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Macroeconomics Study Guide

by: Riley Lassiter

Macroeconomics Study Guide ECON 2003

Marketplace > Arkansas Tech University > Economcs > ECON 2003 > Macroeconomics Study Guide
Riley Lassiter
Arkansas Tech University
GPA 3.6

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About this Document

This study guide contains information on Chapter 6: Price Controls and Taxes, Chapter 8: Laffer Curve, Mercantilism, Absolute Advantage, Chapter 9: International Trade, GATT, Tariff Tax, World pric...
Principles of Macroeconomics
Dr. Reavis
Study Guide
Macro, Macroeconomics, price controls, Taxes, Laffer Curve, Mercantilism, absolute advantage, International Trade, GATT, Tariff Tax, World Price, Immigration
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This 5 page Study Guide was uploaded by Riley Lassiter on Tuesday February 2, 2016. The Study Guide belongs to ECON 2003 at Arkansas Tech University taught by Dr. Reavis in Fall 2015. Since its upload, it has received 31 views. For similar materials see Principles of Macroeconomics in Economcs at Arkansas Tech University.

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Date Created: 02/02/16
Econ Study Guide Chapter 6  “Price controls are usually enacted when policymakers believe that the market price of a  good or service is unfair to buyers or sellers.”  Policymakers use taxes to raise revenue for public purposes and to influence market  outcomes.  Policies often have effects that their architects did not intend or anticipate.  Controls on prices: o Price ceiling: a legal maximum on the price at which a good can be sold.  Price ceiling is not binding if equilibrium is below.  Price ceiling is binding constraint if equilibrium is above.  Could cause shortage of supply.  “When the government imposes a binding price ceiling on a  competitive market, a shortage of the good arises, and sellers must  ration the scarce goods among the large number of potential  buyers.”  Free markets ration goods with prices. o Price minimum: a legal minimum on the price at which a good can be sold.  Price floor is not binding if equilibrium is above.  Price floor is binding if equilibrium is below.  Could create surplus of supply. o Evaluating price controls  Price controls often hurt those they are trying to help.  Subsidies, not perfect, could benefit instead.  Taxes o Who bears the burden of the tax?  Tax incidence: the manner in which the burden of a tax is shared among  participants in a market. o Taxes on Sellers affecting Market Outcomes  3 steps to analyze supply and demand  1. Decide whether the law affects the supply or demand curve.  2. Decide which way the curve shifts. o How much?  3. Examine how the shift affects the equilibrium price and  quantity.  Implications  Taxes discourage market activity; when a good is taxed, the  quantity of the good sold is smaller in the new equilibrium.  Buyers and sellers share the burden of taxes; in the new  equilibrium, buyers pay more for the good and sellers receive less.  Shifts the supply curve upward by size of the tax. o How taxes on buyers affect market outcomes  Apply same three steps.  Share burden  Shifts the demand curve downward by the size of the tax. o Elasticity and Tax Incidence  Burden is not usually shared fairly on taxes.  Burden falls more heavily on the side of the market that less elastic.  Elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable.  Chapter 8 o Progressive: Rate UP as Income UP  Taxes high income people more o Regressive: Rate DOWN as Income UP  Taxes low income people more o Fiscal policy – taxes and what to do with tax revenue o Laffer Curve  Tax Rate 0% = 0% Tax Revenue  Tax Rate 100% = 0% Tax Revenue  Must be taxed at perfect level to receive most tax revenue. o The deadweight loss of taxation  The impact of a tax on a market outcome is the same whether the tax is  levied on the buyers or sellers of a good.  Tax levied on buyers = demand curve shifts downward by size of tax  Tax levied on sellers = supply curve shifts upward by tax size.  Tax on a good causes the size of the market for the good to shrink. o How a tax affects market participants  Economic welfare measured by:  Buyers o Consumer surplus = amount buyers are willing to pay – the  amount they actually pay for it.  Sellers o Producer surplus = the amount sellers receive for the good  – their costs.  Government receives tax revenue  Tax size X quantity of goods sold = tax revenue  Welfare without a tax  Mercantilism o The economic problem: how to make the best use of economic resources.  Resources are limited o 1500­1800 o Resources are fixed. o Everyone can get their part o “We want our wealth to go up; have to take it away from other countries.” o Exports = good  Increase domestic jobs  Increase domestic wealth o Need colonies because need raw materials o Command economy  Central authority o Jean­Baptiste Colbert perfected mercantilism for France’s King Louis XIV o “In order for me to get a bigger piece, you have to get a smaller piece.” o Favorable Balance of Trade: Exports>Imports o Self­Sufficiency o Mercantile Store  Little bit of everything o Domestic manufacturing  Must regulate economy to promote o Protectionism: country passes laws to discourage imports o Government incentives  Hands on approach  Subsidies  Monopolies  Protective tariffs  Goal = eliminate risk  Don’t want competition within o French preferred industries  Luxury goods  Shipping  Armaments o Colonies expected to trade exclusively with homeland country o Corruption  Absolute Advantage o Adam Smith o Country should produce what costs the least  If france can make cheaper wine than Britain, Britain should buy their  wine.  Whoever can do it cheapest, should do it. o Ricardo  Comparative advantage  Comparative advantage in producing a good, I should produce this  good.  Chapter 9: International Trade o GATT (General Agreements on Tariffs and Trade)  Reduce trade barriers  Increase trade  Global economy efficiency o Tariff­tax (Barrier 1)  Protetive­usually higher, to protect domestic  Revenue­are small, bring in revenue, pay for government functions:  customs, international trade (administrative charge) o Quota (Barrier 2)  Raises price  Decrease quantity  Limit on market o Red Tape­Government Forum to Talk about Trade  Originally only 23 members 1947  Round (meetings) of negotiation  1947 able to get countries to reduce tariffs by 21%  Kennedy Round: decrease tariffs by 35%  1995 Transformed into World Trade Organization  Added mechanism for countries to resolve dispute  150 countries today  1990s US importing gas from South America o Decided to established standard for gas (cleaner) o Standard for domestic gas and higher standard for imported gas. o Protectionist policy o Cost more to import gas o Filed trade dispute against U.S. and won o U.S. appealed and lost o U.S. had to modify standards to be equal  As U.S., being member of WTO, giving up sovereignty  WTO does not engage in environmental or wage laws o World Price  Price will decrease to world price or very close because will buy imports  instead.  Immigration o Benefits of Immigration  Entrepreneurship  Cultural diversity  Helping economy  Increase their standard of living  Stimulate economy  Increased labor resource  Improves economy efficiency because cuts cost of production o People will migrate from Mexico to U.S. until equal labor costs. o Groups affected by immigration  Low wage labor  African American males  Some skilled workers  Native born PhDs o Straining the Criminal Justice System  Illegal immigrant commits a crime  Put in jail  Incarcerated at sanctuary jail, will not be deported  Growing # of sanctuaries


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