Eco part 2 Flashcards
(30 cards)
Q: State the Keynesian equilibrium condition for injections and leakages.
S+T+M=I+G+X.
Leakages = investments
Injections: These are the additions to the economy, like investment, government spending, and exports.
Leakages: These are the withdrawals from the economy, like savings, taxes, and imports.
Q: Define the marginal propensity to consume (MPC).
A: The fraction of additional disposable income spent on consumption:
Q: If MPC = 0.8, what is the value of the Keynesian multiplier?
k= 1/ 1 - 0.8 =5.
Q: What does the 45° line in the Keynesian cross diagram represent?
A: All points where aggregate expenditure equals aggregate income (AD = Y).
Q: Explain the paradox of thrift.
A: Increased saving reduces consumption, leading to lower aggregate demand and income, potentially worsening economic downturns.
Q: What is the formula for the accelerator effect?
A: α = ΔI/ΔY, linking investment to changes in output.
Q: How do cost-push inflation and demand-pull inflation differ?
A: Cost-push arises from supply shocks (e.g., rising oil prices), while demand-pull is due to excess aggregate demand.
Q: What is the natural rate of unemployment?
A: The unemployment rate when the labor market is in equilibrium, consisting of frictional and structural unemployment.
Q: List three components of the balance of payments.
A: Current account, capital account, and changes in foreign reserves.
Q: How does a devaluation affect exports and imports?
A: Exports become cheaper for foreigners, and imports become more expensive, improving the trade balance (if elastic).
Q: What does the Phillips curve illustrate?
A: A short-run inverse relationship between inflation and unemployment.
Q: Define real exchange rate.
RER=NER× P foreign / P domestic, adjusting nominal rates for price differences.
Q: What is hysteresis in unemployment?
A: Long-term unemployment causing skill erosion, reducing employability and creating persistent joblessness.
Q: What is the quantity theory of money equation?
MV = PQ, where M = money supply, V = velocity,P = price level, Q = real output.
Q: Explain stagflation.
A: High inflation combined with stagnant economic growth and high unemployment (e.g., 1970s oil crises).
Q: What is fiscal policy?
A: Government use of spending and taxation to influence aggregate demand and economic activity.
Q: What is the Laffer curve?
A: Illustrates the relationship between tax rates and tax revenue, suggesting excessive rates reduce revenue.
Q: How does the Solow growth model explain steady-state growth?
A: Long-run growth depends on exogenous factors like population growth and technological progress, not savings.
Q: What is endogenous growth theory?
A: Emphasizes internal factors (e.g., R&D, education) driving long-term growth, unlike exogenous models.
Q: Calculate APC if consumption = 500 and disposableincome = 600.
APC= 500 / 600 = 0.83.
Q: What is the output gap?
Difference between actual GDP and potential GDP ( Y - Y* ).
Q: How does a trade deficit relate to fiscal deficits?
M−X=(I−S)+(G−T). A fiscal deficit (G>T) can worsen the trade deficit.
Q: What is vertical equity in taxation?
A: Higher-income earners pay a larger fraction of income as tax (progressive taxation).
Q: Define disposable income.
A: Yd = Y−T, income available after taxes for consumption/saving.
