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Macrotheory Revision Before Mid-Term

Macrotheory Revision Before Mid-Term

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Published by Abdelrahman Zohairy

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Published by: Abdelrahman Zohairy on Oct 08, 2012
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01/13/2013

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Department of Economics
Macrotheory
Material to study
Lecture 1 ch.1Lecture 2 , tut sheet 1, ch.2 in the bookLecture 3 , tut sheet 2, ch. In the book
Solve Quiz 1
Lecture 4 tut sheet 3. ch.3 in the book
Solve Quiz 2
Lecture 5 tut sheet 4.
Exam Structure:
15 MCQ = 15 marks1 Problem = 15 marksBonus question = 3 marks
Topics covered:
1) Ex-post macroeconomics: Macroeconomicmeasurement and accounting
National income and production
Inflation
(Un-)employment
2) The goods market and the multiplier effect
The consumption function
The investment function
Government expenditures and taxation
Equilibrium and its determinants
3) The goods market in the short run:the ‘Keynesian cross’ (ctd)
The impact of public policy on equilibrium
The multiplier effect
Deriving the IS curve
 
 Additional information:
Gross versus net product 
In economics, gross means before deductions (brutto),e.g. 
Gross domestic product (GDP) refers to the market value of allfinal goods and services produced within a country in a given period. GDPper capitais often considered an indicator of a country'sstandard of living
 
Net Domestic Product (NDP)
refers to the Gross Domestic Product (GDP)minusdepreciationon a country's Capital (economics) goods. (The NDP is thus,ineffect, an estimate of how much the country has to spend to maintain thecurrent GDP.)
Domestic versus national product 
GDP
can be contrasted with
 
(GNI).
The difference is that GDP defines its scope according to location,while GNP defines its scope according to ownership. In a global context,worldGDP and world GNPare therefore equivalent terms. GDP is product producedwithin a country's borders; GNP is product produced by enterprises owned by acountry's citizens. The two would be the same if all of the productive enterprisesin a country were owned by its own citizens, and those citizens did not ownproductive enterprises in any other countries. In practice, however, foreignownership makes GDP and GNP non-identical. Production within a country'sborders, but by an enterprise owned by somebody outside the country, counts aspart of its GDP but not its GNP; on the other hand, production by an enterpriselocated outside the country, but owned by one of its citizens, counts as part of itsGNP but not its GDP
Investment
Investment is the amount purchased per unit time ofgoods which are not consumed but are to be used for future production. Examples includerailroadorfactoryconstruction. Investment is often modeled as a function of Income andInterest rates, given by the relation I = f(Y, r). An increase in income encourageshigher investment, whereas a higher interest rate may discourage investment as itbecomes more costly to borrow money. Even if a firm chooses to use its ownfunds in an investment, the interest rate represents anopportunity costofinvesting those funds rather than lending out that amount of money for interest.
Unplanned investment :
Investment expenditures that the business sector undertakes apart from those theyintend to undertake based on expected economic conditions, interest rates, sales,and profitability. Another term for unplanned investment is change in inventories,which result when aggregate expenditures differ from aggregate output.
 
Unplanned investment can be either positive or negative, meaning businessinventories can either rise or fall. Should unplanned investment occur, then actualand planned investment differ, aggregate expenditures are not equal to aggregateoutput, and the macroeconomy is not in equilibrium
Taxes
An important feature of tax systems is the percentage of the tax burden as it relatesto income or consumption. The terms progressive, regressive, and proportional areused to describe the way the rate progresses from low to high, from high to low, orproportionally. The terms describe a distribution effect, which can be applied to anytype of tax system (income or consumption) that meets the definition.
 is a tax imposed so that theeffective tax rateincreases as the amount to which the rate is applied increases.
The opposite of a progressive tax is a
,where the effective taxrate decreases as the amount to which the rate is applied increases. Thiseffect is commonly produced where means testing is used to withdraw taxallowances or state benefits.
In between is a
, where the effective tax rate is fixed, whilethe amount to which the rate is applied increases.
A lump-sum tax
is a tax that is a fixed amount, no matter the change incircumstance of the taxed entity
If lump sum tax applied thenT= TºIf proportional tax systemT= t * YMultiplier in case of Proportional tax system = 1/[1 – c
1
(1 – t)]

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