AD/SRAS/LRAS
Name the 4 shifters of Aggregate Demand
Consumption Spending, Investment Spending, Government Spending, Net Exports
This concept is calculated by dividing the Change in Consumption by the Change in Income.
Marginal Propensity to Consume
If consumption increases, which curve shifts and which direction.
AD increases, shifts to the right.
In the short-run, if Aggregate Demand increases, what happens to Price Level and Real GDP?
Price Level: Increase
Real GDP: Increase
These are the two tools of Fiscal Policy.
Government Spending & Taxes/Transfers
Name the 3 shifters of Short-Run Aggregate Supply
Inflationary Expectations, Resource Prices/Availability, Technology/Productivity
The MPC and MPS added together always equal this.
1
If nominal wages increase, which curve shifts and which direction?
SRAS decreases, shifts to the left.
In the long-run, if Aggregate Demand increases, what happens to Price Level and Real GDP?
Price Level: increases
Real GDP: No Change
Taxes and Transfers that adjust automatically to changes in income are called this.
Automatic Stabilizers
Name ONE of the three reasons/effects why Aggregate Demand is upward sloping.
Income Effect, Interest Rate Effect, Net Exports Effect.
If your MPC is .8, this is your Spending Multiplier
5
1/MPS or 1/(1-.8) or 1/.2 = 5
If imports increase, what would happen to the Price Level and Real GDP?
Price Level: Decrease
Real GDP: Decrease
(Aggregate Demand Decreases)
If your economy is in a positive output gap, explain how the economy adjusts in the long-run.
Wages increase, SRAS decreases to the Full Employment Output (LRAS).
In a $500 million recessionary gap, government spending would need to change this amount to close the gap. MPC = .9
$50 Million Increase
$500 Million = 1/1-.9 or 1/.1 x ?
$500 Million = 10 x ?
This is a reason why the Short-Run Aggregate Supply curve is upward-sloping.
Sticky Wages and Resource Prices
If your country has an MPC of .75, and there is a $100 Million dollar increase in government spending, this is the total change in Aggregate Demand.
$400 Million
$100 Million x 1/(1-.75) OR 1/.25
$100 Million x 4 = $400 Million
Assume your economy is in long-run equilibrium. If productivity increases in the short-run, what output gap is created?
Positive Output Gap
(Short-Run Aggregate Supply increases)
If your economy is in a Negative output gap, explain how the economy adjusts in the long-run.
Wages fall, SRAS increases to the full employment output level. (LRAS)
In a $200 Million inflationary gap, taxes would need to change this amount. MPC = .8
- $50 million
-$200 Million = (-.8/.2) x ?
-$200 Million = -4 x ?
According to the Long-Run Aggregate Supply curve, this type of relationship exists between Price Level and Real Output.
NO Relationship.
If the government increases spending by $600 million and funds this by increasing taxes by $600 million, this is the total change in Aggregate Demand.
$600 Million
$600 Million x 1 = $600 Million
Assume your country is in Long-Run Equilibrium. If interest rates increase, what will happen to the unemployment rate? What output gap is created?
Unemployment Rate increases, Negative Output Gap
(AD Decreases, Real GDP Decreases, unemployment Increases).
The rate of unemployment represented by the LRAS is called this.
Natural Rate of Unemployment
In a recessionary gap, tax revenues would change in this direction, and transfers would change in this direction to stabilize the economy.
Tax Revenues: Decrease
Transfers: Increase