The Main Event (AD/AS Basics)
The effect that says a lower price level increases the purchasing power of money, causing people to buy more.
What is the Wealth Effect (or Real Balance Effect)?
This determinant of AD changes when businesses become more optimistic about the future and buy more equipment.
What is Investment Spending?
The two main tools of discretionary fiscal policy.
What are government spending and taxation?
If citizens save 10 cents of every new dollar they earn, this is their MPC.
What is 0.9?
This is the name of the gap when the short-run equilibrium GDP is less than the full-employment GDP.
What is a recessionary gap?
This curve is vertical because in the long run, the economy's output is determined by its resources and technology, not the price level.
What is the Long-Run Aggregate Supply (LRAS) curve?
A widespread technological advancement will shift these two curves to the right.
What are the SRAS and LRAS curves?
To close an inflationary gap, the government should use this type of fiscal policy.
What is contractionary fiscal policy?
The formula used to calculate the simple spending multiplier.
What is 1/MPS?
When an economy self-corrects from a recessionary gap, this curve shifts to the right as wages fall.
What is the SRAS curve?
The term for an unfortunate combination of rising unemployment (falling output) and rising inflation.
What is stagflation?
A massive cut in personal income taxes will shift this curve to the right.
What is the Aggregate Demand (AD) curve?
An example of an automatic stabilizer that helps slow down an overheating economy without new government action.
What are progressive income taxes (or unemployment benefits decreasing)?
If the MPC is 0.75, this is the simple spending multiplier.
What is 4?
Contractionary fiscal policy aims to shift the AD curve to the left to fight this problem.
What is inflation (or an inflationary gap)?
The SRAS curve is upward-sloping primarily because these are slow to change in the short run.
What are nominal wages (or input prices)?
An increase in the expected future price level would cause workers to demand higher wages now, shifting this curve to the left.
What is the Short-Run Aggregate Supply (SRAS) curve?
When the government increases spending to fight a recession, it will likely create this on its annual budget.
What is a budget deficit?
If the multiplier is 5, a $20 billion increase in government spending will increase GDP by this maximum amount.
What is $100 billion?
DAILY DOUBLE! On the board, correctly draw and label an economy experiencing an inflationary gap.
Student must draw a graph where the intersection of AD and SRAS is to the right of the vertical LRAS curve).
The three effects that explain why the Aggregate Demand curve is downward sloping.
What are the Wealth Effect, the Interest-Rate Effect, and the Net Export Effect?
If the U.S. dollar suddenly appreciates, this component of AD will decrease, shifting the AD curve to the left.
What are Net Exports?
This policy, which involves cutting taxes or increasing spending, is designed to shift the AD curve to the right.
What is expansionary fiscal policy?
This is why a $50 billion tax cut has a smaller impact on GDP than a $50 billion increase in government spending.
What is because a portion of the tax cut will be saved rather than spent?
On the board, draw the effect of a negative supply shock, like a nationwide transportation strike.
(Student must draw a graph showing the SRAS curve shifting to the left, resulting in a higher price level and lower output).