Elasticity of Supply
(►Q / Avg Q)
(►P / Avg P)
Total Revenue - Total Costs
Both Implicit and Explicit
(1 - t)
(Consumption / Disposable Income)
1 - MPC(1 - t)
of a Country
S - I + (T - G - R)
Savings - Investments + (Taxes - Gov't Spending - Transfers)
Tools of Fiscal Policy
- Government Spending
Tools of Monetary Policy
- Open Market Operations
- Discount Rate
- Reserve Ratios
Consumer Price Index
ΣQc * Pc
————— * 100
ΣQb * Pb
Percent change of CPI basket relative to the base * 100.
When a government budget deficit causes a decrease in private investment.
Amount of additional output resulting from one additional unit of input.
Marginal Revenue Product
————————— * Price
MP * P
Giffen and Veblen Goods
Inferior, Do not violate fundamental axioms
High-Status, violate fundamental axioms
The sum of price times quantity of goods and services. Based on current prices so inflation increases nominal GDP.
The sum of price (in year n) times quantity (current year) of goods and services. Realative to a base year. Ignores inflation.
C + I + G + (X - M)
C = Consumption spending
I = Investment in business
G = Gov't purchases
X = Exports
M = Imports
- Supply creates it's own demand.
- Shifts in aggregate supply/demand are primarily driven by changes in technology.
- Economies have a strong tendency toward full-employment equilibrium.
- Recessions put downward pressure on the money wage rate.
- Over-full employment puts upward pressure on the money wage rate.
- Business cycles are temporary deviations from long-run equilibrium.
- Wages and prices of productive inputs (other than labor) are "downward sticky".
- Use monetary and fiscal policy to increase aggregate demand.
- Variations of aggregate demand are caused by inappropriate decisions made by monetary authorities.
- Recessions can be created by inappropriate decreases in the money supply or external shocks.
- Central bank should increase the money supply steadily and predictably.
- Business cycles are caused by government intervention in the economy.
New Classical Economics
- Real Business Cycle Theory (RBC)
- Emphasizes effect of real economic variables such as changes in technology and external shocks.
- Applies Utility Theory to Macroeconomics.
- Individuals and firms maximize utility.
- Policymakers should not try to counteract business cycles.
The time lag necessary to match employees who seek work with employers needing their skills.
Caused by long run changes in the economy that eliminate some jobs while creating others for which unemployed workers are not qualified.
Caused by changes in the general level of economic activity. Positive when the economy is operating at less than full capacity and can be negative when employment is over the full employment level.
Inflation rate that is decreasing but remains greater than zero.
Geometric mean of Laspeyres and Paasche indexes
- Results from a decrease in aggregate supply caused by an increase in real price of a factor of production (wages/labor, energy)
- Decreases GDP