Aggregate Demand
What is the Wealth Effect?
What is the buying power of money (as prices go up, purchasing power goes down)?
Define aggregate supply
The amount of goods and services (Real GDP) that firms will produce in an economy at different price levels
In macroeconomic equilibrium, the economy can be at three different places, what are they?
Full employment, above full employment (inflationary gap), and below full employment (recessionary gap)
What is the difference between marginal propensity to save versus a marginal propensity to consume?
MPS: The fraction of an increase in income that is not spent on an increase in consumption.
MPC: The fraction of change in disposable income that is spent on consumption
The two methods by which fiscal policy is enacted in our economy...
What is Discretionary (congress makes new bill) vs Non-Discretionary (permanent govt spending or tax change)?
What is aggregate demand measuring and how do we calculate it?
What is Real GDP & consumer spending, investment spending, government spending, & net exports?
What are sticky wages?
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. AKA nominal wages that do not change
Draw two AD/AS model graphs - one that shows an inflationary gap and one that shows a recessionary gap. Include equilibrium points and labels.
Recessionary gap - to the left of the LRAS
Inflationary gap - to the right of the LRAS
What is the formula for the spending multiplier?
1/MPS or 1/1-MPC
Fiscal policy that is meant to remedy recessionary gaps and two examples of how this policy remedies recessionary gaps.
What is expansionary fiscal policy and increase govt spending/decrease taxes (increase disposable income)?
Aggregate Demand is the relationship between the _________ demanded and the _________ when all other influences on expenditure plans remain the same.
Quantity of Real GDP and Price Level
What is the difference between short term and long term aggregate supply?
Short-Run Aggregate Supply: Wages and resource prices are sticky and will not change.
Long-Run Aggregate Supply: Wages and resource prices are flexible and will change.
What is a supply shock?
An event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general
How do you calculate the tax multiplier?
It is ALWAYS one less than the spending multiplier
Fiscal policy that is meant to reduce inflation and decrease GDP.
List what fiscal policy this is, what economic issue it is fixing, and two ways this fiscal policy will fix that economic issue.
What is contractionary fiscal policy, closing an inflationary gap, and decrease govt spending/increase taxes (decrease disposable income)?
How does the foreign exchange market effect aggregate demand?
An increase in foreign income increases U.S. exports and increases U.S. aggregate demand
An increase in the LRAS means there is also an increase in ___________ which demonstrates ________________________.
The PPC and this shows economic growth for the country.
What is a combination of recession and inflation known as?
Stagflation
Answer the following scenarios:
1) Victoria’s income increases $1000 and her spending increases $750. What is her marginal propensity to consume (MPC)?
2) The MPC is .75 and the government increases spending by $10 million, the maximum change in GDP is:
1) .75
2) $40 million increase
One benefit of this fiscal policy is that it has an immediate economic impact without any congressional or presidential approval.
What are automatic stabilizers?
Draw graphs for the following scenarios:
Income taxes have been lowered
Price levels have increased by 15%
The Canadian euro has appreciated in value. How does this effect Canada's AD?
1) AD shifts right
2) no shift; move up along the curve
3) AD shifts left
Using the AD/AS model, draw graphs for the following scenarios:
1) companies are expecting inflation to increase
2) the government provides more subsidies
3) technology advancements result in higher productivity
1) SRAS shifts left
2) SRAS shifts right
3) LRAS shifts right
Draw an AD/AS model graph that starts at full employment.
1) Demonstrate the effect an increase in consumer spending would have in the short run.
2) Describe what happened to inflation and unemployment as a result.
3) Describe what would happen in the long-run w/ no govt policy changes and graph this.
1) AD shifts right
2) prices rise so inflation rises, output rises so unemployment decreases
3) Nominal wages would increase, shifting SRAS left back onto the LRAS line (full employment output)
Answer the following scenarios:
1) The MPS is .10 and the government increases taxes by $10,000 the maximum change in GDP is:
2) The MPC is .5 and there is a $1000 increase in autonomous consumption. The maximum change in GDP is:
3) The MPS is .25 and there is a $6 million negative GDP gap. What is the minimum government spending change needed to close the gap?
1) $90,000 decrease
2) $2,000 increase
3) $1.5 million increase
List three issues with fiscal policy and define them.
What is recognition lag (congress must react before its too late), administrative lag (takes time to pass legislation), & operational lag (spending/planning takes time to organize/execute)?