24 terms

What are the two factors of production?

labor and capital

What are the variables of Labor and capital? What do they entail?

Capital= K: tools, machines, and structures used in production

Labor= L: the physical and mental efforts of workers

Labor= L: the physical and mental efforts of workers

What is the production function equation? what is it in words?

Y= F (K,L)

shows the amount of output (y) the economy can produce with K and L units

- reflects the level of technology

- exhibits constant returns to scale

shows the amount of output (y) the economy can produce with K and L units

- reflects the level of technology

- exhibits constant returns to scale

What determines the distribution of national income?

factor prices: price per unit firms pay

wage= price of L

rental rate= price of K

wage= price of L

rental rate= price of K

What is the MPL

the extra output the firm can produce using an additional unit of labor

What is the Rental Rate Equation?

MPK= R/P

MPK goes down when Capital goes up

MPK goes down when Capital goes up

What is the neoclassical theory of distribution

each factor input is paid its marginal product

What is total labor income equation?

MPL*L

What is the total capital income equation?

MPK*K

What is the total income equation?

Y= (MPL)(L) + (MPK)(K)

What is C in a closed economy?

Disposable income

Y-T

Y-T

What is I in a closed economy?

I=I(r) where r=real interest rate

What is r in relation to I?

r: the cost of borrowing

I negatively depends on r

I negatively depends on r

What is G in a closed economy?

government spending on goods and services where G and T are exogenous

Aggregate Demand Equation

E(r)= C(Y-T)+I(r)+G

Aggregate Supply Equation

Y= F( K,L)

Equilibrium Equation

Y=E(r)=C(Y-T)+I(r)+G

What can change in the equilibrium equation?

only r can adjust to reach equilibrium

What is the demand of funds?

investment

What is the supply of funds?

savings

What is the price of funds?

real interest rate

Types of Savings and the equations

- Private savings= (Y-T)-C

- Public savings= T-G

- National savings (s)=Y-C-G

- Public savings= T-G

- National savings (s)=Y-C-G

What shifts a savings curves?

Private: preferences, tax laws for savings

Public: fiscal policy where G or T changes

Public: fiscal policy where G or T changes

What shifts the loanable funds

Tech advances

tax laws about investment

tax laws about investment