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37 Cards in this Set
- Front
- Back
How does the economy solve problems? |
Classical or Keynesian approach |
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Classical |
focuses on supply of the market |
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recessionary gap (classical) |
economy is too small -> wages drop -> bus. profit increases -> bus expansion -> shift of supply curve to right, eliminates gap |
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inflationary gap (classical) |
economy is too big -> wages rise -> bus profit decline -> bus reduce activities -> shift of supply curve to left, eliminates gap |
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five basic principles of classical |
focuses attention on supply (production provides answers to problems) | market is central focus | govt has minor, minimal role (should not be involved) | marketplace should be flexible (price/wages should change) | marketplace is always balance (supply = demand, if not balanced, will do so on its own) |
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Seys law |
supply creates its own demand |
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Keynesian approach |
made by John Meynard Keynes, focuses on demand |
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Keynesian vs classical |
Market is rigid (classical = flexible) | market won't solve its own problems (classical it does) | govt fixes problems (classical = no govt involvement) | demand comes from consumers and businesses) |
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determinants of consumer spending |
key influence -> income income from last pay confident from earning it income you will earn |
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marginal perpencity to consume |
how much you will spend & save from last paycheck = change in comsumption / change in income |
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non income determinants |
wealth, how much you borrow, future expectations, real current interest ratios |
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wealth effect |
higher wealth, higher spending |
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average perpencity to consume |
how much you would save/spend from all paychecks = consumption / income |
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business spending |
main goal -> profit |
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calculating benefit of a project |
expected rate of return (company earnings) / amount of investment |
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cost of project |
determined by real interest rates |
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what effects decision of a project |
rate > cost -> project is done cost > rate -> money is not spent higher interest rate -> less is spent |
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what can change how you calculate rate of return |
cost of acquisition, business taxes, tech changes in production, amount of capital goods available, planned inventory changes, expectations |
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reasons for unstable business spending |
unstable = varies year to year variability of company expectations | durability of equipment | irregulatory of development of new products | variability of profit (key source of investment money) |
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expenditure multiplier |
magnified effect on GDP when money is spent when $$ is earned, it is spent over and over again = 1 / (1 - MPC) OR 1 / MPS |
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change in GDP |
amount of spending * multiplier |
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expansion and decline of GDP |
investment > savings = decline in inventory -> GDP expands |
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equilibrium GDP |
savings = investment aggregate expenditures intersects 45 degree line |
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fiscal policy |
too little demand = govt must pick up slack |
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two reactions to recessionary gap |
increase govt spending both are discretionary fiscal policy |
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two reactions to GDP gap |
(diff between potential and actual GDP) GDP gap / expenditure multiplier = how much should be spent |
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tax multiplier |
MPC / 1 - MPC |
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automatic stabilizers OR nondiscretionary fiscal policies |
govt expenditures that happen automatically |
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criticism of got involvement |
long time lag, decisions are political and not economic, state govt does the opposite of federal |
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crowding out effect |
govt borrows money = higher interest rate (bus invest less) |
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budget deficit |
govt spends more than it collects in a year |
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national debt |
total money govt borrows over the past year that isn't paid back |
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3 reasons govt collects |
recessions, military activities, undisciplined physical actions (govt cuts taxes, not spending) |
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ways to see national debt |
actual # (18 trillion) | debt compared to GDP (ratio) |
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issues with national debt |
bankruptcy (govt can go bankrupt but not likely) |
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real effect of debt on ecnomy |
more unequal income distribution, higher taxes (disincentives work/investment), loss of resources to other countries, crowding out effect |
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fixing GDP gap |
GDP gap / expenditure multiplier |