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132 Cards in this Set
- Front
- Back
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What explains the long recessions of 1936?
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employment, interest and money
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What does the Keynesian model assume?
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costs are large enough not to change prices in the long run
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In the short run...
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firms meet demand at preset prices
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Firms typically set a price and meet the demand __ ____ _____ in the short run.
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at that price
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the costs of changing prices
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menu costs
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Three points for menu costs
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determining the new price
incorporating prices into the business informing consumers of new prices |
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Firms change prices when the...
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marginal benefits exceed the marginal costs
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Even though it's a lot easier now, there are still...
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menu costs
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What has technology done?
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reduced menu costs
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What are two things that reduce costs of changing prices in the store?
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Bar codes and scanners
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easier way to figure out what people are willing to pay
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online surveys
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Two examples of technology reducing menu costs
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highly segmented airline pricing
internet mechanisms for setting price |
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What are two internet mechanisms for setting price?
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ebay and priceline
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Three other costs that remain
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competitive analysis
deciding the new prices informing consumers |
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What is Planned Aggregate Expenditure?
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total planned spending on final goods and services
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What are the four components of planned aggregate expenditure?
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consumption, investment, government purchases, net exports
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Who does consumption?
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households
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What is investment?
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planned spending by domestic firms on new capital goods
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What are government purchases
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federal, state, and legal government purchases
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What is net exports?
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Exports - imports
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If I sold less than I intended, my net inventory is...
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going to be higher
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If I sold more than I intended, my net inventory is going to...
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be lower
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What do we assume about PAE?
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for C, G, NX, planned = actual
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Inventory can be ________, as can net exports
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negative
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The difference between what we actually spend and what we plan to spend comes from...
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investment
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What is going to change in investment?
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Net inventory
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What is the general equation for planned aggregate expenditure?
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PAE = C + Ip + G + NX
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Consumption accounts for ___-______ of total spending
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two thirds
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Consumption is...
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a powerful determinant of planned aggregate expenditure
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What is included in Consumption?
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purchases of goods, services, and consumer durables.
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What is not included in consumption?
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new hourses
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What does consumption depend on?
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Disposable income
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Amount we can actually spend?
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disposable income
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T =
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net taxes (Taxes- transfers)
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Disposable income equation
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(Y-T)
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There is a really strong relationship between..
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consumption and disposable income
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What shifts the consumption function?
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changing either Cbarre or AC
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What rotates the consumption function?
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MPC
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The consumption function is...
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Cbarre + MPC(Y-T)
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Definition of consumption function
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an equation relating planned consumption to its determinants, notably income
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Cbarre is...
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autonomous consumption
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MPC is...
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the change in consumption for a given change in disposable income
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MPC is always...
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less than one and greater than zero
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What is autonomous consumption?
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spending not related to the level of disposable income
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If I have a house that appreciates, I may...
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feel wealthier and spend more
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If the value of my assets foes up, then...
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my wealth goes up
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Spending goes up as _______ goes up
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wealth
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The wealth effect is the...
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tendency of changes in asset prices to affect household wealth and thus their consumption and spending
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Welath effect is ___________ of disposable income
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independent
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Where is the wealth effect included in the consumption function?
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Cbarre (the intercept)
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Autonomous consumption also captures...
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effects of interest rate on consumption
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Higher rates of interest increase the cost of usig credit to purchase consumer durables and other items, so people...
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may consume less and save more.
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The higher the interest rate...
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the more expensive it is to buy stuff on credit
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Why do you have to take into account disposable income?
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because of taxes (income net taxes)
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the increase in consumption spending when disposable income increases by 1$
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Marginal propensity to consume (MPC)
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If households receive an extra 1$ in income...
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they spend part (MPC) and save part (MPS)
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What is the main determinant of consumption spending?
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disposable income
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One point for disposable income
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output plus gov. transfers minus taxes
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What is our intercept
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autonomous consumption
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MPC is the
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slope
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okun's law
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actual - potential/potential * 100 = -2(u-u*)
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If I produce less, you will...
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spend less
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and If you spend less, I will...
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produce less
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Two dynamic patterns in the economy
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declines in production lead to reduced spending
reductions in spending lead to declines in production and income |
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What does consumption depend on?
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output, Y
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PAE depends on...
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Y
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PAE is a function of...
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production
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Dynamic
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multiple things happen at once
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output gap
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one minus the other
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My consumption is a function of...
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disposable income
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How does production impact spending?
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through consumption
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PAE =
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C + mpc (Y-T) + Ip + G + NX
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What are the two parts of PAE?
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autonomous expenditure
induced expenditure |
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the part of spending that is independent of output
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autonomous expenditure
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the part of spending that depends on output
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induced expenditure
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What is the slope?
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induced expenditure
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Short-run equilibrium is the level of output at which...
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planned spending = output
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There is no change in output as long as...
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prices are constant
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Our equilibrium condition can be written as
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Y = PAE
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Planned spending and taxes have a _________ relationship
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inverse
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Our initial short-run equilibrium is also...
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full employment
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The income-expenditure multiplier shows...
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the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output
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The larger the MPC...
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the greater the multiplier
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equation for income-expenditure multiplier
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1/MPS = 1/1-MPC
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The government may develop policies to...
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get us back to full employment
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Stabilization policies are...
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government policies that are used to affect planned aggregate expenditure with the objective of eliminating the output gap.
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When are expansionary policies done?
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in recession
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What do expansionary policies do?
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increase PAE
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When are contractionary policies used?
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in expansions
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What do contractionary policies do?
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decrease PAE
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change in government spending, taxes, and transfers
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fiscal policy
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use changes in money supply
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monetary policy
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Why do we use stabilization policies when there is a recession?
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to target low employment and low output
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What do we use an expansion for?
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to combat inflation
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Government spending is...
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a part of planned spending
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Change in government spending will..
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directly affect planned aggregate expenditure
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Military spending as a share of GDP...
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decreased sharply after WWII
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Two things for added demand from military spending helped end the Great Depression
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recessions associated with declines in military spending
increases in G help stimulate the economy |
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You can increase _______ ______ to get rid of a recession.
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military spending
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What is something else the government has control of ?
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taxes and tranfers
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Net Taxes =
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total taxes - transfer payments - government interest payments
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Planned aggregate expenditures are ___________ by changing _____ _____ and/or ________ _______
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influenced
total taxes transfer payments |
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If you decrease T...
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disposable income goes up because you are going to spend more
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Lower taxes or higher transfers...
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increase disposable income
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Increases in disposable income lead to...
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higher C
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PAE =
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Cbar + G + Nx + - MPC*T + MPC*Y
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If we want income to go up, we need net taxes to...
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go down.
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When I either decrease taxes or increasing transfers, I have to give you more because...
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I am giving you the money to spend and you will save some
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Y* =
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the maximum output that we can both achieve and sustain
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Fiscal policy may affect...
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political output as well as potential spending
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Investment in infrastructure...
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increases Y*
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Taxes and transfers affect incentives and...
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can change potential output Y*
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Supply side economists emphasize the...
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supply-side effects of fiscal policy
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Two points for current thinking is more moderate
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demand-side effects of spending matter
supply-side effect also matters |
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Why do we use fiscal policy?
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as a stimulus for the economy because we have competing objectives
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What is the government deficit?
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the difference between government spending and net taxes (G - T)
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Large and persistent budget deficits...
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reduce national saving
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Less saving means less investment which means...
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less growth
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Managing the impact of the deficit limits the government's ability to...
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use fiscal policy as a stimulus
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Political considerations make it...
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difficult to use contradictionary fiscal policy
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What are the two limits to fiscal policy flexibilty
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The legislative process requires time
competing political objectives |
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The legislating process requires ____ and a change in fiscal policy may be ____.
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time
slow |
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Two points for competing political objectives
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national defense
entitlements such as medicare and income support |
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Automatic stabilizers are...
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provisions in the law that imply automatic increases in government spending or taxes when output is low
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Why are automatic stabilizers built into the law?
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so that no decision is required
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What are two examples of automatic stabilizers?
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unemployment compensations
progressive income tax |
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Fiscal policy may be useful to address _________ periods of recession
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prolonged
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Monetary policy is ____ ______ _____ to stabilize the economy?
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more often used
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What does fiscal policy target?
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G and T
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G is an...
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direct effect
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T is an...
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indirect effect
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To increase disposable income, you must...
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decrease net taxes
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