TOPICS FOR FINAL EXAM MACROECONOMICS Factors of production land labor capital entrepreneurship What is meant by rational economic behavior trying to maximize the benefit with a given cost or minimize the cost for a given benefit Positive and Normative statements Positive statements or theories about how the economy works Normative judgments about what is good or bad or what courses of action should be taken Common Errors in Economic Reasoning 1 Fallacy of false cause after this therefore because of this post hoc ergo propter hoc Fallacy of composition 2 3 what holds for one person does not necessarily hold for everybody Ceteris paribus fallacy other things being equal cet Par an increase in interest rates will lead to decreased borrowing cet Par if gas prices increase people will switch to smaller cars What is meant by fiscal policy monetary policy Fiscal policy tax laws gov t spending Monetary policy influence the money supply or interest rates affects amount of money Employment Act of 1946 It is the responsibility of the Federal gov t to promote maximum employment production and purchasing power Major Macroeconomic policy goals in the United States 1 Price stability 2 Full employment 3 Economic growth 4 Stabilize the business cycle Phases of the business cycle Recession or depression trough expansion peak Recession two consecutive quarters of declining Real GDP Trough turning point where Real GDP stops falling and begins rising Peak turning point when Real GDP peaks and begins falling Expansion period when Real GDP is growing Importance of John Maynard Keynes The General Theory of Employment Interest and Money 1936 unemployment is caused by a lack of sufficient aggregate demand purchasing is slowed down the gov t should try to boost it using fiscal policy increase in gov t spending will stimulate the economy a tax cut will stimulate the economy Adam Smith and the Invisible Hand advantages of specialization Wealth of Nations 1776 good things will just happen naturally no gov t interference necessary advantages of specialization each person focuses on one part of something Production possibilities frontier Assumptions 1 Fixed resources 2 Fixed technology 3 Full employment of resources Law of increasing costs diminishing marginal returns Economic growth shifts the frontier Technological advance shifts the frontier Capital goods vs consumption goods present consumption versus future growth Defense goods vs consumption goods points inside the PPF are inefficient PPF shows max output possibilities that are available capital goods factories tractors drill presses etc used to make consumption goods consumption goods food clothes Opportunity cost what you have to give up to get something else Comparative advantage the ability to produce something at a lower opportunity cost Types of economic systems characteristics Laissez faire no interference Capitalism US emphasis on free market people make their own choices Characteristics private ownership of property and means of production profit motive people produce what people want price changes signal when to increase decrease production Command economy gov t determines what is made and who gets the output Socialism significant amount of gov t interference usually hired for life high taxes limits incentive to work or invent new products because you don t get the benefits the gov t does gov t provides a lot of health and unemployment benefits Japan Barter Economy requires double coincidence of wants trade economy The role of profit in the economy Increases value of factors of production The role of prices in the economy Forms of business enterprise advantages and disadvantages 1 Sole proprietor partnerships unlimited liability pay a lot of taxes bc business profits are taxed 3 Corporation limited liability pay corporate taxes on all profits pay out dividends Limited and unlimited liability Limited you aren t personally responsible Unlimited personally liable all of your stuff can be taken Corporate income taxes and double taxation of profits corporates pay taxes once on corporate profits and again as dividends Stocks people can buy them to obtain partial ownership Mutual funds Capital gains increase in the price of an asset Dividends payments to stockholders Retained Earnings portion of after tax profits that the company keeps for later use Corporate Bonds interest rate is taxable issued by corporations Treasury Bonds least risky of all bonds interest is taxable Municipal Bonds issued by cities and couties interest is not taxable advantage for municipalities bonds decrease in value if interest rates increase Balanced budget budget surplus budget deficit Surplus tax revenue is greater than government spending transfer payments Deficit tax revenue is less than government spending transfer payments The U S income tax system shitty Taxable income Personal exemptions things that you can deduct from your taxes Standard deduction versus itemized deductions standard is a set amount itemized deduction has separate categories you should choose whichever one will give you the most exemptions Marginal tax rates current max 35 did exceed 90 back in the day Average tax rate versus marginal tax rate Average tax rate the total amount taxed gross income Marginal tax rate the highest percent taxed from your income Classification of taxes progressive proportional regressive Progressive marginal tax rate increases as level of income increases Proportional marginal tax rate is constant regardless of level of income ex medicare social security Regressive marginal tax rate decreases as level of income increases ex sales tax Equitable Tax System Horizontal people with equal incomes should pay equal taxes problem don t have equal deductions Vertical people with higher incomes should pay more taxes Benefits principle those who benefit from public spending should pay more taxes to pay for that spending ex people who use a road a lot should pay more taxes on that Ability to pay principle people with a greater ability to pay should pay more taxes The Social Security system social security taxes are not paid on interest income dividends capital gains or royalties there are no deductions or personal exemptions Present Value Fn PV 1 i n Gross domestic product GDP total goods and services produced Nominal influenced by changes in prices nominal increase does not imply increase in real or output Real not influenced by changes in prices Components of Consumption GDP C I G NX