Inventories fall Produce more
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Multiplier Effect
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An increase in autonomous expenditure shifts the AE line upwards Real GDP increases by more than the change in autonomous expenditure Change in Real GDP/ Change in Autonomous Expenditure 1/(1-MPC)`
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Paradox of Thrift
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What appears favorable in the long run, might be detrimental in the short-run
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The Aggregate Demand Curve
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As D increases: Production increases, and Price increases
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Price Level Effects AE in 3 Ways
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1) Consumption-- Price Level rises, wealth falls, consumption falls 2) Investment--Price level rises, Investment falls 3)NX-- Price level rises, Nx falls
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What type of relationship do price level and real GdP have
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inverse
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Aggregate Supply
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2 Curves: short-run, long run
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Aggregate Demand Shifts in curve
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1) Changes in gov policy Monetary- interest rates (IR falls, Investment rises, consumption rises) Fiscal-- taxes and spending (Taxes rise, consumption falls, investment falls) 2) Changes in expectations of households and firms -More optimistic (C rises, Investment rises) 3) Changes in foreign variables -Foreign Recession (Decrease in demand, NX falls) - Dollar gets stronger (Decrease in demand)
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LRAS
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Vertical Line
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SRAS Shifts
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Caused by: 1) Availability of factors of production- size of labor force increases, SRAS increases 2) Changes in tech 3) Changes in future price expectations 4) Changes in prices of imported resources (OIL) - Oil Prices decreases, SRAS increases
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Macroeconomic Equilibrium
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IF Y1 is below potential= SRAS shifts out Y1 is above potential= SRAS shifts in Rise in oil prices= SRAS Shifts in
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Stagflation
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inflation and recession happened in the 70s with the oil crisis
