Economics Quiz 4

Front 1

Investment

Back 1

spending firms money reserve mney and inventory

Front 2

investment based on

Back 2

a firms decision to invest or not is depemdemt om MB vs. MC

Front 3

Golden rule of maximizatioin

Back 3

MB=MC

Front 4

What is the marginal benefit of investment?

Back 4

the EXPECTED rate of return. Note this may not end up being the actual rate of return

Front 5

Marginal cost is

Back 5

the interest rate because you either use your money out of your savings or you gain interest. If the interest rate is higher you leave your moeny in the bank

Front 6

What causes a slide on the investment curve?

Back 6

a change in the interest rate

Front 7

Non interest rate determinents of investment

Back 7

1. taxes,
2. acquisition, maintenance, and operating costs
3. technology
4. stock of capital goods on hand
5. expectations

Front 8

Taxeslowered affect on investment

Back 8

if tax lowered investment goes up

Front 9

acquisition maintenance and operating costs effect on investment if cost goes up

Back 9

cost to acquire goes up than investment goes down because less money to spend

Front 10

Technology increase effects investment

Back 10

investment goes up because it makes it more productive or efficient

Front 11

Stock of capital goods on hand if overstocked or shortage

Back 11

if overstocked investment down if shortage investment goes up

Front 12

Expectations effect on investment

Back 12

recession investment down if boom investment up

Front 13

Consumption spending in comparison to investment spending

Back 13

consumption spending esp. for durables is pretty stable whereas investment spending is very volatile and changes alot over time

Front 14

Why are consumption and investment spending so different

Back 14

durability--consumption stuff lasts a long time so you can wait and not buy new right away. Investment spending is more discressionary than consumption you have to eat you don't have to have new comps. 2. Innovation is sporatic. We don't know when new technology will be developed to invest in. If nothing is developed investment is down but then there will be a boom when something new comes out. Thus investment spending comes in waves. 3. Variability in profits and expectations people don't always think in terms of future different expecations for different outcomes. Political, international, weather expectations anything that changes expectations changes investment

Front 15

P and Q are inversely related why?

Back 15

Because substitution effect. Price went up purchasing power is decreased. These don't work in the aggregate.

Front 16

Why the aggregate demand curve is downward sloping

Back 16

1. real balance effect
2. interest rate effect
3. Foreign purchases effect

Front 17

Real balance effect

Back 17

look at people's savings if prices are up savings power is down. Purchasing power of savings is down. when you feel poor you don't spend

Front 18

interest rate effect

Back 18

amount set by Fed. Reserve bank at a fixed amount. Interest rate up demand down price up

Front 19

Foreign purchases effect

Back 19

if the price level in the US rises relative to price levels in the rest of the world when the exchange rate remains the same you buy overseas. This causes a slide on the aggregate demand curve

Front 20

Things that change consumption

Back 20

wealth, expectations, real interest rates, household debt, and taxes

Front 21

things that shift investment

Back 21

taxeq up investment down
expectations recession investment down
technology up investment up
stock of capital on hand and degree of excess capacity up investment up
interest rates up investment down
costs up investment down

Front 22

things that shift G

Back 22

government can only tax or spend

Front 23

Prosperity abroad

Back 23

if rest of the world is doing well high GDP and employment than exports up because we sell more to foreigners. if world in recession exports will be down because they have no money

Front 24

exchange rate

Back 24

if we want japanese car we pay in yenif our exchange rate changes it changes how much we buy abroad.

Front 25

aggregate supply

Back 25

it is controversial how the graph looks

Front 26

wages are sticky

Back 26

they don't ususally fall.

Front 27

why don't wages fall?

Back 27

minimum wage, contracts, implicit contracts, efficiency wage theory

Front 28

efficiency wage theory

Back 28

pay too lottle employees will sabatoge and make bad products, moral efficiency turnover we have to pay them more to keep them happy

Front 29

short term

Back 29

prices do not change at teh same time. Particularly wages lag behind until firms find it profitable to increase supply

Front 30

long run

Back 30

the wage will adjust and profits will equal out.

Front 31

long run aggregate supply curve is

Back 31

straight up and down

Front 32

capacity constraints

Back 32

horizontal segment of AS curve
upward sloping
full employment

Front 33

horizontal segment

Back 33

excess capacity at low levels of output to put back to work they go back without requesting higher pay because they're just happy to work so there's no upward pressure on prices

Front 34

upward sloping

Back 34

ecnomy moves toward full employment to get additional output owrkers demand higher pay, overtime, and to entice away from other jobs and wages start to rise

Front 35

full employment

Back 35

capacity reached without more technology or labor you can't produce anymore. The price will start going up as demand increases.

Front 36

2 reasons for 3 segemtns AS

Back 36

resources capacity constraint
input prices change at differnet rates particularly wages lag behind

Front 37

what causes a shift in AS?

Back 37

taxes raise cost of production so AS down
changes in technology make AS go up
resources more better resources AS up but hurricain wipes some out then AS down

Front 38

If we increase govt spending what happens to inflation?>

Back 38

inflation goes up

Front 39

the multiplier

Back 39

we want to know how much it goes up by

Front 40

the multiplier equation

Back 40

change in GDP divided by initial change in spending

Front 41

change in GDP equals

Back 41

multipllier times initial change in spending

Front 42

the multiplier equals

Back 42

1/mps

Front 43

the larger the MPC the larger the multiplier

Back 43

ok

Front 44

the more saving or imports and higher taxes take out spending which does what to multiplier?

Back 44

makes it go lower

Front 45

what is the proper role of the government in the economy?

Back 45

In the microworld it doesn't need help because the markets will fix themselves, however in the macro world intervention is needed to prevent depresions

Front 46

fiscal policies

Back 46

government spending and taxing policies. the legislative brahch which is congress house of reps, senate and the executive along with the prs. make the fiscal policy

Front 47

monetary policy

Back 47

federal reserve controls interest rates and money supply. They are partly a private company. They are an administrative branch of the govt.

Front 48

3 elements of fiscal policy

Back 48

1. policies regarding govt purchases of goods and services
2. policies regarding taxes (what will taxes be) IRS and executive set tax rates
3. Policies regarding transfer payment

Front 49

Sometimes the govt has a lot of control over some things but other things are out of its control such as

Back 49

GOVT can set tax rates and such but they can't control exactly what hey will receive because that's based on people's incomes

Front 50

things the govt can control in respect to economy and fiscal policy

Back 50

1. government spending (they control what to buy)
2. policies regarding taxes (Set tax rates)
3. Policies regarding transfer payments (control requirements and eligibility)

Front 51

what happens during a recession?

Back 51

Tax revenue goes down because fewer people are working and they are making less. Government spending goes up because more people collect welfare and unemployment, which makes deficit worse. During a recession we don't want to have to balance our budget because we'd have to stop govt spending or else have higher taxes either of which would make the recession worse

Front 52

discretionary fiscal policy

Back 52

the elements of fiscal policy within the control of the government what tehy can actually control

Front 53

is it possible to raise spending and raise taxes to pay for it and still get the economy going?

Back 53

Yes you can because the government multiplier and tax multiplier the govt multiplier is greater so it'll be okay

Front 54

if we're not spending the govt iwll spend for us

Back 54

oke

Front 55

tax multiplier

Back 55

-mpc/mps

Front 56

balanced budget multiplier

Back 56

change in G=change in I

Front 57

contractionary policy

Back 57

if there's an inflation gap we need to make it contract of go won

Front 58

what is the best policy to change?

Back 58

that is based on personal preferance

Front 59

Problems with fiscal policy

Back 59

1. time have to have 6 months of declining in order to say we're in a recession
2. administrative lag once we declare we are than it takes a long itme to pass a law determining what to do about it because the pres and the senate must agree
3. operational lag than it takes time for it to impact after the law is passed by this time we may not need it anymore

Front 60

political business cycle

Back 60

people make decisions based on what's best for themselves politicialns are no exception. Goal of them is to get reelected

Front 61

The economy has 2 built in stabilizers

Back 61

1. progressive tax system the richer you are the more you pay
2. welfare state lots of programs to help people in bad times

Front 62

results from stabilizers in the economy during a recesson

Back 62

if you make less during a recession you pay less tax.also welfare gives you money to live on so AD gets shifted up again

Front 63

results of stabilizers in inflationary period

Back 63

everybody's working too much taxes go up so spending goes down. Govt spending on welfare goes down and this shifts AD down.