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Medium Income
- Exact income earned by middle worker
- *better way for average
- 1/2 of all workers earn more
- 1/2 of all workers earn less
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Mean Income
- Add up income of all workers and divide by number of workers
- *distorts average
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Aggregate Demand
Total demand for GDP
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Aggregate Supply
Total supply for GDP
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Components of Aggregate Demand
AD = C + I + G + X - IM
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Circular flow model
Name sectors and markets
- Sectors:
- Business Sector (production)
- Household Sector (consumption)
- Market:
- Product Market (goods&services)
- Labor Market (jobs)
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What is Say's Law?
(1799 Jean B. Say) "Supply Creates its Own Demand" means act of production always creates enough jobs and income so that households can buy entire GDP
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What conclusions did Classical Theory draw regarding the working of the overall economy?
Free market economy (pursue self-interest) can run itself or regulate itself and can solve its own problems
Economy will always stabilize at full employment
*Dominate theory from 1700 to 1950
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According to Classical Theory, is government intervention in the the economy either necessary or desireable?
- Government intervention is not needed or desirable
- "Laissez Faire"
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According to Classical Theory, should the government balance its budget every year?
- Yes, always balance the budget
- Government spending = Taxes
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According to Classical Theory, what is a desirable level of taxes and Government Spending?
As low as possible
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What conclusion did Keynesian Theory draw regarding the working of the overall Economy?
- A free market economy (pursue self-interest) cannot always solve its own problems, can not always regulate itself
- Free market economy can stabilize at any unemployment rate.
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What will happen to the level of GDP if AD exceeds AS?
- GDP goes up
- Businesses increase production and price
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What will happen to the level of GDP if AS exceeds AD?
- GDP goes down
- Businesses have unsold goods, decrease price, decrease production
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What will happen to the level of GDP if AD = AS?
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According to Keynesian Theory, will the economy always be at full employment?
No, economy will stabilize at level of GDP where AD = AS. This can occur at any unemployment rate
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According to Keynesian Theory, is government intervention in the economy either necessary or desirable?
Yes, sometimes government intervention can help solve major economic problems
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According to Keynesian Theory, what can the government do to increase AD and thereby increae GDP?
- Increase government spending
- Decrease taxes
- FED-increase money supply (lower interest rate)
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According to Keynesian Theory, should the government balance its budget every year?
- No
- If Recession-budget deficit
- If Inflation-budget surplus
- If no major problems-balance budget
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What are the four largest categories of government spending in the 2010 budget?
- National Defense
- Social Security Benefits
- Medicare
- Interest on National Debt
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What are some shifts in Government spending categories (in percentage terms) since 1970?
- National Defence (less) 43% - 21-26%
- All Benefits (more) 27% - 56%
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How much was the level of Federal Government spending as a Percentage of GDP in 1910? From 1960 through 2007? In 2010?
- G/GDP
- 1910 2b/10b= 2%
- 60-07 20%
- 2010 25%
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What are the four largest sources of government revenue in the 2010 budget?
- Borrowing
- Individual Income Tax
- Social Security Tax
- Corporate Profits Tax
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How are Social Security benefits paid for?
- Today's workers pay social security tax, that money gets sent out today to pay benefits of today's elderly reitered people
- Social Security & Medicare
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Will the Social Security system collect enough in Social Security taxes this year to pay the benefits promised to today's (year 2011) retired people?
No, social security deficit, not paying enough social security tax to pay all benefits
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Explain why the Social Security surplus has disappeared and is now a deficit.
Not enough workers per retired person. Previous surplus not saved, used to fund other government spending
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If we keep the current Social Security system, list some modifications that can enable us to pay future promised benefits beyond year 2029.
- Increase Social Security Tax rate
- Decrease benefits promised to future retired people
- Increase retirement age
- Eliminate "Income Cap" on Social Security Tax
- Deny Social Security Benefits to wealthy retired people
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Progressive tax & example
- Higher income earners pay a higher percentage tax rate
- US Income Tax
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Proportional (flat) tax & example
- All income earners pay the same percentage tax rate
- Michigan Income Tax
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Regressive tax & example
- Higher income earners pay a lower percentage tax rate
- Sales tax, excise tax, social security tax, fees, fines
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Is a sales tax progressive, flat, or regressive?
Regressive
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Is a set "user fee" (where every person pays the same dollar price for a given government service) progressive, flat, or regressive?
Regressive
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Budget Deficit
- Government spends more than collected in taxes
- G>T
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Budget Surplus
- Government collect in taxes more than they spend
- G<T
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Balanced Budget
- Government spend the same as they collect in taxes
- G=T
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Fiscal Policy
Use of government budget (spending and taxes) as a way to influence overall economy, done by president and congress.
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What effect will Expansionary Fiscal Policy have on Aggregate Demand? On the Budget? On GDP
- AD- increase
- Budget-increase spending or decrease taxes, budget deficit
- GDP- increase
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What effect will Contrationary Fiscal Policy have on Aggregate Demand? On the Budget? On GDP?
- AD-decrease
- Budget-decrease spending or increase taxes, budget surplus
- GDP-decrease
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What are the three sources from which the Government can borrow when it has a Budget Deficit?
- Federal Reserve
- Americans
- Foreign
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Explain why many conventional (non-supply-side) economist believe that constant large budget deficits can contribute to or create economic problems. What are some of those problems?
- Borrow from Fed-increase money supply, increase inflation
- Borrow from Americans-reduce investment spending(crowding out), future-reduce economic growth and lower standard of living
- Borrow from Foreign-trade deficit, future-repay loan with interest in future to foreing people (could compromise foreign policy)
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What is supply-side economics?
Set of government policies that are designed to increase aggregate supply through tax cuts, and deregulation of business and market incentives to promote savings and investment spending.
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Assume that a large tax cut causes a budget deficit (as in 2004) or greatly reduces o surplus (as in 2001). What impact will this tax cut have on the economy, and future state of budget according to a suupply-side economist?
A. Incentives-increase work effort, increase savings, increase production, increase in investment spending = increase aggregate suupply = increase GDP
B. Future budget-tax cuts lead to increase in investment spending increase in economic growth = future higher GDP, more jobs, higher incomes
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What is the Laffer Curve?
A graph that shows us the relationship that exist between tax rates (%) and tax revenue ($). (Arthur Laffer)
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What is the difference between a budget deficit and the national debt?
National debt is the total of all past year's budget deficits, not been paid and the budget deficit is the current year's budget deficit.
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How large was the national debt as a percentage of GDP in 1945?
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In what year was our national debt the highest, when measured as a percentage of GDP?
1945
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Who owes the 15 trillion debt to whom?
US government owes the 15T to holders of US government securities
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How is it possible for the government to maintain our current national debt of 14.9 trillion indefinitely?
US government continually finances the national debt.
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What are two other ways in which the government can repay the current 14.9 trillion national debt?
- A. Power to tax (generate Budget Surplus)
- B. Power to print money (FED) {cause inflation}
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What is another possible way to deal with the national debt?
- Cancel it
- taxpayers win, securities holder lose
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What are the two primary burdens on society of the national debt?
- Potential: we(taxpayers) must repay entire national debt
- Actual: we (taxpayers) must pay interest on national debt
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