Aggregate Demand
What is aggregate demand?
Aggregate Demand is all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels
What is the multiplier effect?
Draw the SRAS curve
Upward sloping curve
If consumer spending increases, draw what happens to price level and GDP in the short run.
Shift to the right of AD
What is fiscal policy?
Actions by the government to stabilize the economy
Draw the AD curve
Downward sloping
What is the MPC equation?
MPC = Change in consumption / Change in disposable income
In an Recessionary Gap, what happens to GDP?
GDP decreases, unemployment is more than the natural rate
What is stagflation?
When high inflation occurs at the same time as slow economic growth and high unemployment
What are the two types of fiscal policy?
Expansionary and Contractionary
What is one of the three reasons the AD curve is downward sloping?
Real-Balance Effect, Interest-Rate Effect, or Foreign Trade Effect
If the MPC is 0.8 then the MPS is...
0.2
In an inflationary gap, what happens to GDP?
GDP increases, Unemployment is less than the natural rate
Assume an economy is at full employment, if there is an increase in government spending, what happens to the price level, real GDP, and employment in the short run? - Draw it
Price level increases, real GDP increases, employment increases, resulting in a positive output gap
What is one of the main problems with fiscal policy?
Takes time to go into effect - recognition, administrative, & operational
What is one of the shifters of AD?
Consumer spending, investment spending, government spending, or net exports
Use the spending multiplier - If the MPC is 0.8, how much will an initial increase of $10 billion in government spending increase the total GDP?
MPC = 0.8, MPS = 0.2
Spending multiplier = 1/0.2 = 5
5 X $10 billion = $50 billion
Draw the LRAS Curve
Vertical Line
True or False - In the long run, wages and resource prices are flexible and will change as price levels change.
TRUE
An appropriate fiscal policy to combat a recession would be to increase which - the money supply, interest rates, or government spending?
Government spending
What is the AD equation?
same as GDP
AD = GDP = C + I + G + X
A high marginal propensity to consume implies what?
a low marginal propensity to save
What does IRAP stand for?
Inflationary Expectations, Resource Prices, Actions by the Government, Productivity
If there is a positive output gap, in the long run, which way will the SRAS need to shift to return the economy to the full employment output?
Left
What is an example of discretionary fiscal policy?
increase in government spending