Flashcards in Macroeconomics Deck (38):

1

## What are the 3 components of income to a closed economy

### Consumption, investment, gov expenditure

2

## What is a stock

###
A stock is a quantity measured at a point in time.

3

## What is a flow

###
A ow is a quantity measured per unit of time.

4

## What’s market clearing

###
An assumption that prices are exible, and adjust to

equate supply and demand.

Happens when prices are flexible rather than sticky

5

## What’s the aggregate demand eqn

### AD= C+I+G

6

## What is a consumption a function of

### Y-T

7

## What is Investment a fn of

### Interest rate

8

## What is the Aggregate supply eqn

###
F(K,L)

Function of capital and Labour

9

## Definition of consumption

### The value of all goods and services bought by households

10

## What is disposable income

### total income minus total taxes

11

## What is marginal propensity to consume (MPC)

###
The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.

It’s the slope of the consumption function C(Y-T)

12

## What’s average propensity to consume (APC) and how does it change with increasing income

###
A ratio of total consumption to total disposable income for different levels of disposable income It is calculated by dividing the amount of consumption by disposable income for any given level of income

It falls as income rises (more likely to save as income rises)

13

## Difference between Keynes and Fisher models for consumption

###
Keynes: Current consumption depends only on current income.

Fisher: consumption depends on lifetime income, and people

try to achieve smooth consumption. (depends only on the present value of

lifetime income.)

14

## What 8s the lifetime resources eqn

###
Wealth + years to retirement x annual income

W + RY

15

## What is the smooth consumption eqn

### Lifetime resources / lifetime years

16

## What is the Life Cycle hypothesis

###
The LCH says that income varies systematically over the phases of the

consumers life cycle, and saving allows the consumer to achieve smooth

consumption.

17

## For the Permanent income hypothesis, what is the income equation

###
Y= Yp + Yt

Permanent plus transitory income

18

## What is the PIH consumption eqn

###
C= aYp

a > 0 is the fraction of permanent income that people consume per

year.

19

## What’s the difference between the PIH and LCH

###
LCH: current income changes systematically as people move through their life

cycle.

PIH: current income is subject to transitory uctuations.

20

## What is the basis behind the random walk hypothesis

###
based on Fishers model & PIH, in which forward-looking consumers base

consumption on expected future income

If PIH is correct and consumers have rational expectations, then consumption

should follow a random walk (i.e., a martingale): changes in consumption

should be unpredictable.

Consumption appears random as consumers have factored in

changes in permanent income, so the changes dont actually affect C.

21

##
What is the principle behind the consumption model of instant gratification

###
people are likely to not be perfect decision makers,

Save too little due to instant gratification of

consuming.

22

## Gross investment

### Total capital spending

23

## Net investment

###
Gross investment minus an estimate for capital

consumption (replacement for depreciated goods)

24

## What are the 3 components to the cost of capital

###
Interest cost

Depreciation

Capital loss (negative as capital gain reduces cost of capital)

25

## Factors that affect levels of investment

###
Business confidence

Profitability

Public policies

Technological shocks

Inadequate financial systems

26

## Name 4 types of gov spending

###
Current spending

Capital spending

Interest payments

Transfer payments

27

## 3 types of taxes

###
Direct taxes (on earnings)

Indirect taxes (on expenditures)

Wealth taxes (capital transfer)

28

## Why don’t monopolists operate in inelastic demand section

### As here the marginal revenue is negative

29

## Equation for Lerner Markup Index and what is it a measure of

###
L = P - MC / P

Measure of Market power

Higher numbers is greater market power

Perfectly comparative firm L = 0

L = 1 monopoly power

Can also be written as - 1/demand elasticity. Less elastic demand implies more market power.

30

## How does Lerner index correspond with price distortions

### Higher Lerner markup index shows higher price distortion (due to low demand elasticity)

31

## Define market power

### The ability of a firm to profitably charge a price above the perfectly competitive levels

32

## In perfect competition what is the long run price

### P= marginal cost = min AC

33

## In a monopoly what is relation between MR and MC

### MR = MC when at optimal quantity (profit maximisation)

34

## Why do monopolist firms only operate in elastic region

### The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic

35

## MR equation in terms of P and e

### MR = P ( 1 + 1/e )

36

## What is MPK

### Marginal product of capital, the additional output as a result of an additional unit of capital.

37

## Define the Gov spending multiplier and give it’s equation

###
The increase in spending resulting from a £1 increase in G

= MPC / 1 - MPC

38