The Goods market: general questions Flashcards
(36 cards)
What determines output in the short run?
Demand determines output
In macroeconomics, short-run output is influenced by demand fluctuations.
What is the formula for GDP?
GDP ≡ C + I + G + X - IM + Is
C: Consumption, I: Investment, G: Government spending, X: Exports, IM: Imports, Is: Inventory investment.
What does Z represent in macroeconomics?
Z ≡ C + I + G + X - IM
Z represents aggregate demand.
What is the relationship between Y and Z?
Y = Z
This indicates that output (Y) is equal to demand (Z).
What is disposable income (YD)?
YD = Y - T
Y is total income and T is total taxes.
How is consumption (C) defined in relation to disposable income?
C = c0 + c1 * YD
c0 is autonomous consumption, and c1 is the marginal propensity to consume.
What is the formula for saving (S)?
S ≡ Y - T - C
Saving is defined as income after taxes and consumption.
What does the fiscal policy encompass?
T and G describe fiscal policy
T: Taxes, G: Government spending.
What does the equilibrium condition in the goods market state?
Y = Z
In equilibrium, production equals demand.
What is the fiscal multiplier?
Multiplier = 1 / (1 - c1)
The fiscal multiplier indicates how much output will increase in response to an initial increase in demand.
What happens to equilibrium output when autonomous spending increases?
ΔY = ΔZ / (1 - c1)
This reflects the effect of increased autonomous spending on output.
What is the definition of net exports (NX)?
NX = X - IM
Net exports represent the difference between exports and imports.
What is the consumption function?
C = c0 + c1 * YD
This function describes how consumption varies with disposable income.
What does an increase in demand lead to?
An increase in production and income
This creates a cycle of increased demand and output.
What is the significance of the 45-degree line in equilibrium analysis?
It represents where production equals income
This line is used to graphically determine equilibrium.
What happens if expenditure does not equal output?
The difference is covered by a change in the inventory stock
This indicates adjustments in inventory levels based on demand and production.
What is the implication of a budget surplus?
Public saving > 0
This occurs when government revenues exceed expenditures.
What does a budget deficit indicate?
Public saving < 0
This occurs when government expenditures exceed revenues.
What is the impact of a decrease in consumption on the economy?
It can lead to a decrease in output (Y)
A drop in consumer confidence can reduce overall demand.
What is the formula for private saving (S)?
S ≡ YD − C
Alternatively, S ≡ Y − T − C
What does public saving indicate when it is less than zero?
Public saving < 0
Indicates a budget deficit
What is the goods market equilibrium equation?
Y = C + I + G
How is the IS relation defined?
S = I + G − T
It stands for ‘Investment equals Saving’
What are the two equivalent ways of stating the condition for equilibrium in the goods market?
- Production = Demand
- Investment = Saving
