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Chapter 3 Econ 3302
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Terms in this set (24)
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
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
What determines the distribution of national income?
factor prices: price per unit firms pay
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
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
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
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
What shifts a savings curves?
Private: preferences, tax laws for savings
Public: fiscal policy where G or T changes
What shifts the loanable funds
Tech advances
tax laws about investment
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