Aggregate Demand
What is the difference between Demand & Aggregate Demand?
Demand is the amount of a product consumed for a singular market.
Aggregate demand is consumption for an entire economy.
What is the MPC Formula?
ΔC / ΔY
Explain the difference between the short run and long run.
The short run refers to the time where at least ONE input price is fixed (set in stone). In the long run, inputs/prices are flexible.
What is the difference between an inflationary and recessionary gap?
Recessionary: producing below Yf
What is the difference between discretionary and non-discretionary fiscal policy?
Discretionary Fiscal Policy
Takes awhile
Non-Discretionary Fiscal Policy
AKA: Automatic Stabilizers
An increase in which of the following would cause the AD curve shift to the left?
A) Consumer Optimism
B) Population
C) Cost of Resources
D) Income Taxes
D Income Taxes
What is the change in consumption formula?
ΔC = MPC X ΔY
What are sticky prices?
When wage and other input price changes lag behind price level changes, input prices are referred to as “sticky” (stuck in the past price level)
What is demand pull inflation?
What is cost push inflation?
Demand pulls up prices. Consumers want goods and services so they bid up prices.
Higher production costs increase prices.
What policies can fix a recessionary gap?
Increase GS
Decrease PIT
The stock market is on the rise this year.
Ford builds several new factories in the U.S.
The U.S. increases its exports to China.
WHAT DO ALL OF THESE HAVE IN COMMON?
Total Change in GDP/AD Formula?
Total change in GDP = Multiplier x Initial Change
What are the shifters of Aggregate Supply?
Resource Prices
Government Actions
Productivity/Tech
What is stagflation? When does Stagflation occur?
Leftward Shift of AS
High price level low output
What policies can fix an inflationary gap?
Decrease GS
Increase PIT
List all the shifters of AD.
C + I + G + Xn
Spending= 1/1-MPC
Tax= -1/1-MPC
Explain the short run tradeoff between inflation and the unemployment rate in SRAS.
As price level goes up, output goes up, and unemployment decreases
As PL goes down, output goes down, and unemployment increases
What shifts LRAS?
What shifts a PPC
What is an example of an automatic stabilizer?
Welfare, Unemployment, Income Taxes
The AD Curve Assumes that...
A) as the price of a good or service increases, nominal wages decrease
B) as the domestic price level increases, consumers substitute domestic goods for foreign goods
C) all prices and total consumer incomes are constant
D) changes in the price level affect real wealth
E) nominal interest rates increase as the price level decreases
D) changes in the price level affect real wealth
If the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur? Why?
AD will increase, multiplier effect, we don't magically reduce spending by tax increase.
An increase in price level will lead to a shift of the SRAS curve in which direction?
TRICK QUESTION
PL IS NOT A SHIFTER OF AS
What if the difference between Yf and Y1
Yf: Potential
Y1: Actual
What are the 3 time lags of Fiscal Policy?
1. Recognition Lag- Congress must react to economic indicators before it’s too late.
2. Administrative Lag- Congress takes time to pass legislation.
3. Operational Lag- Spending/planning takes time to organize and execute (changing taxing is quicker).