TOPICS FOR FINAL EXAM: MACROECONOMICSFactors of production: land labor, capital, entrepreneurshipWhat is meant by rational economic behavior: trying to maximize the benefit with a given cost orminimize the cost for a given benefitPositive and Normative statements:Positive: statements or theories about how the economy worksNormative: judgments about what is good or bad or what courses of action should be takenCommon Errors in Economic Reasoning1. Fallacy of false cause-“after this, therefore because of this”-post hoc, ergo propter hoc2. Fallacy of composition-what holds for one person does not necessarily hold for everybody3. 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 carsWhat is meant by fiscal policy; monetary policyFiscal policy: tax laws & gov’t spendingMonetary policy: influence the money supply or interest rates (affects amount of money)Employment Act of 1946It is the responsibility of the Federal gov’t to promote maximum employment, production, and purchasing powerMajor Macroeconomic policy goals in the United States1. Price stability2. Full employment3. Economic growth4. Stabilize the business cyclePhases of the business cycle: Recession or depression, trough, expansion, peakRecession: two consecutive quarters of declining Real GDPTrough: turning point where Real GDP stops falling and begins risingPeak: turning point when Real GDP peaks and begins fallingExpansion: period when Real GDP is growingImportance of John Maynard KeynesThe 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 economyAdam Smith and the Invisible Hand; advantages of specializationWealth of Nations, 1776-good things will just happen naturally, no gov’t interference necessary-advantages of specialization: each person focuses on one part of somethingProduction possibilities frontierAssumptions1. Fixed resources2. Fixed technology3. Full employment of resourcesLaw of increasing costs - diminishing marginal returnsEconomic growth shifts the frontierTechnological advance shifts the frontierCapital goods vs. consumption goods; present consumption versus future growthDefense 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, clothesOpportunity cost-what you have to give up to get something elseComparative advantage-the ability to produce something at a lower opportunity costTypes of economic systems: characteristicsLaissez faire – no interferenceCapitalism – US, emphasis on free market, people make their own choicesCharacteristics: private ownership of property and means of production, profit motive (people produce what people want), price changes signal when to increase/decrease productionCommand economy – gov’t determines what is made and who gets the outputSocialism – 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’tprovides a lot of health and unemployment benefits (Japan)Barter Economy requires double coincidence of wants – trade economyThe role of profit in the economy- Increases value of factors of productionThe role of prices in the economy-Forms of business enterprise: advantages and disadvantages1. Sole proprietor & partnerships-unlimited liability, pay a lot of taxes bc business profits are taxed3. Corporation-limited liability, pay corporate taxes on all profits, pay out dividendsLimited and unlimited liabilityLimited: you aren’t personally responsibleUnlimited: personally liable, all of your stuff can be takenCorporate income taxes and double taxation of profits-corporates pay taxes once on corporate profits and again as dividendsStocks-people can buy them to obtain partial ownershipMutual funds-Capital gains-increase in the price of an asset Dividends-payments to stockholdersRetained Earnings-portion of after tax profits that the company keeps for later useCorporate Bonds-interest rate is taxable-issued by corporationsMunicipal Bonds-issued by cities and couties-interest is not taxable (advantage for municipalities)Treasury Bonds-least risky of all bonds-interest is taxable*bonds decrease in value if interest rates increaseBalanced budget; budget surplus; budget deficitSurplus: tax revenue is greater than government spending & transfer paymentsDeficit: tax revenue is less than government spending & transfer paymentsThe U.S. income tax system-shittyTaxable incomePersonal exemptions-things that you can deduct from your taxesStandard deduction versus itemized deductions-standard is a set amount, itemized deduction has separate categories-you should choose whichever one will give you the most exemptionsMarginal tax rates-current max: 35%-did exceed 90% back in the dayAverage tax rate versus marginal tax rateAverage tax rate: the total amount taxed/gross incomeMarginal tax rate: the highest percent taxed from your incomeClassification of taxes: progressive, proportional, regressiveProgressive: marginal tax rate increases as level of income increasesProportional: 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 SystemHorizontal: people with equal incomes should pay equal taxes (problem: don’t have equal deductions)Vertical: people with higher incomes should pay more taxesBenefits 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 taxesThe Social Security system-social security taxes are not paid on interest income, dividends, capital gains, or royalties-there are no deductions or personal exemptionsPresent ValueFn = PV (1 + i)nGross domestic product (GDP)-total goods and services producedNominal: influenced by changes in prices-nominal increase does