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63 Cards in this Set
- Front
- Back
Investment
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spending firms money reserve mney and inventory
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investment based on
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a firms decision to invest or not is depemdemt om MB vs. MC
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Golden rule of maximizatioin
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MB=MC
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What is the marginal benefit of investment?
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the EXPECTED rate of return. Note this may not end up being the actual rate of return
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Marginal cost is
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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
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What causes a slide on the investment curve?
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a change in the interest rate
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Non interest rate determinents of investment
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1. taxes,
2. acquisition, maintenance, and operating costs 3. technology 4. stock of capital goods on hand 5. expectations |
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Taxeslowered affect on investment
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if tax lowered investment goes up
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acquisition maintenance and operating costs effect on investment if cost goes up
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cost to acquire goes up than investment goes down because less money to spend
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Technology increase effects investment
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investment goes up because it makes it more productive or efficient
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Stock of capital goods on hand if overstocked or shortage
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if overstocked investment down if shortage investment goes up
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Expectations effect on investment
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recession investment down if boom investment up
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Consumption spending in comparison to investment spending
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consumption spending esp. for durables is pretty stable whereas investment spending is very volatile and changes alot over time
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Why are consumption and investment spending so different
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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
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P and Q are inversely related why?
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Because substitution effect. Price went up purchasing power is decreased. These don't work in the aggregate.
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Why the aggregate demand curve is downward sloping
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1. real balance effect
2. interest rate effect 3. Foreign purchases effect |
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Real balance effect
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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
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interest rate effect
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amount set by Fed. Reserve bank at a fixed amount. Interest rate up demand down price up
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Foreign purchases effect
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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
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Things that change consumption
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wealth, expectations, real interest rates, household debt, and taxes
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things that shift investment
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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 |
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things that shift G
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government can only tax or spend
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Prosperity abroad
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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
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exchange rate
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if we want japanese car we pay in yenif our exchange rate changes it changes how much we buy abroad.
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aggregate supply
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it is controversial how the graph looks
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wages are sticky
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they don't ususally fall.
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why don't wages fall?
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minimum wage, contracts, implicit contracts, efficiency wage theory
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efficiency wage theory
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pay too lottle employees will sabatoge and make bad products, moral efficiency turnover we have to pay them more to keep them happy
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short term
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prices do not change at teh same time. Particularly wages lag behind until firms find it profitable to increase supply
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long run
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the wage will adjust and profits will equal out.
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long run aggregate supply curve is
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straight up and down
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capacity constraints
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horizontal segment of AS curve
upward sloping full employment |
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horizontal segment
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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
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upward sloping
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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
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full employment
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capacity reached without more technology or labor you can't produce anymore. The price will start going up as demand increases.
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2 reasons for 3 segemtns AS
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resources capacity constraint
input prices change at differnet rates particularly wages lag behind |
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what causes a shift in AS?
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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 |
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If we increase govt spending what happens to inflation?>
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inflation goes up
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the multiplier
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we want to know how much it goes up by
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the multiplier equation
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change in GDP divided by initial change in spending
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change in GDP equals
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multipllier times initial change in spending
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the multiplier equals
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1/mps
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the larger the MPC the larger the multiplier
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ok
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the more saving or imports and higher taxes take out spending which does what to multiplier?
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makes it go lower
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what is the proper role of the government in the economy?
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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
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fiscal policies
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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
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monetary policy
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federal reserve controls interest rates and money supply. They are partly a private company. They are an administrative branch of the govt.
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3 elements of fiscal policy
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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 |
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Sometimes the govt has a lot of control over some things but other things are out of its control such as
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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
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things the govt can control in respect to economy and fiscal policy
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1. government spending (they control what to buy)
2. policies regarding taxes (Set tax rates) 3. Policies regarding transfer payments (control requirements and eligibility) |
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what happens during a recession?
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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
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discretionary fiscal policy
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the elements of fiscal policy within the control of the government what tehy can actually control
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is it possible to raise spending and raise taxes to pay for it and still get the economy going?
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Yes you can because the government multiplier and tax multiplier the govt multiplier is greater so it'll be okay
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if we're not spending the govt iwll spend for us
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oke
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tax multiplier
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-mpc/mps
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balanced budget multiplier
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change in G=change in I
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contractionary policy
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if there's an inflation gap we need to make it contract of go won
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what is the best policy to change?
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that is based on personal preferance
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Problems with fiscal policy
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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 |
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political business cycle
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people make decisions based on what's best for themselves politicialns are no exception. Goal of them is to get reelected
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The economy has 2 built in stabilizers
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1. progressive tax system the richer you are the more you pay
2. welfare state lots of programs to help people in bad times |
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results from stabilizers in the economy during a recesson
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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
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results of stabilizers in inflationary period
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everybody's working too much taxes go up so spending goes down. Govt spending on welfare goes down and this shifts AD down.
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