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Increase in nations capacity to produce products
- The percentage increase in nations capacity to produce
- 4% good
- 1% or 2% average
number of products that are being produced per worker per hour
- better technology
- better labor
- better management
- more investment goods
what is the relationship between investment spending and economic growth?
more investment spending leads to faster economic growth
what has been the trend in US productivity growth since 1950?
1950 to 1975 + 3% productivity growth
1975 to 2012 + 1 1/2 % productivity growth
trend of productivity growth from 1950-2012 has slowed down
what is the relationship between productivity growth and average income?
productivity growth = average real income
a. median income
b.define mean income
- a. exact income earned by middle worker
- 1/2 all workers earn more, 1/2 all workers earn less and median income right in the middle
b. mean income is everyones income and divide by number of workers=average income
a. aggregate demand
b. aggregate supply
a. total demand for the entire GDP
b. total supply of GDP
8. what are the components of aggregate demand
AD(aggregate demand)= C (consumption) + I (investment) + G (government) + X (exports)- Im (imports)
The circular flow model divides the economy into two broad markets. What are they
A. 2 sectors
- 1. household sector
- 2. business sector
B. 2 markets
- 1. Production market (store)
- 2.labor market (job)
What is "Says law"
1799 Jean B Say came up with says law
"Supply creates its own demand"
- which means:
- Act of production creates enough jobs and incomes so that households can buy the entire GDP
what conclusions did classical theory draw regarding the working of the overall economy?
Classical thoery: Dominant theory 1650's to 1950's
a. free market self interest economy can run itself or can regulate it self and can solve its own problems
b. free market economoy will stabalize at full employment
according to calassical theory, is government intervention in the economy either necessary or desirable?
- no (not needed)
according to classical theory, should the government balance its budget every year?
yes always balance budget
- government spending = taxes
- G = T
according to classical theory, what is a desirable level of taxes and government spending?
As low as possible
what conclusions did keynesian theory draw regarding the working of te overall economy?
Keynesian theory: donminant theory 1950' to today
John M. Keynes worked out the keynesian theory 1883-1946
1936 John keynes wrote a book The general theory of employment interest and money
a. "MAJOR PROBLEMS" free markey economy can not always regulate itself and cannot always solve its own problems
b. Free market economy can stabilize at any unemployment rate
what will happen to the level of GDP in each of the following cases?
a. AD exceeds AS
b. AS exceeds AD
c. AD = AS
- a. GDP: up AD exceeds AS
- $16 trill > $15 trill (business) increase or increase price GDP: up
- b. Recession: AS exceeds AD
- $15 trill > $14 trill (business) decrease production , unsold goods GDP: down
c. AD = AS no change , stable GDP
According to keynesian theory, will the economy always be at full employment?
economy will stabalize at level of GDP where AD = AS
This can occur at unemployment rate
according to keynesian theory, is government intervention in the economy either necessary or desirable?
sometimes government intervention can help solve major economic problems
according to keynesian theory, what can the government do to increase AD and thereby increase GDP?
Increase AD and thereby increase GDP
a. decrease taxes
b. Increase in government spending
c. FED: increase money supply (lower interest rate)
according to keynesian theory, should the government balance its budget every year?
a. if recession: Budget deficits
b. if inflation: Budget surplus
c. if no major problems: Balance the budget
every year president and congress sets budget
2013 budget year begins october 1, 2012
what are the four largest catgories of government spending in the 2011 budget?
a. national defense $750 billion (21% budget)
b. social security benefits $720 billion (20% budget)
c. medicare (eldrly) $450 billion (13% budget)
d. Interest on national debt $260 billion (7% budget)
what are some shifts in government spending categories ( in percentage terms) since 1970?
- 1970 2012
- national defense 43% ---down---->21% / 25%
all benefits 27%-----up---------> 55%
how much was the level of federal government spending as a percentage of GDP in 1910? from 1960 thru 207? In 2011?
- 1910 - 2%
- 1960-2007 25%
what are the four largest sourcesof government revenue in the 2011 budget?
- idividual income tax $1120 billion (31% budget)
- social security tax (medicare) $750 billion (21% budget)
corporate tax $210 billion (6% budget)
excise tax $110 billion (3% budget)
how are social security benefits paid for?
todays workers pay social securit tax that money gets sentout today to pay benefits of todays elderly retired people
will the social security system collect enough in social security taxes this year to pay the benefits promised to todays (year 2012) retired people?
- not enough social security tax being paid to cover all benefits
explain why the social security surplus has disappeared and is now a deficit
not enough workers per retired person
if we keep the curent social security system, list some modifications that can enable us to pay future promised benefits beyond year 2029?
a. increase ss tax rate 6.2% to 7.2%
b. decrease benefits to future retired people
c. increase retirement age 65----->67------>68----->70
d. Deny social security benefits to wealthy
Define fiscal policy
use of government budget (G and T) to influence overall economy are by president and congress
budget deficit- G more than T
budget surplus- T more than G (1970-1997, 2002-2012)
balanced budget: G=T (1998-2001)
what effect will expansionary fiscal policy have on aggregate demand? on the budget? On GDP?
- recession/ high unemployment
- government should run expansionary fiscal policy in order to increase aggregate demand
- (increase in government spending and decrease in taxes)
- intentional budget deficit/increase GDP
what effect will contractionary fiscal policy have on aggregate demand? on the budget? on GDP?
- government should run contractionary fiscal policy in order to decrease aggregated demand
decrease in government spending and increase in taxes (intentional budget surplus and decrease in GDP)
what are some reason why our budget deficit sometimes increases. For example wehad a budget surplus of $130 billion in 2001 and a budget deficit of $413 billion in 2004.another example we wnt from a budget deficit of $163 billion in 2007 to a budget deficit of $455 billion in 2008 and a budget deficit of $1400 billion in 2009.
- a.. weak economy (recession or high unemployment)
- b. national defense (war)
- c. expansionary fiscal policy
what are three sources from which the government can borrow when it has a budget deficit?
a. federal reserve
c. foreign sector
explain why many conventional (non-supply-side) economists believe that constant large budget deficits can contribute to or create economic problems. what are some of those problems?
a. borrows from fed
fed buys these us government securities
increase money supply
can cause inflation
- b. borrows from americans
- americans lend money to government instead of lending to businesses reduse investment spending
- slower economic growth
- c. borows from foreign sector
- foreign peole buy us government securities
- instead of buying US made exports
according to Keynesian theory, an increase in the size of the budget deficit wikll help the overall economy right now. give some reasons why.
- budget deficit: good
- (increase AD)
according to classical theory, a decrease in the size of the budget deficit will help the overall economy right now. give some reasons why.
- balance the budget
- (deficit is causing problems, inflation growth , trade deficit)
what is supply-side economics?
set of governmentspolicies designed to help overall economy by increasing aggregate supply-thru "tax decreases"
what is the laffer curve?
assume that a large tax cut causes a budget deficit (as in 2004) or greatly reduces a surplus (as in 2001) what impact will this tax cut have on the economy, and future state of the budget according to a supply-side economist?
what is the diference between a budget deficit and the national debt?
- budget deficit: a given year, G more than T
- national debt: total of all the past years budget deficits that have not yet been repaid
in what year was our national debt the highest, when measured as a percentage of GDP?
who owes the $15.9 trillion national debt to whom?
US government owes $16 trillion to holders of US government securities
- fed reserve 10%
- americans 60%
- foreign 30%
how is it posible for the government to maintain our current national debt of $15.9 trill indefiinitely?
government continously refinances the national debt
what are two other wyas in which the government can repay the current $15.9 trill national debt?
2 ways to repay:
a. power to tx (collect more taxes)
b. fed: print money
what is another possible way to deAl with the national debt?
whaT ARE TWO PIMARY BURDENSon society of the national debt?
a. us tax payer must repay national debt
- b. actual
- US tax payer must pay interest on national debt 300 billion