Macro Herzog Exam 1

chain-weighted indexes and why they are needed

use a moving average of price levels in consecutive years, Used as an inflation adjustment. - try to give more of a weighted average so this stuff doesn't overstate GDP

What happens if Government does not maximize use of resources

waste- therefore there are shortages and the needs aren't met and prices increase

net exports and how it is affected by comparative advantage

we are importing more than we are exporting. Net exports (exports minus imports)

Discretionary Income

what households can spend at their discretion, spent before you earned it

Cost-push inflation

when I have higher costs, I have to raise my price to keep my certain level of profit

Demand-pull inflation

when demand is getting ahead of supply, demand pulls prices up

What the effect is of taxing the rich to create equity

when you tax the rich higher, problems occur: companies are less inclined to produce. They can't keep the profits, and the money that the government wants never comes...then they throw people on the unemployment line - shift the supply curve left

What is the cost benefit analysis?

whenever the government taxes you, the money you pay the gov is money you can't buy goods with. Every dollar you pay them, society needs to get what they intended to pay for.

why price stability is not necessarily zero inflation

why do we accept that? that is because we have to have some increase in prices. Agregate supply growth will stop but we don't want that, employers want the prices to go up. want them to increase output. people expect to pay more for stuff bc they do more things than it used to there are more things to own now- internet there are more things they need.

Economic theory and the idea of "economy medication"

will run properly with the right economic theory

whether or not prices can go up or down of different items by different amounts

yes, that is why we have a chain weighted index, change weighted prices

More Adam Smith beliefs

Believed in very little or no government intervention

the distinction between GDP and NDP

GDP is the measurement of how we are doing in the creation of jobs, and production possibility. Net Domestic Product measures the amount of money to replace equipment.

Legislative lag

I can put policy out there but takes time to get law to pass. It takes time to decide on what policies we should use.

Free rider goods

If you are visiting a city and benefit by their police, roads, and other goods, you are a freerider. Because you use them for free. - don't pay taxes for benefit of government programs

Regressive vs. progressive taxes

Regressive tax- Social Security is the only tax in our country which the rate you pay goes down as your income rises. Progressive tax is when rates increase as income increases. - we have this in US

planned/central economy vs. free market economy and what the U.S. engages in.

USA is free market. But cannot be entirely free bc roads and stuff. Planned/central gov decides what will be produced, how and for whom. Free is private entity provides for all of our need

Excise Tax

Usage tax. (gas, whiskey, cig) if they use certain products. Often called sin tax. You don't pay them until you buy them

GDP Growth's effect upon determining whether or not recession exists

We are in a recession if GDP falls for two consecutive quarters

bracket creep

a Phenomenon that is caused by inflation which causes a taxpayer to be cheated if inflation increases their income into a higher tax bracket.

Aggregate Demand

a country's entire economy= GDP

Social Security

a way the government collects money, is for retirement and for any disabled minors in the household.

The U.S. Factor Mobility

ability of our workforce to shift from one firm to another firm when their existing employers have lesser growth.

All corporate taxes

also progressive. go up but also start to drop.

Externalities

are costs that are experienced by a third party who does not benefit from those costs. - example: if you live in the house thats polluted, paying the costs of the company. Gov can give you a remedy to sue that company

item weight

calculating the CPI and the item weight ***look at the pie chart on page 92

The U.S. and its technological advantage

capital intensive allows for more advancements in technology and and incentive to keep producing more thuss, an advantage - we've been a leader

why corporate profits must be adjusted for finding income of GDP

coroporates have retained earnings and they dont want dividends.

What deflation is and its status

deflation is when prices fall or if inflation rate is negative or reverse inflation.

Unemployment Tax

employer will pay a percent of your pay to your gov. ex- factory kind of like insurance

Gov failure

exists when the try to remedy certain projects as well as when they intervene in the economy to fix a problem, but only end up creating more problems. That means it harms social welfare and/or makes the market less efficient.

proportional taxes and how often they are used

flat tax- everybody pays the same rate same rate regardless of income until 90000 income

Merit Goods

gov feels everyone is entitled to at least at some minimum level such as food, clothing, shelter, and medical attention.

relative prices

group in the cpi like corn

The amount of government intervention since the days of FDR

has increased. Government has to intervene now

Aggregate Supply

the total supply of goods and services available to a particular market from producers

Theory vs. reality

theories when we apply them there are other factors going on. Sometimes reality takes hold and can screw up the theory.

Facts regarding the antitrust laws

things that say you cannot monopolize; Sherman Act of 1890: cannot conspire to monopolize; people were finding a way around it and monopolizing; so then they said you cannot do anything that has the same effect as monopolizing - predator pricing (illegal) caused amendments added to the Sherman Act. Not legal to do price discrimination. 1. Sherman Act - Clayton act....

Disposable Income

this is the income you can actually spend after taxes

The focus of macroeconomic policy

to get the economy at full employment and lower prices to equalize opportunities and how to get everyone to work and maintain prices.

Federal Government roles

to pay the debts, regulate commerce between states and other nations, coin money, and a few others—were and are powers that made more sense to assign to a central government

What is National Income

total income received by current factors of production. Less: indirect taxes, corporate taxes, retained earnings, social security taxes, foreign factors Plus: transfer payments from the government, net interest, income from outside the US and US owned factors

Social Security taxes and Medicare

Deducted from paycheck fica- pays for retirement Medicare- 7.85% that is deducted from paycheck. Employers will match that

Taxes and resources

Drawing money from our pockets that we cannot use to buy land, labor, and capital - taxes tap into our resources

When managing the economy, the 3 core issues

-What is to be produced with our limited Resources -How are we to produce them -For whom do we want to produce them

How the inflation rate is found and its recent status

- inflation is tracked by CPI. The Consumer price index and the increase from years past

State and Local Tax

- rates are different than the federal, represent 2/3 of the taxes

How the cost of Government spending is measured

- takes money from you, every dollar they spend is less money that can be spent in the price sector. - removing from the private sector, cost benefit analysis

The chain reaction of what happens to stocks when the economy is nearing full employment

-stock hates high interest rates - wen interest rates go up, fewer people can afford the monthly payment for cars houses - riskier stocks. get a better return on less risky, dump stocks. - when you have full employment people assume there will be inflation, all these people working all this money is floating around. if we have full employment- too much spending and shortages. Shortages cause inflation, this shoots up interest rates. then stocks will fall. this is a chain reaction - too much employment, stock prices start to fall

COLA's

Cost of living allowance, raise based upon what inflation was. They aren't always right

Saving

= disposable income - what you spend

ARM's

Adjustable rate mortgages

GNP

Americans income measured by GNP defining GNP by taking GDP and adding net income of Americans they didn't receive from outside our country.

When net Investment is positive

As long as the dollar value of new plants and equipment (gross investment) exceeds depreciation. If net inv declining, economy is contracting.

GDP calculation

C(osts) + I(nvestments) + G(ov spending) + (X )(exports minus imports

The status of China, the U.S. and other countries regarding their GDP and GDP per capita

China had a bigger GDP but more people. Countries with higher GDP may not be better than those who have a lower one, it is actually GDP per capita.

what goods are included in GDP calculation

Final good and not the Intermediate goods (tires, wheels, engine)

What is inflation and its characteristics?

Increase in the average level of prices of goods and services and it hurts society.

The effect of price ceilings

Keep prices low and affordable - shortage -discourages people from housing - shortage of housing so people stop providing these things

Human capital?

Labor intensive industries or countries that tend to be more labor intensive than capital intensive, utilize.

How to calculate Net Domestic Product

Net Domestic Product= GDP - depreciation

nominal and real income of individuals

Nominal income after taxes is the same as the rate of inflation.

Public Choice Theory

Politicians make choices to make them better politician not improve economy.

what would shift the demand and supply curves and which direction

Positive factors shift them right Negative factors shift them left

the difference between the different effects of inflation

Price effect: having less ability to buy stuff because price is too high Money illusion: When people think their income or wealth is increasing with each pay raise, when in fact it is declining when it's not keeping up with the rise in inflation Bracket creep: When an income is increased due to inflation, which then puts them into a higher tax bracket that has not been adjusted properly to inflation, resulting in less spending power Income effect: When nominal income goes up, but not as high as the rate of inflation Interest Rate: Interest rates go up when having inflation.

Private vs. public goods

Private goods: goods owned and provided in the private sector or by businesses to make a profit. Public goods are those that the government often provides for us if the free market can't possibly do so.

Your nation's ability to have comparative advantage

Produce things at the lowest opportunity cost. Middle eastern countries producing oil instead of cars, given their geography

Opportunity costs

Saying yes to one thing and saying no to the other and taking the cost of what you're turning down into account.

The problem with answering these questions

Shortages

GDP calculation

Status of our economy

What is productivity?

Taking output and dividing it by the # of inputs used to produce it

the total value of market incomes vs. the total value of final output.

They equal each other but they dont balance because depreciation, foreign factors, US citizens own businesses in other countries. - look under national income in book pg 88

Ballot Box Economics

politicians ask the public if they want a specific action taken toward economic policy

The price signal

What? How? For Whom? People not willing to produce something unless if you are willing to pay the price and give them the profits they want

Opportunity cost and the need for a cost-benefit analysis

Whenever the gov't tries to manage social problems, it involves opportunity costs so a cost-benefit analysis is needed to see the effectiveness of their programs - did we reach our objective?

both sides of computing GDP

income vs expenditures pg 88

What makes the income vs. expenditure GDP equation out of balance?

indirect taxes, dividends, foreign factors, income of people here making money from other countries.

The U.S. and our productivity compared to other developed nations:

is capital intensive compared to the other nations because we place emphasis on the capital side of the market

inflation impact on society

it causes uncertainty/ instability

what full employment represents

it doesn't necessarily mean that there is 0 unemployment, usually a good indicator of the economy. Should be around 4%

The effect of price floors

keep prices high so products are produced. Causes surplus (farmers)

the major roles of government

make the rules and regulations, they produce the services and military, emergency and to PROTECT the consumer and the environment they are in.

the CPI, PPI, and WPI, how they are calculated and when they are calculated

market basket of goods...CPI: the cost of living to general population of consumers PPI: the cost of producing for customers, WPI: wholesalers

the Lorenz curve

measures what percent of the wealth is owned by various percentages of the population GINI: area/triangle , bigger gini coefficient is the more inequality.

GDP measurement problems

non market activities- exists when you're doing something and not charging. ex- babysitting, volunteering. believe there is more income out there than is reported

Equilibrium

occurs when the supply and demand intersect

Cheaper help and productivity:

output / the number of inputs to produce it; inputs such as outputs per labor hour or capital equipment.

money illusions

people think their getting richer but its really the same rate and its taxed

the Production Possibilities Curve

production possibilities and will help what you will produce, a point under the curve is inefficient, a point over the curve is unattainable without technology

Where the U.S. stands in the free market vs the central economy status

refers to a mixed economy because the free market cannot satisfy all of society's needs

GDP deflator

same thing as CPI, changes the categories much more often. Focused on domestic production

Transfer Payments

social security benefits, unemployment, welfare.

Socialism vs. Communism

socialism: is when the government decides what, how and for whom things will be produced vs. Communism economic and political system and no ownership

one person's expenditure and what it represents

someone's income

determinants of demand

taste, income, other goods (substitute and complementary), lower/higher taxes, more/less government spending, more/less money injected into the money supply, expectations, number of buyers

determinants of supply

technology, factor costs, taxes, regulation, skills/knowledge and maximization of use of human capital, subsidies, expectations, infrastructure, number of sellers

Adam Smith's theories and the Invisible Hand

the economy runs itless, if gov gets involved it will make it worse and not better, leave the econ alone bc the econ will take care of itself

Personal Income

the income of all American households before it is taxed