EC131 Economics for Business - Macroeconomy Introduction

Flashcards on Macroeconomics for Business

What is the purpose of the income function?

To show that whatever we earn must go on domestically produced goods and services or on withdrawals.

What components are included in the income function?

Domestic consumption (Cd) and withdrawals (W). Y = Cd + W

What are the components of withdrawals (leakages) from the economy?

Net saving (S), Net taxes (T), Import expenditure (M).

What is the expenditure function?

E = C + I + G + X – M, which simplifies to E = Cd + J, where J represents injections.

What does 'J' represent in the expenditure function?

Injections to the economy (I + G + X), which are independent of income and exogenous.

What are the components of injections into the economy?

Investment (I), Government spending (G), and Export expenditure (X).

What is the consumption function?

Cd = a + bY, where 'a' is autonomous consumption and 'b' is the marginal propensity to consume.

What is autonomous consumption?

Consumption that is independent of income (the intercept 'a' in the consumption function).

What is the marginal propensity to consume?

The proportion of an increase in income that is spent on consumption (the slope 'b' in the consumption function).

What happens at the equilibrium national output?

Income equals expenditures (Y = E), and withdrawals equal injections (W = J).

Define the multiplier effect.

The concept that an initial change in injections leads to a larger change in equilibrium national output.

How is the multiplier calculated?

1 / (1 - mpc) or 1 / mpw, where mpc is the marginal propensity to consume and mpw is the marginal propensity to withdraw.

What are potential issues with the multiplier?

Difficulties in estimating the marginal propensity to withdraw or consume, uncertainty about spending habits, and impact on macroeconomic stability.

What are the two types of unemployment?

Equilibrium and Disequilibrium unemployment.

What is equilibrium unemployment?

Unemployment that exists even when the labor market is in equilibrium (labor supply equals labor demand), including frictional and structural unemployment.

What is disequilibrium unemployment?

Unemployment that occurs when the labor market is not in equilibrium (e.g., real-wage unemployment, demand-deficient unemployment).

Distinguish between frictional and structural unemployment.

Frictional unemployment occurs when individuals move between jobs. Structural unemployment occurs when individuals lose their jobs as the industry they work in declines.

What is demand-pull inflation?

Inflation caused by an increase in aggregate demand.

What is cost-push inflation?

Inflation caused by an increase in the costs of production.

What are some of the costs associated with unemployment?

Personal and financial costs, lower output, lower profit for firms, and lower tax revenue.

What are some of the costs associated with inflation?

Erosion of savings value, lack of investment, and worsening of the balance of payments.

Define exchange rate.

The price of one currency in terms of another.

What is a floating exchange rate?

An exchange rate system where the value of a currency is determined by the supply and demand in the market.

What factors cause the depreciation of a currency?

Higher relative inflation, higher relative income, lower relative interest rates, and market speculation.

What are the effects of a depreciation in domestic currency?

Exports become cheaper and more competitive, imports become more expensive, and potential cost-push inflation.