MPC- yeah you know me
Formula for the spending multiplier
1/1-MPC
T or F: Expansionary fiscal policy increases the money supply which lowers interest rates, increasing investment and increasing AD.
False
What causes cost push inflation?
Decrease in SRAS
Name the components of AD
C I G Xn
Draw an economy with unemployment greater than the natural rate.
On board
How do you compute marginal propensity to consume?
Change in consumption / change in disposable income
A recessionary gap.
What causes demand pull inflation?
Two out of the three things that shift SRAS
Change in resource prices, change in government actions, change in productivity
On a graph, illustrate what would happen if the government did not in response to a recession.
On board
What happens to the size of the spending multiplier as the MPS increases?
It decreases
What are three examples of contractionary fiscal policy?
Answers will vary.
What causes Stagflation? What problems does it create?
Decrease in SRAS- causes high unemployment and high inflation
One of the two shifters of LRAS
Change in resource quantity or quality, change in technology
How would inflation in the US impact the value of the US currency with respect to the Euro? Graph the foreign exchange market for US dollars to illustrate this.
Value of the US $ would decrease. Graph on board
What is the formula for the tax multiplier?
MPC/MPS
If the MPC is .80, and there is an inflationary gap of $200 million, what should the government do in terms of taxes?
Increase taxes by $50 million
The price of at least one input is fixed- "Sticky" usually wages
Name two automatic stabilizers
Progressive tax system, unemployment insurance
How could an increase in government spending, with no change in taxes, impact the real interest rate What is this called? Illustrate it in a graph.
Increase it, crowding out, graph on board.
Which will have a bigger impact on AD- a $20 mill. increase in government spending or a $20 tax cut- explain why.
Increase in spending.
Would the FED would use contractionary or expansionary fiscal policy if the country was producing above its potential output?
wages and resource prices are fully flexible
Explain how the progressive tax system acts as an automatic stabilizer
When GDP is down, tax burden is lower. When GDP is up, the tax burden increases.
Not a graph- define autonomous consumption.
Consumer spending on necessities regardless of income.