Macroeconomics test 2: chapters 8, 9, 10, 11, 12, 18

investment demand schedule and investment schedule in private open economy adding international trade (exports x and imports m) to "private closed economy" makes the economy

"private open economy".

Factors facilitating womens' employment

- availability of birth control - population shift from small to large cities - expansion of scope of the traditional women's scope of the traditional women's work - increased number of part-time jobs - effect of anti-discriminatory laws which had opened positions to women in politics, administration, public offices, industry and commerce

Differences in the rate of economic growth

- faster in "less developed" countries than in the "developed" countries b/c developed countries already have the tech needed for growth and their growth reflects the additional tech that must be invented a process that takes time. - less developed countries began from "point 0" and their growth reflects the use of tech that is already available

In U.S., labor increased in numbers due to

- immigration - the entry of women into the workforce

construction of aggregate expenditure model assumed three types of economy

- private closed economy that is economy without international trade and without government interference - open economy that is one that includes imports and exports - mixed economy that includes also government expenditures and taxes

6 main ingredients of economic growth

- supply factors (physical ability to expand) - demand factors - efficiency factor - labor productivity - factors increasing labor productivity - economy's potential output depends on supply and efficiency factors but not on price

Antigrowth view

Economic growth causes environmental problems; Economic grows does not contribute to solutions of social problems, and fails to distribute the gains of the economic growth; Society is producing more but enjoying it less; High growth is not sustainable because of limited of natural resource

Structures that promote growth

In general: Structures that increase savings and investments; structures that promote development of new technologies, and structures that ensure efficient flow of resources the their most productive uses Special: Strong property rights; enforced patents and copyrights; efficient financial institutions; educated population; free trade economic system; competitive market system; political stability, and social philosophy of creation of wealth as a goal

what is the effect of debt:

When debt increase consumption is increased. Reverse is also true

The movement from one point to another on a consumption schedule is...

a change in the amount consumed and is caused by changes in real GDP. The movement of the entire schedule is caused by non-income determinants of consumption

In free market MB>MC is

a condition of survival.

Investment decision is

a marginal-benefit/ marginal cost (MB/MC) decision

Economic growth enables...

a nation to attain its economic goals more readily

producers respond to price changes is in two stages

a short run reaction followed by a long run reaction

adding public sector means

adding the government purchases and taxes to the model

increase government spending and tax cuts à cause

aggregate spending in the economy to change in the same direction

What is the effect of multiplier?

an initial change in investment spending can cause a magnified change in domestic output and income

investment demand curve is constructed by a

arraying all potential investment projects in descending order of their expected rate of return. The curve slops downward because of the inverse relationship between the real interest rate and the quantity of investment demanded.

How is economic growth measured?

as a percentage rate of growth per quarter (3-month period) or per year

what are average and marginal propensities

average propensity to consume (apc) is the average tendency to consume a certain part (percentage) of the total income. average propensity to save (aps) is the average tendency to save a certain part (percentage) of the total income

Demand factors

businesses and households must be able to buy the increased production; thus economic growth requires increase in total spending to realize the profit from increased production or production is reduced or stopped

"private open economy" is

c + ig + xn

investment demand is volatile because of

capital investments, irregularity of inventions, and because of the many unpredictable and changing factors that make expectations of future rate of return unreliable.

investment demand curve is

constructed by arraying all potential investment projects in descending order of their expected rate of return. The curve slops downward because of the inverse relationship between the real interest rate and the quantity of investment demanded.

the two components of aggregate expenditures are

consumption (c) and gross investment (ig) then consumption (aggregate expenditure) rises gdp and employment increase

saving and planned investment are equal because saving is a leakage of money available for

consumption and investment is an injection of money into money available for consumption restoring the amount available for consumption (s = i)

when the price level rises, the quantity of real gdp demanded

decreases and vise versa.

expectation of lesser rate of return

decreases investment demand and shifts the curve to the left;

mpc and multiplier are

directly related

To calculate the approximate years in which GDP doubles...

divide number by 70 by the annual % of growth. ex - at 3% annual growth US GDP will double (70/3) in 23 yrs

multiplier can be found by

dividing the change in real gdp by initial change in spending change in gdp = multiplier x initial change in spending (if investment in economy rises by $30 billion and gdp rises by 90 billion the multiplier is 3 (= 90/30)

expected rate of return (r) is obtained by

dividing the expected profit by costs Example: expected profit $100, expected costs $1000, then r = 100/1000 = 10%

limitations of the aggregate expenditure model

does not show price-level changes. it ignores premature demand-pull inflation. it limits real gdp to the full employment output. it does not deal with cost-push inflation. it does not allow for self-correction.

aggregate expenditures and real output are

equal at a higher level of gdp

Business will invest in projects where

expected rate of return is higher than the interest rate. Example: a project that will not be accepted if interest rate is 12% might become acceptable at interest rate of 7%

when consumption (aggregate expenditure) declines

gdp and employment decline

equilibrium

gdp: c + ig = gdp

Pro-growth view

growth is the path to greater material abundance desired by the vast majority of people

Factors facilitating economies of scale

improved resource allocation from agriculture to manufacturing to computers, decline of discrimination against women and minorities, increase liberalization of international trade agreements.

. at any other gdp level the gdp is

in disequilibrium and business will have to re-adjust its production equilibrium gdp is determined where the aggregate expenditure schedule intersects the 45 degree line

consumption changes in taxes move the consumption and the saving schedules...

in the same direction.

Since taxes are paid at the expense of consumption and of saving...

increase in taxes reduces both consumption and savings, and vice versa.

increases aggregate demand will

increase price level and real gdp, reverse is also true

positive net export schedule (xn)

increases aggregate expenditure and gdp by increased expenditure on domestically produced output

expectation of greater rate of return

increases investment demand and shifts the curve to the right

mps and multiplier are

indirectly related

real interest rate (i) is the

interest rate paid to the lender of money (the price you pay for using someone else's money, the price of the money). must be added to the mc. "real interest rate" is the nominal interest rate less the rate of inflation

MC is the

interest rate that must be paid for borrowed funds

relationship between the price level as measured by the gdp price index, and the real gdp demanded is

inverse

increases of stock of capital good on hand and of inventories reduce

investment demand and shifts. investment demand curve to the left. reverse is also true.

because taxes reduce consumption the equilibrium gdp

is lowered.

because di increase

it will have more effect on private spending than public spending à increase in the price level of the economy

the determination of the size of fraction that will be spent or saved is related to

marginal propensity to consume mpc and marginal propensity to save mps.

Labor productivity

measured as real output per hour of work; GDP = hours of work x labor productivity. The formula is invalid when output does not depend on time spent in working. Example: a layer writing a letter

Distribution of modern economic growth

modern economic growth is distributed unevenly most likely because it began at different times expanding from Europe to North America, later to Asia, South America, Middle East, and more recently to Africa

nominal wages do not adjust to prices in the short run, increase in prices (without increase in wages) brings

more profit and production is increased, the curve slopes up. conversely a decline in price (without decline in wages) reduces profit and production will decline, the curve slopes down

if we assume that an increase in investment is associated with increased spending, then

more spending results in higher gdp and lesser amount of spending results in lower gdp. however the effect of change in spending on gdp is larger than the initial change in spending. this effect is called multiplier effect.

What to remember about "personal saving" (S)

part of disposable income (DI) that is not consumed (C). S = DI - C

these data show what business is

planning to invest if situation does not change

the net export schedule lists the amount of net exports that will occur at each level of gdp

positive net export schedule (xn) and negative export schedule

net exports are exports minus imports (xn = x-m) may be

positive or negative exports increase production and employment and add money to the available domestic expenditure import generates production and increased expenditure abroad

addition of government purchases to

private spending (c+ig+xn) yields a higher level of aggregate spending c+ig+xn+g

Capitalism is about

profit

Effects of modern economic growth

rapid and sustained increase in standard of living; reduction of time spend working and increase of time for leisure, increased longevity, increased leisure time led to cultural, social, and political changes.

aggregate demand schedule or a curve shows the amount of...

real gdp that buyers collectively desire to purchase at each possible price level

increase in business taxes

reduces expected rate of return, reduce investment demand and shifts investment demand curve to the left. Reverse is also true

negative export schedule

reduces the aggregate expenditure and contracts gdp

The first definition of economic growth is used for

reporting growth rates

Effects of introduction of steam engine:

shift of manufacturing from manufacturing by hand to mass- production by engines in factories; shift of population from countryside to cities where factories became located, and development of long-distance trade

Changes in wealth, expectations, interest rates, and household debt will...

shift the consumption schedule in one direction and the savings schedule in the opposite direction

aggregate supply schedule or curve

shows the level of real domestic output that firms will produce at each price level.

"saving schedule" or "saving function" is obtained by...

subtracting consumption from DI. There is a direct relationship between saving and DI. When DI is small the portion of it that goes to savings is smaller than whenDI is large. Dis-saving occurs at relatively lower DI

Economy's potential output depends on...

supply and efficiency factors but not on price

Modern economic growth is characterized by

sustained and ongoing increases in living standards. Informal date of its start is the invention of steam engine in 1776, the begin of Industrial Revolution

taxes reduce consumption (c) and savings(s) at...

taxes reduce consumption (c) and savings(s) at

Factors increasing labor productivity

technological advances; new forms of business management, some forms of business organization, capital investment in technology, and public investment in infrastructure (roads, bridges, airports, etc.)

john maynard keynes taught that the total spending ("total aggregate expenditure") determines

the amount of goods and services produced (gdp) and therefore the level of employment necessary for their production. business will produce only as much as it is profitable to produce.

Real GDP per capita

the amount of real output per person in a country. Real GDP per capita = Real GDP / population

"consumption schedule" or "consumption function" reflects what?

the assumed direct relationship between DI and C. In general households increase their spending as their income rises. When DI is higher a larger part of DI is spent, when DI is lower a smaller part of DI is spent.

no level of gdp can be sustained except

the equilibrium level of gdp

MB from investment is

the expected rate of return business hopes to realize

Effect of growth rate variations on standard of living

the higher the rate of growth the faster is the improvement in the standard of living measured by Real GDP per Capita changes

Break-even income is...

the income level at which households plan to consume their entire income: C=DI.

improved technology stimulates

the investment and shifts investment demand curve to the right;

increased optimism of managers and owners stimulates

the investment, and shifts investment demand curve to the right

In making macroeconomic models, economists focus on...

the relationship between consumption and real domestic output (real GDP).

marginal propensity to consume (mpc) is

the tendency to consume a certain part (percentage) of the disposable income as related to changes in the DI

marginal propensity to save (mps) is...

the tendency to save a certain part (percentage) of the disposable income as related to changes in DI

equilibrium gdp is that level of production at which

the total produced equals the total purchased (no over- spending and no over-production) ($470 in the table)

Consumption and savings schedules are usually stable (probably) because

this is probably because saving decisions are made for long-terms and because non-income determinants frequently move the schedules in opposite directions and may be self- canceling

ad-as model enables us to

to analyze changes in real gdp and the price level simultaneously

Efficiency factor

to reach its production potential economy must achieve economic efficiency, full employment, and efficient use of resources.

increase in public spending (like an increase in private spending) shifts aggregate expenditure...

upward and produces a higher equilibrium gdp. the reverse is also true and both are subject to the multiplier effect

net export is influenced by the

value domestic and of foreign currencies, but also by the quality of the exported items.

the two most critical questions in macroeconomics are:

what determines the level of gdp (given the nation's production capacity)? what causes the real gdp to rise in one period and to decline in another period?

The second definition of economic growth is used

when comparing the standard of living

in private closed economy producers are

willing to produce a certain level of production if they can expect to receive a certain level of income from the sale of that output aggregate expenditure schedule shows the amount (c+ig) the producer will spend at each possible output (or income) level.

tax cuts à increase disposable income (di)

à higher national income and additional consumer spending à increase in the price level of the economy

increase government spending, no change in taxes

à increase aggregate demand

Economists define and measure growth as either

∙ An increase in real GDP occurring over some time period. Ex - one quarter of a year ∙ An increase in real GDP per capita occurring over some time period.