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lah dee dah II
lah dee dah II
34
Economics
1st Grade
03/30/2009

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Term
3 reasons AD slopes down
Definition
1) Real Balance Effect ("Wealth Effect")
2) Interest Rate Effect
3) International Effect
Term
Real Balance (Wealth) Effect
Definition
price level increases (inflation) reduce the real value of money balances (up P = down M/P = down C = down AD)
Term
Interest Rate Effect
Definition
if real balances fall, savings declines (down savings = up interest rate = down quantity of investment)
Term
international effect
Definition
if the price level of the US goes up, we will import more and export less, meaning our net exports and therefore AD will decrease
Term
5 factors that shift AD
Definition
1) Real income and wealth
2) Foreign Income and Wealth
3) Expected Income and Wealth
4) Expected Inflation (buy what you need immediately)
5) Exchange Rate (higher exchange rate means dollar depreciation = less imports and more exports)
Term
Why does the AS curve slope up?
Definition
If input and output prices change uniformly, there is no change in output, but if only output prices rise/fall, increase/decrease output
Term
Which prices (input vs. output) adjust more slowly?
Definition
input prices (workers, capital, raw materials) adjust slower than output prices (services, goods)
Term
Y*
Definition
full employment output (when u=u*)
Term
3 factors that shift SRAS only
Definition
1) supply shocks (weather)
2) resource prices (input prices, -)
3) expected inflation (-)
Term
3 factors that shift LRAS
Definition
1) resources (land, labor, capital)
2) technology
3) institutions (property rights, income taxes, social stigmas)
Term
3rd rotunda principle
Definition
the three sources of economic growth are resources, technology, and institutions
Term
Beliefs of Classical economists
Definition
1) prices inflexible in both directions (no SRAS)
2) focus on the supply (LRAS) rather than demand
3) focus on LRAS makes the economy seem inherently stable
4) no extended unemployment or significant contractions/recessions
Term
Beliefs of Keynesian economists
Definition
1) prices inflexible downward (fixed contracts and money illusion)
2) when prices don't adjust, output must
3) AD determines output or real GDP
4) in the LR, we're all dead
Term
fiscal policies
Definition
1) government spending
2) taxes
Term
monetary policies
Definition
changes in the money supply (to affect interest rates)
Term
quantity theory
Definition
MV=PY (money x velocity = price level x real income)
Term
three stages of fiscal policy (Colander)
Definition
1) triage policy (financial sector is the heart, need to keep it going at all costs)
2) treatment policy (monetary and fiscal policies, as well as expectations)
3) rehabilitation stage (repair the damage done in the other two stages)
Term
discretionary spending
Definition
spending in which year-to-year spending adjustments allowed (defense spending and misc. spending)
Term
mandatory spending
Definition
obligatory payments based on existing laws (social security, medicare, etc.)
Term
long run trends in government expenditures (outlays and revenues)
Definition
1) mandatory spending rising - 26% to 62%
2) defense declining - 49% to 21%
3) discretionary declining - 67% to 38%
Term
national debt
Definition
net accumulation of budget defecits
Term
marginal propensity to consume
Definition
portion of additional income used for consumption (MPC) where 0
Term
2 types of keynesian fiscal policy (general)
Definition
expansionary and contractionary (recessionary)
Term
3 critiques of keynesian fiscal policy
Definition
1) lags (recognition, implementation, and impact)
2) crowding out
3) new classical critique
Term
three types of lags (and description)
Definition
1) recognition lags - difficult to realize when the government should use expansionary or recessionary policy
2) implementation lags - fiscal policy requires laws and congressional agreement as well as actual implementation by bureaucrats which takes a lot of time
3) impact lag - allows for the fact that fiscal policy takes a while to impact the economy
Term
4 types of automatic stabilizers
Definition
1) progressive income taxes
2) corporate income taxes
(change in T)
3) Unemployment insurance
4) welfare payments
(change in G)
Term
crowding out
Definition
government must compete with private borrowers for funds, effectively "crowding them out" of the market
Term
new classical critique
Definition
more debt today means higher taxes later, and people know this, so that AD is unchanged, because while government spending goes up, savings do as well, reducing the effects of the fiscal policy ("inflation is always and everywhere a FISCAL phenomenon)
Term
progressive income tax
Definition
any tax system in which the tax rate rises with income
Term
marginal tax rate
Definition
tax rate on next dollar of income
Term
average tax rate
Definition
total tax bill as a portion of income
Term
Laffer curve
Definition
tax rate increase can increase tax revenue, but only up to a certain point, were it will decrease revenue (decreased propensity to work to earn an extra dollar or fraction thereof)
Term
4 methods to enact supply-side fiscal policy and their goals
Definition
1) lower income taxes
2) lower corporate profit taxes (more encouragement for innovation and technological development)
3) tax credits for research and development
4) educational subsidies
goal: shift out the LRAS curve
Term
principle tool of supply-side keynesian fiscal policy (and three examples)
Definition
marginal income tax RATES (progressive invome tax, marginal tax rate, average tax rate)
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