ECON 1113: FINAL EXAM
38 Cards in this Set
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5 Effects of Deflation
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1. Increased real burden on debtors and increased real benefits for lenders.
2. Reduced real wage of workers. 3. Increased real benefits of soldiers receiving fixed pensions. 4. Big business benefit b/c they can control their normal prices. 5. Small businesses see their profits fall as n…
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3 Types of Investment
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1. Business Fixed Investment
2. Residential Investment 3. Inventory Investment
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Business Fixed Investment
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A firm's spending on new structures and equipment used in production.
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Residential Investment
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Spending on new residences that are owned, occupied or rented.
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Inventory Investment
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A firm's spending on goods to be placed in inventory.
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Rho
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Estimated return of an investment.
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Investment Decision Rule
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Rho > i, make investment
i > Rho, don't invest.
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Determinants of MEI
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1. Expectations about future profitability
2. Technology
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Bullish
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Expect increased future profitability.
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Bearish
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Expect decreased future profitability.
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Monetarist View of V
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% Change in V = O
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Keynesian View of V
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V changes
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Monetarist View of M sub D
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M sub D is inelastic.
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Keynesian View of M sub D
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M sub D is elastic.
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Monetarist View of MEI
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Elastic.
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Keynesian View of MEI
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Inelastic.
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Treasury
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Executive branch department responsible for collecting taxes and financing government spending.
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Fed
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Quasi-public insitution responsible for nominal money supply.
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Short Run Effects of the Federal Budget Deficit
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1. Increased i
2. Decreased I 3. Changed composition of PTE (increased G leads to decreased I) 4. Complicate Fed's conduct of monetary policy
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"Crowding Out"
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The reduction in private investment brought about by deficit-financed increases in government spending.
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Long-Term Effects of the Federal Budget Deficit
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1. Reduce capital formation (fewer capital goods purchased) which in turn reduces the long-run rate of economic growth.
2. Reduce the overall efficiency of the economy b/c more resources are in the public sector & fewer are in the private sector.
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Supply-Side Economics
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School of thought that emphasizes the physical productive capacity of the economy.
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Marginal Tax Rates
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Tax rates imposed on incomes above certain thresholds (called marginal tax brackets).
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Relationship Between Supply-Side Economics & Marginal Tax Rates
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Supply siders believe that lower marginal tax rates provide an incentive to produce more (thus generating more income).
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Stagflation
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Situation in which inflation and unemployment are both increasing (impossible in the simple Keynesian model).
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Full-Employment Real GDP (Q)
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Physical output when the economy is operating at physical and technological capacity.
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Demand
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The amounts of a good or service that people are willing and able to purchase at various prices during some specified time period, ceteris paribus.
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6 Determinants of Demand
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1. Price of the good/service in question
2. Level of buyers' incomes 3. Number of buyers in the market 4. Buyers' expectations concerning future prices 5. Buyers' tastes 6. Prices of related goods & services (complement goods and/or substitute goods).
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5 Determinants of Supply
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1. Price of the good/service in question
2. Prices of the resources used to produce the good/service 3. Number of sellers in the market 4. State of technology 5. Sellers' expectations regarding future prices
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Price Floor
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Minimum level below which prices cannot legally fall. Contributes to excess supply.
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Price Ceiling
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Maximum level above which prices cannot legally rise. Contributes to shortages.
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Elasticity of Demand
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Elasticity of Demand = % Change in Quantity Demanded/% Change in Price
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Elasticity of Supply
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Elasticity of Supply = % Change in Quantity Supplied/% Change in Price
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4 Determinants of Demand Elasticity
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1. Number os substitutes available for the good/service in question.
2. Proportion of total buyers' income accounted for by the price of the good/service 3. Buyers' tastes for the good/service (whether it is perceived as a necessity or luxury) 4. The amount of time buyers have to adjust …
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Consumption Function
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Consumption decisions are made according to the following factors:
-Current level of disposable income -Expectations regarding future prices and earnings -Availability of credit -Existing stock of consumer goods -Level of consumer wealth
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Average Propensity to Consume
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Measures the proportion of disposable income that is spent on consumption.
Average Propensity to Consume = Total Current Consumption/Current Disposable Income
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Marginal Propensity to Consume
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Measures the proportion of any additional current disposable income that is spent on consumption.
Marginal Propensity to Consume = Change in Current Consumption Expenditure/Change in Current Disposable Income.
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Break-Even Level
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Point at which current consumption equals current disposable income.
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ECON 1113: FINAL EXAM