Econ Fina!!

In competitive markets, firms minimize average cost and maximize profit by....

combining resources in such a way that price times marginal product for each resource is equal to the price of the resource. P x MP is equal to the value of the resource's contribution to output, and the price of the resource is the amount of payment (income) received by the resource owner.

GDP is calculated by summing Consumption, investment, government purchases and Net exports. BUT SUBTRACTING

Imports

Federal Reserve-

controls money supply

Marginal product is equal to the amount by which production increases with the addition of one worker.

Product price is the amount by which each of these units of output increases the firm's revenue.

Lags of fiscal policy -

Recognition lag(time between being aware of a recession[6 months of decreased GDP, two quarters] or inflation is taking place), administrative lag(the wheels of democratic gov. turn very slowly, time needed to take fiscal action and time that is actually taken to make the decision and how to act upon imposing the policy) and operational lag

Regressive Taxes

Social security taxes- regressive taxes, cap on $118,000 Sales Tax- also regressive

Marginal Revenue Product(MRP)

The change in revenue that results from the addition of one extra unit when all other factors are kept equal. The marginal revenue product is used to examine the effect of variable inputs, such as labor, and follows the law of diminishing marginal returns.

Under what circumstances might an increase in the minimum wage increase employment in a low-wage market?

The firm has substantial monopsony power

Law of diminishing marginal returns

beyond some point, extra product attributed to each additional unit of labor will decline

Any risk which is measurable and predictable in the aggregate is insurable. These include

fire, flood, employee injury, theft and the like. Risk due to changes in government policy is not predictable and is therefore uninsurable.

The "derived demand" concept suggests that an increase in the demand for computers will:

increase the demand for computer design engineers. Derived demand is the notion that the demand for a resource depends on the demand for the good or service that the resource helps to produce.

Discretionary Fiscal policy

government decides to do this, congress must approve)

APC

(average propensity to consume) fraction of disposable income that households plan to spend for consumer goods a and services

The firm has monopoly power, as evidenced by the downsloping demand curve

. There is a range of prices over which price exceeds average total cost, suggesting this firm can earn a positive economic profit.

When economy expands-prices rise When economy contracts- unemployment rises

...

Money is anything that performs the functions of.....

1. serves as a medium of exchange 2. unit of account 3. Store of value

Board of governors-

7 people who serve very long terms, 14 year terms. Appointed by the President, approved by congress.

In a competitive market, the wage is determined by the

intersection of market supply and market demand: . A monopsony maximizes profits by equating the marginal resource cost (MRC in the diagram) with marginal revenue product

For a competitive firm,

marginal resource cost is equal to the wage rate.

Taylors rule

something about unemployment

An increase in the demand for or a decrease in the supply of loanable funds will increase

the interest rate in the market. Higher government borrowing will increase the demand for loanable funds in the market for government bonds, raising the interest rate in this market.

The real rate of interest is the difference between

the nominal interest rate and the inflation rate.

There is no substitutability between complementary inputs so...

they must be used in fixed proportions. With only an output effect, a decrease in the price of one increases the demand for the other.

Cyclical unemployment

unemployment rate - NRU=cyclical unemployment rate

The abbreviation for marginal product: MP Marginal Product

which is the change in the quantity of total product resulting from a unit change in a variable input, keeping all other inputs unchanged. Marginal product is found by dividing the change in total product by the change in the variable input.

Active Fiscal policy-

without the government making any changes

Monopsony

A market where there is only one buyer, or in a labor market, there is only one employer

APC is caculated by

Comsumption/income

GDP is calculated by summing

Consumption, investment, government purchases and Net exports

Federal Bank

Controls interest rates

2 Fiscal Policies

Discretionary Fiscal policy( government decides to do this, congress must approve) Active Fiscal policy-without the government making any changes

Suppose a firm has the option to purchase new equipment for $16,000 that can reduce its annual operating costs by $800. The firm should borrow funds for this investment if it can negotiate an annual nominal interest rate: A) less than 3% B) less than 5% C) less than 20% D) at least 10%

Feedback: The machine has an annual rate of return of 5% (800 / 16,000 = .05, or 5%). Any nominal interest rate less than this amount will add to the firm's profit.

Part time workers are counted as

Fully employed, therefore may understate the level of unemployment

MPS=savings multiplier(leakage)

M=1/MPS

Examples of Market Failures..

Negative externalities, Positive externalities and public goods.

In calculating GDP Government Transfer payments like Social Security or unemployment compensation are...

Not counted.

The XYZ Corporation can make a 4% real (inflation-adjusted) return on an investment. It can borrow funds to finance the investment at a nominal rate of 6% and the inflation rate is 1%

The real rate of interest in this example is 5%—the difference between the nominal interest rate and the inflation rate. Since the company can earn only 4% on the investment in real terms, it will not earn enough to cover the interest payments and the project will be unprofitable.

Nominal GDP

The sum of all monetary transactions involving FINAL GOODS and services that occur in the economy in a year

Crowding out effect

This occurs when government spending is financed through borrowing from the private sector, which puts upward pressure on interest rates and stop private investors who cannot afford to borrow at the higher rates of interest.

WHen GDP declines it is called

a recession

An investment in human capital is

an expenditure on education or training that improves the skills and productivity of the worker.

Suppose Congress, in an attempt to increase taxes on the wealthy, passes a law doubling the tax rate on interest income. Considering the markets in which most households save, this law would most likely:

decrease the supply of loanable funds and increase equilibrium interest rates. Higher taxes on interest income would likely deter individuals from saving, a major source of loanable funds. The reduction in supply would drive up equilibrium interest rates. Of course for the savers, the interest rates received net of paying the tax will likely decline.

Higher taxes on interest income would likely

deter individuals from saving, a major source of loanable funds. The reduction in supply would drive up equilibrium interest rates. Of course for the savers, the interest rates received net of paying the tax will likely decline.

Compared to an otherwise identical firm selling its output competitively, a firm with monopoly power:

must lower its price to sell additional output, so MRP(marginal revenue product) declines faster than MP

NRU-

natural rate of employment, when economy is at the NRU, all economic resources are being utilized