Economics- Chapters 8 and 9 – Flashcards
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classical economics
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prior to 1930s; adam smith, invisible hand theory
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invisible hand theory
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let it be, self-correcting, price-wage flexibility
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say's law
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supply creates its own demand
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keynesian economics
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true focus on fiscal policy, price-wage inflexibility
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aggregate expenditures model
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spending model developed by john maynard kaynes
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private sector model
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C, Ig, G, Xn in relation to GDP
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no government, closed economy, no Xn, all savings is household, depreciation and net foreign factor equal zero
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what are the 4 assumptions for the private sector model?
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to create an aggregate expenditures model, C, Ig, G, Xn in relation to GDP
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what is the goal of the consumption and savings curves?
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AE=C+Ig+G+Xn
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formula for aggregate expenditures
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consumption model
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C in relation to DI
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savings model
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S in relation to DI
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consumption and savings
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what are the two parts of the private sector model?
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breakeven point
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the place where DI=C, S=0
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the aggregate expenditures model
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what model does the consumption model end up becoming?
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APC (average propensity to consume)
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the fraction of disposable income that people consume
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APS (average propensity to save)
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the fraction of disposable income that people save
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C/DI
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formula for APC
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S/DI
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formula for APS
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1
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what do APC and APS add up to equal?
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the leakage column
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for the savings model, where is the y-axis scale from?
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MPC (marginal propensity to consume)
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how much people will consume when they have a change in DI
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MPS (marginal propensity to save)
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how much people will save when they have a change in DI
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change in C/change in DI
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formula for MPC
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change in S/change in DI
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formula for MPS
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1
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what do MPC and MPS add up to equal?
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movement on C or S curve
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caused by any change in DI
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Shifts on C or S curve
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caused by any non-income determinant
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C and S curves
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stable curves, not volatile
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wealth, expectations, consumer indebtedness, consumer taxes
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what are the non-income determinants?
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financial assets and real assets
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what does wealth consist of as a non-income determinant?
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C-up, S-down
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wealth increases
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C-down, S-up
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wealth decreases
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C-up, S-down
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debt increases
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C-down, S-up
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debt decreases
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C-down, S-down
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taxes increase
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C-up, S-up
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taxes decrease
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interest rates
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what is the main determinant of Ig?
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C+Ig
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for investment demand curve, what is the formula for aggregate expenditures?
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acquisition, maintenance, and operating costs, business taxes, technological change, stock of capital goods on hand
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what are the determinants of the investment demand curve?
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the initial costs of capital goods, and the estimated costs of operating and maintaining those goods
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what is acquisition, maintenance, and operating costs as a determinant of investment demand?
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firms look to expected returns after taxes in making their investment decisions
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what is business taxes as a determinant of investment demand?
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technological progress- the development of new products, stimulates investment
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what is technological change as a determinant of investment demand?
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relative to output and sales, influences investment decisions by firms
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what is stock of capital goods on hand as a determinant of investment demand?
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durability, irregularity of innovation, variability of profits, variability of expectations
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what explains the instability of investment?
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capital goods have an indefinite life
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what is durability as an instability of investment?
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new products and processes stimulate investment in vast upsurges, or "waves" of investment spending
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what is irregularity of innovation as an instability of investment?
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the expectation of future profits is influenced by the size of current profits, and because current profits are highly variable
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what is variability of profits as an instability of investment?
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firms tend to project business conditions into the future, but the expectations can change when events suggest possible change in future business conditions
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what is variability of expectations as an instability of investment?
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equilibrium GDP
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where all production is bought
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expenditure output approach, and leakages-injection approach
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what are the two ways to find equilibrium GDP?
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expenditure output approach
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AE=GDP, consists of private-closed economy and public-open economy
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AE=C+Ig
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in a private-closed economy in the expenditures output approach, what does aggregate expenditures equal?
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AE=C+Ig+G+Xn
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in a public-open economy in the expenditures output approach, what does aggregate expenditures equal?
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leakages-injection approach
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has things coming into the economy and things going out
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leakage
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money that trails out of the economy; savings, imports taxes
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injections
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money pumped into the economy, other that C; government spending, investment, exports
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S=Ig
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in a private-closed economy in the leakages-injections approach, what equals what?
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S+M+T=Ig+G+X
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in a public-open economy in the leakages-injections approach, what equals what?
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equilibrium
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AE=GDP, leakages=injections, no overproduction, no excess spending
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disequilibrium
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shortages and surpluses
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shortages
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spending is greater than production, AE>GDP
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increase production, increase employment, output, and income
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what is the response to a shortage?
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surplus
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production is greater than spending, AE<GDP
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slow down production,m decrease employment, output, and income
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what is the response to a surplus?
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the multiplier effect
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a change in a component of aggregate expenditures leads to a larger change in equilibrium price
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multiplier
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change in equilibrium GDP/initial change in spending
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change in GDP=multiplier x change in AE
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what is the formula for equilibrium GDP?
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initial change in spending usually means Ig, it refers to increases or decreases in AE, multiplier works in both directions, but is always positive
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what are the 3 points for multipliers?
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1/MPS or 1/1-MPC
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what is the formula for a multiplier?
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incomes abroad- up, x-up, xn- up
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what happens if gdp's abroad increase?
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incomes abroad- down, x- down, xn- down
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what happens if gdp's abroad decrease?
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tarriff
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a tax on imports
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domestic industries
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who do tarriffs protect?
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p- up, m- down, xn- up, gdp- up
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what happens if taxes increase?
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more expensive here- x- down, cheaper abroad- m- up, xn- down
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US dollar appreciates
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cheaper here- x- up, more expensive abroad- m down, xn- up
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US dollar depreciates
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gdp gap
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the amount the gdp, or AD would need to change, or shift to get back to full employment
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recessionary/inflationary gap
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the amount AE needs to change to get back to full employment
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gdp gap/multiplier
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the formula for inflationary or recessionary gap
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G- up, or T- down
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how do you fix a recessionary gap using fiscal policy?
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G- down, or T- up
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how do you fix an inflationary gap using fiscal policy?
