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56 Cards in this Set
- Front
- Back
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inflation, .
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An increase in the average price level for goods and services
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deflation
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a decrease in the average price level for goods and services
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relative price
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price of one product relative to another
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What is the Consumer Price Index?
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A measure of the average price level for urban consumer goods and services
ex. healthcare, education |
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How do individual price changes affect the Consumer Price Index?
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It depends on their level of importance
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What is the formula for the rate of inflation?
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CPIt - CPI (t-1)/ CPI (t-1) x 100
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5. Explain the difference between the demand-pull and cost-push causes of inflation.
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DP: Due to an increase in demand/spending//expenditures firms lose inventories and increase prices
CP: Due to an increase in costs in production firms face a profit squeeze and increase prices |
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Why does inflation have “redistributive” effects?
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Some are worse off and some are better off
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Explain the price effects of inflation.
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Inflation occurs when relative price increases on key commodities Ex. energy, education, housing
Increase in Relative Price leads to decreases in purchasing power |
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8. Define purchasing power.
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Ability to buy other goods and services
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9. Explain the income effects of inflation.
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Groups/individuals on a fixed income are affected
Losers: Consumers/buyers Winners: Producers/sellers Income: Flow of earnings per unit time (wages salaries interests) |
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10. Explain the difference between nominal income and real income.
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N: Income measured in Current money
R: income measured in Constant money |
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11. What is the formula for real income?
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Nominal Income/ (1-rate of inflation) ^ # of years
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12. Explain the difference between the nominal interest rate and the real interest rate.
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N: Interest measured in Current $ (specified interest rate in loan contract)
R: Purchasing Power Winners: Borrowers Losers: Lenders/savers |
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13. What is the formula for the real interest rate?
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Nominal interest rate - inflation
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14. Explain the wealth effects of inflation.
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Wealth: Stock of assets that store value
Ex. Stocks bonds real estate |
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15. Explain the difference between the nominal return and the real return from an asset.
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NRA: % Change in assets valued
RRA: Purchasing power |
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16. What is the formula for the real return from an asset?
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Nominal Return on an Asset - inflation
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17. What are some of the protective mechanisms against inflation?
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Cost of Living Adjustment
Adjustable Interest Rates |
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Cost of Living Adjustment
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Inflation increases by % and nominal income increases by %
Real income/ purchasing power does not change |
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Adjustable Interest Rates
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R = fixed nominal interest (i) - rate of inflation (pie) then i = r - pie
if pie Increases by % then i increases by % |
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1. What is the business cycle? How is it measured?
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Periodic percent changes in real GDP (output)
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2. What typically happens to unemployment and inflation during an expansion?
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Real GDP Increases then Demand for Labor Increases then Unemploment Decreases and Demand or costs of production increases and inflation increases
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3. What typically happens to unemployment and inflation during a downturn?
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Real GDP decreaes then demand for labor decreases then unemployment decreases and demand for goods/services of cost of production decreases and inflation decreases (deflation)
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1. What are the four major components of aggregate demand (AD)?
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Household Consumption
Business Investment Government Spending Net exports (ex-im) |
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2. How much does each component contribute to AD (in % terms)?
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HC: 67-70%
BI: 15-17% GS: State/local 13-15% Federal 5-7% NE: -3 - -5% |
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. Define disposable income. What are the two uses of disposable income?
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Personal income - personal income taxes
Consumption & Saving |
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4. Define (and calculate) the average propensity to consume (APC).
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C/Yd = proportion of disposable income that is spent
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5. Define (and calculate) the marginal propensity to consume (MPC).
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Sensitivity/responsiveness of consumption to a Change in disposable income
Change in C/Change in Yd |
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6. Explain the difference between the APC and MPC.
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APC tells you how much of is spent of income wheres as MPS tells us how much a person will spend less or more depending on a change in income
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8. What are the sources/determinants of autonomous consumption?
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Savings
Credit (loans, credit cards, etc) Wealth Expectiations |
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9. Define the consumption function. Illustrate the consumption function using a graph.
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Consumption may be psotive even if Yd=0
Consumption changes even if Yd does not. |
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10. Define dissaving, saving, and breaking-even.
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Dissaving: consumption > Yd
Saving: Consumption < Yd Breakeven: Consumption = Yd |
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12. What are the various forms of business investment?
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Business purchases of output (capital, tech, r&d)
Construction Net Inventories |
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13. What are the sources/determinants of business investment?
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Producer Expectations
+ Exp Increase BI - Exp Decrease BI Access to Credit Increase Credit Increase BI Decrease Credit Decrease BI |
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14. Explain why state and local government spending is pro-cyclical.
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State/Local
Increase growth increase SL spending Decrease growth Decrease SL spending Due to balanced budgets |
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15. Explain why federal government spending is counter-cyclical.
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Federal
Increase Growth Decrease Federal Spending Decrease Growth Increase Federal Spending No Balanced budget |
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16. What determines the volume of US exports?
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Foreign Demand for U.S. output
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17. What determines the volume of US imports?
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US demand for foreign output
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1. Explain the relationships of the Circular Flow of Money.
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Explains how imbalances/ instability in AD occurs
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2. What is a leakage? What are the various forms of leakages?
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Income not spent directly and/or immediately on domestic output
1. Savings 2. Taxes 3. Imports |
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3. What is an injection? What are the various forms of injections?
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Any addition of spending into the domestic economy
1. HC 2.BI 3.GS 4.Ex |
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4. What is a recessionary GDP gap? What causes a recessionary GDP gap?
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Output < Full employment
Caused by a lack of demand (AD) due to leakages>injections Increase savings/taxes/imports and or decreases HC/BI/GS/EX Results in high unemployment and low inflation |
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5. What is an inflationary GDP gap? What causes an inflationary GDP gap?
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Output > full employment casused by an excess amount of AD due to leakages<injections
Increases HC/BI/GS?EX or decrease Savings/taxes/imports Results in Low unemployment and High inflation |
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6. Explain the multiplier process.
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Why do imbalances in AD magnify themselves?
How much will the economy suffer? |
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7. What is the formula for the multiplier?
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How much of initital change to the total change
1/ (1-mpc) |
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8. What is the formula for the total change in spending?
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multiplier x initital change in spending
How big of a difference do you have between initial change and total change |
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1. Define the budget balance.
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Total Receipts - Total Outlays
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2. What are the various federal government receipts and outlays?
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Receipits: Taxes, fees, interest
Outlays: Gov spending, income transfers, interest paid out, salaries and benefits |
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3. Define deficit, surplus, and balanced budget.
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Deficit: Receipts < outlays
Surplus: Receipts > outlays Balanced Budget: Receipts=outlays |
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4. Explain the difference between progressive and regressive taxation.
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Progressive: Increase income increase tax rate
Decrease income Decrease Tax rate Regressive: Increase Income decrease tax rate Decrease income increase tax rate |
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5. Which federal taxes are progressive? Which federal taxes are regressive?
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Progressive: Individual and corporate income
Regressive: Excise and Social security |
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6. What are the largest sources of federal tax revenues?
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Individual Income Taxes
Excise Taxes Corporate Income Taxes Social Security Taxes |
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7. Explain the difference between the discretionary and non-discretionary budget authorities.
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Discretionary: can increase of decrease funds (1/3 budget)
Non-discretionary: Cannot change funds because of laws (2/3 budget) |
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What are the largest forms of total federal expenditures?
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Social Security
Health Care Reform Interest Payments on the National Debt Unemployment Insurance |
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9. What are the largest forms of discretionary federal expenditures?
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National Defense
Health and human Services Education Veteran Affairs |
