Flashcards: Money, Demand, Supply and Interest — 90 cards

What does microeconomics study under ceteris paribus?

Individuals or relatively small sectors.

What does macroeconomics study?

The economy as a whole and combined effects of individual choices.

Name one main macroeconomic aggregate.

Total output.

What is the formula for aggregate demand (AD)?

$AD = C + I + G + X - M$.

Why is aggregation difficult in macroeconomics?

Different goods and services have different physical units.

How is real output estimated?

By deflating total output value with a price index to get constant-price output.

What is national income?

The sum of factor incomes excluding transfer payments.

What is consumption in macroeconomics?

Household expenditure.

What distinguishes aggregate demand from national expenditure?

Aggregate demand is planned expenditure, national expenditure is actual spending.

What is aggregate supply in macroeconomics?

It is the total value of all final goods and services firms wish to supply.

When does macroeconomic equilibrium occur?

When aggregate demand equals aggregate supply with no forces changing income.

What is the income identity formula?

$Y = C + S + T$ where income is split into consumption, saving, and taxes.

What is the equilibrium condition for injections and withdrawals?

$I + G + X = S + T + M$ under macroeconomic equilibrium.

How does the AD–AS model depict aggregate demand and supply?

Aggregate demand slopes downward, aggregate supply slopes upward against price level.

What determines equilibrium in the AD–AS model?

The intersection of aggregate demand and supply curves sets equilibrium income and price.

In which year did Keynes publish The General Theory of Employment, Interest and Money?

1936

What does classical macroeconomics emphasize about markets?

Markets work best when left alone.

What does Keynesian macroeconomics argue about government intervention?

Government intervention can improve economic performance.

Which economist is especially associated with monetarism in the 1960s and 1970s?

Milton Friedman

What does monetarism treat as a critical determinant of economic outcomes?

Money

Name one economist associated with new classical macroeconomics.

Robert Lucas

What are the three assumptions of the new classical school?

Agents maximize, expectations are rational, and markets clear.

What does rational expectations imply about people's predictions and government policies?

People form best predictions and understand policies, so they cannot be fooled easily.

What do Classical economists assume about wages and prices?

They assume wages and prices are flexible and continuously clear markets.

What causes price rigidities and unemployment according to New Keynesians?

Information problems and adjustment costs cause price rigidities and unemployment.

What does rational expectations imply about people's predictions?

People use all available information to form statistically best predictions of the future.

Why can't predictable government policy systematically fool most people under rational expectations?

Because people anticipate and adjust to predictable policy effects.

What do New Keynesians argue causes macroeconomic fluctuations in output and employment?

Information problems and costs of changing wages and prices cause fluctuations.

Why do Monetarists oppose discretionary stop-go demand management?

Because repeated expansions and contractions increase inflation and unemployment.

What monetary policy do Monetarists favor?

A fixed annual money-supply growth rule such as 3 percent.

Why do New Classical economists reject adaptive expectations?

Because rational producers anticipate announced policy effects, negating temporary output changes.

What is long-run aggregate supply associated with?

The natural level of output, denoted Qn, in long-run equilibrium.

What happens to price level and real GNP when aggregate demand falls from AD2 to AD1?

Both price level and real GNP fall.

What occurs to unemployment when aggregate demand falls from AD2 to AD1?

Unemployment rises above its natural rate.

What can restore long-run equilibrium after aggregate demand falls?

A gradual decline in prices and input costs.

When does a deflationary gap occur?

When real output is below natural level and unemployment exceeds its natural rate.

When does an inflationary gap occur?

When real output exceeds natural level and unemployment falls below its natural rate.

What do classical economists say about changes in aggregate demand?

They change the general price level but not full-employment output.

What policies do Keynesians recommend to reduce interest rates and raise spending?

Expansionary fiscal policy and expansionary monetary policy increasing money supply.

What is the circular flow in economics?

The continual movement of money, goods, and services between households and firms.

What is the formula for total income in a two-sector economy?

$Y = C + I$

What do real flows consist of in the circular flow model?

Factors moving from households to firms and goods and services moving from firms to households.

In which direction do money flows move in the circular flow model?

Opposite to real flows, from firms to households and from households to firms.

What roles do households play in the two-sector model?

They supply factors of production and consume final output.

What roles do business firms play in the two-sector model?

They employ factors, produce output, and sell goods and services.

What effect do injections have on the spending flow in the circular economy?

Injections increase the spending flow.

What effect do leakages have on the spending flow in the circular economy?

Leakages reduce the spending flow.

What distinguishes injections from leakages in the circular flow?

Injections increase spending, while leakages reduce spending.

What do households do in the two-sector circular flow model?

Households sell factor services and buy final output from businesses.

What do businesses do in the two-sector circular flow model?

Businesses pay factor incomes and sell goods and services to households.

What assumptions does the two-sector circular-flow model make?

It assumes a closed economy with production only in business, full sales, full household consumption, and no government or external transactions.

What does the three-sector model add to the circular flow?

It adds government expenditure and taxation.

What additional elements does the four-sector model include?

It includes foreign trade through exports and imports.

What equilibrium condition applies in the four-sector open economy?

Total leakages equal total injections.

Which leakages and injections must balance in the four-sector model?

Leakages are savings, taxes, and imports; injections are investment, government expenditure, and exports.

What is national income accounting?

It is the systematic measurement of aggregate economic activity over a period.

What does gross national product measure?

The total market value of final goods and services by a country's citizens' resources in a period.

What is the formula relating GNP, GDP, and net factor income?

$GNP = GDP + NFI$

How is net factor income defined?

Factor income received from abroad minus factor income paid abroad.

What is the difference between GDP and GNP?

GDP measures production within borders; GNP measures production by citizens' resources.

Which approaches can measure GNP?

Product, expenditure, or income approaches.

What is the expenditure approach formula for GNP?

$GNP = C + I + G + (X-M)$

Why must intermediate goods be excluded from national output?

To avoid double-counting the same production.

How does nominal GNP value final output?

At current period prices.

How does real GNP value final output?

At constant prices from a base period.

What is the formula for calculating real GNP?

$Real\ GNP = \frac{Nominal\ GNP \times 100}{Price\ index}$

What is the real GNP if nominal GNP is 66 billion and price index is 110?

60 billion dollars.

What does the consumer price index estimate?

The percentage change in prices of a consumption goods basket.

What is the formula for the annual inflation rate?

$Inflation\ rate = \frac{CPI_t-CPI_{t-1}}{CPI_{t-1}} \times 100$

How is per-capita income calculated?

By dividing GNP by the population size.

What is per-capita income used for?

To compare economic growth across countries.

How does real GDP differ from nominal GDP?

Real GDP uses base year prices, nominal GDP uses current prices including inflation.

What is the expenditure approach formula for national output?

$Y=C+I+G+NX$

What does the GDP deflator measure?

The rise in prices from the base period used for real GDP.

How is the inflation rate calculated using CPI values?

By $RI=\frac{CPI_{1993}-CPI_{1992}}{CPI_{1992}}\times100$

What is disposable income?

Income consumers can spend or save in a period.

What is the formula relating disposable income, consumption, and saving?

$Y_d=C+S$

How is saving calculated from disposable income and consumption?

$S=Y_d-C$

What does the consumption function express?

The relationship between disposable income and consumer spending.

What is the formula for the consumption function?

$C=a+bY_d$

How is the average propensity to consume defined?

$APC=\frac{C}{Y_d}$

What is the formula for the marginal propensity to save and its relation to MPC?

$MPS=\frac{\Delta S}{\Delta Y_d}$ and $MPC+MPS=1$

What is the saving function if $C=a+bY_d$?

$S=-a+(1-b)Y_d$

When does equilibrium occur in a two-sector economy?

When aggregate demand equals aggregate supply.

What is the equilibrium income formula in a closed economy with government and constant tax rate?

$Y=\frac{1}{1-b(1-t)}(a+I+G)$

What is the approximate equilibrium income with $C=500+0.6Y_d$, investment 300, government spending 500, and tax rate 0.2?

Approximately 2,500.

What is the net export function in an open economy?

$X=g-mY$ where $m$ is the marginal propensity to import.

What is the open-economy multiplier formula?

$\frac{1}{1-b(1-t)+m}$

What does investment demand represent?

The desired change in the nation's capital stock including structures, equipment, residential construction, and inventories.

How does interest rate affect investment demand?

Lower interest rates encourage investment; higher rates discourage it.