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Basic Relationships
Build Models to Explain Business Cycles - Unemployment - Inflation
22
Economics
Undergraduate 2
10/29/2014

Additional Economics Flashcards

 


 

Cards

Term
Three Pairs of Economic Aggregates
Definition

1) Income & Consumption (I & S)

 

2) Interest Rate & Investment

 

3) Changes Spending (D) & Changes Output (Production)

Term
Consumption (C)
Definition

Spending

 

One of two things that can be done with Income

Term
Saving (S)
Definition

Not spending ($ remaining after consumption);

 

Part of Disposable Income (DI) not spent.

 

$ not spent for a specifc period from a specific amount of Income.

 

One of only two things that can be done w/ Income.

Term
Income
Definition

Inevitable Payments i.e. Wages/Salary, Rents or Interest rcv'd., 

 

Flow of $ (purchasing power) per unit of time

derived from use of human or property resources.

Term
45 degree line
Definition

line on a graph that bisects the 90 degree right angle

 

each point on the line represents

Consumption (C) & Disposable Income (DI)

 

 

in a direct (positive) relationship

Term

Describe the Vertical Distance between 45 degree line & the Consumption (C) line

 

-  and  -

 

What is represented when move rightward on the horizontal line

and

what is represented when move leftward?

Definition

Vertical distance Increases as move rightward along the horizontal line;

 

-  and  -

 

Vertical distance Decreases as move leftward along the horizontal line.

Term
What is one of the best established relationships in macroeconomics?
Definition

Other-things-equal: Ceteris paribus 


an economic assumption.

 

Relationship between

 

Income (I) and Savings (S)

Term
What causes recessions?
Definition

 

Decreases in spending

 

either by Consumers, Consumption spending (C)

 

-- or  --

 

by gov't buying producing (Ig)

Term
Formula:  Saving
Definition

 

Saving (S) =

 

Disposable Income (DI)   Minus   Consumption (C)

 

 

Term
What is the most significant factor determining a nation's levels of Consumption & Saving?
Definition

Disposable Income (DI) is the most significant factor

 

determining a nation's levels of Consumption & Saving.

Term

Discuss the consumption schedule?

 

Its function?

 

What it captures? 

 

How it works?

 

Why it is important to economists?

Definition

Consumption schedule is a graph

 

shows direct relationship between (C) & (DI)

(C) = Consumption;  (DI) = Disposable Income

 

Will capture aggregate Household behavior i.e.

Increase Spending as DI income increases

-- and --

Spend a larger portion of a small disposable income

than of a large disposable income

 

Important: #s be illustrated/brought to life

Term
Uses of the 45 degree line --
Definition

Used as an instrument to derive a final value

with use of other curves (like Consumption curve)

Term

Discuss the slope of the 45 degree line in a 

 

Consumption Curve (Fig. 27.1)

 

Definition

Slope is always positive --

 

Less than 1.

 

Slope is = to "marginal propensity to consume"

 

which is how much a specific level of income will make you / or allow you to consume/spend

Term

45 degree line: What is it used for/its purpose?

 

Pg 548 19e Fig 27.1

Definition

Used only to illustrate a relationship or for theoretical purposes.

 

It never shows an actual relationship between 2 factors.

 

In the case of Consumption: Line is used only to show where Consumption = Income -- given a derived consumption curve

Term
What is the immediate cause of recession?
Definition

People stop Spending.

 

This sets off other behavior:

 

Spending stops --> Businesses stop Producing --> (Profits drop) --> Bizs begin layoffs of Labor --> Fewer workers --> Lower output --> GDP trends down --> Unemployment rises

Term

How does macroeconomics explain the Recession in the Business cycle?  

 

What suggestions does it make to fix this problem?

 

 

 

1 of 2

Definition

Macroeconomics offers several approaches.

 

1) Classical Approach - based on theories, ideas etc. from 1700's / before Industrial Revolution began. Economy will fix itself / move forward / trend to growth; no interference / no gov't intervention is needed.

 

Classicists dispute the existence of recession -- Proof: Say's Law ( if everything produced in economy is sold, there is enough $ in the economy via products' income or Profits to buy all that is produced ).

Term

How does macroeconomics explain the Recession in the Business cycle?  

 

What suggestions does it make to fix this problem?

 
 
2 of 2
Definition

If it appears that a Recession occurs in the economy, the economic circumstances that look like recession won't last;

 

"Demand always chases Supply."

 

Economic issues always fix themselves shortly/soon, so don't touch anything / could cause problem if do.

 

"Supply creates its own Demand."

Term

Why is the Supply (S) line on a S-D (Demand) curve a vertical line?  p 548, Fig. 27-1 "Consumption in '98"?

 

What causes this phenomena?

 

 

NOTE:  Fix this -- find correct language for Term card

Definition
Qe is equal to Production; Economy is producing as much quantity as it can.  Qe = capacity.
Term
Chap 27 19e / Chap 28 20e
Definition
Term

Discuss Say's law

 

Who  -- What  -- When  -- Where  -- How

Definition

Say = Fra. economist -- 1700's - dev. theo. around time of Indust. Revo. -- sugg. gov't intervention in business causes problems tha AOwise would not occur

 

to Say, a classical economist, there is no such thing as recession  -- 

 

  • expression of laissez-faire economics

 

if there is economic activity that looks like recession, economy will simply act to resolve it w/out gov't.

Term

Discuss how Great Depression 1930's tested 

Say's Law?

 

 

 

 

 

Class Notes 10/30/14

Definition

In 2 yrs. U.S. GDP dropped 27% -- nearly 1/3 of economy evaporated --> 1 in 4 were out of work before it ended

- lasted > 10 yrs. -- Prices were "sticky"

Huge unemployment

Production not operating @ full capacity

Long-run (time) did not help economy to correct

Classical theory - Say's Law failed

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