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Macroeconomics Equilibrium
Distribution of Income
Inflation
Unemployment
National Income and Economic Development
100
What are fiscal policies?
Policy using changes in government spending and/or interest rates to achieve economic objectives.
100
What are direct taxes.
Imposed on peoples' income or wealth, and on firms' profits.
100
What is Inflation?
A sustained increase in the general (or average) level of prices and a fall in the value of money.
100
What is th Unemployment Rate?
It is a number of unemployed workers expressed as a percentage of the total workforce.
100
What is GNP/Nominal GDP?
The total value of goods produced and services provided by a country during one year, equal to the GDP plus the net income from foreign affairs.
200
What does the “J” shaped curve in a Keynesian LRAS illustrate?
Perfectly Elastic at low levels of economic activity. As the economy approaches its potential output and the spare capacity is "used up", the economy's available factors of production become increasingly scarce. When economy reaches full capacity, it is impossible to increase output any further.
200
Why is the Laffer curve…a curve (and not straight lined)?
It illustrates the relationship between direct taxes rates and government revenues. As the tan increases gov't revenue increases up to a point, then decreases.
200
Explain what is happening in an inflationary spiral graph.
Increase in AD Higher Prices Higher costs of production Workers negotiate for higher wages. Households increase spending because of the illusion of wealth.
200
Explain the Phillipis curve.
A trade-off between inflation and unemployment rate. Low level of unemployment- firms pay higher wages Unemployment high- wages are low since unemployed workers compete with each other for jobs.
200
Identify the elemnts in a circular flow model, including sources of leakages and injections
Investment, Exports, Government spending for expenditures of Households. Saving, Imports, Taxes for Income to Households.
300
Explain the difference between demand-side policies and supply-side policies.
Demand side policies are designed to influence AD while supply side policies shifts the LRAS curve.
300
Why do neoclassists view the gov’t redistributing income as a negative thing?
Cause unemployment Causes a rise to taxes negative affect on the economic growth/development.
300
Explain why deflation can be a problem.
Unemployment(AD is low thus business lay-off workers) effect on investment (businesses make lesser profit) cost to debtors (people who takes loan, the value of your debt rises)
300
Explain how demand-deficient unemployment occurs.
When there is insufficient AD in the economy and real wages do not fall to compensate for this.
300
What does it mean to have a high Gini index, and how would this be shown on a Lorenz curve?
Higher Gini index means more unequal is the income distribution and the curve is further from the line of absolute equality.
400
What are the four phases of the business cycle?
Boom, Recession, Trough, and Recovery
400
How can supply-side policies affect the distribution of income?
It will reduce income taxes , Reduction or elimination of minimum wages. , Reduction of unemployment benefits.
400
What are the three costs of inflation?
Loss of purchasing power, effect on interest rates, effect on the savings, uncertainty, labor unrest.
400
What are two solutions to structural unemployment?
Government must give subsidies to firms for training workers and also to encourage people to move to areas with jobs.
400
What are the three methods used to calculate GDP?
The output method, income method, and the expenditure method.
500
Evaluate the effect of demand-side policies on the economy.
To steer the economy towards full employment using fiscal and monetary policies. Increasing level of output implies an increase in demand for labor which reduce unemployment.
500
Evaluate the effects of progressive, regressive, and proportional taxes on unemployment
Tax deductions in progressive taxes allow people to reduce their taxable income for spending. This encourages people to find work and lower unemployment. Regressive taxes encourages people find work since a higher proportion of income is paid at lower levels of income. Proportional taxes lower unemployment because because if taxes were constant, then this could be viewed as a supply-side policy to encourage greater incentives to work and therefor raise labor supply.
500
Give three solution to solving inflation and explain why.
Policy to decrease aggregate demand for demand-pull inflation, like deflationary fiscal policy (increase taxes and lower government spending) and/or deflationary monetary policy (raise interest rates and reduce money supply) For cost-push inflation, then supply-side policies may bring down price level by increasing the quantity of the factors of production. If inflation is caused by excessive money supply then the money supply should only increase by the same amount as the real increase in national output.
500
Which is more effective in reducing unemployment? Demand-side policies or Supply-side policies.
It depends on the type of unemployment. If the economy is experiencing a downturn in economic activity, then it is likely that demand-deficient unemployment will rise, making demand management policies suitable. To solve natural employment, it is best to use supply-side policies. Since the economy is producing at near full capacity, demand side policies would result in inflationary pressure.
500
What are the advantages and limitations of GDP as a measure of economic development as compared to three other methods of development?
A limitation is that all economic activity within the country is recorded thus international companies of the respective country is not recorded. Inflation has to be taken into account for GDPs which will overstate the value of GDP.