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42 Cards in this Set
- Front
- Back
CH. 7
determined by the equal contribution of both demand and costs of production |
Equilibrium price
note that: aggregate expenditure and aggregate supply contribute to equilibrium national income. |
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Spending by consumers on consumption goods, spending by businesses on investment goods, spending by government, and spending by foreigners on net exports.
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Aggregate expenditure
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Recall that the amount of consumer income spent on consumption and saving is represented by:
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Y = C + S
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recall that the amount of production goods and investment goods produced by producers is represented by:
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Y = C + Ii
note that: The I = S equation describes the economy in macroequilibrium. No excess demand or supply exists. Aggregate expenditure equal aggregate supply. |
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C + Ii = C + S, where saving equals intended investment
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Equilibrium level of national income
note that: The I = S equation describes the economy in macroequilibrium. No excess demand or supply exists. Aggregate expenditure equal aggregate supply. |
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Goods produced for consumption that remain unsold.
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Unwanted inventories
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Investment spending that producers actually make – that is, intended investment (investment spending that producers intend to undertake), plus or minus unintended changes in inventories.
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Actual investment (Ia)
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A curve that shows the quantity of aggregate expenditures at different levels of national income or GDP.
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Aggregate expenditure curve (AE):
note that: The intersection of the 45° income curve and AE identifies the economy’s equilibrium position. -When Ii > S, producers hire more workers to replace depleted inventories. Y increases and continues to increase until Ii = S. -When S > Ii, inventories build up and producers lay off workers. Y decreases until Ii = S. |
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The multiple by which income changes as a result of a change in aggregate expenditure
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Income multiplier
It is written as: multiplier = (change in Y )/(change in AE) |
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The formula to determine the income multiplier is written as...
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1/(1 - MPC).
Since (1 - MPC) = MPS, the formula can be written: 1/MPS. |
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The more people try to save, the more income falls, leaving them with no more and perhaps even less saving
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The paradox of thrift
(S > Ii). The equilibrium level of national income falls. |
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CH. 8
• Relatively brief periods of unemployment caused by people deciding to voluntarily quit work in order to seek more attractive employment |
Frictional unemployment
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Unemployment that results from fundamental technological changes in production, or from the substitution of new goods for customary ones
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Structural unemployment
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Unemployment associated with the downturn and recession phases of the business cycle.
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Cyclical unemployment
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• Unemployed people who give up looking for work after experiencing persistent rejection in their attempts to find work.
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Discouraged workers
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Workers employed in jobs that do not utilize their productive talents or experience
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Underemployed workers
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People who are gainfully employed or actively seeking employment
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Labor Force
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The rate of unemployment caused by frictional plus structural unemployment in the economy
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The Natural rate of Unemployment
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An employment level at which the actual rate of unemployment in the economy is equal to the economy’s natural rate of unemployment
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Full Employment
I.E. Cyclical unemployment is zero |
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The amount by which aggregate expenditure falls short of the level needed to generate equilibrium national income at full employment without inflation
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Recessionary Gap
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The amount by which aggregate expenditure exceeds the aggregate expenditure level needed to generate equilibrium national income at full employment without inflation
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Inflationary Gap
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Government spending and taxation policy to achieve macroeconomic goals of full employment without inflation
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Fiscal Policy
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Government spending equals tax revenue. The equation is written:
G = T, Where G = government spending and T = tax revenue. |
Balanced budget
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The multiple by which the equilibrium level of national income changes when a dollar change in taxes occurs. The multiple depends upon the marginal propensity to consume.
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Tax Multiplier
The equation for the tax multiplier is: -MPC/(1 - MPC). |
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The effects on the equilibrium level of national income of an equal change in government spending and taxes. The balanced budget multiplier is 1.
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Balanced Budget Multiplier
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Government spending exceeds tax revenues
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Budget deficit
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Tax revenues exceed government spending.
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Budget surplus
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CH. 9
An increase in real GDP, typically expressed as an annual rate of real GDP growth. |
Economic growth
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Principal factors that contribute to a nation’s economic growth:
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1) The size of its labor force
2) The degree of labor specialization 3) The size of its capital stock 4) The level of its technology |
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The ratio of capital to labor, reflecting the quantity of capital used by each laborer in production
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Capital-labor ratio
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The quantity of GDP produced per worker, typically measured in quantity of GDP per hour of labor
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Labor productivity
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A rise in the ratio of capital to labor.
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Capital deepening
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The ratio of capital stock to GDP
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Capital-output ratio
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• Wars, changes in climate, population booms, clustering of innovations, changes in consumer confidence, changes in government spending, or changes in international exchange rates.
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externally induced cycles
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According to William Stanley Jevons, years of good harvest, low food prices, and higher real income and employment, is what theory of the business cycle
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Sunspot theory
it states that: years of good harvest, low food prices, and higher real income and employment, are inversely related to the number of sunspots. • The sunspot theory mostly applies to agricultural economies, and is less relevant to modern industrialized countries. |
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• Wars require massive increases in government spending, which tends to increase economic growth. Marxists and others have argued that wars are sometimes engineered to get us out of economic crises.
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War-induced cycles
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• Disasters or low interest rates spur large investments in new housing, which in turn promotes increased economic growth. As housing investment slows, so too does economic growth
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housing theory of the business cycle
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• Pioneering innovations promote a host of supporting innovations in clusters, and thus produce their own variety of business cycle. Steam engines, railroads, electricity, cars, and computers offer some examples.
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innovation theory of the business cycle
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Changes in investment spending and changes in national income are mutually reinforcing due to the role of expectations
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internally induced business cycles
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• The relationship between the level of investment and the change in the level of national income
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Accelerator
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• Fiscal policy designed to moderate the severity of the business cycle
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Countercyclical fiscal policy
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• The time interval between deciding on an appropriate policy and the execution of that policy.
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Administrative lag
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