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21 Cards in this Set

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Efficiency Wage Models
These models hold that it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates.
Consumption Function
The relationship between consumption and disposable income. Consumption is directly related to disposable income and is positive even at zero disposable income

C = C0 + (MPC)(Yd)
Marginal Propensity to Consume
-MPC
-The ratio of the change in consumption to the change in disposable income
- Change in C / Change in Yd.
Autonomous Consumption
The part of consumption that is independent of disposable income.
What will cause an increase in consumption?
(1) Raise autonomous consumption
(2) Raise disposable income
(3) Raise the MPC
Saving = ?
(1) Disposable income - Consumption
(2) Yd - (C0 +(MPC)(Yd))
Marginal Propensity to Save
-MPS
-The ratio of the change in saving to the change in disposable income
-Change in S / Change in Yd.
Multiplier
-The number that is multiplied by the change in autonomous spending to obtain the overall change in total spending.
-If the economy is operating below Natural Real GDP, then the multiplier turns out to be the number that is multiplied by the change in autonomous spending to obtain the Real GDP
- 1 / (1-MPC)
Change in total spending = ?
Multiplier * Change in autonomous spending
Five key points about Simple Keynesian Model (in terms of AD and AS)
1. The price level is constant until Natural Real GDP is reached.
2. The AD curve shifts if there are changes in C, I, or G.
3. It is possible for the economy to be in equilibrium and in a recessionary gap too.
4. The private sector may not be able to get the economy out of a recessionary gap because they can't increase C or I enough.
5. The gov't may have a management role to play in the economy. It may have to raise AD enough to stimulate the economy out of the recessionary gap and move it to its Natural Real GDP level.
Three key points about Simple Keynesian Model (in terms of TE and TP)
1. The price level is constant until Natural Real GDP is reached.
2. The TE curve shifts if there are changes in C, I, or G.
3. It is possible for the economy to be in equilibrium and in a recessionary gap too.
What happens if TE < TP?
This means that individuals are buying less output than firms produce. Inventories will rise above optimum levels. Therefore firms cut back production to reduce inventories to their optimum levels.
What happens if TE > TP?
This means that individuals are buying more output than firms produce. Inventories will fall below optimum levels. Therefore firms increase production to raise inventories to their optimum levels.
What happens if TE = TP?
Inventories are at their optimum levels and firms neither increase nor decrease production.
What did Keynes believe about wage rates and prices?
He believed that wage rates and prices may be inflexible downwards. This is due to labor unions and employees resisting employer's wage cuts and anticompetitive elements in the economy.
What did Keynes think about Say's Law?
He didn't agree that it would hold in a money economy. He thought that consumption could fall, therefore increasing saving, by more than investment increased.
What are the three points that prove the consumption function?
(1) Consumption depends on disposable income.
(2) Consumption and disposable income move in the same direction.
(3) As disposable income changes, consumption changes by less.
What concept is the multiplier based on?
That a change in autonomous spending will bring about a multiple change in total spending.
What will an increase in C, I, or G do to the TE curve?
It will shift the curve upward!
What will a decrease in C, I, or G do to the TE curve?
It will shift the curve downward!
Review:
Chart on page 220 and what the graphs look like!!!!