econ2010 exam 2 cheat sheet - 1 TAXATION a Let f be the...

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1.) TAXATION: a.) Let f be the fraction of income paid in tax in a given tax program (e.g., U.S. income tax orU.S. Social Security tax). In equation form: f = total tax paid / income b.) A progressive tax program = one in which f rises as income rises. c.) A proportional tax program = one in which f remains constant as income changes. [Note: The program in (c) would be a true "flat tax" program.] d.) A regressive tax program = one in which f falls as income rises. 2.) REAL vs. NOMINAL GDP: Suppose the output of an economy consists of two goods, A and B. We also have two years, 1 and 2. a.) Year 1 nominal GDP =(Year 1 output of A )(Year 1 price of A) + (Year 1 output of B)(Year 1 price of B) Note that when calculating nominal GDP, the prices and output quantities we use are both from the same year. So, Year 2 nominal GDP =(Year 2 output of A )(Year 2 price of A) + (Year 2 output of B)(Year 2 price of B) b.) When calculating real GDP for a given year, we will still always use the output quantities of that year, but we will use the prices of the base year. So, for example, if we pick year 1 as the base year, we will have: Year 1 real GDP = Year 1 nominal GDP(real GDP always equals nominal GDP in the base year), and Year 2 real GDP = (Year 2 output of A)(Year 1 price of A) + (Year 2 output of B)(Year 1 price of B) c.) GDP deflator for a given year = nominal GDP for the same year / real GDP for the same year e.g., 2000 GDP deflator = 2000 nominal GDP / 2000 real GDP 3.) GDP, SPENDING AND INCOME: a.) I = The amount that firms spend on new capital + changes in inventories. NOTE: Changes in inventories include both desired and undesired changes in inventories.
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