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45 Cards in this Set

  • Front
  • Back
d: classical model
a macroeconomic model that explains the long run behavior of the economy
when did the classical model fall out of vogue
great depression/ 1930's. keynesian model became popular
what is a critical assumption of the classical model?
all markets clear
what does markets clear mean
the price in every market will adjust until quantity supplied and quantity demanded are equal
who supplies labor and who demands labor
firms demand / households supply
what does the upward slope of the labor supply curve tel us
the greater the wage, the greater the number of people will want to work. there is some number at which some people believe they are btter off working than not working
d: labor supply curve
indicates how many people will want to work at various real wage rates
d: labor demand curve
indicates how many workers firms will want to hire at various real wages
what does output depend on
1) amount of resources for labor to use
2) technology which determines how much output we can produce with these resources
d: aggregate production function
shows how much total output can be produced with different quantities of labor with quantities of everything else held constant
what is the diminishing returns to labor
where the aggregate production function curve begins to flatten out, output rises with another worker being added but at a point adding another worker doesnt matter since there is not enough resources for the worker to work with and gains from specialization are harder to come by
in a simple economy with just households and firms, total spending must be equal to...
total output
what is say's law
the idea that toal spending will be sufficient to purcahse the total output produced
"each time a good or service is produced an equal amount of income is created, therefore...
the act of producing a good creates the very income that is needed to purchase the good"
says law
d: planned investment spending
business purchases of planned equipment

total investment minus the change in inventories over a period

Ip= I - Δinventories
d: net taxes
total government revenue minus government transfer payments

t= total tax revenue- transfers
d: disposable income
disposable income= total income (gdp) - net taxes
d: household saving
the poriton of after tax income that households donot spend on consumption

S= disposable income - consumption
d: total spending
C + Ip + G
d: leakages
income earned but not spent by households during a given year (taxes and savings)
2 types of leakages
d: injections
spending form sources other than households (planned investment government spending)
2 types of injections
planned investment
government spending
how to remember leakages
"saving for college is taxing since your piggy bank always has a leak in it"

savings and taxes are leakages that is income earned but not received
how to remember injections
"governments plan to invest in injections that can cure diseases"

government spending and planned investments are injections that are added to the economy
d: loanable funds market
the market in which savers make their funds available to borrowers
how do households supply funds to the loanable funds market
put funds in bank
purchase a bond (lend directly to government)
purchase shares of corporate stock
d: interest
the payment households receive for funds supplied to the loanable funds market
total supply of loanable funds is equal to...
household savings
increase in the interest rate will...
increase household savings
decrease planned investment
not change government purchases
demand for loanable funds is equal to...
planned investment spending + the government deficit
d: budget deficit
the excess of government purchases over net taxes
when G is greater than T

= G-T
government cannot spend funds it does not have, it must cover its deficit by borrowing in the loanable funds market.
the governments demand for loanable funds is equal to...
its deficit
d: budget surplus
when government spending is less than net taxes (T-G)
why is the government demand for funds curve a straight line?
because the government will run a deficit (its demand for loanable funds, spending money it does not have) no matter what the interest rate is at little or no political cost
formula for demand for funds
Ip + (G-T)

planned investment plus the deficit
formula for supply of funds
d: fiscal policy
change in government purchases or net taxes designed to change total output
d: supply side effects
movement of supply, come from changing the quantities of resources available in the economy
d: demand side effects
effects on total output that affect total spending, fiscal policy has no demand side effects at all
an increase in government spending causes
decrease in investment spending
decrease in consumption
increase in saving
--- complete crowding out
d: crowding out
decline in one sectors spending caused by an increase in some other sectors spending
d: complete crowding out
a dollar for dollar decline in one sector's spending caused by an increase in some other sector's spending
imports are

savings and taxes
outputs are

government and planned investment