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Ec108 - Macro > The Goods Market > Flashcards

The Goods Market Flashcards

1
Q

When economists think about year-to-year movements in economic activity, they focus on

A

the interactions among production, income, and demand

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2
Q

1) changes in the demand for goods lead to changes in

A

production

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3
Q

2) changes in production lead to

A

changes in income

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4
Q

3) changes in income lead to

A

changes in the demand for goods

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5
Q

demand for goods Z =

A

Z = C + I + G + X - IM

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6
Q

In a closed economy

A

X = IM = 0

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7
Q

Closed economy Z =

A

Z = C + I + G

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8
Q

Composition of GDP: Consumption

A

goods and services purchased by consumers

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9
Q

Composition of GDP: Investment

A

the sum of non-residential investment and residential (houses) investment

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10
Q

Composition of GDP: Government spending

A

purchases of goods and services by the federal, state, and local governments; excluding government transfers

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11
Q

Composition of GDP: Exports

A

purchases of US goods and services by foreigners

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12
Q

Composition of GDP: Imports

A

purchases of foreign goods and services by US consumers, US firms and the US government

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13
Q

Composition of GDP: Net exports or trade balance

A

trade surplus: exports > imports
trade deficit: imports > exports

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14
Q

Composition of GDP: inventory investment

A

products made but not sold

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15
Q

% consumption in GDP 2014

A

68.3%

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16
Q

Consumption is a function of

A

disposable income (YD), which is the income that remains once consumers have received government transfers and paid their taxes

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17
Q

the consumption function

A

a behavioural equation that captures the behaviour of consumers

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18
Q

Consumption function is

A

a linear relation with two parameters, c0 and c1

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19
Q

Keynesian consumption function

A

C = c0 + c1YD

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20
Q

c1 in Keynesian consumption function

A

marginal propensity to consume, or the effect of an additional dollar of disposable income on consumption with 0 < c1 < 1

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21
Q

c0 in Keynesian consumption function

A

what people would consume if their disposable income equals zero with c0 > 0

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22
Q

Changes in c0 reflect

A

changes in consumption for a given level of disposable
income

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23
Q

Consumption increases with disposable income but

A

less than one for one (shallow gradient)

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24
Q

disposable income is

A

Yd = Y - T

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25
Q

T in disposable income is

A

taxes minus government

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26
Q

endogenous variables

A

variables depend on other variables in the model

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27
Q

exogenous variables

A

variables not explained within the model but are taken as given instead

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28
Q

investment =

A

I = I (bar)

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29
Q

bar on investment means

A

investment is a given

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30
Q

G and T describe

A

fiscal policy - the choice of spending taxes by the government

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31
Q

reason 1 why G and T are exogenous

A

governments do not behave with the same regularity as consumers or firms

32
Q

Reason 2 why G and T are exogenous

A

we will typically treat G and T as variables chosen by the government and will not try to explain them within this model

33
Q

Determination of Equilibrium Output step 1

A

Assume X = IM = 0 (closed economy), so
Z = C + I + G

34
Q

Determination of equilibrium Output step 2

A

Replacing C and I from equations (3) and (4)
Z = c0 + c1 (Y - T) + I(bar) + G

35
Q

Determination of Equlibrium Output step 3

A

Equilibrium in the goods markets requires
Y = Z

36
Q

determination of equilibrium output step 4

A

Replacing Z in (6) by equation (5) gives
Y = c0 + c1 (Y - T) + I(bar) + G

37
Q

determination of equilibrium output step 5

A

In equilibrium, production (Y ) is equal to demand, which in turn depends
on income (Y ), which is itself equal to production

38
Q

first tool macroeconomists use

A

algebra to make sure that the logic is correct

39
Q

second tool macroeconomists use

A

graphs to explain the results

40
Q

third tool macroeconomists use

A

words to explain the results

41
Q

To characterise equilibrium output in algebra step 1

A

Rewrite equation (7)
Y = c0 + c1Y - c1T + I(bar) + G

42
Q

To characterise equilibrium output in algebra step 2

A

Reorganize the equation
(1 - c1) Y = c0 + I(bar) + G - c1T

43
Q

T o characterise equilibrium output in algebra

A

Y = (1/(1 - c1))(c0 + I + G - c1T
i)

44
Q

autonomous spending

A

(c0 + I + G ¡ c1T)
is the part of the demand for goods that does not depend on output

45
Q

autonomous spending is positive because

A

if T = G (balanced budget) and c1 is between 0 and 1, then (G - c1T) is positive, and so is autonomous spending

46
Q

multiplier

A

The term 1/(1 - c1) r, which is larger than 1 as 0 < c1 <
1.

47
Q

the multiplier is larger when

A

c1 is closer to 1

48
Q

an increase of consumption will increase output by

A

multiplier
* consumption increase

49
Q

To characterise the equilibrium graphically step 1

A

Plot production as a function of income. Because production equals income, their relation is the 45-degree line

50
Q

to characterise the equilibrium graphically step 2

A

Plot demand as a function of income
Z = (c0 + I(bar) + G - c1T) + c1Y

51
Q

to characterise the equilibrium graphically part 3

A

in equilibrium, production equals demand

52
Q

equilibrium output is determined by the condition that

A

production is equal to demand

53
Q

if c0 increases by $1 bil, an increase in autonomous spending has a ________- effect on equilibrium output

A

more than one-for-one

54
Q

pattern to get to equilibrium after demand shifts up

A

first round increase in demand -> first round increace in production -> second round increase in demand -> second round increase in production

55
Q

the total increase in production after n+1 rounds is

A

a geometric series with a limit of 1/(1 - c1) which is the multiplier

56
Q

equilibrium output in words 1

A

Production depends on demand, which depends on income, which is itself equal to production

57
Q

equilibrium output in words 2

A

an increase in demand leads to an increase in production and income which in turn leads to a future increase in demand

58
Q

equilibrium output in words 3

A

the increase in output is larger then the initial shift in demand, by a factor equal to the multiplier

59
Q

equilibrium output in words 4

A

The multiplier depends on the propensity to consume, which can be estimated using econometrics – the set of statistical methods used in economics

60
Q

dynamics of adjustment

A

the adjustment of output over time

61
Q

how long the adjustment takes depends on

A

how and when firms revise their production schedule

62
Q

John Maynard Keynes articulated an alternative model that focuses instead on …

A

investment and saving in the General Theory of Employment, Interest and Money in 1936

63
Q

Private saving (S) is

A

S ≡ YD - C
S ≡ Y - T - C

64
Q

by definition public saving =

A

T - G

65
Q

budget surplus

A

public saving >0

66
Q

budget deficit

A

public saving < 0

67
Q

Generating IS relation step 1

A

In equilibrium Y = C + I + G

68
Q

Generating IS relation step 2

A

Subtract T from both sides and move C to the left side
Y - T - C = I + G - T

69
Q

Generating IS relation step 3

A

The left side of the equation is simply S, so
S = I + G - T

70
Q

Generating the IS relation step 4

A

Or equivalently I = S + (T - G)

71
Q

Two equivalent ways of stating the condition for equilibrium in the goods market

A

production = Demand
investment = saving

72
Q

Algebra of output equilibrium using IS relation step 1

A

Because consumption behaviour implies that
S = Y - T - C
= Y - T - c0 - c1(Y - T)
Rearranging terms, so
S = -c0 + (1 - c1) (Y - T)

73
Q

marginal propensity to save

A

1 - c1 between zero and 1

74
Q

Algebra of output using IS relation step 2

A

In equilibrium, I = S + (T - G), so that equation (10) becomes
I = -c0 + (1 - c1)(Y - T) + (T - G)

75
Q

Algebra of output equilibrium using IS relation step 3

A

Solve for output
Y =
(1/(1 - c1))
[c0 + I + G - c1T]

76
Q

Algebra of output equilibrium using IS relation step 4

A

this is the same as equation (8) where I = I(bar)

Ec108 - Macro (2 decks)

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