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66 Cards in this Set
- Front
- Back
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elastic demand
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perfect competition
raising the price will lead to total elimination of quantity sold |
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inelastic demand
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when an increase in price leads to an increase in spending on the goods
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increase in real rate of interest causes firms investments to... why?
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decrease
firms can earn a high rate of return by lending their funds |
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rational
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assume people have well-defined goals and they will try to achieve these goals the best they can
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CPI
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current year/base year
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tariff on foreign good does what to surplus
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decreases consumer surplus and decreases total surplus
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a firm has market power if
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it can change the market price of its good
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the MR of a firm with market power is greater or less than the price
why? |
less because to sell one more, unit it must lower the price on all units of output
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if state imposes tax, which curve is affected?
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supply curve
shifted right |
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if real interest rate falls, what will happen to saving and investment
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saving will decrease, investment will increase
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real interest
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measures the additional purchasing power one receives by lending a dollar
nominal interest rate - inflation |
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goals of US monetary policy
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1 - low and stable inflation
2 - full employment of resources |
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if the chance for getting fired increases, savings will.... why?
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increase
because they will want to increase the funds available for contingencies |
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monopoly will reduce the price of its good if...
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MC is less than MR
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MC of each input that producer has to buy is...
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real interest rate X cost of input
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lower real interest rate does what to the value of a dollar
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depreciates it
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what does lower real interest rate mean for savings?
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lower interest rate for savings
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how does expected increase in inflation affect savings and investment
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savings decrease
investment increase |
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depreciation of the dollar leads to
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increase in NE (dollar cant buy as much imports)
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when real interest rate decreases....
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consumption and investment increase
asset prices increase NE increase account deficit increases depreciation of the dollar |
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lower interest rates followed by dollar
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depreciation and decrease in current account deficit
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business cycle
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peak, recession, trough, expansion
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output gap
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economys actual output minus its potential output
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what happens to real wages in cyclical unemployment
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they increase at a slower rate
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what happens to inflation in a recession
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it increases at a slower rate
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potential output
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potential GDP
the max sustainable GDP that an economy can produce for a period of time |
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recessionary gap
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actual output is below potential output
resources are not being fully utilized, not efficient |
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expansionary gap
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actual output above potential output
firm prices tend to rise, increase inflation, decrease efficiency |
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natural rate of unemployment
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amount of unemployment attributed to frictional and structural unemployment
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Okun's Law
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output gap = 2(cyclical unemployment rate)(potential GDP)/100
if output gap increases by 2%, cyclical unemployment increases by 1% if potential output remains the same |
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keynesian model assumption
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in the short run, firms meet the demand at set price before changing price
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Keynesian Model
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PAE determines output
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Planned aggregate expenditure
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output at each point in time is determined by the amount that people throughout the economy want to spend
C + I(planned) + G + NE |
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consumption function
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C = constant + mpc(Y+T)
constant not dependent on output in economy mpc = amount consumption rises when disposable income is raised by a dollar (Y-T) = disposable income (Y is output) |
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short-term equilibrium output where prices are fixed
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where PAE = Y
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increased interest rate's effect on consumption
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consumption decreases
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eliminating recessionary gap
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increase government spending
expansionary policies |
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recession caused by
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insufficient spending
consumption too low expenditure line is moved down in recession |
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stabalization policy
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policies to affect planned aggregate expenditure (monetary and fiscal policy)
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fiscal policy
in recession? |
decisions about gov budget
increase G (part of C) moves expenditure line up or decreases taxes or increase transfers |
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increase in tax
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decreases disposable income, lower spending, closes expansionary gap,
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multiplier
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the amount by which a one unit increase in autonomous expenditure increases short-run equilibrium output
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LRAS
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vertical line
shows level of potential output in long run intersection with AD and AS curve is long run equilibrium |
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aggregate supply
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supply of total domestic goods
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aggregate demand
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PAE
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what curve does increase in expected inflation affect
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AS curve, shifts up
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if Fed tightens monetary policy
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AD shifts left
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AD curve shows relationship between
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short-term output and inflation
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increase in government purchases
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shifts AD curve right
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expected increase in inflation
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shifts AS curve upward
actually increases inflation |
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can there be an output gap if economy is in short term equilibrium?
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yes
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adverse inflation shock
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inflation shock that causes increase in inflation
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aggregate supply shock causes
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inflation to rise
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the exchange rate between X and Y is 1.4.
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you can buy 1Y for .7X
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nominal exchange rate is determined by
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the supply and demand for country's currency
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tightening of monetary policy
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causes the dollar to appreciate
demand shifts right, supply shifts left, higher exchange rate |
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increase in Feds discount rate
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shifts supply curve left
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real exchange rate
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average domestic good/average foreign good in domestic currency
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tools of fiscal policy
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governement expenditure, taxes, transfer payments
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to close output gap
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reduce tax by gap/mpc
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fiscal policy is important stabalizing force because
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usually contains automatic stabalizers
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recession often preceeded by
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increase in inflation
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in recessionary, unemployment rate is greater/less than natural rate of unemployment
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greater
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in the short run
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government policies can help eliminate output gap
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output gaps would not exist if
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prices were adjusted immediatelqy
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velocity equation
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MV = PY
OR nominal GDP/money stock |
