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MacroEconomics: Dolan
Part 3 of Finals review (CH's: 10-12 w/Supplementary Info)
36
Economics
Undergraduate 1
11/14/2009

Additional Economics Flashcards

 


 

Cards

Term
Aggregate Demand Model
Definition

The Sum of all Spending in the economy.

 

GRAPH

Term
What SPECIFIC 4 pieces does the Agg Demand model contain?
Definition

1. Consumption

2. Gov't spending

3. investment

4. net exports (exports-imports)

Term
3 Reasons why Agg Demand is in a downward Spiral
Definition

1. Wealth effect:  When Prices DOWN, consumers have more purchasing power.

2. Interest rate effect: Prices DOWN, Interest rates DOWN, people borrow more.

3. international effect: Prices DOWN so our goods become cheaper to foreign people, so the US exports more.

 

Term
Consumption
Definition

-# of consumers

-Income

-Expectation

-Demographics

Term
Increase in Aggregate demand (as it applies to consumption) means:
Definition

# of consumers UP

Income UP

Optimistic 

Younger population=More Spending

Term
Decrease in Aggregate Demand (as it applies to consumption) Means:
Definition

# of consumers DOWN

Income DOWN

Pessimism

Older Population

Term
Investment
Definition

Interest Rates

Excess capacity: A measure of business resources not being used.

Term

Increase in AGG Demand 2 (Investment)

 

Decrease in AGG Demand 2 (Investment)

Definition

Interest Rates DOWN

Little Excess Capacity

 

---

 

Interest Rates UP

Plenty of Excess Capacity

Term
Government (as it applies to the Aggregate Demand model)
Definition

Taxes

Spending

Term

Increase in Aggregate Demand (Gov't)

 

Decrease in Aggregate Demand (Gov't)

Definition

INC: Taxes DOWN

Spending UP

 

DEC: Taxes UP

Spending DOWN

Term
Net Exports (as it applies to AGG Demand)
Definition

Foreign Income

Foreign Price Level

Term

Increase in Aggregate Demand (Net Exports)

 

Decrease in Aggregate Demand (Net Exports)

Definition

INC: Foreign Income UP

Foreign Price Level UP

 

DEC: Foreign Income DOWN

Foreign Price Level DOWN

Term
3 Schools Of Economic Thought
Definition

I: Classical

II: Keynesian

III: Supply Side "Reaganomics" 

Term
Classical Theory Of Economics
Definition

-Adam Smith's. Wrote "Weath of Nations" 1789

-Economy Corrects itself

-NOT Pro Gov't Intervention

-Uses the Aggregate Demand Model

-Prices are Flexible

Term
What got us out of Great Depression?
Definition
WWII Or more accurately the massive Government spending associated with the War.
Term
Keynesian Economic Theory
Definition

-Aggregate expenditures model

-Economies Can't Correct themselves

-PRO Government Intervention.

-Prices and wages stick.

-named for: John Maynard Keynes - British Economist made famous for General Theory of Employment, Interest and Money, (Advised Roosevelt and the formation of his New Deal policies)


Term
Supply Side Economics
Definition

-Use a rise in aggregate supply to stimulate the economy

-Favors LESS Business Taxes

-And favors LESS Regulation

-Termed "Reaganomics" by some.

 

Term

Demand Pull Inflation: 

 

Definition

Caused by increase in Agg Demand

GDP UP. GRAPH:

Term
Cost Push Inflation
Definition

Stagflation Caused by Decrease in Agg Demand by higher resource price -Stagflation.

Price UP GDP DOWN

 

GRAPH

Term
Recession
Definition

Decrease in Aggregate demand caused by consumers


GRAPH

Term
How The economy Corrects itself:
(Need Graph AND Term+associated 4 pieces)
Definition

LRAS - Long Run Aggregate Supply: Full Capacity of the economy

1.) - Recession A-D Curves go left.

Shifts from AD0->AD1

2.) Prices fall from p0->p1 (Deflation)

3.) Prices of Inputs fall

4.) Lower resource prices = higher AGG Supply.

GRAPH;

Term

Aggregate Expenditures Model - Keynesian Theory

 

4 Components

Definition

1.) Gov't Spending

2.) Consumption

3.) Investment

4.) Net Exports

 

Same component IDEAS as Agg Demand model. Different components. Devil is in the details.

Term
Consumption (FOR THE A.E. Model)
Definition

Autonomous Consumption

Doesn't Depend on income (eat, rent, etc).

 

Graph

 

 

 

MPC: (Marginal Propensity to Consume) Percentage of increase in income I actually consume.

Term
Investment + Gov't (As they apply to the A.E. Model)
Definition

 Autonomous, Both stay the same as one another regardless of GDP.

(Graph)

 

Term
Net Exports (as they apply to A.E. Model) (And the first 2 Graphs associated with Nx)
Definition

Exports - Imports.

 

GRAPH

 

Trade Surplus - Exports are > than Imports

 

Trade Deficit - Exports are < than Imports

 

GRAPH 2

Term

Net Exports (as they apply to A.E. Model) Last graph+Gaps)

Definition

Last Graph

 

GDP Gap: Potential GDP-Actual GDP

Recessionary Gap: Increase in spending needed to close GDP Gap

Term

Circular Flow Diagram, Injections and Leakages

(list 3)

Definition

Graph

 

Injections: (Autonomous)

1.) Gov't Spending

2.) investments

3.) Exports

 

Leakages:

1.) Taxes

2.) Imports

3.) Savings 

Term
Paradox of Thrift
Definition

Good for an individual to save but everyone saving brings economy down

 

Equilibrium-Injections=Leakages

Term
Multiplier
Definition

Multiplier = 1/Leakages = 1/Svg+*Tx+IMPorts

 

Savings measured in MPS

 

*Ignore TX because cities have sales tax.

Term

MPS

 

 

MPI

Definition

MPS - Marginal Propensity to save

(% of an increase in income that is saved),

 

MPI - Marginal Propensity to Import

(% of an increase in income spent on imports.)

Term

Consumption (Formula)

 

MPC

Definition

Consumption = A+ (MPC x Income)

 

MPC (Marginal propensity to consume)=

% of an increase in income that is consumed.  

Term

Consumption+Savings Formulae

 

APC (And formula)

APS (And formula)

Real World Multiplier

Definition

APC = (Avg. Propensity to consume)

Total C/Total I= 2500/2000 = 1.25*

*=if >1 we are dissaving

 

APS = 1 - APC. 1-1.25= .25

(APS=Avg. propensity to save)

MPC+MPS=1

Multiplier in real world = or around 2.

 

APS+APC MUST=1.

Term
3 Reasons why fiscal policy may not work
Definition

1.) Ricardian Equivalence - When gov't borrows more to increase spending, people spend less and save more to prepare for future tax increases.

 

2.) Crowding out effect when a gov't increases its borrowing and interest rates increases.

 

3.) Lags: takes 6-18 months for fiscal policy to work.

a.) takes congress + economists several months to realize there's a problem. 

b.) takes 3-6 months to formulate policy

c.) After implemented takes 3-12 months to work.

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