Macroeconomics Test 2

Front 1

How does the economy solve problems?

Back 1

Classical or Keynesian approach

Front 2

Classical

Back 2

focuses on supply of the market

Front 3

recessionary gap (classical)

Back 3

economy is too small -> wages drop -> bus. profit increases -> bus expansion -> shift of supply curve to right, eliminates gap

Front 4

inflationary gap (classical)

Back 4

economy is too big -> wages rise -> bus profit decline -> bus reduce activities -> shift of supply curve to left, eliminates gap

Front 5

five basic principles of classical

Back 5

focuses attention on supply (production provides answers to problems) | market is central focus | govt has minor, minimal role (should not be involved) | marketplace should be flexible (price/wages should change) | marketplace is always balance (supply = demand, if not balanced, will do so on its own)

Front 6

Seys law

Back 6

supply creates its own demand

Front 7

Keynesian approach

Back 7

made by John Meynard Keynes, focuses on demand

Front 8

Keynesian vs classical

Back 8

Market is rigid (classical = flexible) | market won't solve its own problems (classical it does) | govt fixes problems (classical = no govt involvement) | demand comes from consumers and businesses)

Front 9

determinants of consumer spending

Back 9

key influence -> income
Past income -> current spending habits

income from last pay

confident from earning it

income you will earn

Front 10

marginal perpencity to consume

Back 10

how much you will spend & save from last paycheck

= change in comsumption / change in income

Front 11

non income determinants

Back 11

wealth, how much you borrow, future expectations, real current interest ratios

Front 12

wealth effect

Back 12

higher wealth, higher spending

Front 13

average perpencity to consume

Back 13

how much you would save/spend from all paychecks

= consumption / income

Front 14

business spending

Back 14

main goal -> profit
no profit -> no projects
earned profits -> money spent on projects

Front 15

calculating benefit of a project

Back 15

expected rate of return (company earnings) / amount of investment
compared to cost of project

Front 16

cost of project

Back 16

determined by real interest rates

Front 17

what effects decision of a project

Back 17

rate > cost -> project is done

cost > rate -> money is not spent

higher interest rate -> less is spent

Front 18

what can change how you calculate rate of return

Back 18

cost of acquisition, business taxes, tech changes in production, amount of capital goods available, planned inventory changes, expectations

Front 19

reasons for unstable business spending

Back 19

unstable = varies year to year

variability of company expectations | durability of equipment | irregulatory of development of new products | variability of profit (key source of investment money)

Front 20

expenditure multiplier

Back 20

magnified effect on GDP when money is spent

when $$ is earned, it is spent over and over again

= 1 / (1 - MPC) OR 1 / MPS

Front 21

change in GDP

Back 21

amount of spending * multiplier

Front 22

expansion and decline of GDP

Back 22

investment > savings = decline in inventory -> GDP expands
savings > investment = inventory growth -> GDP declines

Front 23

equilibrium GDP

Back 23

savings = investment

aggregate expenditures intersects 45 degree line

Front 24

fiscal policy

Back 24

too little demand = govt must pick up slack

Front 25

two reactions to recessionary gap

Back 25

increase govt spending
reduce taxes

both are discretionary fiscal policy

Front 26

two reactions to GDP gap

Back 26

(diff between potential and actual GDP)

GDP gap / expenditure multiplier = how much should be spent
GDP gap / tax multiplier = how much taxes should be cut

Front 27

tax multiplier

Back 27

MPC / 1 - MPC

Front 28

automatic stabilizers OR nondiscretionary fiscal policies

Back 28

govt expenditures that happen automatically
congress doesn't decide
unemployment benefits, changes in progress tax rates

Front 29

criticism of got involvement

Back 29

long time lag, decisions are political and not economic, state govt does the opposite of federal

Front 30

crowding out effect

Back 30

govt borrows money = higher interest rate (bus invest less)
defeats primary purpose of increased spending

Front 31

budget deficit

Back 31

govt spends more than it collects in a year

Front 32

national debt

Back 32

total money govt borrows over the past year that isn't paid back

Front 33

3 reasons govt collects

Back 33

recessions, military activities, undisciplined physical actions (govt cuts taxes, not spending)

Front 34

ways to see national debt

Back 34

actual # (18 trillion) | debt compared to GDP (ratio)

Front 35

issues with national debt

Back 35

bankruptcy (govt can go bankrupt but not likely)
must it be paid back? yes, but govt can refinance
does it put a burden on future generations? yes & no, depends what it is spent on

Front 36

real effect of debt on ecnomy

Back 36

more unequal income distribution, higher taxes (disincentives work/investment), loss of resources to other countries, crowding out effect

Front 37

fixing GDP gap

Back 37

GDP gap / expenditure multiplier