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45 Cards in this Set
- Front
- Back
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d: classical model
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a macroeconomic model that explains the long run behavior of the economy
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when did the classical model fall out of vogue
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great depression/ 1930's. keynesian model became popular
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what is a critical assumption of the classical model?
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all markets clear
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what does markets clear mean
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the price in every market will adjust until quantity supplied and quantity demanded are equal
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who supplies labor and who demands labor
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firms demand / households supply
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what does the upward slope of the labor supply curve tel us
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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
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d: labor supply curve
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indicates how many people will want to work at various real wage rates
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d: labor demand curve
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indicates how many workers firms will want to hire at various real wages
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what does output depend on
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1) amount of resources for labor to use
2) technology which determines how much output we can produce with these resources |
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d: aggregate production function
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shows how much total output can be produced with different quantities of labor with quantities of everything else held constant
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what is the diminishing returns to labor
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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
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in a simple economy with just households and firms, total spending must be equal to...
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total output
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what is say's law
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the idea that toal spending will be sufficient to purcahse the total output produced
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"each time a good or service is produced an equal amount of income is created, therefore...
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the act of producing a good creates the very income that is needed to purchase the good"
says law |
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d: planned investment spending
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business purchases of planned equipment
total investment minus the change in inventories over a period Ip= I - Δinventories |
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d: net taxes
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total government revenue minus government transfer payments
t= total tax revenue- transfers |
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d: disposable income
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disposable income= total income (gdp) - net taxes
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d: household saving
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the poriton of after tax income that households donot spend on consumption
S= disposable income - consumption |
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d: total spending
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C + Ip + G
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d: leakages
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income earned but not spent by households during a given year (taxes and savings)
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2 types of leakages
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taxes
savings |
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d: injections
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spending form sources other than households (planned investment government spending)
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2 types of injections
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planned investment
government spending |
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how to remember leakages
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"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 |
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how to remember injections
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"governments plan to invest in injections that can cure diseases"
government spending and planned investments are injections that are added to the economy |
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d: loanable funds market
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the market in which savers make their funds available to borrowers
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how do households supply funds to the loanable funds market
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put funds in bank
purchase a bond (lend directly to government) purchase shares of corporate stock |
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d: interest
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the payment households receive for funds supplied to the loanable funds market
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total supply of loanable funds is equal to...
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household savings
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increase in the interest rate will...
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increase household savings
decrease planned investment not change government purchases |
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demand for loanable funds is equal to...
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planned investment spending + the government deficit
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d: budget deficit
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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. |
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the governments demand for loanable funds is equal to...
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its deficit
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d: budget surplus
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when government spending is less than net taxes (T-G)
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why is the government demand for funds curve a straight line?
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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
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formula for demand for funds
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Ip + (G-T)
planned investment plus the deficit |
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formula for supply of funds
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S
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d: fiscal policy
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change in government purchases or net taxes designed to change total output
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d: supply side effects
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movement of supply, come from changing the quantities of resources available in the economy
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d: demand side effects
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effects on total output that affect total spending, fiscal policy has no demand side effects at all
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an increase in government spending causes
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decrease in investment spending
decrease in consumption increase in saving --- complete crowding out |
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d: crowding out
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decline in one sectors spending caused by an increase in some other sectors spending
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d: complete crowding out
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a dollar for dollar decline in one sector's spending caused by an increase in some other sector's spending
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imports are
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leakages
savings and taxes |
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outputs are
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injections
government and planned investment |
