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3E1 Business Economics > Macroeconomics > Flashcards

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
consumer’s 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 Fisher’s 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

What does MPC x ΔY equal

ΔConsumption