Macroeconomics Midterm

The impact of unlimited human rights on the limited resources of nature.

• 1. Develope resonable assumptions about economic behavior
• 2. Identify categories and variables to measure those categories
• 3. State the hypothesis about the relation between variables
• 4. Empirically test the theory

• Empirical method not objective in the state sense.
• We can establish facts but there are values in facts.

• Empirical method is objective.
• First establish assumptions and make them into facts.

• Concerned with what is the facts.
• Value free
• Objective

• Concerned with what ought to be.
• Value judgements
• Subjective

An economy is efficient if it takes all opportunities to make some people better off without making our people worse off

Insuring that everyone gets their fair share.

• 1. Society produces two goods
• 2. Society uses resources efficiently
• 3. Technology is constant
• 4. Resources are constant

There is an inverse relationship between the price of a good and the quantity demanded of that good all else equal.

• 1. Changes in peoples preferances.
• 2. Changes in peoples income.
• 3. Changes in prices of substitute and complementary goods.
• 4. Peoples expectations about the future.

• Demand goes up shortage
• Supply goes up surplus

• Households--Factor Markets-- Firms-- Markets for Good and Services.
• Factors Factors G&S G&S
• Money

Supply creats its own demand

• Leakage--Save
• Injections-- Investment

• National Defense- 15%
• Education- 17%
• Other Good and Services- 25%
• Transfers- 44%

• The transfer of tax revenues in general to specific programs.
• Social security, unemployment, medicare...

• 1. Provide public goods and services-- national defense, criminal justice system, education.
• 2. Redistribution of Income-- transfering tax revenues to the transfer programs.
• 3. Stablization- government has the responsibility to promote full employment with stable prices.
• 4. Economic regulation

• 1. Non-excludability- the supplier cannot prevent consumption of the good by people who do not pay.
• 2. Non-Rivalry- If others consume the goods this does not diminish the benefit to an individual.

• 1. They are excludable- suppliers can prevent people who do not pay from consuming the good.
• 2. They are rival in consumption- additional persons consuming the good would diminish the benefit to an individual.

Applies to non-excludable goods- self interestedpersons (who do not pay for the good) consume the good by taking a free ride from persons to pay.

• Marginal Tax Rate-- Changes in taxes paid/ changes in income.
• Average Tax Rate- Total tax/ Total income

• Property- Levied on land annd buildings to help pay for local public services.
• Estate- Levied at the time of death on estate and inheritance.

• Sales- a flat tax on retail prices
• Excise- taxes on the manufacture liquor, tabacco and gasoline.
• Social Security- Payroll tax on wages and salary.

• 1. Equity are tax burdens distributed in a just way.
• 2. Efficiency- does the tax improve productive allocatoins of resources in the economy.
• 3. Emforcability- cam the tax be enforced? If not should they not tax.

• 1. Horizontal Equity- equals should be treated equal.
• 2. Vertical Equity- People who are economically unequal should bear equal tax burdens.

• 1. The Benefit Principle- People should be taxed according to the benefits they recieve.
• 2. The Ability to pay Principle- The fairest tax is based on the ability of the tax payer to pay.

• 1. The progressive Tax Rate- the tax rate increases as income increases. (10, 20, 30, 40)
• 2. The regressive tax rate- the tax rate decreases as income increases. (40, 30, 20, 10)
• 3. the proportional- the tax rate stays the same as income increases. (10, 10, 10, 10)

• Non-Means- tested transfer. (social security, medicare, unemployment)
• Means- qualify if your income falls below poverty threshold. (TANF, EITC, Supplemental Security income, food stains)

• 1. Gov't should not redistribute income- the proper role of gov't is to maintain rule of law.
• 2. Efficiency v. Equity- the welfare state leads to marginal tax rates that are too high. Reduces work efforts and the problem of the notch.

The current market value of final goods and services produced within the bounderies at the US in a given year.

The current market value of final goods and services produced by US firms at home and abroad.

• 1. The national income and product accounts.
• 2. Value added approach

• Expenditures- Consumption, Investment, Gov't Spending, Exports/Imports.
• Income- compensation to employees, Rents, Profits, Indirect business taxes.

The difference between the proce of a good and the cost of intermidiate goods used to produce it.

• It does measure well being but we need to be cautious of it.
• Does not measure distribution of income, quality of output or environmental damage.

• 1. the consumer price index CPI- uses the goods and services consumed by the average urban house hold.
• 2. the producer price index PPI- uses goods purchased by wholesalers.
• 3. the GDP price Deflator- uses final good and services that are produce in the economy.

• P1-P0/P0
• P1- the price index in a current year
• P0- Price index in a earlier year

• Nominal- The value of something in terms of curent prices.
• Real- A nominal value after adjusting for inflation.

• 1.Demand Pull inflation- occurs when aggregate demand exceed capacity in the economy.
• 2. Cost push inflation- Due to increased prices of factors of production.
• 3. Expectations inflation- occurs when the public comes to anticipate inflation.

• 1. The Equity Effects- inflation reduces real income.
• 2. The Efficiency Effects- inflation contributes to higher cost of production.

• # unemployed/ civilian labor force X 100.
• A person is unemployed if they are not working but have been actively seeking work during the previous four weeks.

• 1. Frictional unemployment- people who are inbetween jobs.
• 2. Strctural unemployment- people who are unemployed due to structural changes in economy.
• 3. Cyclical unemployment- thsi is related to the level of aggregate demand in the economy.

• Unemployment that exists when economy is at capacity.
• Fictonal + Structural Unemployment

Is an additional cost or benefit not reflected in the price of a good.