Units 3.1 & 3.2
This is the formula to calculate the marginal propensity to consume.
Change in Consumption (C) / Change is Disposable Income (Yd)
The term short-run doesn't indicate a length of time; it indicates this.
Input Prices and Wages are STICKY.
When the Price Level is higher than the equilibrium Price Level, the market will experience this.
Surplus
In the absence of any government intervention, equilibrium is achieved through this process.
Long-Run Self-Adjustment
This type of policy is implemented by the government to help the economy eliminate output gaps.
Fiscal Policy
One of the reasons the AD curve is downward sloping is because of this effect related to purchasing power.
Real Wealth Effect
One of the determinants of SRAS is price expectations. If there are deflationary expectations, businesses would react in a way that would cause the SRAS curve to shift in this direction.
Shift Right (Produce More NOW, when PL is higher).
When current output is equal to potential output, the market is in this state.
Equilibrium
This curve shifts when self-adjustment takes place.
SRAS
TRIPLE PLAY!
These are the three types of fiscal policy the government can implement.
This multiplier has a larger effect on the maximum change on GDP it can create; this multiplier has a lesser effect on the maximum change on GDP it can create.
Spending Multiplier; Tax Multiplier
In the long-run, all input prices and wages become this.
Fully Flexible
DAILY DOUBLE!
A supply-side negative shock will result in this nightmare scenario for the economy.
Stagflation
If the economy is currently below full employment, the economy will self-adjust by this curve shifting in this direction.
SRAS shifts right
This type of fiscal policy is used to offset a recessionary gap; this type of fiscal policy is used to offset an inflationary gap.
Expansionary; Contractionary
TRIPLE PLAY!
List the formulas for the following multipliers:
1). Spending Multiplier
2). Tax Multiplier
3). Transfer Multiplier
1). Spending Multiplier = 1 / MPS
2). Tax Multiplier = (-)MPC / MPS
3). Transfer Multiplier = MPC / MPS
The LRAS curve is very much related to this model (previously learned in the course).
Production Possibilities Curve (PPC)
An increase in imports will have this effect on the unemployment rate.
Increase in Unemployment Rate
(AD shift left, Real GDP decreases, Less workers needed, Unemployment Rate increases)
If SRAS shifts left during the self-adjustment process, then there must have been this type of demand shock prior to the self-adjustment.
Positive Demand Shock
This term represents policies that are already in place (previously passed via legislation) that kick in to help alleviate recessionary/inflationary gaps throughout the business cycle.
Automatic Stabilizers
This term represents the amount of goods on hand to sell and when it increases, it increases investment which would shift AD to the right.
Inventory
As we move along the SRAS curve, there is a tradeoff between these two things, which can then be directly represented on this model.
Inflation and Unemployment Rate
Phillips Curve
Inflation can be caused by a shift in demand or a shift in supply. These terms represent each of these two scenarios, respectively.
Demand-Pull Inflation (Demand shifts right)
Cost-Push Inflation (Supply shifts left)
DAILY DOUBLE! When self-adjustment takes place in an economy that is experiencing an inflationary gap, price levels will end up changing in this way and output will end up changing in this way.
Price Level Increases (wages and input prices)
Output does not change
If the economy has a $12B recessionary output gap and the MPC is .75, the government would need to spend this much or cut taxes this much to close the gap.
Spending Multiplier = 1 / .25 = 4
Government Spending = $3B
Tax Multiplier = (-).75 / .25 = (-)3
Cut Taxes = $4B Tax Cut