Aggregate Demand
Is the fraction of an additional $1 of disposable income that is saved.
Marginal Propensity to Save.
Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.
Sticky Wages.
What is the economy experiencing?
- Price levels increasing.
- Aggregate output decreasing.
Stagflation.
The "Great Depression" created what type of shock?
(Also state what direction the curve shifted)
- Negative Demand Shock.
- Aggregate Demand shifted to left.
_________________ policy is fiscal policy that is the direct result of deliberate actions by policy makers rather than automatic adjustment.
Discretionary fiscal.
The actual increase in consumer spending when disposable income rises by $1 is called what?
Marginal Propensity to consume.
List the four factors that can shift the SRAS curve.
1. Changes in commodity prices.
2. Changes in nominal wages.
3. Changes in productivity.
4. Changes in expectations about inflation.
What is the economy experiencing?
- Price levels decreasing.
- Aggregate output decreasing.
Recessionary gap.
During the 1990's a new technology(the internet) was born, which created what type of shock?
- Positive Supply Shock.
- SRAS shifted to right.
Fiscal policy that reduces aggregate demand, is called what?
Contractionary policy.
List three components that can shift the aggregate consumption function:
1. Changes in Expected Future Disposable Income
2. Changes in Aggregate Wealth
3. Investment Spending
Explain why LRAS is vertical.
In the long run, nominal wages—like the aggregate price level—are flexible, not sticky. In the long run the aggregate price level has no effect on the quantity of aggregate output supplied.
What is the economy experiencing?
- Price levels increasing.
- Aggregate output increasing.
Inflationary gap.
This is the point where AD, SRAS, & LRAS intersect.
Long-Run Macroeconomic Equilibrium.
Fiscal policy that increases aggregate demand is called what?
Expansionary fiscal policy.
Why Is the Aggregate Demand Curve Downward-Sloping? (List all 3 components)
- The Real Wealth Effect
- The Interest Rate Effect
- The Exchange Rate Effect (Net Export Effect)
What three components shift the LRAS curve?
1. Increases in the quantity of resources, including land, labor, capital, and entrepreneurship.
2. Increases in the quality of resources, such as a better-educated workforce.
3. Technological progress.
This is the difference between actual aggregate output and potential output.
Output gap.
President Donald Trump's 2017 tax cuts created what type of aggregate shock?
(Also state what direction the curve shifted)
- Positive Demand Shock.
- Aggregate Demand shifted to right.
This is a policy response to demand shocks.
Stabilization Policy.
List all 5 things that can shift Aggregate Demand Curve.
1. Changes in expectations.
2. Changes in wealth.
3. Size of the existing stock of physical capital.
4. Fiscal policy.
5. Monetary policy.
What policy would the following be used for.
- a reduction in government purchases of goods and services.
- an increase in taxes.
- a reduction in government transfers.
Contractionary fiscal policy.
What policy would the following be used for:
- an increase in government purchases of goods and services.
- a cut in taxes.
- an increase in government transfers.
Expansionary fiscal policy.
During the 1970's oil imports to the United States were impacted creating what type of aggregate shock?
(Also state what direction the curve shifted)
- Negative Supply Shock.
- SRAS shifted to left.
Government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands, without requiring any deliberate action by policy makers, are called:
Automatic stabilizers.