Macroeconomics FinalStudy Guide- Factors of production:o Lando Laboro Capitalo Entrepreneurship- Rational Economic Behavior: making smart decisions on fixed cost spending by maximizing benefits and minimizing costs- Positive Economic statements: statements or theories about how the economy works; if we x, x tends to happen.- Normative statements: policy statements about what courses of action should or ought to be taken; we should x.- Common Errors in Economic Reasoning:o Fallacy of false cause: the false assumption that if x happens after y, x caused y; “after this, therefore because of this”o Fallacy of composition: the false assumption that if something applies to a part, it applies to the whole; what holds for one person does not necessarily hold for everybodyo Ceteris paribus fallacy (other things being equal): cannot keep everything in theeconomy constant. - Employment Act of 1946: it is the continuing responsibility and policy of the Federal Government to use all practicable means to promote maximum employment, production, and purchasing power. - Fiscal Policy: tax laws and government spending – determined by congress and the president- Monetary Policy: influence the money supply and interest rates – conducted by the Federal Reserve System.- Major Macroeconomic Goals:o Promote maximum production (economic growth)o Promote maximum purchasing power (stable prices)o Promote maximum employmento Smooth out the business cycle- Phases of the business cycle:o Expansion: period when real GDP is growingo Peak: turning point when real GDP peaks and begins fallingo Recession: period when real GDP is fallingo Trough: period when real GDP stops falling and beings rising- John Maynard Keynes:o Wrote The General Theory of Employment, Interest and Money in 1936o Argued that there is no automatic tendency for the economy to move toward full employmento Believes that unemployment is caused by a lack of sufficient aggregate demando Recommends increasing government spending and cutting taxes- Adam Smith:o Wrote The Wealth of Nations in 1776o Emphasized how a free market economy can allocate resources efficiently without central planning or government interference.o Emphasized that “The Invisible Hand” leads the private interests of consumers and producers towards socially desirable endso Emphasized benefits of specialization labor in order to increase productivity.- Production Possibilities Frontier (PPF)o Assumes: Fixed resources Fixed technology Full employment of resourceso Law of increasing costs – diminishing marginal returnso Economic growth shifts the frontiero Technological advances shifts the frontiero Capital goods vs. consumption goods; present consumption vs. future growtho Defense goods vs. consumption goods- Opportunity cost: the best alternative that we give up when we make a choice- Comparative advantage: the ability to produce something at a lower opportunity cost than other producers.- Types of economic systems:o Laissez faire Minimal government interference in the economy; let people do what theywanto Capitalism Emphasis on the free market system, producers and consumers are free to make their own choices Private ownership of property and means of production Profit motive gives producers incentive to produce what they want Prices are free to move up and down and provide signals about when to increase or decrease productiono Command economy The central government owns many of the factors of production (ex: government might own railroads, banks, hospitals, schools, etc.) Government planners often decide what will be produced and who will getthe output.o Socialism Significant amount of government interference in economic affairs Government controls many industries High taxes (tax the rich in order to redistribute money so the rich lose incentive to work) Government provides extensive health and unemployment benefitso Barter Economy Requires double coincidence of wants Inefficient because no money is involved and both sides need to have their wants met- Profits:o Increase the value of the factors of productiono When we earn a profit, we produce and sell a good or service at a price that exceeds the cost of the factors used to produce it; increased the value of the factors of production used to produce a good or service- Prices:o Determine who will buy what and how much of it they will buyo Effects inflation, employment, etc.- Forms of business enterprises:o Sole Proprietorship:  Individual person who works on their own Unlimited liability Business profits = sales revenue – business expenses Business profits are taxes as wage income on individual income tax return Largest type of business enterpriseo Partnership: Two or more people working together with an agreement Unlimited liability Business profits = sales revenue – business expenses Business profits are taxes as wage income on individual income tax returno Corporations: Controlled by stock ownership and have legal documentation Limited liability Sales revenue – business expenses = before tax profits Before tax profits – corporate taxes = after tax profits (what shareholders get) After tax profits = retained earnings + dividends- Retained earnings: portion of after-tax profits that are retained by the corporation for later use- Dividends: portion of after-tax profits that are distributed to stockholderso Reported on individual tax return of the stock holdero Taxed just like wage income Pay corporate taxes on profits Taxed twice- Types of bonds:o Corporate Bonds Interest is taxable Junk bonds (highest risk of default) Rated by Standard & Poors or Moodyso Municipal Bonds: Issued by cities and counties Interest is not taxable which is a big advantage for municipalities becauseit lowers the interest rate that municipalities’ pay Risk varies from city to cityo Treasury Bonds US government security of maturation which is 10 years or more Interest is taxable Least risky of all bonds- Taxable Income:o Income taxes are paid on taxable interest not gross incomeo Calculated by subtracting personal exemptions and standard deductions and also by subtracting either itemized deductions or contributions to IRA’s.- Gross income tax:o Calculated by adding up: Wages and tips Salary Sole proprietor profits Partnership profits Taxable interest (money in bank) Dividends