Aggregate Demand
The four components of aggregate demand
Consumption, Investment, Government Spending, and Net Exports
How the spending multiplier is calculated
1/(1-MPC)
What direction is the SRAS curve sloping?
Upward
The two types of fiscal policy
Expansionary and Contractionary
Economic policies and programs that automatically help stabilize an economy by reducing fluctuations in the business cycle.
Automatic stabilizers
Shape of the aggregate demand curve
Downward sloping
What is the multiplier if the MPC is 0.8
5
The amount of goods and services (real GDP) that firms will produce in an economy at different price levels
Aggregate supply
What does expansionary fiscal policy consist of?
Increased government spending and tax cuts
Are automatic stabilizers discretionary or non-discretionary
Non-discretionary
Effect of an increase of government spending on AD
Shift right
What is the multiplier if the MPS is 0.1
10
Change in resource prices, actions of the government, and change in productivity.
Who is responsible for fiscal policy?
Provide an example of an automatic stabilizer
Unemployment insurance, food stamps, and income taxes
People spend more as the value of their assets rise
Wealth effect
Value of tax multiplier compared to spending multiplier
One less
How do expectations of future inflation affect the SRAS curve?
Shift left
How can fiscal policy combat inflation
Decreased government spending or tax increases
How do automatic stabilizers work during a recession?
Increase government spending or decrease taxes
Effect of an increase in taxes on AD
If the MPC is 0.75, what is the tax multiplier?
3
What relationship does the SRAS show between price level and real output?
Intentional changes in taxes and government expenditures made by Congress to stabilize the economy
Discretionary fiscal policy
Why are automatic stabilizers important?
They help smooth out economic fluctuations without the need for new legislation.