Review Qs Flashcards
Real vs. Monetary Flows
Real is stuff (consumer goods, factors of production, labor), Monetary is payment
Why is purchasing a bond not an investment?
Because buying a bond is simply exchanging two financial instruments. Real investment is when you buy things that will be used to create more stuff later. Buying a bond is a form of saving by loaning your money to a company for their use in investment.
What is equilibrium in the circular flow model?
When E=Y. Savings need to equal I + G + (X-IM) because C + S = Y, and E = C + I + G + (X-IM).
What happens if there is disequilibrium?
There will be unplanned inventories, either positive or negative. Firms will either increase or decrease production in response. This will result in equilibrium but most likely not full employment, as there is nothing taking it to full employment.
Real Consumption Function Equation
C = a - bT - b(1-t)Y
Why do unplanned inventories have an effect?
Closely related to expectations (which are huge for Keynesians). If you don’t sell as much as you expected to you will revise future plans and therefore produce less. Less production equals less Y, which will lead to equilibrium?
Define the Multiplier
The number one needs to multiply an initial shock by to find the total change in Y. This is greater than 1 because there is a series of induced re-spending effects, as people spend the additional income they receive that becomes income for other people. Sum of an infinite geometric progression
In general, how big should gov policy be for more or less spending?
Gap to full / multiplier
How big should a tax break be to fix a gap?
Fixed Tax: 100 dollar of tax increase leads to (mpc)*100 in spending decrease.
How big should a tax break be to fix a gap?
Fixed Tax: 100 dollar of tax increase leads to (mpc)*100 in spending decrease.
How does classical labor market respond to a decrease in aggregate demand?
In the classical system, full employment is achieved automatically due to wage-price flexibility. When AD drops, that lowers the price level. This creates a higher real wage, (because money wages have stayed the same so far), however, that would lead to too many people wanting to work, so to fix that the money wage drops until its back into line with the previous real wage.
Justification for downward sloping demand curve?
1) Wealth Effect (money value in the bank can buy more stuff as price decreases). 2) Lower prices may attract more foreigners (because of relative prices). 3) Lower prices may lead to lower interest rates, increasing investment which means more demand.
Justification for downward sloping demand curve?
1) Wealth Effect (money value in the bank can buy more stuff as price decreases). 2) Lower prices may attract more foreigners (because of relative prices). 3) Lower prices may lead to lower interest rates, increasing investment which means more demand.
How to Calculate unplanned inventories?
By finding the E at the certain Y. Keep it simple.
