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UMASS / Economics / ECON 104 / Why are some investments planned and others unplanned?

Why are some investments planned and others unplanned?

Why are some investments planned and others unplanned?

Description

School: University of Massachusetts
Department: Economics
Course: Introduction to Macroeconomics
Professor: Mehrene larude
Term: Fall 2016
Tags: Introduction to Macroeconomics, Studyguide, econ 104, and Midterm 1
Cost: 50
Name: Econ 104: Midterm Study Guide
Description: These study guide (includes the answers for questions) cover what is going to be in midterm.
Uploaded: 10/18/2016
12 Pages 58 Views 1 Unlocks
Reviews


1)Concepts and terms


Why are some investments planned and others unplanned?



a) Value added: the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that  stage.

b) Unemployed: any person 16 years old or older who is not working, is  available for work, and has made specific efforts to find work during  the previous 4 weeks.

c) Not in the labor force: a person who is not looking for work because  he or she does not want a job or has given up looking

d) Planned investment: those additions to capital stock and inventory  that are planned by the firms.

e) Actual investment: the actual amount of investment that takes  place. It includes items such as unplanned changes in inventories. f) Discretionary fiscal policy: Changes in taxes or spending that are  the result of deliberate changes in government policy.


What factors determine the effectiveness of discretionary fiscal policy?



∙ NDP= GDP – Depreciation

∙ NNP= GNP – Depreciation

Don't forget about the age old question of What is the operational sex ratio?

2)All the types of diagrams showing the “Keynesian  cross”


What are other measures that could be used to measure the well being in an economy?



 The point where AE function (AE=C+I) intersects with the 45 degree  line (Y=AE) is called Keynesian Cross.

3)Two different methods of measuring GDP

a) Why is output theoretically equal to income?

i) Because all of value added is paid out as income to someone  except firms’ retained earnings, which are also part of national  income.

4) GDP, GNP

a) When will GDP be greater than GNP? And when less?

b) Oil-rich countries like Equatorial Guinea:

i) GNP<<GDP We also discuss several other topics like What is the meaning of the demographic changes in globalization?

ii) Because the output (oil) is owned by oil companies from other  countries, like Exxon, Shell, or BP, which are not owned by citizens  of Equatorial Guinea.

5) Measurement of social wellbeing

a) Problem of using GDP as a measurement:

1. Measure only production for sale.

2. GDP counts BADS or wastes, like expenditures on weapons. 3. Doesn’t count time on leisure.

6) Name at least one alternative measure of societal  wellbeing

a) Genuine Progress Indicator: used in Vermont and Maryland; Oregon,  Washington, Colorado, and Hawaii.

b) Gross National Happiness: Bhutan Don't forget about the age old question of What is when an individual inherits the same alleles for a particular gene from both parents?

c) Index of Sustainable Economic Welfare (ISEW): Finland, elsewhere

7) Nominal GDP rise faster than Real GDP

a) Nominal GDP grows faster than Real GDP, because the change of  price level (inflation rate) as well as the real growth of goods and  services produced. Since the inflation rate is usually positive in a  long time span, the growth rate of nominal GDP will be greater.

8) GDP per capita

a) US GDP is about $15,000 billion (also known as $15 trillion), and the population of the US is 0.3 billion.

b) GDP per capita =$50,000

9) What is “Unemployed”

a) Not in the labor force

b) Conditions of being unemployed: Any person 16 years old or older  who  

(1)is not working

(2)is available for work

(3)has made specific efforts to find work during the previous 4  weeks.

10) Paradox of Thrift

a) Consumers hear news that the economy may go into recession b) They therefore decide to change their behavior in a way that increases  saving at every level of income

c) How will Y* change? 

d) How will total saving change?

e) Y* will decrease. S will not change (still equals to I) Don't forget about the age old question of Does artificial mean fake?
We also discuss several other topics like What dynasty did the zhu yuanzhang conquer to create the ming dynasty?

equilibrium: S=I

 Condition of  

 Assumption: Interest rate will not change, so that I remains constant.

11) Circular Flow, Injection & Leakage

12) Finding Y*, Multiplier

a) In a two-sector model with no government and no trade, assume that  the consumption function is C = 200 + .75Y and that I = 100.  (1) What is equilibrium GDP (Y*)?  

(2) What is the (investment) spending multiplier?  

(3) If firms decide to increase their spending on expanding productive  capacity by 10, what will be the new level of equilibrium GDP? (4) Derive the saving function from the consumption function  (remember, this is a two-sector model with no government and no  trade). Graph it and the investment function and point out the value of Y* at which the economy is in equilibrium. [Lecture 5.1; (CFO Ch. 8 is  sort of helpful)] If you want to learn more check out What is the definition of mechanistic organizations?

13) Definition or condition?

a) Which of these equations is a definition, or identity (true for all values  of Y)? Which is an equilibrium condition (only true for one value of Y,  namely the equilibrium value)?

(1) Aggregate Expenditure = Consumption + Investment +  Government Spending + Net exports

(2) Y (output/income) = Aggregate Expenditure

(3) Disposable Personal Income = Y – T

(4) Leakages = Injections (in the two-sector model, for example, S = I)  

14) Multiplier and MPC

a) If consumption function #1 has a flatter slope than consumption  function #2, and therefore AE function #1 has a flatter slope than AE

function #2, then which one will have the larger spending multiplier?  [the slope is the MPC; just apply the formula for the multiplier] • Multiplier= 1/ (1-MPC)

• MPC1<MPC2

• Multiplier1<Multiplier2

15) Discretionary Spending & Nondiscretionary Spending a) Discretionary spending $1.1 trillion

• Voted by Congress each year  

• Biggest item: Military ($598 billion)

b) Mandatory (nondiscretionary) spending $2.45 trillion • Ongoing “entitlement” programs: Social Security ($0.9 tr),  Medicare ($1.0 tr), food assistance ($0.1 tr), other ($0.5 tr) • Two Biggest items: (1) Medicare & Health: $986 billion; (2)Social  Security: $895 billion.

c) Interest on the national debt $0.2 trillion

• Total federal budget: $3.8 trillion

• The portion of non-discrepancy part: 2.45/3.8=64.5%

16) Y* with Government

• C = 19 + 0.75Yd

• I = 15

• G = 15

• T = 12

• Find equilibrium GDP

17) Tax Cut and Y*

• Suppose: C = 4 + 0.5Yd, investment spending is fixed and government spending is fixed

• Tax cut by 1

• How much will Y* change?

18) Intersection of AE and 45 degree at level of Y*

1)Concepts and terms

a) Value added: the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that  stage.

b) Unemployed: any person 16 years old or older who is not working, is  available for work, and has made specific efforts to find work during  the previous 4 weeks.

c) Not in the labor force: a person who is not looking for work because  he or she does not want a job or has given up looking

d) Planned investment: those additions to capital stock and inventory  that are planned by the firms.

e) Actual investment: the actual amount of investment that takes  place. It includes items such as unplanned changes in inventories. f) Discretionary fiscal policy: Changes in taxes or spending that are  the result of deliberate changes in government policy.

∙ NDP= GDP – Depreciation

∙ NNP= GNP – Depreciation

2)All the types of diagrams showing the “Keynesian  cross”

 The point where AE function (AE=C+I) intersects with the 45 degree  line (Y=AE) is called Keynesian Cross.

3)Two different methods of measuring GDP

a) Why is output theoretically equal to income?

i) Because all of value added is paid out as income to someone  except firms’ retained earnings, which are also part of national  income.

4) GDP, GNP

a) When will GDP be greater than GNP? And when less?

b) Oil-rich countries like Equatorial Guinea:

i) GNP<<GDP

ii) Because the output (oil) is owned by oil companies from other  countries, like Exxon, Shell, or BP, which are not owned by citizens  of Equatorial Guinea.

5) Measurement of social wellbeing

a) Problem of using GDP as a measurement:

1. Measure only production for sale.

2. GDP counts BADS or wastes, like expenditures on weapons. 3. Doesn’t count time on leisure.

6) Name at least one alternative measure of societal  wellbeing

a) Genuine Progress Indicator: used in Vermont and Maryland; Oregon,  Washington, Colorado, and Hawaii.

b) Gross National Happiness: Bhutan

c) Index of Sustainable Economic Welfare (ISEW): Finland, elsewhere

7) Nominal GDP rise faster than Real GDP

a) Nominal GDP grows faster than Real GDP, because the change of  price level (inflation rate) as well as the real growth of goods and  services produced. Since the inflation rate is usually positive in a  long time span, the growth rate of nominal GDP will be greater.

8) GDP per capita

a) US GDP is about $15,000 billion (also known as $15 trillion), and the population of the US is 0.3 billion.

b) GDP per capita =$50,000

9) What is “Unemployed”

a) Not in the labor force

b) Conditions of being unemployed: Any person 16 years old or older  who  

(1)is not working

(2)is available for work

(3)has made specific efforts to find work during the previous 4  weeks.

10) Paradox of Thrift

a) Consumers hear news that the economy may go into recession b) They therefore decide to change their behavior in a way that increases  saving at every level of income

c) How will Y* change? 

d) How will total saving change?

e) Y* will decrease. S will not change (still equals to I)

equilibrium: S=I

 Condition of  

 Assumption: Interest rate will not change, so that I remains constant.

11) Circular Flow, Injection & Leakage

12) Finding Y*, Multiplier

a) In a two-sector model with no government and no trade, assume that  the consumption function is C = 200 + .75Y and that I = 100.  (1) What is equilibrium GDP (Y*)?  

(2) What is the (investment) spending multiplier?  

(3) If firms decide to increase their spending on expanding productive  capacity by 10, what will be the new level of equilibrium GDP? (4) Derive the saving function from the consumption function  (remember, this is a two-sector model with no government and no  trade). Graph it and the investment function and point out the value of Y* at which the economy is in equilibrium. [Lecture 5.1; (CFO Ch. 8 is  sort of helpful)]

13) Definition or condition?

a) Which of these equations is a definition, or identity (true for all values  of Y)? Which is an equilibrium condition (only true for one value of Y,  namely the equilibrium value)?

(1) Aggregate Expenditure = Consumption + Investment +  Government Spending + Net exports

(2) Y (output/income) = Aggregate Expenditure

(3) Disposable Personal Income = Y – T

(4) Leakages = Injections (in the two-sector model, for example, S = I)  

14) Multiplier and MPC

a) If consumption function #1 has a flatter slope than consumption  function #2, and therefore AE function #1 has a flatter slope than AE

function #2, then which one will have the larger spending multiplier?  [the slope is the MPC; just apply the formula for the multiplier] • Multiplier= 1/ (1-MPC)

• MPC1<MPC2

• Multiplier1<Multiplier2

15) Discretionary Spending & Nondiscretionary Spending a) Discretionary spending $1.1 trillion

• Voted by Congress each year  

• Biggest item: Military ($598 billion)

b) Mandatory (nondiscretionary) spending $2.45 trillion • Ongoing “entitlement” programs: Social Security ($0.9 tr),  Medicare ($1.0 tr), food assistance ($0.1 tr), other ($0.5 tr) • Two Biggest items: (1) Medicare & Health: $986 billion; (2)Social  Security: $895 billion.

c) Interest on the national debt $0.2 trillion

• Total federal budget: $3.8 trillion

• The portion of non-discrepancy part: 2.45/3.8=64.5%

16) Y* with Government

• C = 19 + 0.75Yd

• I = 15

• G = 15

• T = 12

• Find equilibrium GDP

17) Tax Cut and Y*

• Suppose: C = 4 + 0.5Yd, investment spending is fixed and government spending is fixed

• Tax cut by 1

• How much will Y* change?

18) Intersection of AE and 45 degree at level of Y*

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